[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION'S FINANCE PROGRAMS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC, MARCH 9, 2006
__________
Serial No. 109-41
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
_____
U.S. GOVERNMENT PRINTING OFFICE
27-430 PDF WASHINGTON : 2006
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government
Printing Office Internet: bookstore.gpo.gov Phone: toll free
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
SAM GRAVES, Missouri DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire ED CASE, Hawaii
STEVE KING, Iowa MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan RAUL GRIJALVA, Arizona
RIC KELLER, Florida MICHAEL MICHAUD, Maine
TED POE, Texas LINDA SANCHEZ, California
MICHAEL SODREL, Indiana JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
J. Matthew Szymanski, Chief of Staff
Phil Eskeland, Deputy Chief of Staff/Policy Director
Michael Day, Minority Staff Director
SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS
JEB BRADLEY, New Hampshire Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan ENI F. H. FALEOMAVAEGA, American
RIC KELLER, Florida Samoa
TED POE, Texas DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
Adam Noah, Counsel
(ii)
C O N T E N T S
----------
Witnesses
Page
Hager, Mr. Michael, Associate Deputy Administrator for Office of
Capital Access, U.S. Small Business Administration............. 6
Mercer, Mr. Lee, President, National Association of Small
Business Investment Companies.................................. 7
Wilkinson, Mr. Anthony, President & CEO, National Association of
Government Guaranteed Lenders.................................. 9
Chilcott, Mr. Kurt, Chairman of the Board, National Association
of Development Companies....................................... 10
Schubert, Ms. Lynn M., President, The Surety Association of
America........................................................ 12
Mayo, Mr. Grace, President & CEO, Telesis Community CU........... 13
Appendix
Opening statements:
Bradley, Hon. Jeb............................................ 33
Millender-McDonald, Hon. Juanita............................. 34
Velazquez, Hon. Nydia (Ex Officio)........................... 36
Prepared statements:
Hager, Mr. Michael, Associate Deputy Administrator for Office
of Capital Access, U.S. Small Business Administration...... 38
Mercer, Mr. Lee, President, National Association of Small
Business Investment Companies.............................. 45
Wilkinson, Mr. Anthony, President & CEO, National Association
of Government Guaranteed Lenders........................... 53
Chilcott, Mr. Kurt, Chairman of the Board, National
Association of Development Companies....................... 68
Schubert, Ms. Lynn M., President, The Surety Association of
America.................................................... 77
Mayo, Mr. Grace, President & CEO, Telesis Community CU....... 83
Additional Material:
Edwards, Mr. Bill, Association for Enterprise Opportunity.... 90
(iii)
OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION'S FINANCE PROGRAMS
----------
THURSDAY, MARCH 9, 2006
House of Representatives
Subcommittee on Tax, Finance, and Exports
Committee on Small Business
Washington, DC
The Subcommittee met, pursuant to call, at 10:30 a.m., in
Room 2360 Rayburn House Office Building, Hon. Jeb Bradley
[Chairman of the Subcommittee] presiding.
Present: Representatives Bradley, Chabot, Millender-
McDonald, and Velazquez (Ex Officio).
Also Present: Representatives Moore and Sherman.
Chairman Bradley. Good morning. I am going to open this
hearing and welcome all of you to this hearing on the Tax,
Finance and Export Subcommittee of the House Committee on Small
Business. I am pleased to be working closely with my
colleagues--I think they will arrive here shortly, hopefully--
as we review the current state of the finance programs of the
Small Business Administration. And I look forward to hearing
the recommendations made by our witnesses in this regard. That
said, I would like to thank our distinguished witnesses for
taking the time to appear before us today.
Access to capital is a vital element in the success of any
venture. And the knowledge of where to find such resources is
equally essential. Accordingly, one of the key roles of the
Small Business Administration is to provide financial
assistance to American small businesses.
Small businesses are responsible for more than half of the
United States' gross domestic product, and the finance programs
available at the SBA are vital to the development and expansion
of those small businesses. SBA financial assistance is
delivered through investment programs, loan programs, and
bonding for contractors, among other approaches. It is through
these programs that small businesses are able to obtain the
means to grow, create more jobs, increase revenue, and help
strengthen our economy.
Over the years, the SBA and its methods of assistance in
the strengthening of the small business sector of our economy
have undergone changes and improvements. Today we have the
opportunity to hear the comments and recommendations of those
who are on the front line of these programs in order to better
understand the demands of the small business sector and to
continue our support in the most efficient and economical
manner possible.
The President's budget for fiscal year 2007 funds small
business lending at $28 billion. $17.5 billion of that funding
would go to guaranteed loan volume under the 7(a) loan program.
The section 504 loan program, which provides guaranteed
loans for fixed assets, such as land, equipment, and buildings,
would receive $7.5 billion. And guaranteed long-term loans for
venture capital investments in small businesses as a supplement
to the capital of small business investment companies would be
allocated $3 billion.
Congress must continue to enable small businesses to have
access to the capital needed to expand and prosper. The input
of those working closely with these small businesses is vital
to this committee as it moves forward with the SBA
reauthorization. And with your testimony today, we can help
create an environment that fosters the growth and development
of American small businesses.
I am looking forward to hearing the testimony from our
witnesses here today. And I look forward to their thoughts on
this extremely important topic. However, before we do so, I
would like to recognize our ranking member of this
Subcommittee, Mrs. Millender-McDonald. And I know that
Congresswoman Velazquez will be here shortly. And she will have
an opening statement, too. And I will recognize her when she
gets here.
Thank you.
[Chairman Bradley's opening statement may be found in the
appendix.]
Ms. Millender-McDonald. Mr. Chairman, thank you so much.
And good morning to all of you. I am pleased to join with the
Chairman and those members who will be finding themselves into
this committee room today as we discuss an issue of great
importance to our nation's entrepreneurs. And that is access to
capital.
For budding small business owners, a five-year plan is an
essential step towards building a business. This forward-
thinking planning sets a strong foundation and demonstrates a
commitment to success.
Unfortunately, it has been five years since the SBA has
shown that same commitment to America's businesses in the form
of a new reauthorization plan. Instead, every year we have seen
force and have been forced to fend off cuts in the budget
without any improvements to the SBA financial programs that our
nation's entrepreneurs so desperately need.
In our discussion today, I want to bring forth new ideas
that we can use to update and improve our nation's
entrepreneurs access to affordable capital. In today's economy,
securing affordable capital is one of the most important
components in growing a successful small business. Yet, many
small business owners have difficulty qualifying for
traditional bank loans. All too often, they are forced to use
various methodologies of financing, such as credit cards and
personal loans, to fund their business ventures. Because small
business owners cannot access capital in the same way that
large businesses can, it has been Congress' responsibility to
ensure that there are special financing options geared to meet
their specific needs.
This is why it is so critical that we show a commitment to
America's small businesses by enhancing and strengthening SBA's
financing programs. These initiatives, including the 7(a), the
504, new markets venture capital, and SBIC programs, fill an
important role. These initiatives fill a financing gap for
small firms by making loans on great ideas that probably would
not have been looked at twice by traditional banks. By bridging
gaps in the capital markets, these programs have more than
proven their effectiveness over the years.
In fact, since 1953, nearly 20 million small businesses
have received direct or indirect help from one or another of
the SBA programs. In turn, the agency's programs have become
the government's most effective instrument for economic
development: creating jobs and providing stability during times
of uncertainty.
These programs are especially helpful for women,
minorities, and individuals in low-income communities that
often face additional barriers in accessing capital. Their
entrepreneurial success can greatly assist in uplifting their
local economies. This is where special initiatives, such as
SBA's microloan programs, come in.
The microloan program assists under-represented small
business owners with loans that they otherwise would not be
able to attain, even through the SBA 7(a) program. Last year
alone, the microloan program provided entrepreneurs with $20
million in loans and helped our budding entrepreneurs progress
from poverty to successful business ownership.
Still, over the past three years, the Bush administration
has proposed eliminating this vital program. This program
deserves to be supported, not dismantled. Clearly, access to
capital is access to opportunity for our nation's
entrepreneurs. If we sincerely want our nation's entrepreneurs
to have the ability to secure capital, spur economic
development, and create job opportunities, we must support the
SBA programs with the long-term initiatives that will ensure
their survival. This is why it is so important that we are
talking at this time today to review the success of SBA's
financing programs.
Today we will hear testimony from a variety of
organizations and individuals representing the various small
business programs.Drawing upon their experiences in helping our
nation's entrepreneurs succeed, I am hopeful that their useful
insight and recommendations can be used to improve the SBA
programs and ensure the success of our nation's small
businesses.
Mr. Chairman, it is clear that our nation's entrepreneurs
have done an outstanding job of creating jobs and spurring
economic growth. In order to continue their good work, we must
be empowered and they must be empowered with all of the
necessary tools; most importantly, affordable and available
capital. If we want our entrepreneurs to continue serving as
America's main economic drivers and job creators, it is
integral that we form a long-term vision for their vital
initiatives.
Mr. Chairman, I thank you so much for this hearing. And I
look forward to the testimony of all of the witnesses who are
here today.
[Ranking Member Millender-McDonald's opening statement may
be found in the appendix.]
Chairman Bradley. Thank you very much, Mrs. Millender-
McDonald.
Now I would like to yield as much time as you would like to
consume to the ranking member of the committee, Congresswoman
Velazquez. Thank you.
Ms. Velazquez. Thank you, Mr. Chairman. I really appreciate
it. I also would like to thank Congresswoman Millender-McDonald
for letting me sit in on this hearing. And I appreciate all of
the work you are doing on this issue.
The President never misses an opportunity to proclaim that
small businesses are a priority for this administration. Yet,
time and time again, his policies simply do not back up his
rhetoric. No place is this more apparent than in how SBA access
to capital programs are being run.
Ensuring loans are affordable and that relief from rising
capital costs is available are both critical in helping
entrepreneurs to remain a driving force in today's economy.
While this administration has talked the talk, they have
failed to walk the walk. For evidence of this, one only needs
to look at the 7(a) program, the largest long-term lending
initiative for small businesses.
Under the current administration, lending has grown much
more costly and harder to obtain. In the past two years alone,
costs on borrowers have doubled and lender costs have risen by
118 percent, making it increasingly difficult for small
businesses to receive the capital they need.
As if that was not bad enough, in the F.Y. 2007 budget, the
administration plans to further increase the cost of this
program by proposing to raise current fees and creating a whole
new set of fees. This would make the program even more costly,
only pushing 7(a) and other lending programs further out of
reach.
