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| [House Hearing, 115 Congress] | |
| [From the U.S. Government Publishing Office] | |
| AN OVERVIEW OF SBA'S 7(A) LOAN PROGRAM | |
| ======================================================================= | |
| HEARING | |
| before the | |
| SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATIONS | |
| OF THE | |
| COMMITTEE ON SMALL BUSINESS | |
| UNITED STATES | |
| HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED FIFTEENTH CONGRESS | |
| FIRST SESSION | |
| __________ | |
| HEARING HELD | |
| MARCH 9, 2017 | |
| __________ | |
| [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] | |
| Small Business Committee Document Number 115-008 | |
| Available via the GPO Website: www.fdsys.gov | |
| ______ | |
| U.S. GOVERNMENT PUBLISHING OFFICE | |
| 24-525 WASHINGTON : 2017 | |
| ----------------------------------------------------------------------- | |
| For sale by the Superintendent of Documents, U.S. Government Publishing | |
| Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; | |
| DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, | |
| Washington, DC 20402-0001 | |
| HOUSE COMMITTEE ON SMALL BUSINESS | |
| STEVE CHABOT, Ohio, Chairman | |
| STEVE KING, Iowa | |
| BLAINE LUETKEMEYER, Missouri | |
| DAVE BRAT, Virginia | |
| AUMUA AMATA COLEMAN RADEWAGEN, American Samoa | |
| STEVE KNIGHT, California | |
| TRENT KELLY, Mississippi | |
| ROD BLUM, Iowa | |
| JAMES COMER, Kentucky | |
| JENNIFFER GONZALEZ-COLON, Puerto Rico | |
| DON BACON, Nebraska | |
| BRIAN FITZPATRICK, Pennsylvania | |
| ROGER MARSHALL, Kansas | |
| VACANT | |
| NYDIA VELAZQUEZ, New York, Ranking Member | |
| DWIGHT EVANS, Pennsylvania | |
| STEPHANIE MURPHY, Florida | |
| AL LAWSON, JR., Florida | |
| YVETTE CLARK, New York | |
| JUDY CHU, California | |
| ALMA ADAMS, North Carolina | |
| ADRIANO ESPAILLAT, New York | |
| BRAD SCHNEIDER, Illinois | |
| VACANT | |
| Kevin Fitzpatrick, Staff Director | |
| Jan Oliver, Chief Counsel | |
| Adam Minehardt, Minority Staff Director | |
| C O N T E N T S | |
| OPENING STATEMENTS | |
| Page | |
| Hon. Trent Kelly................................................. 1 | |
| Hon. Alma Adams.................................................. 2 | |
| WITNESSES | |
| Ms. Sonya McDonald, Executive Vice President and Chief Lending | |
| Officer, Randolph Brooks Federal Credit Union, Universal City, | |
| TX, testifying on behalf of the National Association of | |
| Federally-Insured Credit Unions................................ 4 | |
| Ms. Cindy Blankenship, Vice Chairman, Bank of the West, | |
| Grapevine, TX, testifying on behalf of the Independent | |
| Community Bankers of America................................... 5 | |
| Mr. Tony Wilkinson, President and CEO, National Association of | |
| Government Guaranteed Lenders, Washington, DC.................. 7 | |
| Mr. Edward C. Ashby, III, President & CEO, Surrey Bank & Trust, | |
| Mount Airy, NC, testifying on behalf of the American Bankers | |
| Association.................................................... 8 | |
| APPENDIX | |
| Prepared Statements: | |
| Ms. Sonya McDonald, Executive Vice President and Chief | |
| Lending Officer, Randolph Brooks Federal Credit Union, | |
| Universal City, TX, testifying on behalf of the National | |
| Association of Federally-Insured Credit Unions............. 22 | |
| Ms. Cindy Blankenship, Vice Chairman, Bank of the West, | |
| Grapevine, TX, testifying on behalf of the Independent | |
| Community Bankers of America............................... 37 | |
| Mr. Tony Wilkinson, President and CEO, National Association | |
| of Government Guaranteed Lenders, Washington, DC........... 51 | |
| Mr. Edward C. Ashby III, President & CEO, Surrey Bank & | |
| Trust, Mount Airy, NC, testifying on behalf of the American | |
| Bankers Association........................................ 57 | |
| Questions for the Record: | |
| None. | |
| Answers for the Record: | |
| None. | |
| Additional Material for the Record: | |
| CUNA - Credit Union National Association..................... 63 | |
| AN OVERVIEW OF SBA'S 7(A) LOAN PROGRAM | |
| ---------- | |
| THURSDAY, MARCH 9, 2017 | |
| House of Representatives, | |
| Committee on Small Business, | |
| Subcommittee on Investigations, Oversight, and | |
| Regulations, | |
| Washington, DC. | |
| The Subcommittee met, pursuant to call, at 11:00 a.m., in | |
| Room 2360, Rayburn House Office Building, Hon. Trent Kelly | |
| [chairman of the Subcommittee] presiding. | |
| Present: Representatives Kelly, Chabot, Blum, Bacon, | |
| Marshall, Adams, and Velazquez. | |
| Chairman KELLY. Good morning. Thank you all for being with | |
| us today. I call this hearing to order. | |
| Our startups, our entrepreneurs, our small businesses, the | |
| true engines of our economy, continue to experience a rigid | |
| lending environment. While large companies are turning to debt | |
| and equity markets to raise capital, small businesses all over | |
| the country regularly turn to conventional bank lending to | |
| finance their projects. At times, small firms cannot access | |
| conventional lending, so they have nowhere to turn for the | |
| capital to grow their business or create jobs. Despite being | |
| creditworthy, they often do not have the proven track record | |
| for traditional lending. Instead of turning away the next great | |
| American company, lenders can work with small businesses and | |
| provide access to SBA's numerous lending programs. | |
| We are here to talk about one of these lending programs | |
| today. The Advantage Loan Program, widely known as the 7(a) | |
| Loan Program, provides creditworthy small businesses the | |
| opportunity to receive capital if traditional lending is not | |
| available. The program, which is currently running at zero cost | |
| to the American taxpayer, does not provide direct loans; | |
| rather, the SBA offers guarantees of repayments made to | |
| lenders. With the recent growth of the program in terms of loan | |
| approvals, loan amounts, and the congressionally authorized | |
| lending limit, it is important for our Committee to | |
| comprehensively review the program. Does SBA have the correct | |
| tools in place to provide oversight? Where should there be | |
| improvement? Is the Credit Elsewhere Test, the test which | |
| determines whether or not a small business is able to obtain | |
| capital from traditional options, strong enough? | |
| The hearing today will kick off a series of conversations | |
| focused on the 7(a) Loan Program. | |
| Today, the Subcommittee will hear directly from the | |
| lender's window, those financial institutions participating in | |
| the program. | |
| I appreciate each of the witnesses for being here today. I | |
| look forward to your testimony. | |
| I now yield to Ranking Member Adams for opening remarks. | |
| Ms. ADAMS. Thank you, Mr. Chair. And I want to thank | |
| Ranking Member Velazquez for being here as well. And to all of | |
| our witnesses. | |
| With the economy showing continued growth, it is important | |
| to ensure that small businesses have the tools and the | |
| resources that they need to prosper. And in order for small | |
| firms to play their traditional job-creating role, a number of | |
| factors must be in place. Perhaps the most important ingredient | |
| is the availability of capital. Lending through the Small | |
| Business Administration is always critical for entrepreneurs | |
| seeking affordable capital to start new ventures and expand | |
| existing businesses. | |
| SBA loan programs fill a critical gap in the market for | |
| small businesses that cannot access traditional lending | |
| sources. In particular, SBA's 7(a) Loan Program is a public- | |
| private partnership that helps private lenders provide capital | |
| to small businesses that would not normally qualify for credit | |
| on reasonable terms. In recent years, 7(a) loans have | |
| experienced unprecedented growth, making this hearing | |
| particularly timely today. While over 64,000 loans totaling $24 | |
| billion was supported in fiscal year 2016, only 26 percent of | |
| 7(a) loans went to minorities, and only 18 percent to women- | |
| owned firms. This is simply unacceptable. | |
| In addition to these underwhelming numbers, the SBG OIG has | |
| identified lender oversight as a serious management challenge | |
| for SBA. The OIG first raised their concerns in fiscal year | |
| 2001, and the issue continues to this very day. As the 7(a) | |
| Loan Program grows, it is vital for the SBA to have the | |
| resources in place to conduct lender oversight and to guarantee | |
| that all entrepreneurs, no matter what gender or race, have | |
| equal opportunities to utilize the program. | |
| I look forward to hearing from our witnesses and gaining | |
| their insights on making the SBA's flagship program work even | |
| better for small businesses. It is vital that loans in the 7(a) | |
| programs are targeted to businesses who need them most, | |
| particularly those who have been unable to secure capital | |
| through private channels. Putting capital in the hands of | |
| businesses that need it most will help further the economic | |
| development of America's small businesses. | |
| So on that note, again, I would like to thank our witnesses | |
| for taking time to be here. Your views and experiences, of | |
| course, will be valuable to the Subcommittee as we consider how | |
| best to meet the entrepreneurs' capital needs. | |
| Thank you, Mr. Chair. I yield back. | |
| Chairman KELLY. Thanks to the ranking member. And this is | |
| such a bipartisan Committee, and I really thank the ranking | |
| member for her support and being here today and her timely | |
| comments. | |
| If the Committee members have an opening statement | |
| prepared, I ask that they be submitted for the record. | |
| I would like to take a moment to explain the timing lights | |
| to you. You will each have 5 minutes to deliver your testimony. | |
| The light starts out as green. It will turn yellow, and | |
| finally, after, when you have 1 minute remaining, that means | |
| start wrapping up, and finally, at the end of your 5 minutes, | |
| it will turn red. I ask that you try to adhere to the time | |
| limit and in my first Committee chairman not make me tap you | |
| out today. | |
| Our first witness--I am going to introduce the three and | |
| then I will allow the ranking member. | |
| Our first witness is Sonya McDonald. Ms. McDonald is an | |
| executive vice president and chief lending officer for Randolph | |
| Brooks Federal Credit Union in Universal City, Texas, which is | |
| located in southcentral Texas. She has been serving credit | |
| union members in various roles at Randolph Brooks Federal | |
| Credit Union for years, including numerous executive level and | |
| leadership positions. Along with being a recipient of the | |
| Presidential Volunteer Service Award, Ms. McDonald was named to | |
| the San Antonio's 40 Under 40 List and is a graduate of the | |
| University of Texas at Austin. She is testifying today on | |
| behalf of the National Association of Federally-Insured Credit | |
| Unions. | |
| Our next witness is Ms. Cindy Blankenship. Ms. Blankenship | |
| is the vice chairman of Bank of the West in Grapevine, Texas. | |
| Having opened Bank of the West in 1986 with her husband, Ms. | |
| Blankenship has been a leader in community banking for many | |
| years. Ms. Blankenship is a former chair of the Independent | |
| Community Bankers of America and has testified before numerous | |
| congressional committees. She has been recognized in the past | |
| as one of the 50 most powerful women in banking. Ms. | |
| Blankenship is testifying today on behalf of the Independent | |
| Community Bankers of America. | |
| Our next witness is Tony Wilkinson. Mr. Wilkinson is the | |
| president and chief executive officer of the National | |
| Association of Government Guaranteed Lenders. For over 25 | |
| years, Mr. Wilkinson has been at the helm of the Association | |
| which represents the 7(a) lending industry. Before coming to | |
| NAGGL, Mr. Wilkinson was an executive at Stillwater National | |
| Bank. He has served as a member of the SBA's National Advisory | |
| Council and as a member of SBA's Investment Advisory Council. | |
| He has also been a recipient of SBA's National Financial | |
| Services Advocate of the Year Award. | |
| And I now yield to our ranking member. | |
