[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
AN OVERVIEW OF SBA'S 7(A) LOAN PROGRAM
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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
______
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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
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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
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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.
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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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