It has become very clear what type of effect these poor
policy choices are now having. Lending was down by $300 million
last quarter. When you factor these new costs, coupled with the
rising interest rates, it is apparent that the trend of less
and less capital going into the economy is only going to
continue.
Traditional capital is not the only place this
administration is failing our nation's entrepreneurs. For the
last year and a half, SBIC's participation in security programs
has been shut down due to mismanagement and poor policy
decisions. However, the agency has yet to propose a new plan to
reopen the program.
I think this speaks to the level of commitment that exists
for this nation's small businesses. When you consider this
decision in light of the fact that currently less than one
percent of venture capital goes to minority businesses, it
really makes you wonder where the administration's priorities
are.
Compounding this is the proposal to abolish one of the most
significant policies affecting low-income entrepreneurs: the
microloan program. So much for compassionate conservatism. It
is just like this administration to put politics in front of
good policy. They continue to call for an elimination of the
microloan program when they do not have the support of one
single member of the House or Senate.
This program makes loans to entrepreneurs that are unable
to get a traditional loan due to inexperience with credit, lack
of access, or the need for an ongoing technical assistance.
Clearly this initiative is crucial for the thousands of
entrepreneurs that have no other means of financing available
to them.
By terminating the microloan program and not reopening the
participating securities program, the administration is turning
its back on start-ups of all types that need access to seed
capital. Blocking access to start-up financing impedes the
formation of new businesses and prevents the job growth that is
still netted in so many parts of this country.
Small businesses are the measured driver of this economy,
but it is crucial that we work together to make sure that they
have the tools needed to thrive and be successful. I don't see
the administration coming to the table with the interest of
small businesses in mind.
This agency's proposals repeatedly represent OMB's interest
and not those of our nation's entrepreneurs. Small businesses
deserve better than this.
Thank you, Mr. Chairman.
[Congresswoman Velazquez's opening statement may be found
in the appendix.]
Chairman Bradley. Thank you very much.
And now I would recognize Congressman Sherman for purposes
of an introduction.
Mr. Sherman. I am here to introduce Grace Mayo of the
Chatsworth Community Credit Union. She is the president and
chief executive officer of that credit union. And that credit
union has really shown among valley organizations in my
district for its dedication to the community. They're building
a new building, which will have a community room.
Grace herself is involved in virtually every charitable and
business organization in the valley. And she has taken a lead
in the credit union movement and will be particularly able to
tell this Subcommittee how credit unions can be involved in
lending to small business.
So I introduce to you a real valley girl who knows her
stuff, Grace Mayo.
Ms. Mayo. Thank you, Congressman.
Chairman Bradley. Thank you very much.
Now I'll turn to the panel. Our first witness is Mr.
Michael Hager, who is the Associate Deputy Administrator for
the Office of Capital Access of the SBA.
Our second witness is Mr. Lee Mercer, the President of the
National Association of Small Business Investment Companies
here in Washington.
The third witness is Mr. Anthony Wilkinson, who is the
President and CEO of the National Association of Government
Guaranteed Lenders in Stillwater, Oklahoma. Thanks for coming
so far.
The fourth witness is Mr. Kurt Chilcott, Chairman of the
Board of the National Association of Development Companies in
McLean, Virginia.
Our fifth witness is Ms. Lynn M. Schubert, President of The
Surety Association of America here in Washington.
And our last witness, as Congressman Sherman introduced, is
Grace Mayo, President and CEO of Telesis Community Credit Union
in Northridge, California. Thank you for coming so far.
So first Mr. Hager. Thank you.
STATEMENT OF MICHAEL HAGER, OFFICE OF CAPITAL ACCESS, U.S.
SMALL BUSINESS ADMINISTRATION
Mr. Hager. Well, thank you Chairman Bradley, Ranking Member
Millender-McDonald,--
Chairman Bradley. If I could just interrupt? I should have
started out by saying that because there are six witnesses in
this panel and we want to make sure we get to questions, if you
could do your utmost to try to stay within the five-minute
rule, summarize? And then we'll be able to have more questions.
Thank you.
Mr. Hager. Thank you again for inviting me to testify
before this committee regarding the SBA's reauthorization and
the fiscal year 2007 budget for capital access programs. I am
here this morning to talk about the SBA's incredible loan
growth over the last five years, our actions to manage that
growth, and our actions to manage the risk associated with that
growth.
We have significantly increased our loan volume since 2001,
more than doubling the number of 7(a) and 504 loans, doing so
at zero additional cost to our subsidy rates to our taxpayers.
The President's fiscal year 2007 proposal provides, as you
indicated, Mr. Chairman, $28 billion for SBA's refinancing of
small businesses. In 2005, we served more businesses than ever
before in our two major loan products. And we increased the
numbers of loans funded by 22 percent in one year, moving from
80,000 in 2004 to 98,000 loans in 2005. During this period,
lending to minorities increased by 23 percent and to women-
owned businesses by 39 percent in terms of the number of loans
funded.
To maintain the zero subsidy cost of these programs, minor
fee changes will need to occur. And in the 7(a) program, the
guaranty fee will increase slightly in 2007, from 54.5 basis
points to 55 basis points, an increase of only one-half of one
basis point.
We are especially pleased that the performance of the 504
program permits the SBA to lower the ongoing fee from 19.8
basis points to 1.8 basis points.
The SBA is seeking authority to cover more of its expenses
through fee authority that will enhance the ability of the SBA
to properly manage our programs. First, we are requesting
authority to charge fees to certify development companies, the
CDCs, in the 504 loan program to cover the cost of oversight.
We have the authority for the 7(a) program and are requesting
comparable authority for the 504 loan program.
Second, we are proposing the addition of an administrative
fee to cover the cost of making loans of more than one million
in the 7(a), 504, and SBIC programs. Now, please, this is
separate from the subsidy rate, which exclusively considers the
credit and potential losses of a loan guaranty program. Again,
it's separate from that.
Based on SBA's 2005 experience, only 3 percent of 7(a)
loans will be impacted. And under the 504 program, only 15
percent of those loans would be impacted.
Managing the tremendous growth of our loan portfolio is
another key priority. Many improvements have been made over the
past several years by centralizing lending functions. We have
centralized 7(a) loan guaranty purchase and liquidation as well
as 504 processing. We are moving toward centralization of the
504 liquidation and purchase components and the remaining 15
percent of 7(a) loan processing.
We now process 504 loans in two to three days, as opposed
to previous time frames of up to six weeks. We also process
guaranty purchase requests in all-time record time. In order to
streamline this process of becoming a preferred lender, we are
also looking at setting up a national point of contact for PLP
lenders, replacing today's 68 points of contact. This move will
reduce processing time from up to 8-9 months to less than 30
days.
We are constantly looking at ways to improve lending
functions and better manage operations. A major initiative
underway is to streamline the liquidation process. The proposed
changes will give the agency more flexibility in managing its
loan portfolios that are being liquidated. If finalized, these
regulations will give SBA more flexibility to sell purchased
guarantied loans using asset sales. And we are also proposing
that lenders fully liquidate loans prior to requesting
purchase. This would be an essential component if we are to
maximize our resources.
We also need to manage the risk in our loan portfolio. We
have a state-of-the-art loan and lender monitoring system
provided by Dun and Bradstreet that incorporates the best
practices of the financial industry. As part of the monitoring
system, we have developed and are introducing the concept of
lender risk ratings using both historical performance and
projected future performance and are able to evaluate every SBA
lender on a quarterly basis.
Lender risk ratings also allow us to prioritize on-site
reviews so those with the poorest performing lenders are
reviewed first and if ratings decline, attention can quickly be
focused on those lenders.
Now, in conclusion, we are very proud of the growth of the
programs and our efforts to ensure that this growth is managed
effectively. Today SBA is helping more small businesses meet
their financial needs than ever before and at no subsidy cost
to the taxpayer.
Let me say again we have three priorities in capital
access: continuing our loan growth, managing that growth, and
managing the risk of that growth.
Thank you for your time today, Mr. Chairman, Ranking
Member, and members of the Committee. I will look forward to
the Q and A time.
[Mr. Hager's testimony may be found in the appendix.]
Chairman Bradley. Thank you, Mr. Hager.
I recognize Mr. Mercer and remind everybody to try to stay
within that five-minute time frame. Thank you.
STATEMENT OF LEE MERCER, NATIONAL ASSOCIATION OF SMALL BUSINESS
INVESTMENT COMPANIES
Mr. Mercer. Thank you, Chairman Bradley, Ranking Member
Millender-McDonald, and full committee Ranking Member
Velazquez, members of the committee.
I appreciate the opportunity to appear today to discuss the
status of the SBIC program. My written testimony speaks for
itself. I believe it addresses all of the issues of relevance.
And I will not repeat that testimony here in detail. Rather, I
would like to make the following points.
The SBIC program is one of the most effective programs in
the world, in the world, in stimulating investment in the
smallest of fast-growing companies called gazelles by many
experts that are the foundation of America's economic
structure. The program has been studied by virtually all
foreign countries interested in stimulating growth in their
small business sectors and has been replicated in one form or
another by many.
At the current time, the Bush administration is bent on
eliminating the equity investment portion of the program, the
participating security program, which represents more than 55
percent of investments made last year, and has proposed an ill-
considered, ill-defined, and damaging new fee for the
subordinated debt investment portion of the program, the
debenture program.
With regard to the participating security program, the
administration's actions ignore the demonstrated need for the
program, a need established in the 2005 hearing held at the
full committee level last year.
The participating security program still exists in law,
though no new funds have been licensed since the close of F.Y.
2004. However, the administration has kept the industry and
this committee jumping through hoops trying to find a
replacement structure because it claims that the underlying
security, the participating security, as an equity security
does not meet the requirements of the Federal Credit Reform Act
for the purposes of a credit subsidy program that can be scored
for appropriations purposes. Without that qualification, the
program would need a dollar for dollar appropriation, obviously
a non-starter.
Now, in January, the administration states in writing that
participating securities are debt securities and specifically
requires SBICs to list those securities as debt in their
financial statements. It cites the Financial Accounting
Standards Board, FASB, as authority for this position.
It seems to me that the administration cannot have it both
ways. And if the participating securities are debt securities,
we can restart the program this year by making simple
adjustments in the fees and cash flows to bring the subsidy
rate to zero. If need be, Congress, the author of the Federal
Credit Reform Act, can state in the reauthorization bill that a
participating security is a debt security for all purposes of
that act.