| Ms. ADAMS. Thank you, Mr. Chair. | |
| I am so pleased to introduce Ted Ashby, a native of Mount | |
| Airy, North Carolina. I represent North Carolina, and we are | |
| happy to have a Tarheel in the place today. Mr. Ashby has a | |
| bachelor's degree in business administration and economics. He | |
| has held numerous positions in the banking industry, including | |
| branch administrator, chief lending officer, special assets | |
| manager, and senior vice president. In 1996, Mr. Ashby created | |
| Surrey Bank and Trust. As president and CEO, he has grown the | |
| bank to $278 million in assets, with six branches and a loan | |
| production office. He is testifying today on behalf of the | |
| American Bankers Association. Welcome, Mr. Ashby. | |
| Chairman KELLY. And again, thank you to the distinguished | |
| panel. | |
| And Ms. McDonald, you are recognized for 5 minutes, and you | |
| may begin. | |
| STATEMENTS OF SONYA MCDONALD, EXECUTIVE VICE PRESIDENT AND | |
| CHIEF LENDING OFFICER, RANDOLPH BROOKS FEDERAL CREDIT UNION; | |
| CINDY BLANKENSHIP, VICE CHAIRMAN, BANK OF THE WEST; TONY | |
| WILKINSON, PRESIDENT AND CEO, NATIONAL ASSOCIATION OF | |
| GOVERNMENT GUARANTEED LENDERS; EDWARD C. ASHBY, III, PRESIDENT | |
| AND CEO, SURREY BANK AND TRUST | |
| STATEMENT OF SONYA MCDONALD | |
| Ms. MCDONALD. Chairman Kelly, Ranking Member Adams, and | |
| members of the Subcommittee. Thank you for the invitation to | |
| appear before you this morning. | |
| My name is Sonya McDonald, and I am testifying today on | |
| behalf of NAFCU. I am the executive vice president and chief | |
| lending officer at Randolph Brooks Federal Credit Union. In | |
| this role, I am responsible for a $6 billion portfolio that | |
| encompasses consumer, mortgage, and commercial lending. I | |
| appreciate the opportunity to share with you my experience with | |
| the Small Business Administration's 7(a) Loan Program. | |
| RBFCU became a SBA preferred and express lender in | |
| September of 2005. We are delegated with SBA authority and are | |
| able to offer all of their products. In 2016, we were the | |
| number one SBA lending credit union in our 55 county district. | |
| SBA products allow us to leverage our lending dollars, mitigate | |
| the risk associated with the loans, and extend more credit to | |
| our community small businesses. Our current portfolio has 232 | |
| active SBA loans with a balance of approximately $22 million. | |
| There are many stories of small business owners looking for | |
| that loan that will allow them to either start or grow their | |
| business. While other institutions may have scaled back their | |
| small-dollar business lending, credit unions have been willing | |
| to fill that void. At RBFCU, we are pleased that we have been | |
| able to step up to help meet the demand. SBA 7(a) loans make it | |
| easier for credit unions because the government-guaranteed | |
| portion of these loans does not count towards the arbitrary | |
| credit union member business lending cap. | |
| In San Antonio, we have a great bagel shop, the Bagel | |
| Factory, owned by an Air Force veteran and his wife. They went | |
| to 20 different places and were denied before coming to | |
| Randolph Brooks for an SBA loan. That business is now in its | |
| seventh year and thriving. | |
| Another example is a loan we did for a 100 percent disabled | |
| military veteran. With the help of a SBA express line of | |
| credit, he was able to secure 8(a) certification, and he can | |
| now fulfill software development contracts for the military. | |
| Two years ago, NAFCU signed a memo of understanding with | |
| SBA to help address the challenge of getting more credit unions | |
| involved in the SBA. The MOU formalized a joint partnership | |
| that aims to increase the availability of small-dollar loans by | |
| providing more outlets for entrepreneurs to access SBA products | |
| in their neighborhoods, and it makes the small-dollar loans | |
| more accessible to underserved communities, including women and | |
| minorities. | |
| We appreciate the work SBA has done and have some ideas on | |
| how to make the program stronger. One area where the SBA can | |
| help credit unions is to provide clarity. Sometimes when we | |
| email the SBA directly with a specific question about standard | |
| operating procedures, the response is nothing more than a | |
| screenshot of the website. We have also seen an example of a | |
| loan submitted through general processing where the SBA | |
| processor did not follow the SOP. It was a loan that required | |
| us to place a second lien on a borrower's rental property. | |
| Normally, we would use the tax assessed value on the home, but | |
| in this case, the processor insisted we use the value estimated | |
| by Zillow.com, which was not anywhere in the procedure manual. | |
| If SBA would publish a best practices and clarify guidance, | |
| it would go a long way to helping credit unions when they are | |
| making SBA loans. | |
| At RBFCU, we would also like to see the length of time it | |
| takes to approve a loan shortened. Right now it can take 8 | |
| weeks or longer. | |
| For RBFCU and other credit unions, it would also be | |
| beneficial if the new SBA One software better integrated with | |
| the lending software used by the majority of lenders, something | |
| the old software used to do. | |
| In conclusion, small businesses are the driving force of | |
| our economy and the key to its success. The ability for them to | |
| have access to capital is vital for job creation. While SBA's | |
| 7(a) program provides opportunities to established and | |
| struggling businesses, there are several relatively simple | |
| steps that could propel the program to its full potential, some | |
| of which the SBA can take without legislation. We urge Congress | |
| to do what is necessary to ensure these programs are | |
| successful. | |
| We thank you for your time and the opportunity to testify | |
| before you today on this important issue. I welcome any | |
| comments or questions you might have. | |
| Chairman KELLY. Ms. Blankenship, you are now recognized for | |
| 5 minutes. | |
| STATEMENT OF CINDY BLANKENSHIP | |
| Ms. BLANKENSHIP. Chairman Kelly, Ranking Member Adams, and | |
| members of the Subcommittee, I am Cynthia Blankenship, vice | |
| chairman, CFO, and corporate president of Bank of the West in | |
| Grapevine, Texas, an over $450 million community with 105 | |
| employees and serving the Dallas-Fort Worth suburban area. I am | |
| also a former chairman of the Independent Community Bankers of | |
| America, and I am pleased to testify today on behalf of more | |
| than 5,800 community banks represented by ICBA. | |
| A robust 7(a) program with broad community bank | |
| participation will help small business thrive and create jobs. | |
| We are grateful for this Committee's strong support of the 7(a) | |
| program. Bank of the West is a 30-year partner with the Small | |
| Business Administration and a leading SBA lender in the Fort | |
| Worth District. We currently hold and service nearly $100 | |
| million in high-quality SBA loans with a minimum loss ratio. | |
| Historically, Bank of the West 7(a) loans have created | |
| thousands of jobs in the communities we serve and help sustain | |
| and strengthen our local economy. | |
| Bank of the West uses the 7(a) Loan Program to supplement | |
| our lending and credit services by reaching a broader range of | |
| borrowers who would not qualify for a conventional loan. To | |
| safeguard the program from abuse, the SBA's Credit Elsewhere | |
| Test requires us to fully substantiate and document the reasons | |
| a given applicant cannot be served with conventional credit. | |
| The typical conventional small business loan has a maturity of | |
| 1 to 3 years because it is funded with short-term deposits. | |
| However, 7(a) program loans have average maturities of 16 years | |
| or more. The program even allows for loan terms up to 25 years. | |
| These longer terms lower the entrepreneur's loan payments and | |
| free up needed cash flow to hire, invest, and grow the | |
| business. When another recession occurs, the longer loan term | |
| may help many small businesses weather the crisis. | |
| Bank of the West has been a preferred SBA lender for 30 | |
| years. This program is available to lenders with a proven track | |
| record, a successful SBA lending whose lending policies and | |
| procedures have been thoroughly vetted by the SBA. Once | |
| approved, a preferred lender can use streamlined procedures for | |
| processing SBA loans and make final credit decisions in-house. | |
| This is a critical advantage because it allows us to avoid a | |
| delay of up to 3 weeks at the SBA approval offices. | |
| As an SBA preferred lender, we can be responsive to our | |
| credit applicants, and if they qualify, provide the funds in a | |
| timely fashion. | |
| Stable funding is critical to the success of the 7(a) | |
| program and the thousands of borrowers who rely on it. While | |
| the program is fully funded by user fees, an authorization | |
| level must be approved by Congress each year, and once that | |
| level is reached, no more loans can be approved. | |
| The program authority came to an abrupt halt in the summer | |
| of 2015 when it reached its authorization cap well before the | |
| end of the fiscal year. Congress was forced to pass an | |
| emergency increase to the authorization cap to restart the | |
| program. ICBA greatly appreciates the support and | |
| responsiveness of this Committee in passing that emergency | |
| increase. Thankfully, a hiatus was short lived. A longer | |
| program shutdown would have cut off the thousands of small | |
| businesses that rely on the program for payroll, investment, | |
| and expansion. We must work together to ensure that the program | |
| funding is never disrupted again. One way we might better | |
| achieve this funding stability is by creating a 2-year funding | |
| commitment and have it be renewed every year. | |
| I have focused my remarks today on the 7(a) program. | |
| However, taking a broader perspective, I urge this Committee to | |
| support regulatory and tax relief that would strengthen | |
| community banks and enable more small business lending in SBA | |
| programs and in conventional markets. | |
| ICBA's plan for prosperity is a robust set of legislative | |
| recommendations, many of which serve the same goal as the SBA, | |
| creating more small business credit that will in turn create | |
| economic growth and jobs. A copy of the plan is attached to my | |
| statement, and I would encourage you to read it and discuss it | |
| with the community bankers in your districts. | |
| Thank you again for convening this hearing. I am happy to | |
| answer any questions you may have. | |
| Chairman KELLY. Thank you, Ms. Blankenship. It is always | |
| nice to hear somebody who does not have an accent. | |
| Mr. Wilkinson, you are now recognized for 5 minutes. | |
| STATEMENT OF TONY WILKINSON | |
| Mr. WILKINSON. Good morning, Mr. Chairman, Ranking Member | |
| Adams, and other members of the Committee. I am Tony Wilkinson. | |
| I am the president and CEO of the National Association of | |
| Government Guaranteed Lenders. I am happy to be here today to | |
| talk about the very successful SBA 7(a) program. It is a | |
| public-private partnership that works as there are almost 2,000 | |
| financial institutions who participate in the program, reaching | |
| about 65,000 small businesses annually. These lenders make | |
| private sector loans to small businesses who are credit worthy | |
| but fall into the well-known lending gap that small businesses | |
| face. | |
| Through the 7(a) program, lenders are able to meet the | |
| long-term financing needs of their small business customers. | |
| That means we can appropriately finance a long-term asset with | |
| a long-term loan. The significant majority of conventional | |
| loans, as Ms. Blankenship mentioned, have original maturities | |
| of 3 years or less, and the bulk of those loans actually have | |
| maturities of 1 year or less. So banks are really good at doing | |
| short-term financing, but with the SBA product we are able to | |
| do long-term financing. Again, financing those long-term assets | |
| with a long-term loan. | |
| And as Ms. Blankenship said, our original maturities in an | |
| SBA 7(a) program are 16 years. And so those longer maturities | |
| mean lower payments for those small business borrowers. And | |
| when small business can get the financing that they need, they | |
| can expand and grow and create jobs. It has been estimated that | |
| well over 500,000 jobs are created or retained annually thanks | |
| to the 7(a) program. | |
| Over the last several years, use of the program has grown | |
| dramatically. Loan volume in fiscal year 2016 was over 25 | |
| percent greater than it was just in fiscal year 2014, meaning | |
| more and more small businesses are being served. But it also | |
| means we have been operating at or near our congressionally | |
| authorized annual authorization cap. This fiscal year, under | |
| the current continuing resolution, the 7(a) program has a $26.5 | |
| billion authorization cap. Based on current loan volumes and | |
| projected growth, we anticipate lending about $26 billion net | |
| this year. So again, we are going to be getting very close to | |
| our annual cap. | |
| I want to make sure that we understand that that is a net | |
| number. Our gross lending will probably exceed the cap | |
| somewhat. And as loans for whatever reason do not get closed, | |
| they get canceled, and so we get down to a net number, but it | |
| is very likely that our gross lending will exceed our cap, but | |
| it is the net lending number that is important. | |
| As funding measures are considered with the April 28th | |
| expiration of the continuing resolution, a modest bump up in | |
| our authorization cap would be appreciated just to make sure | |
| that we have sufficient funds to get through this year as | |
| predicting future loan volumes, as you might imagine, is a very | |
| difficult task. Please keep in mind that the 7(a) program | |
| operates at a zero credit subsidy, meaning no appropriations | |
| are needed. The estimated costs of the program are paid for by | |
| the fees charged to lenders and borrowers. So let me repeat. No | |
| Federal appropriations are needed to fund credit subsidies for | |
| this program. | |
| It is a long-held belief in our association for this | |
| program to pass the test of time to be here for small | |
| businesses for many years to come, it has to be a program of | |
| integrity. The program must be used the right way. That is what | |
| we teach in our training programs. It is what we expect from | |
| our members. It is why we understand that it is in the | |
| program's best interest to have SBA engaged in a sustained, | |
| efficient, and cost-effective oversight program to maintain | |
| that integrity. NAGGL has worked, and will continue to work, | |
| with the SBA and this Committee and SBA's Office of Credit Risk | |
| Management to ensure that integrity. | |
| With that, I will close my remarks and be happy to answer | |
| any questions. | |
| Chairman KELLY. Thank you. And Mr. Ashby, you are now | |
| recognized for 5 minutes. | |
| STATEMENT OF EDWARD C. ASHBY III | |
| Mr. ASHBY. Chairman Kelly, Ranking Member Adams, and | |
| members of the Subcommittee, I am Ted Ashby, president and CEO | |
| of Surrey Bank and Trust, headquartered in Mount Airy, North | |
| Carolina. I appreciate the opportunity to present the views of | |
| the ABA on the importance of the SBA Advantage Loan Program, | |
| widely known as the SBA 7(a) program for community banks like | |
| mine. | |
| Our bank was chartered in 1996 with a focus on business | |
| lending. We are intentionally focused on building and | |
| maintaining long-term relationships with our customers. The | |
| success of Surrey Bank is linked to the success of our | |
| community. They are all our neighbors. | |
| Community banks like mine actively pursue small business | |
| loans, which is critical to the economic growth and job | |
| creation in our area. The SBA program supports this with the | |
| help to fill a critical gap particularly for early stage | |
| businesses that need access to longer term loans. The guarantee | |
| helps reduce the risk and capital required for banks and | |
| facilitates loans that may never have been made without this | |
| important level of support from the SBA. | |
| In 1999, Surrey Bank began using SBA to help local | |
| companies meet their credit needs. This is an integral part of | |
| our business model. We have 174 active loans with an average | |
| loan size of $200,000, which demonstrates that the 7(a) program | |
| is very important to us and to our community. In total, 19 | |
| percent of our business loans are insured by the SBA, and 13 | |
| percent of all our loans are insured by the SBA. Our active | |
| involvement in SBA has earned Surrey Bank the ``Community Bank | |
| of the Year'' award in North Carolina 12 of the past 14 years. | |
| Let me give you a couple of examples to show the importance | |
| of SBA to our community. We extended credit to a precast | |
| concrete company that opened its doors in 2007, a terrible time | |
| to open. With the recession, economic activity was weak and the | |
| borrower had difficulty generating enough working capital to | |
| fund new orders. Our bank used the SBA's Cap Lines Contract | |
| Loan Program to fund these individual orders until they could | |
| be completed and the business paid. This company now generates | |
| sufficient cash flow to fund its operations without the SBA or | |
| bank assistance. | |
| My second example, we extended credit to a woman-owned | |
| company that is engaged in traffic and safety control and | |
| highway and bridge construction. This company started in 2004 | |
| with four employees and just two trucks. Since inception, we | |
| granted 23 SBA loans to this company to help fund their | |
| expansion. Today, the company has over $12 million in revenue, | |
| 90 employees, and a fleet of over 100 vehicles and assorted | |
| other equipment. Quite a success story. | |
| But our success is replicated over and over across | |
| communities in America in the banking system. This is why the | |
| ABA supports the Small Business Committee's efforts to build on | |
| the positive aspects of the program and consider improvements | |
| that would benefit the business climate in our communities. | |
| I have noted in my written statement many positive features | |
| of the 7(a) program. The central focus of these features is | |
| that they reduce the cost of the transaction, lower general | |
| collateral requirements, provide faster response times, improve | |
| cash flow, and reduce the amount of working capital needed to | |
| operate the business. All of these facilitate loans that may | |
| have never been possible under conventional financing where | |
| under conventional financing you would require an abundance of | |
| collateral. You have a guarantor that has a strong secondary | |
| source of repayment, and you would most likely have shorter | |
| loan amortizations. | |
| However, improvements can be made to any program. | |
| Primarily, this is involved in the servicing aspects. These | |
| include consolidating loans, allowing portfolio lenders to | |
| obtain a guarantee to avoid regulations on loans to one | |
| borrower limitations, facilitating and offering compromise in | |
| cases where they may be in liquidation through multiple | |
| programs, and making the SBA One platform fully operational to | |
| reduce our paperwork. | |
| In conclusion, the SBA's 7(a) program is a success and | |
| should be supported in the future. It has encouraged economic | |
| growth and allowed Surrey Bank to meet the credit needs of many | |
| small and diverse businesses in our small portion of the state | |
| of North Carolina. | |
| ABA strongly believes that our communities cannot reach | |
| their full potential without the presence of a local bank. Last | |
| year 251 banks disappeared. Since Dodd-Frank was enacted, | |
| nearly 2,000 banks have merged or closed their doors. If the | |
| pressures on our small banks are not relieved, the loss will be | |
| felt far beyond the bank and its loss of employees for that | |
| bank. It will mean something significant has been lost in that | |
| community that was once served by the bank. That is why it is | |
| imperative that Congress take steps to enhance the banking | |
| industry's capacity to serve their customers and facilitate job | |
| creation and economic growth. | |
| Thank you. I will be happy to answer any questions. | |
| Chairman KELLY. I want to once again just thank the | |
| distinguished members of the panel. Thank you so much for what | |
| you bring. | |
| I think one of the main things that is important to me, and | |
| I recognize myself for 5 minutes, so I will hold myself to the | |
| same thing, but one of the most important things is this 7(a) | |
| Loan Program costs us, or costs the taxpayers nothing. So I | |
| think that is very important. So it is a great program because | |
| there is no cost associated with while creating small | |
| businesses or helping them to create small businesses it does | |
| not cost. | |
| And this first question is for the entire panel, but I will | |
| start with--I will let Ms. Blankenship answer first and then we | |
| can go along the list. From the lender's perspective, can you | |
| describe the Credit Elsewhere Test and the steps you take to | |
| verify whether a small business can obtain capital from another | |
| source? | |
| Ms. BLANKENSHIP. We look at the Credit Elsewhere Test and | |
| go through the parameters that SBA has lined out. And | |
| basically, that is how we qualify that small business as an | |
| alternative source of funding through the SBA. Many times those | |
| small businesses are not a good candidate for conventional | |
| financing because they do not have the collateral value or they | |
| are depending on future cash flows, projected cash flows. We | |
| personally do a lot of startups, as well as acquisitions for | |
| small businesses, as well as some franchise. And a lot of times | |
| there is not a historical record there. And personally, I was | |
| able to give my hair stylist Kim a loan to acquire a salon when | |
| the owner died. She was a young lady. She had good credit, but | |
| did not have a lot of collateral. So we were able to help her | |
| acquire that salon. She hired eight additional stylists, paid | |
| her SBA loan off early, and that is just one story where the | |
| Credit Elsewhere Test is a good tool, and we do use it so we | |
| can slot that customer in the right type of either conventional | |
| or SBA loans. | |
| Chairman KELLY. Yeah, and I guess for the public, the few | |
| people who are watching this hearing, is the credit elsewhere | |
| means you are not competing with other sources. If they can get | |
| credit in another place, then they have to do that. They cannot | |
| use this program. They have to only use this if it is the only | |
| resource that they can use to get there. Is that correct? | |
| Ms. BLANKENSHIP. That is correct. | |
| Chairman KELLY. Okay. Do one of you other three, does | |
| anybody want to take a stab before I ask the next question? | |
| Ms. MCDONALD. From my perspective, we are no different than | |
| our friends in the banking industry. We look at the loan and we | |
| see, first of all, can we do it in a conventional manner? And | |
| if we cannot--and it is usually because they do not have the | |
| down payment, they need a longer term, et cetera--but from a | |
| credit union's perspective, we follow the same rules as our | |
| friends in the banking industry. | |
| Chairman KELLY. And Mr. Ashby, I think you had a comment? | |
| Mr. ASHBY. We do not specifically look at the Credit | |
| Elsewhere Test. When we underwrite a loan, we are looking at | |
| the collateral coverage cash flow and secondary source of | |
| repayment. And a lot of the conventional financing is | |
| homogenized because regulators like to know what our loan | |
| policies are. And all our loan policies are generally the same | |
| as you go from bank to bank. So you can identify really very | |
| quickly which loans need this kind of support and help from the | |
| SBA on extended terms. | |
| Chairman KELLY. Thank you very much. | |
| Mr. Wilkinson, in your testimony, you described the PARRIS, | |
| P-A-R-R-I-S, review system as a tool in SBA's oversight tool | |
| box. What other tools does SBA and the Office of Credit Risk | |
| Management utilize to conduct lender oversight? | |
| Mr. WILKINSON. Sorry about that. A relatively new system | |
| that they put in place over the last 4 or 5 years, but it is an | |