If the participating security program is not restarted one
way or another, whether, as I have suggested, which is the
easiest way, or through passage of H.R. 3429 or a like bill,
the Bush administration will have succeeded in cutting the SBIC
program by more than half and will have eliminated all of the
SBIC money flowing to start up early stage companies. I do not
believe that that will be a legacy to be proud of.
We hope the committee will hold the administration's feet
to the fire this year so we can solve the problem in a way that
will benefit the small businesses that depend on the program
for equity capital, the precursor to all growth.
To return to the matter of proposed fees for the debenture
program, for all the reasons stated in my testimony, the
proposal is ill-considered and will do significant damage to
individual SBICs, in particular, and the program in general. It
attempts to pass costs to SBICs that they have no ability to
control. Who has the ability to control those costs? That's a
question we would like to have answered.
SBA cannot even tell us to this date how the fee would be
imposed. The Investment Division was not involved in developing
the fee. So we hope and urge the committee to oppose the budget
proposal in that regard.
Finally, I believe our suggestions for the reauthorization
bill are self-explanatory. We have raised them in the past. We
look forward to working with the committee to determine how
those proposals might be adopted to further improve the SBIC
program.
Thank you for your attention. I will be happy to answer
questions at the appropriate time.
[Mr. Mercer's testimony may be found in the appendix.]
Chairman Bradley. Thank you very much.
Mr. Wilkinson?
STATEMENT OF ANTHONY WILKINSON, NATIONAL ASSOCIATION OF
GOVERNMENT GUARANTEED LENDERS
Mr. Wilkinson. Thank you, Mr. Chairman, Ms. Millender-
McDonald, Ms. Velazquez, Mr. Chabot. Thank you for the
opportunity to testify today. I'm just going to quickly
summarize my written statement.
The budget request for 2007 touches on just a few items.
Number one, the administration requests a $17.5 billion program
level for 2007. We had requested $18 billion, just a little
more than they had in their budget proposal. We find the 17.5
to be acceptable.
The budget request also increases the lender fees up to the
statutory maximum. It's not a big increase, going from .545 up
to .55, but the real point is that we are now at the statutory
maximum for that fee and it cannot be increased any further.
The administration also proposes an administration fee.
This is something we are adamantly opposed to. It is, in
effect, a step towards a government-sponsored enterprise. And,
most broadly stated, if we want to move in that direction, we
should have proper debate before we start covering what truly
is a government function at this point.
The other thing that shows up in the fiscal year 2007
budget request is the fact that we have a declining average
guaranty fee in our program. We are making more and more small
loans, which is a good thing. What is missing from the mix is
fewer and fewer large loans. The large loans, in fact,
subsidize the cost of the smaller loans. What has happened over
the last five years is that the dollar volume of small loans
has gone from 18 percent up to 25 percent. Those loans pay a
much lower guaranty fee than do larger loans.
To stop this trend, we are proposing an increase in the
maximum loan size from $2 million up to $3 million and an
increase in the maximum guaranty amount up to $2.25 million. We
think this will be a way to stop the trend of a declining
average guaranty fee. And if we don't stop that trend, we are
going to be faced with some tough decisions in the fiscal year
'08 budget that would include raising fees even further on
borrowers and lenders, something we would not like to see
happen.
The rest of our legislative proposal is to be able to use
the alternative size standard that is available in the 504 and
the SBIC programs. We have requested a national PLP program.
This is something that the SBA has agreed to. And we are
working to get that done.
And, lastly, we had the authorized level of $18 billion.
That summarizes the written testimony. And I would be happy
to answer questions.
[Mr. Wilkinson's testimony may be found in the appendix.]
Chairman Bradley. Thank you very much
STATEMENT OF KURT CHILCOTT, NATIONAL ASSOCIATION OF DEVELOPMENT
COMPANIES
Mr. Chilcott. Again I would first like to thank Chairman
Bradley, Ranking Member Millender-McDonald, and the Committee
Ranking Member Velazquez, as well as the other members of the
Committee on Small Business for your continued support of the
CDC industry and the SBA 504 program.
I represent NADCO as its chair of the board and also CDC
Small Business Finance based in San Diego, where I serve as
President and CEO. I am going to address two things with you
this morning: the proposed SBA budget for 2007 and then NADCO's
legislative proposal.
NADCO has two concerns regarding the proposed budget. First
of all, the authorization ceiling that has been set of 7.5
billion is too low. We have experienced 30 percent annual
growth in this program the last three years. We expect that to
continue. And we need a larger authorization to accommodate
that growth.
If we meet that authorization and exceed it during the
year, it means the program is shut down, rationed, not
available to small businesses. It is disastrous. There is no
reason not to provide more than adequate authority for this
program given the fact it's zero subsidy. NADCO requests that
you provide an authorization level for 2007 of 8.5 billion to
avoid the shutdown in service and accommodate program growth.
The second major issue, as you have heard, is on fees on
small businesses that are proposed for 7(a) and 504 programs.
NADCO agrees with the committee that these fees should be
removed from the budget. It's as detailed in our written
statement.
We do not believe we should place additional costs on our
small businesses that detract from their ability to grow and
create jobs. We are concerned about the precedent of
establishing such an administrative fee. How can we be sure
that, in fact, these costs are justified or SBA will not
continue to increase this fee to cover more of the agency's
overheads?
We also are concerned about that this might be the first
step in moving SBA's capital programs off budget and out of the
purview of Congress. So, in sum, we urge you to make removal of
these fees a top priority.
In the last several years, the CDC industry and SBA have
gone through unprecedented structural changes. We have seen the
centralization of our loan processing functions. And we have
seen considerable expansion of the CDC's area of operations.
These changes are already and are continuing the
fundamentally change the nature of the industry and the 504
program. NADCO believes it's critical that Congress take action
to firmly establish the purpose and future of the CDC industry
and the 504 program.
Aspects of our legislative proposal will help streamline
the program, reduce costs to small businesses, and increase
their ability to utilize the program, but I really want to
focus on one issue. And that is the definition of a certified
development company.
CDCs are the most recent embodiment of state and local
development corporations that were established over 50 years
ago. Our mission and the value that we bring to small
businesses, the SBA, and the communities that we serve has not
and should not change.
That mission is economic development. As not-for-profit
entities, our priority, our passion is to help small businesses
grow, to create jobs, to invest, and become owners and to build
strong communities in local economies.
We play a role, provide expertise and service to small
business and communities and undertake initiatives that banks
cannot and should not do. We don't set profitability, return on
investment, return to shareholders as our mantras. We count how
many businesses we help, how many loans we provide, how many
jobs we create, how much private capital we leverage, how many
loans we make to women, minorities, veteran, rural, low-income,
and what program services and support we provide to meet our
economic development mission.
Our boards of directors and our membership are made up of
economic development directors for cities, counties, and
nonprofits, the Chamber of Commerce, the local CPA, the
community banker.
NADCO is deeply concerned that SBA has taken steps to blur
the lines between the 7(a) and 504 programs, despite their
different missions. And of even greater concern, SBA has
introduced competition to the regulatory process that is
blurring the lines between CDCs and for profit lenders,
deemphasizing our economic development and our accountability
and commitment to our communities.
We urge you to take the steps that are outlined in
legislation, set the course for the future, and clearly define
the purpose and role of the CDC industry as not-for-profit,
financial intermediaries that deliver small business programs
for the purpose of economic development.
Finally, we ask you to recognize and acknowledge the
network of 250 small nonprofit organizations as created over
the course of 25 years, tremendously successful and efficient
economic development finance program that, in turn, supports a
tremendous amount of local economic development programs and
services throughout the country.
I would be happy to answer any questions the committee has.
Thank you.
[Mr. Chilcott's testimony may be found in the appendix.]
Chairman Bradley. Thank you.
Ms. Schubert? I believe also we have a vote in a few
minutes, but I think we can hear both of your testimonies and
then come back for questions.
STATEMENT OF LYNN M. SCHUBERT, THE SURETY ASSOCIATION OF
AMERICA
Ms. Schubert. Thank you, Mr. Chairman. And thank you for
inviting us here to testify today on this critical issue.
We are here for one purpose only. And that is to testify
about the SBA surety bond guaranty program. You may notice this
is the first time you have heard those words, ``surety bond
guaranty program'' since the Chairman's opening remarks. This
is not a program well-known outside of the construction
community and the insurance community, but it is critical and
vital to small businesses, particularly at this time.
The Surety Association was involved many years ago in
creating the program. And we remain committed to the viability
of the program and the workings of the program.
The existing leadership, new leadership, of the program
also appears to be committed. And we look forward to working
with them. But they cannot do it alone. They need your help in
making this program work.
For those of you who are not completely aware of what this
is all about, to obtain a construction project on a public
project, whether it's federal, state, or local, a contractor
needs to provide a surety bond. Small and emerging contractors
have a very difficult time obtaining those bonds until they
show that they have a track record of success and they have
financial backing.
Obtaining loans for these contractors is a wonderful thing,
but it will not get them a surety bond. And they will not get
that work without both the loan and the surety bond.
There are contractors who have the opportunity to
participate, particularly right now, in the reconstruction in
the Gulf Coast states in helping to rebuild those areas as well
as rebuild their own businesses. But those contractors are
going to need surety bonds.
Surety companies, when the economy is good and everything
is strong and contractors are being paid rapidly, sureties are
willing to participate with those contractors and put their
backing behind the contractor because they believe the
contractor will be able to perform the work. If they don't
perform the work, the surety then pays the loss.
In slow economic times, however, those contractors have a
more difficult time completing the work because pay comes to
them slower. Owners are slower in making the payments on the
project. It is more difficult for them to complete the work.
Sureties understand that. They have a responsibility to
make sound business judgments. They have a responsibility to
their shareholders. They cannot take a risk that the contractor
is not going to perform when it's not a sound business risk.
That is where the bond guaranty program comes in.
What the SBA does is provides guarantees up to 70, 80, or
90 percent of the loss depending on the particular program, for
small contractors if a surety will write that bond.
Because the surety writes the bond, the contractor can work
on public construction. They can establish a track record. They
can become a stronger contractor. They then are moved by those
sureties from the bond guaranty program into the standard
surety market, meaning that the surety will write that
contractor without the guaranty, allowing, then, more
capability or capacity for new and different contractors to
come in through the guaranty program.
It's a win-win for everybody who is involved in the
program, but the program is in serious trouble. There has been
very little commitment to the program over recent years. And
there are a few fundamentals that just absolutely have to be
changed to make this program work for small contractors.
First, the program has to recognize that as surety
companies lose money in certain years, the program is not going
to be self-sufficient every year. It will make money some
years, and it will lose money some years.