| analytically driven program that they used to target what | |
| reviews are going to happen amongst their lenders. And that is | |
| where then they can choose what kind of reviews which lenders | |
| are going to get. And it appears to be working quite well. The | |
| one issue that we would be concerned about is making sure that | |
| the Office of Credit Risk Management has sufficient resources | |
| to do its job. With the growth we have had in the program, we | |
| need to make sure that their resources have increased | |
| commensurately so that they have the appropriate staff to | |
| continue to do the job that they need to do. | |
| Chairman KELLY. And I yield back myself the time that I | |
| have not used. And I now recognize our ranking member from | |
| North Carolina, Ms. Adams, for 5 minutes. | |
| Ms. ADAMS. Thank you, Mr. Chair. And thank you all for your | |
| testimony. | |
| Mr. Ashby, in your written testimony you mention positive | |
| aspects of the 7(a) program and other SBA programs, including | |
| SCORE. Do you have any success stories or specific examples of | |
| how SCORE counseling has benefitted small business clients? And | |
| what improvements can be made there? | |
| Mr. ASHBY. Comments were primarily related to feedback that | |
| we have gotten from customers that have gone through that | |
| process, and they think it is very valuable to have someone | |
| that has basically fought the fight and learned how to navigate | |
| through their business careers and how to help these people | |
| overcome some of the obstacles that happen in their business | |
| because we go through cycles, and some of these retired people | |
| have seen many business cycles. And so my experience is that we | |
| get great feedback. We are not present during those counseling | |
| sessions, but we do get feedback that it is most important to | |
| them to have a mentor. | |
| Ms. ADAMS. Okay. Let me ask you. You know, I had a | |
| listening session last week, some people would refer to it as a | |
| townhall, up in the upper part of my district in Huntersville, | |
| and we had a lot of veterans to come in to talk to us. Do you | |
| deal much with veterans? Have they been interested in the | |
| program through your bank? | |
| Mr. ASHBY. We have had--I think we probably made three or | |
| four loans to veterans last year. There is a special carve-out | |
| for veterans on fees for loans amount of a certain dollar | |
| amount. So we do have interest from veterans. | |
| Ms. ADAMS. Okay. You also note that the SBA One program | |
| platform is not fully operational. What enhancements should be | |
| made to the system? | |
| Mr. ASHBY. Well, right now, basically, we can only get the | |
| issuance of the guarantee, and I think it was originally | |
| designed that you can go soup to nuts. You can do the initial | |
| qualification and then you can print all the closing documents | |
| all on one platform. And so I guess the second half of that | |
| platform is not fully complete at this time. | |
| Ms. ADAMS. Okay. To what extent, I mean, as a follow-up, | |
| has the SBA sought feedback from lenders to improve the system? | |
| Mr. ASHBY. We get constant feedback from our district | |
| director, Lynn Douthett. And so we are being called on all the | |
| time to talk about what types of loans we are seeing. If we | |
| need any training, they oftentimes request Surrey Bank train | |
| some of the new people that are coming into the SBA lending | |
| arena because we have been at it a long time and we are a small | |
| bank. And we try to help them get the proper resources in-house | |
| in order not to run in trouble with the SOP and have problems | |
| going forward, so---- | |
| Ms. ADAMS. Okay. Thank you. | |
| Mr. ASHBY.--we have a good relationship. | |
| Ms. ADAMS. Great. Thank you. | |
| Mr. Wilkinson, for a small business to participate in the | |
| 7(a) program it must not be able to obtain conventional | |
| lending. How does a lender determine if a borrower cannot get | |
| credit elsewhere? | |
| Mr. WILKINSON. Okay. The Credit Elsewhere Test is that the | |
| borrower cannot find financing under reasonable terms and | |
| conditions. So a lender will take a look at each small business | |
| borrower and determine whether it fits into their own | |
| conventional credit policies. For instance, many of our credit | |
| policies say we do not lend to new business startups. In the | |
| SBA program, year-to-date, we are about 36 percent new business | |
| startups. So that is sort of one of the automatics that fit. As | |
| has been mentioned, sometimes it is collateral coverage. | |
| Sometimes it is cash flow coverage. There are some statistical | |
| numbers that lenders look at, and perhaps if those numbers do | |
| not reach a benchmark that is sufficient for conventional | |
| financing, then they would be candidates for the SBA program. | |
| Ms. ADAMS. Okay. Given that it is the lender's best | |
| interest to make the determination that the borrower cannot | |
| obtain credit elsewhere so that they can make the loan, add to | |
| its assets or make money off of the loan, to what extent does a | |
| potential conflict of interest exist there? | |
| Mr. WILKINSON. I guess the first thing is banks are in the | |
| business of lending money, and with every loan that they make | |
| they hope to generate a profit from those. I think what you are | |
| referring to is the ability to sell loans into a secondary | |
| market where the banks can recoup the funds that they have lent | |
| plus generate a profit on those. Those loans that are sold are | |
| typically sold by lenders who have liquidity issues. Lenders | |
| who do not have liquidity issues typically hold their loans. | |
| That is why only about 40 percent of the loans in the 7(a) | |
| market are sold into the secondary market. Most of the loans, a | |
| majority of the loans are actually held and not sold. | |
| Ms. ADAMS. Okay. All right. I am out of time. Mr. Chair, I | |
| yield back. Thank you. | |
| Chairman KELLY. I thank the ranking member. | |
| I do want to recognize both our chairman, Chairman Chabot, | |
| from the great State of Ohio, and our Ranking Member Velazquez | |
| from New York. And I thank both of them for honoring me by | |
| being here today. | |
| And now I recognize the gentleman from Kansas, Dr. | |
| Marshall. | |
| Mr. MARSHALL. Mr. Chairman, I am so excited to be here. It | |
| is a breath of fresh air to talk about a government-private | |
| partnership that is working. I am just here to celebrate. I | |
| needed a breath of fresh air. | |
| Thank you so much for the people that have made the effort. | |
| We need to keep accentuating the positive, and I appreciate | |
| some of you brought solutions. Ms. Blankenship talked about a | |
| 2-year funding commitment. What a novel idea to give you all | |
| certainty. I hope that the chairman and our staff take notes of | |
| these possible solutions. And Ms. McDonald, you talked about | |
| best practices. Give me the best practices and we will do it. | |
| What a novel idea. Timeliness. These people that need the | |
| money, they need to get in the game now because 6 months from | |
| now may be too late for this business opportunity. | |
| You talked about software. Good luck with that. I have been | |
| fighting that one wherever I go. | |
| I do not know about you all, but my community woke up | |
| November the 9th, and it was a breath of fresh air. My | |
| entrepreneurs have been drowning in regulation, and all of a | |
| sudden they started popping up, coming out of nowhere. | |
| And Ms. Blankenship, have you seen an increased number of | |
| entrepreneurs out there since November the 9th? What is going | |
| on in the business world in Grapevine, Texas? | |
| Ms. BLANKENSHIP. Well, I am proud to say we have seen an | |
| uptick and a demand for entrepreneurs. And really, I think, | |
| personally what I have seen coming through our loan committee, | |
| whether it be SBA or conventional lending, is there is just a | |
| renewed energy out there. During the crisis years, we saw a lot | |
| of our small businesses really pull back on expansion and | |
| investment and resources into their business because they did | |
| not know what the economy was going to do. And I think there is | |
| a new confidence. We are seeing people that would not have | |
| taken a gamble on starting a new business or just trying to | |
| acquire another business. We have seen quite an increase in | |
| that. And I think that accounts for the increase in the | |
| program. The program has been critical to us for 30 years. Some | |
| banks, you know, we see players come in and out of the market | |
| but we have been in it for 30 years. And I think the reason it | |
| works for us and some of the other people that stay in it is | |
| because you have to make a commitment and have your own | |
| resources in-house and just use the program as it was intended. | |
| And it is hugely successful. | |
| Mr. MARSHALL. Well, thanks. And we do understand | |
| commitments to your community to do these types of projects. | |
| Ms. McDonald, talk about agribusiness. I am just curious. | |
| Do you see much SBA loans like this for agribusiness, | |
| agriculture? Is that a big part of your market or not so much? | |
| Ms. MCDONALD. It is not a big part of our market. | |
| Mr. MARSHALL. That is too bad. | |
| Mr. Ashby, I am not sure how rural you are. Do you see much | |
| agri-economics going on with yours? | |
| Mr. ASHBY. We have seen a lot of activity in the poultry | |
| industry and we have participated, I think, probably maybe, I | |
| think, two or three loans last year. There is competition in | |
| that field with FSA. | |
| Mr. MARSHALL. Okay. | |
| Mr. ASHBY. USDA makes those loans, also. But that was a | |
| large growth industry in North Carolina last year. | |
| Mr. MARSHALL. Ms. McDonald, let me come back to you. You | |
| talked about your bagel loan, and that is just a great, great | |
| story. Walk me through this business model just a little bit. | |
| And I am sure you are not supposed to give me too many | |
| specifics. Mr. Ashby talked about a $200,000 average loan, but | |
| a business like the bagel industry, that is not a $400,000--I | |
| mean, are these $40,000 and $60,000, $80,000, 90,000 loans? | |
| Give me just kind of a feel for what your more typical loan | |
| looks like. | |
| Ms. MCDONALD. At Randolph Brooks, our average SBA loan is | |
| $90,000. So these are not high-dollar loans. | |
| Mr. MARSHALL. Yeah. Let's kind of walk through the terms | |
| and differences between this and a more bank-traditional loan. | |
| I mean, I had some experience going through these. You know, | |
| first of all, the differences are does the SBA still guarantee | |
| 85 percent of the loan? Or about how much does it do now? | |
| Ms. MCDONALD. It depends on the amount. So if it is less | |
| than $150,000, then it is 85 percent; if it is more than | |
| $150,000, it is 75. | |
| Mr. MARSHALL. Okay. And, you know, typically, you would | |
| walk into a bank. These are kind of high-risk loans. If they | |
| are a well-qualified person, a bank might be asking 20, 30 | |
| percent down. How much down are these type of loans going to-- | |
| how much capital? | |
| Ms. MCDONALD. So at Randolph Brooks, our conventional loans | |
| are 20 percent down. With the SBA guarantee, it can be 10 | |
| percent down. And because we can extend the term, it makes the | |
| payment much more palatable. | |
| Mr. MARSHALL. Exactly. So you addressed the term. What | |
| about interest rates? You know, as best as applies and apples, | |
| is it about the same as a conventional loan? Is it more? Is it | |
| less? | |
| Ms. MCDONALD. I mean, it is a little bit more. You are | |
| taking on the risk. | |
| Mr. MARSHALL. Meaning a little bit more, like half a point, | |
| 50 basis points, or what? | |
| Ms. MCDONALD. I could not answer that. | |
| Mr. WILKINSON. The interest rates are statutorily set. | |
| There is a maximum rate of prime plus 2-3/4. The average | |
| interest rate today is running at prime plus 2. | |
| Mr. MARSHALL. Thanks. That solved it. Thank you. | |
| Chairman KELLY. The gentleman's time is expired. | |
| I now recognize the ranking member from New York, Ms. | |
| Velazquez. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. | |
| Ms. Blankenship, thank you for being here today, and it is | |