OMB has determined it needs to be self-sufficient and has
proposed a 60 percent fee increase to the sureties. This is
absolutely untenable. A proposal has been made to reduce the
fee increase but to make up the funds to increase the fee to
the small contractor. The small contractor is already paying
enough to participate in this program. This needs to be
changed.
The rates that sureties are allowed to charge in the
program are stuck in rates that were established in 1987. Those
are 20 years old. If we can just have a change that would allow
sureties to charge the rates that are approved by the state
insurance departments, then the program would be more
financially viable. And there needs to be more funding for
staff and for education of the staff on the surety bond
program.
As you could probably tell by listening to all of the
testimony here today, just like everyone else, the staff at the
SBA regional offices know a great deal about the loan programs
and very little about the bond program. They need training on
the bond program. There needs to be a commitment at the highest
level to this program.
Sureties are interested in the program. However, it has to
be financially viable for them to participate. We would like to
work with the SBA and with Congress to make this a workable
program for small businesses in the United States.
Thank you.
[Ms. Schubert's testimony may be found in the appendix.]
Chairman Bradley. Thank you very much. I think that we are
down to just a few minutes of the close of the vote. So if it
all right with you, Ms. Mayo in particular, Mrs. Millender-
Mcdonald, I think both of us would like to go. And she would
like to be here to hear your testimony.
So if we can postpone you until we get back in about--I
think it's one vote. So probably about ten minutes we should be
back. Thank you. We will be in recess.
[Brief recess.]
Chairman Bradley. Thank you again for your forbearance. At
this time I would like to recognize Ms. Mayo. Thank you once
again for coming so far.
STATEMENT OF GRACE MAYO, TELESIS COMMUNITY CREDIT UNION
Ms. Mayo. Thank you, Chairman Bradley; Ranking Member
Millender-McDonald; and, of course, Ms. Velazquez. On behalf of
the Credit Union National Association, which we refer to as
CUNA--and I will do that within my message--I obviously
appreciate the opportunity to address the Small Business
Administration's funding level and fee structure for the 7(a)
guaranteed program.
I am Grace Mayo once again, President and CEO of Telesis
Community Credit Union. And my wonderful congressman, Brad
Sherman, was delightful to come in and give me that intro. So
thank you for seeing him.
Just so you know, I am also the chairperson of a credit
union service organization as credit unions are cooperatives.
And one of the things that we do best is we share our resources
amongst each other. So with that, we created this MBL CUSO,
member business service called Business Partners. We are
cooperatively owned by 14 credit unions around this country,
and we service 160 of them nationwide.
What we do is we try to use our resources in assisting them
to provide member services, especially the SBA lending program.
So we unite, use these expertise, and get to the membership as
soon as we can.
CUNA represents basically 90 percent of our nation's
approximately 8,800 state and federally chartered credit
unions. With that, we represent over 87 million members. So,
once again, we are so thankful to let us be here and share this
because we are a growing entity in obviously the
entrepreneurship. These are members that have either lost their
jobs, have downsized, and now are looking at becoming
entrepreneurs.
And within my written testimony, as you will notice,
Telesis has been very active. In fact, we are the largest SBA
lender in California. And, darn it, we're going to continue
that because we have seen the enrichment that this program
along with our business lending programs give to the
entrepreneurs.
In my written document, you will see that the first two
have been females. They are, of course, the ones that we are
also trying to make sure that we support accurately. And the
movement totally understands that.
The industry has only been given SBA approval since 2003.
They issued a legal opinion removing restrictions. And so we're
very new to this marketplace. However, we love SBA. And I use
that adjective, but we do sincerely mean that.
Without this program, because of our overregulate burdens
on the member business side, we have no choice but to make sure
that we utilize the wonderful SBA programs. This is good news
for credit unions, and obviously it's even better for small
businesses as you have documented in your written testimonies.
So we understand the SBA. And we understand it is very
difficult from the SBA that some of our small business owners
cannot get these loans from the larger banks, especially as the
conglomerates take its place.
Credit unions are very well-known to give out smaller
business loans. In fact, our average SBA loan limits are
somewhere around 98,000 on the average. This is our niche. This
is what we want to do. And when we help our members, I'm not
kidding you. I would believe if they were here today, they
would hug each and every one of you for getting it because the
entrepreneurship is the growth of our economy.
Once again, credit unions are homegrown. We are community
credit unions for the most part, regardless of our bonds. And
so this is our mission.
CUNA is hopeful that credit union participation in the 7(a)
program will continue to grow. Of course, we have concerns,
though, with the appropriation. We highly support the
appropriation funding, not only for this fiscal year but
beyond.
And, of course, we urge you not to support the fee
increases because our small business members are the ones that
are burdened. And the last thing we want to do, obviously, is
to turn them away.
And what has happened is when we have SBA loans that are
turned down in our institution, we literally have calls from
the outside market, capital venturists, hard money lenders,
that say, ``If you didn't approve of the SBA loan, can we have
that referral?''
Now, that might be a good thing to a certain degree, but
the down side is for the long term, that small business owner
is giving up sometimes their equity position in the company.
And they're obviously not being charged the up-front fees, but
their interest rate is severely higher.
So, once again, CUNA strongly supports legislative
initiatives to reduce the program's fees, especially when it
comes to the smaller loans, and has advocated for the highest
possible appropriation.
Additionally, as credit unions and credit union members
are--and you have to understand they are accustomed to almost
no fees from credit unions. This really takes us out of the
marketplace so that we can provide this type of wonderful
program's ongoing futures.
Many credit unions, including mine, have been approached,
as I said, once again, by outside entities. And we don't want
to turn these entrepreneurs down.
Another roadblock--and this is significant for us--is that
there is a threatening ability for us to expand in the 7(a)
program. As gracious as they were and Hector Barreto was
wonderful in aligning our industry to come in and support this
program, we are imposed with a very big cap. In fact, this
program in member business loans has a cap of 12.25.
CUNA strongly supports H.R. 2317. It is called the Credit
Union Regulatory Improvements Act, which proposes, among other
things, to increase the current cap that credit unions are
limited to in providing business loans at 12.25 to just up to
20 percent. It also increases the loan threshold from 50,000 to
100,000.
Through the government guaranteed portion of the 7(a)
program, basically we believe that if you help us raise this
cap, we can then continue to support the SBA program. The
arbitrary limits that are currently in place greatly restrict
many credit unions' ability to offer business loans and, as a
result, once again, may prohibit us in providing the 7(a)
program to our members.
In reforming credit union member business limits, as
proposed in H.R. 2317, Congress will help to ensure a greater
number of available sources of credit to small businesses. More
credit unions could enter the business lending market and take
advantage of the SBA's 7(a) and other loan programs, which
ultimately benefits the small business owner.
In closing, we urge Congress and this Subcommittee to
reconsider the importance of the 7(a) program in helping
support small business in this country and improve the funding
process for this very significant program by, one, pursuing
legislation that would reduce the program fees without
affecting the program level; two, restoring the 80 million
appropriation for 2007 and, I urge greatly, in the future; and,
of course, three, reforming the credit union members' business
lending limits.
I thank you so much for this opportunity.
[Ms. Mayo's testimony may be found in the appendix.]
Chairman Bradley. Thank you all very much.
Let me start out the questioning with a question to Mr.
Hager. There has been testimony about increasing the cap size
of the 7(a) loan to $3 million. What would be your position on
that? Would you favor something like that?
Mr. Hager. The $3 million proposal that we received
information on in the last couple of days in 2007 would have a
slight positive impact on the subsidy rate.
We have not seen, I have not seen personally a lot of
demand for a $3 million loan. We believe what we have is
sufficient.
Chairman Bradley. So you don't think it is necessary? Okay.
A question to Ms. Mayo. In your testimony, you mentioned
that the credit union average loan size is less than $100,000.
I think you said 98,000. Yet, 7(a) loans under $150,000 have
grown pretty significantly, even after fees were raised. Why do
you support the appropriation to eliminate the fees in that
case?
Ms. Mayo. Because even though we have all grown--and
honestly when you design a program which focuses on the smaller
loans and as lenders, that is exactly the marketplace we will
go for--what is happening here is that if you start increasing
those types of fees, it makes it much more difficult for us to
persuade our member borrowers to take this program.
So what we are hoping for is that there will be less of
these fees in the future. I mean, if we are going to live with
what we do today, I believe we will continue. But if you lessen
it, I believe it gives us all more opportunities to go after
and help those entrepreneurs that have already been gun-shy.
So for all the increases you see, the other question is,
how many have we not helped because of this?
Chairman Bradley. Mr. Wilkinson, would you comment on the
same question?
Mr. Wilkinson. Could you repeat the question, please?
Chairman Bradley. Well, the question is that the loan
growth of under $150,000 has been pretty significant, I believe
about 25 percent over the last couple of years, despite the
increase in the fees.
And I would say, just for full disclosure, I think I have
agreed with the minority members on the committee and have
opposed, actually, when we have had a chance to vote on this on
the floor imposition of the fee.
So I am interested in the fact that, even despite these
fees, the loan growth has been pretty significant. Why do you
think that is the case? And is it as major an impediment as
some people believe it is, obviously Ms. Mayo?
Mr. Wilkinson. Well, the fees have just been one part of
the issue. And yes, there have been some fee increases, but the
small loans have taken the smallest portion of the increase.
But the other side of that coin is that the indirect costs of
this program have actually gone down.
SBA has done a very nice job over the last five years with
their SBA Express program. And they have taken other
initiatives that have streamlined the process, making the
smaller loans much easier today than it was five years ago. So
while there have been some fee increases, there have been some
indirect cost decreases to offset that. And yes, volume has
been up 20-25 percent.
Chairman Bradley. And even if the fees are to continue, as
the administration's proposal would have it, do you feel that
that volume growth is also going to continue as the demand is
out there?
Mr. Wilkinson. I don't know that we will continue to see 25
percent growth, but that would be more of a function of the
significant rise in interest costs we have seen over the last
couple of years, too.
I mean, a couple of years ago, prime was half of what it is
today. And higher interest rates slow down demand. And so we
are seeing a little softening, but it would be more
attributable to higher interest rates.
Chairman Bradley. Another question to you, Mr. Wilkinson.
The 7(a) loan program has now been without an appropriation and
has been self-funded for a fairly long period of time. Are your
members happy with this situation?
Mr. Wilkinson. Yes. We went to zero subsidy at the
beginning of the last fiscal year. So we have been on zero
subsidy now for a year and a half. And we have had plenty of
loan authority to meet demand. We have not faced any of the
caps, shutdowns, program restrictions that we suffered through
the decade previously. So thus far, zero subsidy has worked
just fine.
Chairman Bradley. Ms. McDonald?
Ms. Millender-McDonald. Thank you so much, Mr. Chairman.
And thanks to all of you for your testimony.
Mr. Hager, I am deeply concerned about the increase in
fees, especially to those who tend to not have the opportunity
to get loans in the manner that they solely need. And when you
have a community such as mine, which starts at the base of
Watts but goes down to Virginia Country Club, then I have from
the most impoverished to the most affluent. But I am speaking
about those that are the small ones in the Watts and the
Compton area.
We know that SBA eliminated the prime and the microloan
programs in its budget. Why is it that SBA is opposed to having
specific programs targeted to low-income communities?
Mr. Hager. Thank you for the question. You know, if you
take a look at 2005 and 2006, the number of loans at 150 and
below, the total loan portfolio of the SBA, 78 percent of those
loans were less than 150.
Ms. Millender-McDonald. Were less than?
Mr. Hager. A hundred and fifty thousand. So we are making
lots of smaller loans. I mean, our growth in the smaller loans
has been outstanding. We believe that a combination of--
Ms. Millender-McDonald. To whom are you making those loans?
I need to have them more specifically identified. Are they
women? Are they minorities? And within the minority, who are
they? Are they disabled? I need to have some specifics on that
percentage that you're speaking of.
Mr. Hager. You know, I would be pleased to--
Ms. Millender-McDonald. Provide that for me?
Mr. Hager. Absolutely.
Ms. Millender-McDonald. Would you please do that?
Mr. Hager. The thing I would like to comment on is that in
my opening comments, I referenced the number of loans that were
being made to women and--
Ms. Millender-McDonald. You have. And I have that.
Mr. Hager. Yes.
Ms. Millender-McDonald. You have 23 percent to minorities--
Mr. Hager. That is correct.
Ms. Millender-McDonald. --and 39 percent to women.
Mr. Hager. That is correct.
Ms. Millender-McDonald. But within that scope, I need to
know how many within that--the 39 percent are women. How many
of the 23 percent to minorities are that of women? You see,
because sometimes when you say 39 percent women, 23 minorities,
they are still intertwined within those percentages.
Mr. Hager. That is correct.
Ms. Millender-McDonald. So that's why I want to know just
where are we in terms of that.
Mr. Hager. I will get the number for you.
Ms. Millender-McDonald. I need to have that, sir.
Mr. Hager. I want to bring up--I keep hearing the fee
issue. And, you know, it was part of the comment here.
Ms. Millender-McDonald. Yes.
Mr. Hager. I want to show, if I may--I've got an exhibit
that I would like to show. If you take a look at this chart,
this chart represents the fee, 7(a) fees, since the year 2002.
And if you take a look at these fees, the only fee that is
greater than at any time since 2002 is the half of one basis
point we're talking about for next year, for the annual fee.
And it's going up to the threshold that we're allocated to. But
all other fees are no more than they were back in 2002. We have
held those fees.
We believe our fee structure is very solid. We believe it's
good when you compare it to what has gone on with rising costs
throughout the country in financial services. So we feel pretty
good about the fee structure.
Ms. Millender-McDonald. Well, is that fee structure
anyplace within your group, sir?
Mr. Hager. No, ma'am, it is not.
Ms. Millender-McDonald. The other question that I do have
is that your 7(a) program has returned in excess of $1.2
billion in excess of these fees to the treasury in the past 10
years. And it's due to its overcharging of small businesses and
lenders in the program.
Now, rather than increasing 7(a) fees, as the
administration recently did and proposes to do it again, why
didn't the SBA propose a plan to write this wrong and return
the money that it wrongfully took from the program participants
in the first place?
Mr. Hager. You're going back in history on me that I--
Ms. Millender-McDonald. I understand that. And I'm saying
you don't go back that far but as far back as you go. And I
would like for you to look into that. I would like for you to
look into that because if there is any funding that is being
returned back to the treasury from those who have been
overexposed by fees, then certainly that should be something
that is put back into a pot for these small business people to
get.
Mr. Hager. I will absolutely when I get back look into
that.
Ms. Millender-McDonald. Okay.
Mr. Hager. It's a good point.
Ms. Millender-McDonald. Mr. Wilkinson?
Mr. Wilkinson. Ma'am?
Ms. Millender-McDonald. You said in your presentation--I
started writing all these names until I don't know now just
what. I might ask you a question that should have been someone
else's. But you did speak to administrative fees.
Mr. Wilkinson. Yes, ma'am.
Ms. Millender-McDonald. And you don't know whether that's a
government function in the first place?
Mr. Wilkinson. It is a government function, the lender
oversight part.
Ms. Millender-McDonald. But you did have some question
about the administration fee imposition?
Mr. Wilkinson. This is a fee that has nothing to do with
credit subsidy. It is a fee to start paying salary and expense
dollars.
And I still don't understand why the magic number of 7
million. It just appears to be a start of okay. This year is 7
million. Next year is 17 million. At some point in time, they
want to have all the administrative costs covered by the
program, which, in effect, what a government-sponsored
enterprise is. And so if we're going to go down that road, we
should just recognize it up front. Let's have that discussion.
Ms. Millender-McDonald. And, Mr. Chairman, just, really,
one more question, please. And that is I see my red light, but
I have got to ask this question.
Now, when you talk about the amount of increase in the 7
loan--I think, Mr. Wilkinson, you proposed that. I was trying
to follow you.
Mr. Wilkinson. The increase in the maximum loan size.
Ms. Millender-McDonald. Yes. Yes, it is yours.
Mr. Wilkinson. Up from 2 million to 3.
Ms. Millender-McDonald. That is correct. And, yet, small
businesses don't really partake in that because those small
loans still do not go to the smallest entrepreneur. Those loans
tend to still go to the highest level of those who are
requesting loans and do not go to the lower borrower, which
means even if it's an increase, this does not necessarily help
that lower entrepreneur, it seems, from the data that I have
gotten.
Mr. Wilkinson. Okay. I guess I am not totally following the
question.
Ms. Millender-McDonald. All right.
Mr. Wilkinson. But we're missing a gap in our program. I
disagree with Mr. Hager from SBA that he hasn't seen them in. I
just had our management retreat last week. And the number one
topic from the folks who attended was ``We need a way to
service our clients who need bigger loan requests. And we're
missing those loans between 2 and 3 million dollars.''
Now, that is a different kind of product than the small
loan product that is being done through SBA Express.
Ms. Millender-McDonald. And we understand that. But our
7(a) loan programs have also been for the little guy and girl,
too, to some degree.
Mr. Wilkinson. Well, I think that is why you see 78 percent
of our numbers of loans that are being made are in the small
loan category.
Ms. Millender-McDonald. All right. Let me just say this.
This committee is Tax, Finance and Export. I want to see more
small businesses have an opportunity to go international, but
how can they when they do not even in their own country have
the propensity to get loans and to have those in a credible way
where fees are imposed in a way that they cannot broaden their
horizon, if you will?
Thank you, Mr. Chairman.
Mr. Wilkinson. If I could just add one quick comment on
that? Without the bigger loans, we're going to see pressure in
the subsidy rate going forward, which we're going to have to
consider raising fees on those small loans in the future. And
that's why we need to add the bigger loans that pay higher
guaranty fees that subsidize the cost of smaller loans included
in our loan mix.
Ms. Millender-McDonald. I will come back to this later.
Chairman Bradley. Congresswoman Velazquez?
Ms. Velazquez. I will defer to Ms. Moore and then the--
Chairman Bradley. I am sorry. Congresswoman Moore?
Ms. Moore. Well, thank you, Mr. Chairman. Thank you,
Ranking Member, for yielding.
I think I want to start my line of questioning out to Mr.
Wilkinson because I was confused or stunned a little bit by a
comment you made as I was coming into the room. And perhaps you
have answered it already. But you talked about the larger loans
subsidizing the smaller loans.
I'm very concerned because there seems to be a huge gap in
loans made to minority businesses versus majority businesses.
And as those loan volumes decrease, most of them being made
under $150,000, the guaranties also decrease, which squeeze
minority businesses more and more and more.
I am wondering because it is my sense that there are many
small minority businesses that come with the same portfolios,
the same capacities to borrow but, yet, they don't get the
larger loans and they also don't get the larger guaranties.
And given our discussion here today regarding increasing
fees for borrowing and so forth, I want to know how we meet our
goals to provide more funds to minority businesses in this
environment.
Mr. Wilkinson. Well, first of all, looking at the number
and the dollar amount of loans going to minorities back to
2000, we have gone from 26 percent of the numbers of loans up--
Ms. Moore. How about the amount? I'm talking about the--
Mr. Wilkinson. --to 34 percent. And the dollar amount, we
have gone from 30 to--let me get on the right line here--33
percent of the dollars. And that's year to date in 2006.
Ms. Moore. But you seem in your testimony to be advocating
for lower loans, for under $150,000 loans, which also reduces
the guaranties.
Mr. Wilkinson. We support making small loans. And you can
see that. There has been a tremendous growth in the amount of
small loans being made. But those loans pay a
disproportionately low guaranty fee.
So as that part of the portfolio becomes bigger and the
large loan part becomes less, we collect a smaller guaranty
fee. That means the subsidy costs are going to go up. So what
we have to do is get some more larger loans into the mix so
that the fees on those smaller--
Ms. Moore. Give the larger loans to minorities is what I
want you to do.
Mr. Wilkinson. I would be happy to give it to whoever.
Ms. Moore. But that is not what is happening from those
data.
I want to ask Mr. Hager before my time expires questions
about the commitment to venture capital for minorities. The
President has--you know, there has been a rescission of the new
market venture capital program. For as long as I have been
here, last year and this year again, there has been no
reauthorization of the new market venture capital program.
I know you are going to tell me about the SBIC and so
forth. Those loans are available to more mature companies, the
debenture program. Can you tell me how we propose to meet our
goals to help minority business, small businesses, women-owned
businesses when we are not committing to the generating of
these businesses?
We are proposing higher fees. We just heard Mr. Wilkinson
talking about--you just heard the dialogue between us regarding
minority businesses getting lower and lower and lower loan
amounts. And I am concerned that we are not meeting our mission
to help grow minority businesses in this environment.
Mr. Hager. Thank you. Congresswoman Moore, more than 15
percent of SBIC funds licensed between 2002 and 2005 had at
least one minority or female fund manager.