| really nice to see you again. | |
| I understand that SBA has been slow to fulfill their | |
| mandate to maximize the effectiveness of SBA LINC and SBA One. | |
| It is critical that SBA is using the best technological | |
| solutions to do so. How important is it to community banks and | |
| other SBA lenders that SBA continues to streamline their | |
| processes using technology to maximize the usefulness of SBA | |
| LINC and SBA One? | |
| Ms. BLANKENSHIP. Well, I think especially of our community | |
| bank, timeliness is everything. So any advances and | |
| streamlining procedures that the SBA can finish up this SBA One | |
| and the LINC--it is not fully operational right now. We are | |
| using a third-party software and we are basically running those | |
| parallel. And we do get continued and regular communication | |
| from SBA encouraging us to use SBA One. And in talking to our | |
| lenders on the SBA side, they are very encouraged by the final | |
| product should it become fully functional. But right now it is | |
| not fully functional, but it looks like it will greatly | |
| increase our efficiencies. It will increase our turn times, and | |
| I think someone mentioned that funding is critical many times, | |
| especially in a small business startup or acquisition. | |
| Ms. VELAZQUEZ. Funding is critical, and in terms of funding | |
| for SBA? | |
| Ms. BLANKENSHIP. Well, the funding for SBA is critical, but | |
| our ability to fund---- | |
| Ms. VELAZQUEZ. Sure. | |
| Ms. BLANKENSHIP.--in a timely manner is very critical as | |
| well. | |
| Ms. VELAZQUEZ. Yes, I agree. | |
| Mr. Wilkinson, we have heard from many lenders about SBA's | |
| SOPs under lender guidelines. What is your view of those SOPs, | |
| and can they be improved? | |
| Mr. WILKINSON. Well, just as a point of clarification, | |
| there are regulations that SBA has issued over the years, and | |
| they are fairly short. And then in addition to those | |
| regulations they have put out what they call Standard Operation | |
| Procedure Manuals, and those are not so short. They are pretty | |
| thick. And those are the ones that we have to pay very, very | |
| close attention to. Sometimes those SOPs get changed rather | |
| quickly, and sometimes without notice. We see it from emails | |
| coming in from some of our members. But for the most part, SBA | |
| does try to work with us and find ways to streamline the | |
| program. | |
| If we go back to just fiscal year 2012, this was a $15 | |
| billion program. I tip my hat to the last couple or three folks | |
| that have been in charge of the Office of Capital Access at | |
| SBA. They were all former bankers. They understood our issues | |
| when we brought them to them, and really worked to try to | |
| streamline it. | |
| So from a $15 billion program in 2012--and we have a | |
| request out for next year to make it a $30 billion program. So | |
| while the SOPs can be somewhat onerous and we pull our hair out | |
| sometimes in trying to figure out what some of the changes are, | |
| the fact is that things have gotten a lot better and we are | |
| looking at an industry that has doubled since 2012. | |
| Ms. VELAZQUEZ. Glad to hear that. | |
| Mr. Wilkinson, I know that several members today have | |
| raised the Credit Elsewhere Test, but I want to ask you about | |
| whether or not you believe that there are instances where some | |
| lenders are not adhering to this test. | |
| Mr. WILKINSON. Could there be some lenders who are | |
| originating loans that could be done conventionally? I could | |
| not say unequivocally the answer is no. I mean, there is most | |
| likely somebody who has made a loan today where a borrower | |
| could get a conventional product. But that is where the role of | |
| lender oversight at SBA comes into play. | |
| As Ms. Blankenship described, every loan file has to | |
| explain why they cannot make that loan on a conventional basis, | |
| and they have to cover the things that cause that reason, be it | |
| lack of collateral or lack of cash flow that meets their | |
| conventional standards. Perhaps it is because the borrower | |
| needs the 25-year maturity rather than the much shorter | |
| maturity that banks like to do on conventional financing. That | |
| documentation needs to be in the file. And if it is not there | |
| and that lender goes to ask for the guarantee to be honored, | |
| chances are the answer is going to be no to the guarantee | |
| request. | |
| Ms. VELAZQUEZ. Okay. Thank you, Mr. Chairman. I yield back. | |
| Chairman KELLY. I thank the gentlelady. | |
| I now recognize the great gentleman from Nebraska, Mr. | |
| Bacon. | |
| Mr. BACON. Thank you for being here. I appreciate your time | |
| and traveling here. I am grateful to you. | |
| Most of my questions were already asked. I just want to | |
| express my concern with your comments, Mr. Ashby, about the | |
| banks that are closing, our community banks and the | |
| consolidations, a lot of it a result of Dodd-Frank. I think | |
| that is an underreported story, and we here should be concerned | |
| about it in Congress. I mean, for small communities, it is a | |
| bad trend and I think we have got to fix that. So I would have | |
| a commitment to help you out with that. | |
| On that note with Dodd-Frank, when I talk to our folks in | |
| the Second District of Nebraska, I hear from the banks it is | |
| very hard to give small loans anymore separate from the SBA | |
| because of the Dodd-Frank regulations. I think that forces a | |
| lot of our small businesses to go to the SBA, which is a | |
| government program and policy causing a problem and then using | |
| another government solution to help fix it. Is this a correct | |
| observation? Do I have that right? For anybody who would like | |
| to answer. | |
| Mr. WILKINSON. Our program has grown dramatically over the | |
| last few years and I do not know that we could singularly say | |
| that it was because of Dodd-Frank. I think there are a lot of | |
| things. The economy is improving. There are more entrepreneurs | |
| looking to borrow today. Our loan volume, our growth is up | |
| year-to-date about 7 to 8 percent over last year. Are there | |
| provisions of Dodd-Frank that are pushing lenders to shrink | |
| their conventional credit box and expand their SBA box? I would | |
| say the answer is probably yes. To what extent I could not | |
| quantify that. | |
| Mr. BACON. Okay. | |
| Mr. ASHBY. At Surrey Bank, we do not think there is as | |
| large a business opportunity in lending to individuals for | |
| personal needs as there are in small business lending because | |
| these regulations are very complex and the risk of running | |
| afoul of those regulations is significant. | |
| Mr. BACON. One more question. I think each of you touch on | |
| it just a little bit, but I would love to have clarity | |
| together. If you could say or tell us one thing you would like | |
| us to help improve with the SBA and the 7(a) process what would | |
| it be? | |
| Ms. BLANKENSHIP. I would like to see us be able to | |
| refinance an existing SBA loan on our books. We probably lose | |
| three to four loans a year because the rules will not allow us | |
| to take out another SBA loan, and it becomes particularly | |
| cumbersome when it has been sold into the secondary market. But | |
| as a result, we end up losing not only the customer but the | |
| deposits, so the deposits go out of our community bank. That is | |
| deposit dollars that could have been leveraged into other loans | |
| and expansion into the community. And that is really a key | |
| obstacle for us right now. So we would like to see that | |
| refinance rule revisited. | |
| Mr. BACON. Thank you. Great input. | |
| Ms. McDonald? | |
| Ms. MCDONALD. As I mentioned earlier, it would be great to | |
| have any unwritten rules or best practices published so that we | |
| do not find out after the fact. It would save us a lot of time. | |
| It would save the SBA a lot of time. | |
| Mr. BACON. I think everybody would like that. | |
| Ms. MCDONALD. Yes. | |
| Mr. BACON. Any job they are in. | |
| Mr. Wilkinson? | |
| Mr. WILKINSON. Well, mine is more at a programmatic level. | |
| Over the last few years we have bumped into our authorization | |
| cap repeatedly, and we had proposed--last year it was included | |
| in--the budget request for the current year has been improved | |
| by OMB and actually was introduced in the Senate as potential | |
| language to give the administrator of the SBA the opportunity | |
| to increase our authorized cap with notice to the | |
| Appropriations Committees by a certain percentage, 10, 15 | |
| percent. So, for instance, this year, she could raise it | |
| another $3 billion, or up to $3 billion with notification to | |
| the Appropriations Committee so long as the program is | |
| operating at a zero credit subsidy. | |
| So no appropriations are needed. It would give us that | |
| flexibility so we are not worrying about did we guess exactly | |
| right on the amount of loan volume we are going to see 18 | |
| months down the road, because that is a hard task to do. And | |
| with that kind of flexibility in the authorization cap, it | |
| would make my life a lot easier. | |
| Mr. BACON. Thank you. And with about the 40 seconds | |
| remaining, Mr. Ashby? | |
| Mr. ASHBY. We are a portfolio lender. We are a small bank | |
| and so I am kind of a small bank advocate. But I think one of | |
| the things that changed this past year was the inability for | |
| banks to write an SBA loan if it would get over their loans to | |
| one borrower limitation. And in a lot of these small | |
| communities that may have $100 million in assets and say $8 | |
| million in capital, that does not give you a very large loan | |
| limit that you can make to some of these customers in your | |
| market that may actually need that loan. So I think for | |
| portfolio lenders it would be great if there could be a carve- | |
| out for certain sized banks. | |
| Mr. BACON. Okay. Thank you very much. I appreciate your | |
| recommendations, and I yield back. | |
| Chairman KELLY. If it is okay with the panel, I think we | |
| are going to do another round of questions. Ms. Adams and I | |
| have both agreed. Is that okay with you guys? And so I will | |
| recognize myself for 5 minutes. | |
| My first question is, and we kind of talked around this, | |
| but is the Credit Elsewhere Test, is it strong enough? And I | |
| would just like to hear your comments on that. | |
| Mr. Wilkinson, I guess we will start with you. | |
| Mr. WILKINSON. Well, I think it is. Clearly, it is raising | |
| a lot of questions here on the Hill as to whether it is or not. | |
| But I think from the lender's side we understand that we have | |
| to document in the file why that borrower cannot get | |
| conventional financing. And could we put some other language | |
| and statute to make that even more clear? That is a possibility | |
| and we would be happy to help draft some language with that, | |
| but it is pretty clear in our books. We treat what SBA means by | |
| credit elsewhere and the things that are detailed out in the | |
| SOP on how you document that. | |
| Chairman KELLY. So you feel like it is strong enough and it | |
| is clear enough that you understand it and it is the right test | |
| right now, is that correct? | |
| Mr. WILKINSON. I understand it, and I think our members | |
| understand it. | |
| Chairman KELLY. Ms. Blankenship? | |
| Ms. BLANKENSHIP. I think it works for us right now. If you | |
| look back at our historical volumes, they did not increase or | |
| decrease because of this test. And remember, when you are a | |
| small community bank, you have a fiduciary responsibility to | |
| your customer. I mean, we go to church and schools. Our kids go | |
| to school together. We cannot take advantage of our customer. | |
| So it is our job to put that customer in the right finance tool | |
| to get them their credit availability. Our reputation and | |
| integrity is riding on this as well. | |
| Chairman KELLY. Mr. Ashby, do you agree? | |
| Mr. ASHBY. I agree. When you look at our percentage of | |
| loans that we have with a SBA guarantee that are business- | |
| related purposes, it is 19 percent. And so when you just look | |
| at the broad category of business opportunities in our area | |
| that is not as vibrant as others, that is a very believable | |
| percentage. | |