Ms. Moore. Thank God for that one.
Mr. Hager. I said either one minority or one female that
was in a very large position within that SBIC.
I believe that one way to accomplish what you're concerned
about is making sure that the infrastructure of the SBIC
ownership, if you will, are minority and women. And they will
definitely look out for--
Ms. Moore. But why not just fund the new market venture
capital program, which would be a more direct--there would be a
more direct match in those types of businesses that could
benefit from it, as opposed to those minority businesses that
have to reach such a high bar?
The SBIC clearly is targeted for more mature businesses.
And we know that minority businesses are last in. So what I am
saying is that translation to me is--because we saw what
happened with the first round of the new market venture capital
program. There was significantly more minority participation.
And the fact that it has not been reauthorized indicates to
us a lack of willingness to generate those businesses. It's a
more direct way of doing it. Wouldn't you agree?
Mr. Hager. I still believe that one way to achieve the
concern that you have is to make sure that we have women and
minorities in fund manager positions, meaning the very top of
the leadership of that SBIC, to enable that SBIC to be looking
and targeting more venture capital funds to minorities and
women. I believe again that that--
Ms. Moore. You have completely not answered my question
because the fact is that the SBIC loan program structure is
inimical to minority businesses that make up 50 percent of the
small business community. The new market venture capital
program is structured to assist businesses that are minority
businesses.
And you have so not answered my question. Thank you.
Chairman Bradley. Congresswoman Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Hager, we are working on a reauthorization of SBA. In
light of your earlier comments that the larger loan proposal
creates a positive subsidy rate for F.Y. 2007, would SBA
support putting this proposal in the committee's
reauthorization bill?
Mr. Hager. We support the proposal that is in the budget
today. I would not go beyond that.
Ms. Velazquez. So that means that anything that is not in
the proposal, you are opposed to?
Mr. Hager. I would not go beyond what is in the budget.
Ms. Velazquez. In your testimony, you mention that the loan
monitoring system is able to draw on historical as well as
projected performance of SBA loan portfolio.
Mr. Hager. Right.
Ms. Velazquez. I am concerned that the recent hurricanes
could increase defaults in SBA loan programs and lead to
further fee increases in the future. How have the recent major
hurricanes affected the SBA's portfolio to date? And what are
your expectations of the potential future impact?
Mr. Hager. Congresswoman, that is an outstanding question
and one that as we look upon the Gulf area--I have spent a lot
of time down there. I was down there two days last week. I've
gone back and forth many times, concerned. What are we going to
start seeing in trends?
And I am pleased to say so far we have not seen a
degradation of those trends. We will continue to monitor it. We
will continue to watch it. We will continue to be flexible
wherever we can. But so far we have not seen a degradation of
the portfolios down there yet.
Now, again, it's still early. And it takes a lot of
constant monitoring to see what kind of trend may develop. But
so far it's okay.
Ms. Velazquez. Ms. Grace Mayo, 85 percent of the 1,759
credit unions that offer business loans do not participate in
the 7(a) loan program. And only 93 credit unions have actually
made at least one loan in the program. Are the high and
constantly increasing fees associated with the 7(a) program
deterring credit unions from participating in the 7(a) program?
Ms. Mayo. To a certain degree, yes. And I do have a
suggestion, though. If we do have the larger loans come in, one
of my concerns, obviously, as an industry is, is that going to
impact all of the 7(a) program, especially if we're talking
about the smaller loans?
If anything, maybe as a committee, my suggestion could be--
and this is just Grace Mayo alone--that possibly if we have the
continuation of the subsidy or the zero subsidy, then maybe we
can consider a higher guarantee for the smaller cap, the
smaller loans. Maybe then we can have even more momentum to the
minority groups and really carve that program out.
But, going back to your question, the other problem with
our industry is, one, we're very new to the SBA world because
we did not have that authority until 2003.
The other reason is SBA in its own right--and I'm not
putting any negative comments, but they have had to downsize
their resources. So it takes us a while. The SBA program is not
that simple to administer. And we would obviously like to
engage. But it is also the MBL cap that we're prohibited to
really commit ourselves into these programs.
Ms. Velazquez. So let me ask you if there is a point at
which higher lender fees make this program not worth it for
credit unions.
Ms. Mayo. Right. We would see less participation,
absolutely.
Ms. Velazquez. Mr. Wilkinson, in your testimony, you state
that ``It is significant that the budget clearly shows, as
NAGGL has long argued, that the large loans subsidize small
loans.'' Given the significant decline in the average size of
the 7(a) loan, is it your opinion that SBA's focus on making
smaller loans through SBA has ironically created the dire
situation that we now face?
Mr. Wilkinson. Well, they have had a focus on small loans,
particularly through the Express product, but I don't think
they have tried to exclude large amounts up to the point where
they banned us from using combination financings. That
provision of law expired, a combination financing or piggyback.
So we don't have a way to get the larger loans into the
loan mix. That's where we need that big loan back in the mix to
keep the fees down so we don't face fee increases in the 2008
budget.
Ms. Velazquez. I will come back, Mr. Chairman.
Chairman Bradley. As long as everybody is okay, we will
have a second round of questions.
Ms. Velazquez. Sure.
Chairman Bradley. Mr. Wilkinson, I would like to go back to
the microloan situation. The testimony of the SBA and Mr. Hager
is, if I can paraphrase it correctly, that because more and
more smaller loans are being made and a greater percentage of
smaller loans, that the microloan program is not as necessary
as it is in the past. Would you agree with that assessment?
Mr. Wilkinson. First of all, I am not a microloan expert.
So I have not ever participated in that program. I have had
some discussions with some folks who have done microloans. And
it is my understanding from them that their average credit
scores are quite a bit lower than the average credit scores
that we would use in a 7(a) product. But that's the only
information I would have.
Chairman Bradley. Anybody else want to chime in on that?
Mr. Chilcott. Sure, Mr. Chairman. CDC small business
finance is an SBA micro lender. We also offer a number of other
products for small businesses that would not otherwise be
available as a part of our mission. And, in essence, what we
are able to provide is if a small business contacts us, we
provide access to a full range of alternative finance programs
for that small business.
It could be a 7(a) loan. It could be a 7(a) community
express loan. It could be our SBA microloan. It could be a loan
pool that we have that a number of banks have created. So in
the full range of financing that is available out there,
certainly the SBA microloans that we are making are for those
who cannot access a traditional 7(a) community express type of
loan.
Chairman Bradley. So you would support retaining the
microloan?
Mr. Chilcott. We believe it still serves a viable purpose
out there in terms of meeting a need that is not met by other
programs.
Chairman Bradley. I would like to go to Ms. Schubert for a
moment. There has been so much talk about the Gulf Coast. And
you focused a little bit on that in your testimony.
First of all, I think you said that there was a necessity
for further training for the bond guaranty staff. Would you
talk about that briefly?
Ms. Schubert. Yes. Under the Plan A, the regional staff
actually approves a bond before it's written. And so for a
surety to submit applications to regional staff to ask for
approval of a bond, you need someone at the staff level who
actually knows something about underwriting surety bonds.
Unfortunately, there have been over the years changes in
the staff, reductions in the staff. And there are not as many
well-trained surety folks out there.
Chairman Bradley. And is this essential in getting
reputable contractors into the Gulf Coast area and ability to
rebuild?
Ms. Schubert. We believe it is. If you want to allow the
local and the small businesses to participate in that
rebuilding, they're going to need bonding capability,
particularly with some of those businesses having had the same
kinds of issues as other businesses in the Gulf Coast. They
have lost some of their capacity. They have lost some of their
people, some of their construction equipment.
We are going to need a guaranty to back up the sureties'
willingness to take that risk to assist those contractors to
participate in those programs.
Chairman Bradley. Let me move in the time remaining in this
round of questions to Mr. Mercer. Sir, what happens if there's
no legislation that restarts the participating securities
program or a similar equity-focused program?
Mr. Mercer. Well, equity financing, as the Chairman knows,
is how you start small businesses. I mean, you can't have debt
without equity. So all the SBA lending programs to any small
businesses depend on those small businesses having a strip of
equity, sufficient equity, to qualify them for loans.
The participating security program is the only pure equity
program in the SBA arsenal. So a company like Build-A-Bear, for
instance, which I think maybe you know of or anybody who has
children knows of, was launched by two SBICs, now a very
successful public company. That's not the type of program that
traditional venture capitalists, who focus on high tech
investments and biotech, are going to invest in.
Over the past four or five years, about $4 billion of
investments have gone into manufacturing companies, 30 percent
of the investments last year. That disappears. So small
companies--and they are few in number, but they tend to be the
gazelles that grow dramatically and then will need senior lines
of credit--will not have equity available to them.
Chairman Bradley. Mr. Hager, do you want to chime in on any
of those questions?
Mr. Hager. The only thing I would say, Chairman Bradley, is
that the participating program is going to cost the taxpayers
$2.4 billion. We have another 3.6 billion promised. That's
going to yield another 500 million to 700 million. We don't
know what that number is yet.
The program is a bad deal for the taxpayer. The program, I
think the venture capital monies that we believe can more
effectively be used will be the debenture program. We have
absolutely no problem with that.
We do have a problem with funding a program that is costing
the taxpayers unbelievable amounts of money of their dollars.
Mr. Mercer. Could I?
Chairman Bradley. Sure
Mr. Mercer. One, SBA is in a negative cash position. That's
correct. We won't know for 12 or 13 years what the eventual
outcome will be in terms of absolute loss. Right now it's in a
negative cash position.
The economy has improved. SBA receipts from the
participating security program are increasing dramatically. So
maybe in 12 years, we can come back here and figure out what
the actual loss is going to be.
There's no question and the industry has agreed that there
should be some restructuring of the economics, if you will, in
quotation marks of the participating security program to
address the risk that SBA has.
And a substantial amount of that $2 billion in negative
cash is the result of the crash of the economy that we just
went through in the recession. I don't think anybody's
portfolio remained unscathed. And participating security SBICs
during that period did not perform any worse than the funds
that, for instance, CalPERS invested in.
So to say it was a fatally flawed program is just not true.
Does it need adjustment? Can it be restarted? Yes. It really
depends on whether Congress wants to have an equity program.
Thank you.
Chairman Bradley. Congresswoman McDonald?
Ms. Millender-McDonald. Yes. Thank you so much.
Mr.--is it Chilcott?
Mr. Chilcott. Chilcott.
Ms. Millender-McDonald. Why is it that the 504 programs are
not as well-known as the 7(a) programs? And has the reduction
of the SBA fill staff affected the 504 programs' liquidation?