| Chairman KELLY. And Ms. McDonald? | |
| Ms. MCDONALD. I think everybody has said it really well. We | |
| have a fiduciary duty to do the right thing. Everybody here | |
| agrees with that. We have to be able to note in the loan file | |
| or document the reasons why we went with an SBA loan, if we | |
| were ever audited, we can confidently give the information. | |
| Chairman KELLY. Thank you. And I still start with you | |
| again, Ms. McDonald, since I left you the last, my second | |
| question is does the SBA have the correct tools in place to | |
| provide oversight? | |
| Ms. MCDONALD. I think so. We have a very good relationship | |
| with the SBA. We are constantly talking to them about ways to | |
| improve the process. I would say yes. | |
| Chairman KELLY. Mr. Ashby? | |
| Mr. ASHBY. Well, SBA has had explosive growth over the last | |
| few years. You know, I think they are doing a good job. Mr. | |
| Wilkinson spoke to the PARRIS SCORE. And I do not know if those | |
| are confidential reports sent out quarterly to the banks that | |
| are participating in the programs, but they cover a lot of | |
| important things: your performance, your asset management and | |
| regulatory compliance risk management, and any special items | |
| and risk factors that the SBA sees out there. So I think it is | |
| well done. | |
| Chairman KELLY. And either one of you two are welcome to | |
| comment. | |
| Ms. BLANKENSHIP. Well, just as a preferred lender, you | |
| know, we have to have integrity in our portfolio and meet | |
| certain standards and not go over loss ratios. So I think that | |
| the oversight is working for us now. With the growth in the | |
| program you may need to enhance the resources at SBA, but for | |
| players like us, I think we are not feeling lack of oversight. | |
| Mr. WILKINSON. I think it is a critical part of our | |
| business. We have a conference call every other week with the | |
| Office of Credit Risk Management to talk about issues that are | |
| out there. We stay very focused on oversight. Do they have | |
| enough tools and resources? We would like to see them. You | |
| know, they had approved prior to the hiring freeze six full- | |
| time equivalents to come on to be the lead auditors. Right now | |
| they hire contractors to do those. Hopefully, when the hiring | |
| freeze is lifted, SBA can hire their own staff that is | |
| dedicated specifically for doing those reviews. | |
| We hear from our members that a lot of times they are | |
| training the consultants on what they ought to be examining | |
| that lender for, which does not seem to work well at all. So we | |
| are hopeful that they will be able to get that done. | |
| We know that the Office of Credit Risk Management is | |
| supposed to get a certain allocation of resources every year. | |
| We would like to make sure that the Office of Credit Risk | |
| Management is actually getting those resources to make sure | |
| that they do have the tools necessary to stay on top of our | |
| growth. | |
| Chairman KELLY. And I yield back. And now I recognize Ms. | |
| Adams. | |
| Ms. ADAMS. Thank you, Mr. Chairman. | |
| Ms. McDonald, credit unions are a vital part of our | |
| Nation's lending to small businesses and share the same | |
| mission, people helping people. How can Congress make it easier | |
| for credit unions to participate in SBA loans, SBA programs? | |
| Ms. MCDONALD. Well, I think we have to look at raising the | |
| member business cap. At Randolph Brooks, we are 6-1/2 percent | |
| loaned out, so we are not near the cap, but there are a lot of | |
| small credit unions out there who cannot get into SBA lending | |
| because as soon as they put in the resources and spend the | |
| money and spend the time, they get a couple of loans and then | |
| they would have to shut down their program. | |
| Ms. ADAMS. Okay. Encouraging more credit unions to | |
| participate in SBA programs is critical to serving many | |
| businesses in underserved markets. So what impact will | |
| increased credit union participation mean to small firms? | |
| Ms. MCDONALD. Well, it gives people the opportunity--it | |
| gives credit unions the opportunity to serve their members. I | |
| mean, that is why Randolph Brooks got into member business | |
| lending. Our members were asking for this type of loan. And so | |
| the more players that are out there able to offer these loans, | |
| the more you are going to have them in the communities that we | |
| serve. | |
| Ms. ADAMS. Let me ask. Do you all recruit members? You say | |
| your members are asking. I am just curious. | |
| Ms. MCDONALD. So we have membership, and we serve them for | |
| their personal loans, their auto loans, their mortgage loans, | |
| and some of those same members, because they trust us, have | |
| come to us and say, you know, we would like to have our | |
| business needs served by you. | |
| Ms. ADAMS. Okay. Do you do any special outreach or it is | |
| kind of word of mouth? | |
| Ms. MCDONALD. Not particularly for business loans. We do | |
| outreach for members in general and then they come to us for | |
| their business needs. | |
| Ms. ADAMS. Okay. Thank you. | |
| Ms. Blankenship, in your written testimony, you note the | |
| increase in authorization for the 7(a) program that was | |
| required in July 2015. Could you please elaborate on the | |
| importance of stable funding and the proposal for a 2-year | |
| funding commitment? | |
| Ms. BLANKENSHIP. Our loans go a loan committee and we | |
| approve those loans in, let's just say it is 30 or 60 days in | |
| advance of closing the SBA loan. So at any given time we have | |
| approved loans that have not closed. And as Mr. Wilkinson said, | |
| sometimes those loans fall out. For whatever reason, they end | |
| up not closing. But we have this listing of loans that our loan | |
| committee has approved and we have told the customer was | |
| approved, but then in order to get it fully funded, we have to | |
| get the authorization from SBA. And so you are always fighting. | |
| We are trying to project, too, into the future, how much | |
| funding will be available based on the total market demand. And | |
| it is continually and annually a challenge that is I think | |
| particularly a challenge for smaller community banks and other | |
| SBA participant lenders. And if we could go to a 2-year | |
| funding, that would give us--the regulators like to see us plan | |
| and do our risk assessments annually, and it would just help us | |
| with our funds management, our liquidity, and our funding | |
| needs. | |
| Ms. ADAMS. Okay. Thank you very much. | |
| Mr. Wilkinson, what efforts have the National Association | |
| of Government Guaranteed Lenders made to expand the universe of | |
| small business lending to traditionally underserved markets? | |
| Mr. WILKINSON. Thank you for that question. We have been | |
| working diligently with the SBA on what we call our smart | |
| business toolkit. It is a program that we put together to help | |
| small businesses understand how to get credit ready, and we | |
| have paid for the underwriting of that course and have given it | |
| to SBA. We have had it translated into Spanish. We have been | |
| working with the Urban League to get that program out into | |
| their membership as well. We have had veteran outreach | |
| programs. We take lending to underserved markets very seriously | |
| and I think it is showing in that the numbers across the board | |
| are up in many of the underserved areas. | |
| Ms. ADAMS. Okay, great. Thank you very much, Mr. Chair. I | |
| yield back. My time is up. | |
| Chairman KELLY. I thank the ranking member and gentlelady | |
| lady from North Carolina again. Thank you for today. | |
| Thank you, witnesses, for being here today and sharing your | |
| thoughts and views. I believe it is important to hear directly | |
| from lenders participating in the program. Your role is | |
| extremely important to our hardworking small businesses that | |
| are striving every day to create themselves and to grow, to | |
| expand and create jobs for others in my district and the | |
| ranking member's district and in districts all across this | |
| great Nation. It is vital that the 7(a) Loan Program operate in | |
| an efficient manner and on behalf of all our small businesses | |
| and the American taxpayer. We will use this conversation from | |
| today as we continue to review and examine SBA's loan programs. | |
| I ask unanimous consent that the members have 5 legislative | |
| days to submit statements and supporting materials for the | |
| record. | |
| Without objection, so ordered. | |
| This hearing is adjourned. | |
| [Whereupon, at 12:04 a.m., the Subcommittee was adjourned.] | |
| A P P E N D I X | |
| [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] | |
| Mr. Chairman, Ranking Member Alma Adams, and members of the | |
| Committee--my name is Tony Wilkinson and I am President and | |
| Chief Executive Officer of the National Association of | |
| Government Guaranteed Lenders (NAGGL), a national trade | |
| association of approximately 800 banks, credit unions, and non- | |
| depository lenders who participate in the Small Business | |
| Administration's 7(a) loan guarantee program. | |
| The American entrepreneurial spirit is stronger than ever. | |
| Unfortunately, there is a very real gap in conventional bank | |
| lending in this country and even the most qualified business | |
| owners often struggle to secure financing that meets their | |
| business needs. A small business seeking capital is often | |
| offered loans with terms of 90-days to 3 years when they really | |
| need much longer term financing to thrive. The needs of this | |
| country's small businesses have always been a depository | |
| mismatch for banks that simply cannot, or may be reluctant to, | |
| tie up their capital in long-term loans for borrowers, | |
| especially in the wake of the Recession. | |
| At the heart of the SBA's success is the 7(a) loan program, | |
| the agency's largest public-private partnership with close to | |
| 2,000 active participating private-sector financial | |
| institutions. These lenders make private-sector loans to small | |
| business borrowers who are creditworthy and healthy, but that | |
| fall through the very wide and well-known lending gap that | |
| American small businesses face. Instead of 90-day to 3-year | |
| term loans, the 7(a) loan program loan has an average term of | |
| 16 years--in other words, the kind of long-term financing that | |
| small businesses need to grow and thrive, but that generally | |
| cannot be found in the conventional market. | |
| In Fiscal Year 2016, financial institutions large and small | |
| provided a little over $22.9 billion in loans to about 64,000 | |
| small businesses nationwide through the 7(a) loan program. | |
| Unlike other federal programs that pass the cost on to the | |
| taxpayer, the 7(a) loan program is completely self-funded by | |
| the fees collected from lenders and borrowers. In fact, the | |
| 7(a) loan program has returned more than $1.55 billion--that's | |
| with a ``b''--to the Treasury since Fiscal Year 2010. In other | |
| words, the 7(a) loan program is currently a revenue stream for | |
| the federal government. | |
| Numbers don't lie. About 500,000 jobs are estimated to be | |
| created or retained annually thanks to the 7(a) loan program. | |
| In addition, there are other benefits that are often hard to | |
| measure, like increased tax revenue governments, and community | |
| growth driven by small business expansion in small towns across | |
| the country. | |
| SBA 7(a) lending is a rare program where the federal agency | |
| has figured out how to get out of its own way and leverage | |
| private-sector expertise: lenders know how to make loans. SBA | |
| does not pick ``winners and losers'' because SBA does not make | |
| the loans and its 7(a) loan program is open to any eligible, | |
| creditworthy small business borrower. The 7(a) program does not | |
| supplant the lending market; it supplements it. SBA | |
| conditionally guarantees a percentage of the loan, leaving a | |
| healthy level of risk on the lenders as incentive to serve as | |
| prudent stewards of the program. | |
| I must stress this point because it is critical to | |
| understanding the lender's `skin in the game': SBA's guarantee | |
| is a contingent guarantee, which means that if a lender fails | |