Mr. Chilcott. I would be happy to answer that second
question first if that's okay.
Ms. Millender-McDonald. Whatever.
Mr. Chilcott. I will get to the first one. But certainly
with regards to what is happening with SBA 504 liquidations, we
have a major concern, which we have expressed for some time
now, that as the District's portfolio management staff has been
eliminated, that, in fact, a number of our loans that are
supposed to be handled by SBA are not being liquidated in an
effective and timely manner.
And there are many CDCs across the country that do not have
information about what is happening with their loans. We're not
sure about the status of that. We know that they are there, but
we have been unable I think to really get the kind of
information that would provide any sense of recoveries, what's
happening with those loans. And if I'm a small CDC and I've got
a couple of loans in liquidation and they are not liquidated in
a timely manner and I suffer losses, that has a big impact on
my ability to deliver loans and on SBA's oversight of my
organization.
So we continue to be concerned about those loans that have
been stuck between eliminating the portfolio management staff
and our hope and legislation that will hopefully move that
responsibility with compensation to the CDCs themselves.
In terms of why the 504 program is not well-known, I think
my first response to that is that in many ways it depends on
the area of the country that you're in in terms of how well-
known the program is.
I would say in California, we have--that program is very
well-known. We probably have more banks that are helping to
offer and market that program. We have an extremely strong
secondary market that is buying the first trust deeds. And the
program is just very well-known out there in the marketplace.
Ms. Millender-McDonald. And I know you support the 504
programs. I am just saying that you might think in California,
perhaps in some areas, there is a great appreciation for the
program, but there are some areas that still do not.
And, Mr. Hager, I come back to you on that because we know
that 504 lending is expected to increase by at least 20 percent
this year. So how many employees does SBA intend to add on to
the centers to process this increased loan volume, especially
in minority communities?
Mr. Hager. An excellent question. We have a strategy that
has been created to handle the loan volume. I mentioned it in
my opening comments.
Ms. Millender-McDonald. Yes, you did.
Mr. Hager. We are going to manage the growth. And the way
we manage the growth is to make sure that we have a proper
infrastructure to handle the increased loan volume.
The SBA has a number of proposals that are very close to
closure, centralized loan processing. And in 504 liquidation,
as a matter of fact, we will hopefully very soon move from a
lot of the field staff into two processing centers to be able
to leverage our resources to handle and accommodate the loan
volume.
We believe that longer-term we have a proposal also on the
table to require liquidation from the CDCs and the 7(a) lenders
before we actually provide the guaranty. They know more about
the liquidation than we do.
So our proposal is let the liquidation take place in the
CDCs. We'll manage the growth.
Ms. Millender-McDonald. Providing you have the staffing.
Mr. Hager. Well, the CDC would provide that staffing.
Ms. Millender-McDonald. Staffing. Okay. Mr. Wilkinson, do
you want to comment on that?
Mr. Wilkinson. Could I comment on that? Yes. The comment
period on SBA's proposal to liquidate first, as we call it--
they call it the business loan and development company loans,
liquidation, and litigation procedures--had some proposals that
would be very detrimental to the 8(a) program.
We have sent in a comment letter. And I would like to
provide a copy of that letter to the committee and ask that it
be included for the record.
Mr. Wilkinson. We are happy to work with SBA. And we have
passed this on to them. Our members are happy to do the work of
the liquidation process. But honoring the guaranty in a timely
fashion is going to be very important.
Delaying any kind of payment of that guaranty to the end of
a liquidation, which can sometimes take 18 months to 2 years,
becomes very expensive. Those costs are going to turn right
around and be put back on--
Ms. Millender-McDonald. So, Mr. Hager, then how do we honor
this in a timely manner, then, to circumvent any imposition of
negatives?
Mr. Hager. We believe, again, that the overall process of
transferring the actual liquidation to the lender will enable,
actually, a more effective processing of that claim, that, in
fact, that at the end of the day won't create delay problems.
It won't worsen the purchase of the guaranty or delay it more
than what we have today. That's our opinion.
Ms. Millender-McDonald. Ms. Mayo, do you want to patch in
here?
Ms. Mayo. I just want to support the 504 program in
California. In fact, we just did a drug rehab right outside of
your area, in Crenshaw, and it was through the--
Ms. Millender-McDonald. Not in my area.
Ms. Mayo. No, it wasn't yours.
Ms. Millender-McDonald. I'm further south.
Ms. Mayo. It was Maxine's, actually.
Ms. Millender-McDonald. That's right.
Ms. Mayo. And she was very happy to--
Ms. Millender-McDonald. Don't get us mixed up here.
Ms. Mayo. I won't, but I just want to reiterate that the
504 program is very valuable in helping this type of
insurgence, really, to the communities. One area--
Ms. Millender-McDonald. We want to see more in my district,
though.
Ms. Mayo. I would be happy to as long as you open up our
field of membership, but that is a whole different story.
Ms. Millender-McDonald. Mr. Hager is going to help us to do
that, I'm sure.
Ms. Mayo. He is absolutely right. And the only thing that
we do ask is when we go and, unfortunately, if the business
does go in failure, then obviously the guaranty portion needs
to be expedited very quickly back to us as a lender.
So we're happy to take that initiative. I believe that is
our role. I think that helps expediently get through the
process of losses. But then the response back from the agency
needs to be just as efficient.
Ms. Millender-McDonald. I just want to again make a
statement that our communities need these programs. And they
have got to be broadened where they get to the very little Joes
and Janes in the communities. And that is what I am talking
about.
Thank you so much.
Chairman Bradley. Congresswoman Moore?
Ms. Moore. Well, thank you, Mr. Chair.
I believe it was Mr. Mercer who really gave us the
discourse on how the SBA loan programs were in a negative cash
position and that was one of the bigger problems. I guess that
leads me to sort of take another stab, Mr. Hager, at my
question that I had for you.
I am wondering, I am suspicious, quite frankly, that
programs that benefit minority communities and minority
entrepreneurs, women entrepreneurs, that the SBA is balancing
its act on their backs.
We look at the 7(a) program. I mean, it's a program
designed for those people who are unable to get financing on
reasonable terms. The new market venture capital program that
we talked about before, it focused on investments in low-income
communities. The community express program again focused on
under-served communities, with 85 percent loan guaranty.
It seems to me that given the strapped position of SBA,
that they're targeting the programs where program guidelines
would more benefit minority lenders. And I'm wondering why the
administration is--it appears that they are balancing their
acts on the backs of minorities. I guess I want you to respond
to that.
Mr. Hager. Congresswoman Moore, in all due respect, I
totally disagree that we are balancing anything on the backs of
minorities and--
Ms. Moore. These are the programs that are not getting
refunded. The funds have been in rescissions, the programs, the
very programs, that would help them the most.
Mr. Hager. We spend and we have a budget in the SBA of $100
million to assist those that need education on how to apply for
a loan. They need education on how to create a business model.
They need education on ``Well, what do I do with it now? How
can I take it on to reality? We have an extremely strong, $100
million outreach program to handle these kinds of issues.''
Yes, the community express program has historically made loans
to a very large degree to women and minorities.
Ms. Moore. But that's what I'm saying. It expires May 31st.
Mr. Hager. The pilot for the community express program was
extended to May. And there are lots of alternatives being
worked out in the community express program.
Ms. Moore. But I heard just from the ranking member here
and others that microloans--how much are you allocating to
them, new markets programs?
Mr. Hager. The microloan program is a program that has been
flat. If you take a look at--
Ms. Moore. Flat? Is that the same as zero?
Mr. Hager. No, in growth. Microloan has been flat in growth
over the last several years. We believe that those loans that
historically perhaps the bank walked away from today they're
not walking away from those loans. They're making them.
Our loans less than $150,000 amount to 78 percent of our
portfolio. I mean, we are making small loans. We are reaching
out to communities with $100 million investment in education.
Ms. Moore. We appreciate the two percent of the venture
capital financing that you're giving to minority businesses. We
appreciate that two percent. But, you know, just because I'm
paranoid don't mean it ain't happening that you're destroying
the infrastructure for minority businesses.
And it seems obvious, you know, because, you know, budgets
aren't just about dollars and cents. And you have failed to
tell me how much money you have put into these programs. They
are about priorities. They're about what your values are.
So you can tell us all day long that you want to help, you
want to get information out to minority businesses about how to
be a business, but when you don't give up the money and when
there are recisions on program funds and you flat-fund the
programs, you know, like Peter Drucker said, communication is
about what ain't being said and in this case about what ain't
being done.
My time has expired.
Chairman Bradley. Thank you.
Congresswoman Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Hager, recently the SBA IG team concluded a report
about the STAR loan program. While I know that you were not at
the SBA at the time, what is your perspective on their report?
Did SBA implement the program in a manner that was unclear or
did lenders simply hear what they wanted to hear?
Mr. Hager. Congresswoman, that's, again, an excellent
question. The STAR program was done before I arrived. I've done
a lot of work on the STAR program.
One, the IG audit was at the request of the administrator.
He asked for it. Two, the disaster that we all remember on that
morning on 9/11 will be with us for the rest of our lives. The
need to get money, capital into the affected areas was
extremely--
Ms. Velazquez. Sir, you know, I have five minutes.
Mr. Hager. Okay.
Ms. Velazquez. I just can't go into the whole background
and history.
Mr. Hager. You know, very quickly--
Ms. Velazquez. Will you please answer my question? Was it
SBA or the lenders--
Mr. Hager. It was--
Ms. Velazquez. --based on the report and the conclusion of
the report?
Mr. Hager. The report concluded that in some cases,
documentation was not adequate. We do not believe there is a
problem. We think that the lenders that made these loans made
them with good faith. And we have a robust process now in--
Ms. Velazquez. No. I'm not talking about now. I'm talking--
Mr. Hager. No. I think the program--
Ms. Velazquez. --at the time when the report was made.
Mr. Hager. The program served its purpose. It served it in
my opinion well.
Ms. Velazquez. So SBA did everything fine and the lenders
did not?
Mr. Hager. SBA did, we believe, everything fine. The
lenders in some cases have not documented. They reached a
conclusion without support documentation in some cases.
Ms. Velazquez. Okay. Let me ask you this. SBA has announced
that it will not process repurchases of STAR loans that do not
possess suitable lender documentation justifying the loans as a
STAR loan. Have you exercised this policy to block the SBA
repurchase of a defaulted 7(a) loan?