| to fully follow 7(a) program requirements and meet its | |
| responsibilities, the SBA can--and does--reduce the amount of | |
| the guarantee payment to lenders. In the most egregious cases | |
| of imprudent lending, the SBA completely denies its liability | |
| under the guarantee. Therefore, the very nature of the | |
| guarantee relationship serves to assure that lenders comply | |
| with the various SBA regulations while engaging in quality | |
| lending. The guarantee program is a sharing of risk and not a | |
| complete transfer of risk. Beyond responsibilities to the SBA | |
| and the taxpayer, as responsible stewards of the program, | |
| lenders have an ongoing responsibility to their federal and | |
| state regulators, their internal regulatory oversight groups, | |
| and even their shareholders to ensure that safe and sound | |
| lending practices are maintained. In part, this `skin in the | |
| game' is what makes the private sector such ideal partners in | |
| the 7(a) loan program. | |
| NAGGL is pleased to testify in front of the Subcommittee on | |
| Investigations, Oversight, and Regulations because we recognize | |
| the benefit of quality lender oversight and strongly support | |
| the continuing implementation of SBA's oversight program. Since | |
| the introduction of federal credit reform, our member | |
| institutions have witnessed the impact that portfolio | |
| performance has on subsidy rates and program fees. And, just as | |
| important as maintaining healthy portfolio performance, proper | |
| lender oversight is needed to protect the main purpose of the | |
| 7(a) loan program--its public policy mission to serve those | |
| small business borrowers in the community who cannot otherwise | |
| receive credit elsewhere on reasonable terms and conditions. An | |
| appropriate oversight approach must also include consideration | |
| of how well the public policy goals of the program are being | |
| met. In other words, effective oversight ensures that | |
| Congressional intent is met. | |
| As Members of the House Small Business Committee, and of | |
| the Congress as a whole, the maintenance of the SBA programs | |
| and the responsibility to oversee the agency starts and stops | |
| with you. As the 7(a) lending industry, we strongly join you in | |
| calling on both SBA lending partners and the SBA itself to | |
| continue their efforts to maintain the integrity of the | |
| program. Our joint goal is for the 7(a) loan program to stand | |
| the test of time in order to serve many more thousands of small | |
| businesses across the country. And, NAGGL members fully | |
| understand that it is in their individual and collective best | |
| interests that SBA continue to engage in a sustained, effective | |
| lender oversight program to meet that goal. | |
| History shows that the lending community is aware of the | |
| need to work with the SBA to police itself. For example, it was | |
| the 7(a) industry that raised concerns about the SBA's | |
| implementation and management of the now discontinued LowDoc | |
| Program soon after it was introduced. Why? There were no | |
| written policies for quite some time after the LowDoc pilot | |
| program was implemented. Similarly, in the 1990s, it was NAGGL | |
| that raised concerns to SBA and Congress about the practices of | |
| the industry's then largest lender. Also, in 2007, I testified | |
| before the Senate Small Business Committee to advocate for | |
| continued onsite reviews of 7(a) lenders, insisting that | |
| offsite reviews alone would not be enough to capture | |
| potentially risky behavior. I could go on, but the evidence is | |
| clear: lenders and the industry do care about the integrity of | |
| the 7(a) loan program. | |
| At the same time, it is also important that the lender | |
| oversight pendulum does not swing too far in the opposite | |
| direction resulting in lenders and borrowers finding the | |
| program unattractive, or resulting in duplication of existing | |
| oversight activities from other regulatory agencies (as well as | |
| a duplication of the costs already associated with those | |
| activities). It is an established fact that the bank and credit | |
| union industries already have substantial lender oversight from | |
| the Office of the Comptroller of the Currency (OCC), the | |
| Federal Deposit Insurance Corporation (FDIC), the National | |
| Credit Union Administration (NCUA), the Federal Reserve Board | |
| (FRB), and various state banking regulators. NAGGL has always | |
| believed that SBA should be required to demonstrate that it is | |
| adding value to current federal and state oversight efforts, | |
| not merely duplicating existing efforts. | |
| So, what is a current snapshot of SBA oversight? The SBA | |
| Office of Credit Risk Management (OCRM) is working overtime at | |
| smart, effective oversight of a fast-growing program. | |
| One notable improvement is OCRM's coordination with other | |
| federal bank regulators. In 2007, when testifying in the | |
| Senate, I advocated for SBA to partner with the federal and | |
| state banking regulators on procedures and lenders of interest | |
| to ensure that the safety and soundness testing of SBA | |
| portfolios was being conducted in a way that was consistent | |
| with the requirements imposed on participating lending partners | |
| by their regulators. I said then: | |
| ``We recognize that an inter-regulatory agency | |
| partnership will require the commitment and cooperation | |
| of several agencies; however, we believe that this type | |
| of arrangement is necessary to provide the most cost | |
| effective and meaningful determination of risk. We | |
| would hope that the SBA is willing to pursue this | |
| avenue prior to arbitrarily requiring that | |
| participating lenders bear the cost of additional | |
| regulatory examination.'' | |
| In the final months of 2016, nearly ten years after that | |
| testimony, SBA entered a Memorandum of Understanding (MOU) with | |
| the FDIC to coordinate information sharing on mutual `lenders | |
| of interest'. NAGGL continues to encourage SBA to negotiate | |
| similar MOUs with the OCC and the Federal Reserve Board. This | |
| kind of coordination reduces duplication of federal efforts and | |
| is critical to an SBA oversight process capable of keeping up | |
| with lending program growth. | |
| It is important to note that just a decade ago, the SBA's | |
| oversight efforts only applied to the largest lenders, even | |
| though its own statistics showed lenders with portfolios under | |
| $1 million still pose a significant risk to the 7(a) loan | |
| program. And it was only recently, in December 2014, that the | |
| SBA created and implemented the PARRiS review system, a risk- | |
| basked review protocol that oversees all 7(a) lenders and takes | |
| into account qualitative and quantitative performance data. | |
| PARRiS stands for ``Portfolio Performance,'' ``Asset | |
| Management,'' ``Regulatory Compliance,'' ``Risk Management,'' | |
| and ``Special Items.'' The PARRiS methodology is meant to | |
| better identify a lender's specific risk areas, assess the | |
| level of risk a lender poses to SBA, and to make | |
| recommendations for corrective action. Lenders are scored ``1'' | |
| through ``5'' as part of a data-driven lender-profile | |
| assessment. Lenders are also subject to multiple levels of | |
| scrutiny and reviews, from analytical and virtual to full | |
| onsite reviews. | |
| By most regulatory practice standards, having been | |
| implemented just two years ago, the PARRiS system is in its | |
| infancy. We encourage you, as authorizers, to allow the PARRiS | |
| system to continuing to develop ever greater sophistication and | |
| to support SBA's ongoing improvement efforts. For instance, | |
| this past January and after nearly two years of advocacy on the | |
| issue, NAGGL successfully shepherded through a policy change in | |
| PARRiS that establishes a lender mission rating in the | |
| methodology used to risk rate lenders. Prior to this change, | |
| PARRiS' lender risk rating did not account for traditionally | |
| lower performance of loans to underserved markets, yet lenders | |
| were simultaneously strongly encouraged to focus on underserved | |
| markets. Now, with this policy change to PARRiS a reality, | |
| lenders are given ``credit'' if they meet certain benchmarks in | |
| lending to an underserved market (small loans, loans to rural | |
| communities, minority-, women-, and veteran-owned businesses, | |
| startups and export businesses)--in other words, the oversight | |
| review process will no longer be at odds with the public policy | |
| mission of SBA lending. | |
| But these are only pieces of an effective lender oversight | |
| puzzle. Authorizers, appropriators, and the SBA must commit to | |
| an open flow of communication regarding what is needed to get | |
| the job done. For example, does OCRM have adequate resources to | |
| conduct the full range of their oversight activities? Is there | |
| enough OCRM staff? These questions are especially relevant as | |
| we see continued increased demand for the SBA programs from | |
| small business borrowers. | |
| Since Fiscal Year (FY) 2014, the authorization cap has | |
| increased by 51% (Note: while the program operates at zero | |
| subsidy, it relies on an authorization cap set by the | |
| Committees on Appropriations in close conjunction when the | |
| authorizers every FY). The net dollars in loans that were | |
| disbursed from participating banks to small business borrowers, | |
| the amount of lending increased by about 28%. This growth is a | |
| result of a confluence of factors, but most pertinent to this | |
| conversation is that as a gap financing program lending where | |
| borrowers cannot find capital conventionally, we should be | |
| growing at a time when conventional lending to small businesses | |
| plummeted post-Recession and has yet to reach pre-Recession | |
| levels. The very fact that volume increased at a time when | |
| conventional lending receded from the market clearly | |
| demonstrates that the 7(a) loan program is indeed doing its job | |
| as a gap financing program. | |
| No one could predict how many small business borrowers | |
| would turn to the 7(a) loan program in the wake of the | |
| Recession, nor how many lenders would see the SBA as an avenue | |
| for being able to help small business borrowers that they were | |
| otherwise turning away. While the gap in access to capital has | |
| always existed for small business borrowers, the climate post- | |
| Recession exacerbated this gap. | |
| With the leadership and action of the House Small Business | |
| Committee, the Senate Small Business Committee, the House and | |
| Senate Committee on Appropriations, and House and Senate | |
| Leadership, the 7(a) program has continued to serve small | |
| business borrowers despite the fact that borrower demand | |
| reached the program's authorization cap prior to the end of the | |
| fiscal year in both FY 2014 and FY 2015. In both of those | |
| fiscal years, the House and Senate were able to pass language | |
| that allowed for the program to be reinstated and avoid a mid- | |
| fiscal year shutdown. Allow me to take a moment to thank you | |
| all for your continued support of the program. | |
| 7(a) volume is a sign of great success for the program. | |
| This period of growth is also the perfect time to ensure | |
| oversight is run appropriately as our potential balance sheet | |
| has more than doubled in size over approximately two-and-a-half | |
| years. As a trade association, NAGGL believes it is perfectly | |
| reasonable to ask questions about whether the oversight | |
| capabilities of SBA have grown commensurate with the increased | |
| volume of the lending program. | |
| NAGGL and SBA lenders are incredibly proud of who we serve | |
| and the role we play in each of your individual districts. Over | |
| the past several years, lending to nearly every underserved | |
| market--from veterans, rural communities, urban areas, women, | |
| Hispanics, and African Americans, to name a few--has increased. | |
| While we can always do more to improve access to capital to | |
| these markets, we are confident that the 7(a) lending industry | |
| is fulfilling the intent of Congress to serve the country's | |
| small businesses. Put simply, the issues that 7(a) loans solve | |
| are the issues that every Main Street across the country | |
| struggle with, and which every legislator, whether Republican | |
| or Democrat, wants to desperately find an answer to over the | |
| next four years--jobs, community rejuvenation, and opportunity. | |
| Chairman Kelly and Ranking Member Adams--I would be pleased | |
| to answer any questions. | |
| [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] | |
| Testimony of | |
| Edward C. Ashby, III | |
| On behalf of the | |
| American Bankers Association | |
| before the | |
| Subcommittee on Investigations, Oversight and Regulations | |
| of the | |
| Committee on Small Business | |
| United States House of Representatives | |
| March 9, 2017 | |
| Chairman Kelly, Ranking Member Adams, and members of the | |
| Subcommittee, I am Ted Ashby, President and CEO of Surrey Bank | |
| & Trust, Surrey Bank is a community bank headquartered in Mt. | |
| Airy, North Carolina with $278 million in total assets. I | |
| appreciate the opportunity to present the views of the American | |
| Bankers Association (ABA) on the state of the Small Business | |
| Administration's (SBA) 7(a) Loan Program and the importance of | |
| this program to my community and banks like mine, The ABA is | |
| the voice of the nation's $16 trillion banking industry, which | |
| is composed of small, mid-size, regional and large banks that | |
| together employ more than 2 million people, safeguard $12 | |
| trillion in deposits and extend more than $9 trillion in loans. | |
| Our bank was chartered in 1996 with a focus on business | |
| lending. At my bank, as is true of my banker colleagues around | |
| the country, we are intensely focused on building and | |
| maintaining long-term relationships with our customers. We view | |
| our customers not as numbers but as individuals and business | |
| owners. The success of Surrey Bank is inextricably linked to | |
| the success of the communities we serve. They are, after all, | |
| our friends and neighbors. | |
| Small businesses are an engine of growth and job creation | |
| for the U.S. economy. In order for small businesses to grow, | |
| they require safe and reliable funding. Community banks in | |
| particularly focus intensely on small business lending. | |
| According to the FDIC, community banks increased small loans to | |
| businesses (defined as less than $1 million) at more than twice | |
| the rate of non-community banks in 2016 and account for 43 | |
| percent of all small loans to businesses. | |
| The SBA programs are an important part of business lending | |
| for many banks. It helps fill a critical gap, particularly for | |
| early stage businesses that need access to longer-term loans. | |
| The guarantee helps reduce the risk and capital required for | |
| banks and facilitates loans that might never have been made | |
| without this important level of support. | |
| In 1999, Surrey Bank began using SBA and other government | |
| sponsored credit enhancement programs as a tool in its strategy | |
| of helping local companies meet their credit needs. As a | |
| portfolio lender, this allowed our bank to attract a wider | |
| range of customers and improve the financial condition of the | |
| bank. SBA granted Surrey Bank its Preferred Lender Status in | |
| 2003 after determining the bank had sufficient experience and | |
| resources to properly administer the program. Since that time, | |
| the bank has actively participated in the SBA 7(a) Loan Program | |
| and has earned ``Community Bank of the Year'' award in North | |
| Carolina twelve of the past fourteen years. | |
| Participation in the SBA 7(a) Loan Program is an integral | |
| part of our business model as a commercial bank. The bank has | |
| $212 million in outstanding loans, of which about 67% (or $142 | |
| million) is for business related purposes. Currently, the bank | |
| has $34.7 million in SBA loans of which $26.5 million is | |
| guaranteed by SBA. Thus, a total of 18.7% of our business | |
| related loans and 12.5% of all loans have SBA guaranties. | |
| The success of the SBA 7(a) Loan Program for my community | |
| and Surrey Bank is evident by the 174 active loans with an | |
| average loan size is $199,366. As an example, the bank extended | |
| credit to a pre-cast concrete company that opened in 2007. | |
| Economic activity was far below expectations and the borrower | |
| experienced difficulty generating working capital to invest in | |
| new work orders. The bank used SBA's Cap Lines Contracts Loan | |
| Program to fund the individual orders. This company now | |
| generates sufficient cash flow to funds its operations without | |
| SBA or bank assistance. Also, the bank extended credit to a | |
| start-up operation engaged in traffic and safety control for | |
| highway and bridge construction. The company started in 2004 | |
| with four employees and two trucks. Since inception, the bank | |
| has extended them 23 SBA loans over 12 years to fund expansion. | |
| The company now has annual revenue over $12,000,000, a fleet of | |
| over one-hundred vehicles and 90 employees. Our success is | |
| replicated over and over across communities in this country. | |
| This is why ABA supports the Small Business Committee's effort | |
| to build on the positive aspects of the Program and consider | |
| improvements that would benefit the business community. | |
| In my comments below, I will outline some of the positive | |
| aspects of the program and provide some suggestions for | |
| improvements to make the program even more effective. | |
| Positive Aspects of SBA 7(a) Loan Program | |
| Let me begin by complimenting the staff in the SBA's North | |
| Carolina District Office. Our bank has received a high level of | |
| support and encouragement from District Director Lynn Douthette | |
| and her staff. The professionalism and dedication to help small | |
| businesses and banks is part of the equation of success of the | |
| SBA programs. In addition, the complementary local programs, | |
| particularly the free counseling through SCORE (Service | |
| Organization of Retired Executives) has proven very helpful in | |
| mentoring business clients. | |
| Here are some key features of the SBA Program that are very | |
| positive: | |
| > The Express Loan Program is very effective. It | |
| reduces the level of paperwork, utilizes the internal | |
| loan policies of the originating bank and reduces the | |
| cost of the transaction to the small business customer. | |
| > Loans to start-up businesses require a business | |
| plan as part of the approval process. This requirement | |
| has proven very useful in helping the owner to consider | |
| various facets of the business that are essential to | |
| achieve profitability and grow the company. | |
| > The program allows the use of projections in start- | |
| up businesses to underwrite cash flow to support the | |
| credit request. Under conventional financing, banks | |
| would normally require an abundance of collateral or a | |
| guarantor with a high level of liquidity to grant | |
| credit. | |
| > The credit score generated by the SBA software to | |
| determine eligibility is very helpful in providing fast | |
| response times to prospective borrowers. | |
| > The program provides for extended loan | |
| amortizations on secured loans at a higher percentage | |
| of the useful life of the collateral. This improves the | |
| borrower's cash flow. | |
| > The advance rates on secured loans are higher than | |
| general loan policy. This reduces the amount of working | |
| capital a small business needs to invest into the fixed | |
| assets of the business. | |
| > The program provides for a long-term commitment | |
| without the time, expense and uncertainty associated | |
| with of balloon payments typically used in conventional | |
| financing. | |
| > Loans can be underwritten based on cash flow | |
| without relying on collateral coverage or book equity | |
| in the business as a condition for credit. | |
| > The use of ``Delegated Authority'' for Preferred | |
| Lenders allows the bank to modify loans. This provides | |
| the borrower an opportunity to work through short term | |
| cash flow issues and or reschedule debt payments | |
| without being forced into liquidation. | |
| > Veterans enjoy reduced fees on loans between | |
| $150,000 and $700,000. | |
| Opportunities for Improving the SBA 7(a) Loan Program | |
| Below are some examples of how the program can be improved, | |
| primarily relating to the servicing of SBA loans: | |
| > SBA loans cannot be consolidated or refinanced by | |
| the same lender. In instances where the borrower is | |
| experiencing rapid growth, the bank is required to make | |
| multiple loans on the same collateral. Frequently, | |
| loans are cross collateralized, which make extending | |
| additional loans more complex. Servicing and | |
| administration of the loans is difficult for the | |
| borrower and the bank. | |
| > SBA guidelines no longer allow a bank to obtain a | |
| guaranty to avoid regulatory loans-to-one-borrower | |
| limitations. This is a disadvantage to small banks that | |
| are portfolio lenders attempting to meet the credit | |
| needs of customers in their market. A carve-out for | |
| banks that are under $1 billion in assets engaged in | |
| portfolio lending should be considered. | |
| > The use of subcontractors in the liquidation | |
| process at times resulted in confusion over the correct | |
| version of the Standard Operating Procedures (SOP) used | |
| to determine eligibility for repurchase. This caused | |
| delays in the liquidation process. We suggest sub- | |
| contractors receive additional training on identifying | |
| the appropriate SOP in affect when the loan was | |
| originated. | |
| > A loan is liquidated based on the type of loan | |
| program. When a borrower has multiple loans, | |
| liquidation can involve multiple service centers in | |
| different states. This creates a duplication of work | |
| for the bank. More importantly, borrowers have a | |
| difficult time making an ``Offer in Compromise'' until | |
| all claims are processed. | |
| > The SBA One platform is not fully operational, | |
| which results in duplication of work to produce the | |
| forms required to properly close the loan. | |
| Conclusion | |
| The health of the banking industry and the economic | |
| strength of the nation's communities are closely interwoven. We | |
| strongly believe that our communities cannot reach their full | |
| potential without the local presence of a bank--a bank that | |
| understands the financial and credit needs of its citizens, | |
| businesses, and government. The SBA 7(a) Loan Program is a | |
| success and should be vigorously supported in the future. It | |
| has encouraged economic growth in our community and allowed | |
| Surrey Bank to meet the credit needs of many small businesses. | |
| The positives of the program are many and the areas of | |
| improvement are primarily related to servicing aspects of the | |
| program. | |
| Before closing, I want to express the concern shared by | |
| many of my banking colleagues that the community banking model | |
| we know today will collapse under the massive weight of rules | |
| and regulations. Lack of earning potential, regulatory fatigue, | |
| lack of access to capital, limited resources to compete, | |
| inability to enhance shareholder value and return on | |
| investment, all push community banks to sell. The Dodd-Frank | |
| Act has driven all of these in the wrong direction and is | |
| leading to consolidations with very real consequences for local | |
| communities. | |
| Last year 251 banks disappeared; since Dodd-Frank was | |
| enacted, nearly 2,000 banks have merged or closed their doors. | |
| For community banks, it goes beyond just our parochial | |
| interests. We are very much a part of our community. It is why | |
| every bank in this country volunteers time and resources to | |
| make their communities better. If the relentless pressures on | |
| our small banks are not relieved, the loss will be felt far | |
| beyond the impact on any bank and its employees. It will mean | |
| something significant has been lost in the community once | |
| served by that bank. This is why it is imperative that the | |
| Administration and Congress take steps to ensure and enhance | |
| the banking industry's capacity to serve their customers, | |
| thereby facilitating job creation and economic growth. | |
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