Mr. Hager. We are today making sure that there will be no
guaranty completed without the proper documentation. In those
cases where documentation is not appropriate they are being
returned to the lender to make sure that the documentation is
there.
Ms. Velazquez. Mr. Wilkinson?
Mr. Wilkinson. I would agree with Mr. Hager that the STAR
program served its purpose. There has been a very limited
number of instances where--
Ms. Velazquez. I just want for you to tell me if you have
any concern about the new policy.
Mr. Wilkinson. No, ma'am. The situation seemed to be where
there are files with no documentation whatsoever. If the lender
did not do that, they need to go put it in the file.
But thus far, the good news is that star loans perform
better than the other 7(a) loans made during the same time
period. And the issues coming to me regarding STAR loan
defaults have been zero.
Ms. Velazquez. Do you believe, Mr. Hager, that the negative
publicity surrounding STAR contributed to the failure of the Go
Loan program?
Mr. Hager. No, ma'am, not at all. By the way, STAR was
implemented according to the direction of Congress. The Go Loan
program, by the way, is not creating hundreds of millions of
dollars, but Go Loan is serving a good purpose.
I talked to Guy Williams, Gulf Coast Bank in New Orleans.
And he will--
Ms. Velazquez. Mr. Wilkinson, the Go Loan program has no--
Mr. Wilkinson. I would respectfully disagree. I had members
who said they would not participate in the Go Loan based on the
way the STAR issue was blown totally out of proportion. The
rider on STAR confused STAR loans with disaster loans. And the
mess went from there.
Ms. Velazquez. Thank you.
Mr. Hager, the significant backlogs related to the recent
hurricanes have created substantial processing backlogs for
disaster loans. Has the SBA been using District employees
assigned to other SBA programs to help with the processing of
those loan applications?
Mr. Hager. Yes, ma'am, they have.
Ms. Velazquez. How is this affecting these other programs?
Mr. Hager. It is not affecting those programs. We have
loaned in some cases on a very limited basis, and then we
transferred those folks back.
Ms. Velazquez. Mr. Chilcott?
Mr. Chilcott. Certainly the use of some of our centralized
processing staff in Sacramento for disaster loan purposes
slowed down our approval processes. But I would add that those
five people are back in the processing center. And we have seen
that processing time get down to certainly a reasonable, quick
turnaround.
Ms. Velazquez. Mr. Chilcott?
Chairman Bradley. One more?
Ms. Velazquez. May I?
Chairman Bradley. Yes.
Ms. Velazquez. Okay. Well, let me ask this one. Mr. Hager,
looking forward, you have indicated that the agency is not
ready to support larger loans to make up a possible funding
shortfall in the 7(a) program. You opposed those in
appropriation.
What would be our option? Would the agency propose more
fees to make a future shortfall in the 7(a) program?
Mr. Hager. We have everything on the able that we think is
required right now. We are not proposing any more fees other--
Ms. Velazquez. If there is a shortfall, can we get a
guarantee that you will not come to us for an increase in fees?
Mr. Hager. No, ma'am.
Ms. Velazquez. ``No, ma'am'' why?
Mr. Hager. I will not give you a guarantee we won't be
back.
Ms. Velazquez. So what you are telling me is that higher
fees are a possibility?
Mr. Hager. I'm not saying. I will have to wait and see the
facts. I can't give you that answer right now.
Ms. Velazquez. Tony?
Mr. Wilkinson. We are concerned that SBA has used all of
the tricks in the bag to get us to zero subsidy this year. We
are concerned that if the trend with the declining average
guaranty fee continues, that there is not going to be a choice
but to push for higher fees. That is why we are pushing so hard
on the $3 million loan size to try to keep that average
guaranty fee from declining any further.
Ms. Velazquez. But when we were discussing loan size and
all of that, they say, Mr. Hager, it seems to me that he is
saying, that higher fees are not an option. So between higher
fees and appropriation, what would be your position?
Mr. Wilkinson. Well, our position is the bigger loan size
because we think it is subsidy rate--
Ms. Velazquez. He said, he is on record, that they do not
support the loan size.
Mr. Wilkinson. I did not hear him say he didn't support. I
heard him say that--
Chairman Bradley. I think what he said is that it was not
necessary at this time. Isn't that correct, Mr. Hager?
Mr. Hager. That is correct.
Mr. Wilkinson. I think what he is talking about is the '07
budget. There is nothing needed for the '07 budget. our concern
is the '08 budget because we have driven this car to the end of
the road.
If I could, I hate to go back to the liquidate first. There
are some fee increases in the '07 budget. The lender fee goes
up a little bit. That pales in comparison to what the cost of
the liquidate first policy can be. And I am really hopeful that
we can spend some time on this.
There are two pieces. Who does the liquidation work?
Lenders are happy to do that. We originate the loan. We service
the loan. We will be happy to liquidate it. But when do we
honor the guaranty? Judicial disclosure states it could take up
to two years for a foreclosure to be completed with the lender
sitting there holding an asset on non-accrual. And it would. It
would disproportionately hurt smaller banks.
We're very concerned on the liquidate first policy. That's
more expensive than the fee increase we're seeing in the '07
budget.
Ms. Velazquez. I am telling you we have two options. On
larger loans, it is not going to happen. So it's either
increasing the fees or appropriation. Where do you stand?
Mr. Wilkinson. I don't know what the fee would be in the
2008 budget. And there may not be one. Performance of the
portfolio may be good enough that that is not anything we would
have to address. We are just concerned that that is where we
are headed.
Chairman Bradley. And on that note, if there are further
questions for any of the witnesses, they can be submitted for
the record. I thank the members for participating in the
hearing and thank the--
Ms. Velazquez. Mr. Chairman, I just would like--
Chairman Bradley. --witnesses very much, too.
Ms. Velazquez. --to make it clear that I will be submitting
some written questions to SBA.
Mr. Hager. Thank you very much.
Ms. Velazquez. And I expect answers as soon as possible,--
Mr. Hager. You will get them.
Ms. Velazquez. --not three months from now.
Mr. Hager. No. You will get them right away. Thank you.
Chairman Bradley. And once again I thank all of the
witnesses for participating in this hearing today.
[Whereupon, at 12:41 p.m., the foregoing matter was
concluded.]
[GRAPHIC] [TIFF OMITTED] 27430.001
[GRAPHIC] [TIFF OMITTED] 27430.004
[GRAPHIC] [TIFF OMITTED] 27430.005
[GRAPHIC] [TIFF OMITTED] 27430.002
[GRAPHIC] [TIFF OMITTED] 27430.003
[GRAPHIC] [TIFF OMITTED] 27430.006
[GRAPHIC] [TIFF OMITTED] 27430.007
[GRAPHIC] [TIFF OMITTED] 27430.008
[GRAPHIC] [TIFF OMITTED] 27430.009
[GRAPHIC] [TIFF OMITTED] 27430.010
[GRAPHIC] [TIFF OMITTED] 27430.011
[GRAPHIC] [TIFF OMITTED] 27430.012
[GRAPHIC] [TIFF OMITTED] 27430.013
[GRAPHIC] [TIFF OMITTED] 27430.014
[GRAPHIC] [TIFF OMITTED] 27430.015
[GRAPHIC] [TIFF OMITTED] 27430.016
[GRAPHIC] [TIFF OMITTED] 27430.017
[GRAPHIC] [TIFF OMITTED] 27430.018
[GRAPHIC] [TIFF OMITTED] 27430.019
[GRAPHIC] [TIFF OMITTED] 27430.020
[GRAPHIC] [TIFF OMITTED] 27430.021
[GRAPHIC] [TIFF OMITTED] 27430.022
[GRAPHIC] [TIFF OMITTED] 27430.023
[GRAPHIC] [TIFF OMITTED] 27430.024
[GRAPHIC] [TIFF OMITTED] 27430.025
[GRAPHIC] [TIFF OMITTED] 27430.026
[GRAPHIC] [TIFF OMITTED] 27430.027
[GRAPHIC] [TIFF OMITTED] 27430.028
[GRAPHIC] [TIFF OMITTED] 27430.029
[GRAPHIC] [TIFF OMITTED] 27430.030
[GRAPHIC] [TIFF OMITTED] 27430.031
[GRAPHIC] [TIFF OMITTED] 27430.032
[GRAPHIC] [TIFF OMITTED] 27430.033
[GRAPHIC] [TIFF OMITTED] 27430.034
[GRAPHIC] [TIFF OMITTED] 27430.035
[GRAPHIC] [TIFF OMITTED] 27430.036
[GRAPHIC] [TIFF OMITTED] 27430.037
[GRAPHIC] [TIFF OMITTED] 27430.038
[GRAPHIC] [TIFF OMITTED] 27430.039
[GRAPHIC] [TIFF OMITTED] 27430.040
[GRAPHIC] [TIFF OMITTED] 27430.041
[GRAPHIC] [TIFF OMITTED] 27430.042
[GRAPHIC] [TIFF OMITTED] 27430.043
[GRAPHIC] [TIFF OMITTED] 27430.044
[GRAPHIC] [TIFF OMITTED] 27430.045
[GRAPHIC] [TIFF OMITTED] 27430.046
[GRAPHIC] [TIFF OMITTED] 27430.047
[GRAPHIC] [TIFF OMITTED] 27430.048
[GRAPHIC] [TIFF OMITTED] 27430.049
[GRAPHIC] [TIFF OMITTED] 27430.050
[GRAPHIC] [TIFF OMITTED] 27430.051
[GRAPHIC] [TIFF OMITTED] 27430.052
[GRAPHIC] [TIFF OMITTED] 27430.053
[GRAPHIC] [TIFF OMITTED] 27430.054
[GRAPHIC] [TIFF OMITTED] 27430.055
[GRAPHIC] [TIFF OMITTED] 27430.056
[GRAPHIC] [TIFF OMITTED] 27430.057
[GRAPHIC] [TIFF OMITTED] 27430.058
[GRAPHIC] [TIFF OMITTED] 27430.059
[GRAPHIC] [TIFF OMITTED] 27430.060
[GRAPHIC] [TIFF OMITTED] 27430.061
[GRAPHIC] [TIFF OMITTED] 27430.062
[GRAPHIC] [TIFF OMITTED] 27430.063
[GRAPHIC] [TIFF OMITTED] 27430.064
[GRAPHIC] [TIFF OMITTED] 27430.065
[GRAPHIC] [TIFF OMITTED] 27430.066
[GRAPHIC] [TIFF OMITTED] 27430.067
[GRAPHIC] [TIFF OMITTED] 27430.068
[GRAPHIC] [TIFF OMITTED] 27430.069