[Senate Hearing 110-435]
[From the U.S. Government Publishing Office]
S. Hrg. 110-435
SBA REAUTHORIZATION: SMALL BUSINESS LOAN PROGRAMS
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ROUNDTABLE
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
May 2, 2007
__________
Printed for the use of the Committee on Small Business and
Entrepreneurship
Available via the World Wide Web: http://www.access.gpo/gov/congress/
senate
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan OLYMPIA J. SNOWE, Maine
TOM HARKIN, Iowa CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana DAVID VITTER, Louisiana
MARIA CANTWELL, Washington ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana JOHN THUNE, South Dakota
MARK PRYOR, Arkansas BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland MICHAEL B. ENZI, Wyoming
JON TESTER, Montana JOHNNY ISAKSON, Georgia
Naomi Baum, Democratic Staff Director
Wallace Hsueh, Republican Staff Director
C O N T E N T S
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Page
Opening Statements
Kerry, The Honorable John F., Chairman, Committee on Small
Business and Entrepreneurship, and a United States Senator from
Massachusetts.................................................. 1
Committee Staff
Ferko, Jacqueline, Professional Staff Member for Senator Snowe... *
Wheeler, Kevin, Deputy Staff Director for Senator Kerry.......... *
Participants
Ballentine, James, Director, Economic Development, Office of
Government Affairs, American Bankers Association, Washington,
DC............................................................. *
Coratolo, Giovanni, Executive Director, Small Business Council,
U.S. Chamber of Commerce, Washington, DC....................... *
Crawford, Christopher, Executive Director, National Association
of Development Companies, McLean, VA........................... *
Hager, Michael, Associate Administrator, Office of Capital
Access, U.S. Small Business Administration, Washington, DC..... *
Kelly, Kevin, Managing Director for Policy and Advocacy,
Association for Enterprise Opportunity, Arlington, VA.......... *
Kwiatkowski, Christopher G., Senior Vice President and Manager of
SBA Lending for Popular Small Business Capital Popular, Inc.,
San Juan, Puerto Rico.......................................... *
Little, Morris ``Mike'', Chairman, National Black Chamber of
Commerce, Washington, DC....................................... *
McCracken, Todd, President, National Small Business Association,
Washington, DC................................................. *
Merski, Paul, Chief Economist and Director of Federal Tax Policy,
Independent Community Bankers of America, Washington, DC....... *
Morrison, James, President, Small Business Exporters Association,
Washington, DC................................................. *
Phillips, Ronald, President, Coastal Enterprises, Inc.,
Wiscasset, ME.................................................. *
Robertson, Sally, President, Business Finance Group, Inc.,
Fairfax, VA.................................................... *
Rowe, C. Edward ``Tee'', III, Associate Administrator, Office of
Congressional and Legislative Affairs, U.S. Small Business
Administration, Washington, DC................................. *
Sikes, Chris, Executive Director, Western Massachusetts
Enterprise Fund, Inc., Greenfield, MA.......................... *
Sullivan, Ann, Federal Legislative Consultant, Women Impacting
Public Policy, Inc., Washington, DC............................ *
Wasser Gish, Joan, Principal Policy Progress, Newton, MA......... *
West, Dennis, President, Northern Initiatives, Marquette, MI..... *
Wilkinson, Anthony, President and CEO, National Association of
Government Guaranteed Lenders, Inc., Stillwater, OK............ *
Walker-Wilson, Greg, Executive Director, Mountain Bizworks,
Asheville, NC.................................................. *
* Comments, if any, are located between pages 4 and 50.
Prepared Statements
Robertson, Sally
Prepared statement........................................... 52
Sikes, Christopher
Prepared statement........................................... 54
Walker-Wilson, Greg
Prepared statement........................................... 56
West, Dennis
Prepared statement........................................... 59
Comments for the Record
Letter to Chairman Kerry from Harry C. Alford, President and
Chief Executive Officer, National Black Chamber of Commerce.... 63
SBA REAUTHORIZATION: SMALL BUSINESS LOAN PROGRAMS
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WEDNESDAY, MAY 2, 2007
United States Senate,
Committee on Small Business and
Entrepreneurship,
Washington, D.C.
The roundtable convened, pursuant to notice, at 10:14 a.m.,
in room 428A, Russell Senate Office Building, Hon. John Kerry,
Chairman of the Committee, presiding.
Present: Senator Kerry.
Staff Present: Kevin Wheeler, Deputy Staff Director for
Senator Kerry; Jacqueline Ferko, Professional Staff Member for
Senator Snowe.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN,
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MASSACHUSETTS
Chairman Kerry. Thank you all very much. This roundtable
will start, and I really appreciate everybody taking time to be
here.
I apologize for being a little late. I had to go to the
Finance Committee just to weigh in because we have a concurrent
hearing going on there, and I just needed to be there for the
beginning of it, so thank you for your indulgence. I appreciate
it. And because of that, I am not able to stay here the whole
time, but that is a normal procedure with the roundtables that
we have had.
Senator Snowe initiated the roundtable process here in this
Committee, and I think it worked very effectively and has been
a very comprehensive and effective way of kind of giving people
a chance to talk a little more and have more of a conversation
and get rid of some of the formality of the hearing process
itself. And we do keep a record, and that transcript will be
available. So there is a record. But, on the other hand, there
is just much more interchange and exchange and back-and-forth,
and I think it becomes a more effective way of helping to
respond to people's criticisms and understand what we can get
done and how to do it and maybe sometimes even come up with
some solutions that we would not otherwise.
Also, I want to put it in the context that last year many
of you here today or many of your organizations have already
testified or submitted testimony, and you have helped us build
a record, which is what we need to do, with respect to the very
provisions that are in the small business lending
reauthorization bill that Senator Snowe and I introduced
yesterday. So the record has been building for that. In
addition, most of those provisions ought to look familiar to
you because they were part of the comprehensive reauthorization
bill that the Committee adopted last summer.
As you know, we ran into some--the only way to describe it
is what it is: We ran into sort of a rolling-hold/
administration resistance to it, which I think was regrettable,
and hopefully we can avoid it this year.
I want to emphasize that Administrator Preston in his
hearings here agreed that that was not a productive way to
proceed and that we ought to just sit down and negotiate
something. If we have a difference, let's sit down and talk
about the difference and see if we can work through it on a
reasonable basis rather than just letting things languish
indefinitely. And I think maybe the dynamics here may have
shifted a little bit since both the House and Senate have
changed control, and so there may be a slightly different
attitude. I know the House, Nydia Velazquez, is adamant about
some of the provisions and wants to proceed forward on them. So
there will be a more coordinated effort here to try to do that.
Today's roundtable discussion is really meant to complement
not only last year's hearing, but also to complement the
hearing that we already held this year on the 2008 budget. That
budget has generated a lot of discussions regarding the
microcredit programs, and on a universal basis, from members on
both sides, there was a deep concern about the proposal to make
the SBA Microloan programs self-financing and eliminate the
technical assistance grants and prime. So I would say it is a
fair representation to say that overwhelmingly members of this
Committee were opposed to those proposals, and so we need to
really sort of examine where we are heading there.
It also touched on the lender oversight and the need to
lower fees on small business borrowers and lenders. My
experience has been--and, you know, this is not a pet peeve
with me. It is simply a response to what we are hearing from
the marketplace, from the users--that these fees are too high.
And I do not go to any meeting in Massachusetts or elsewhere
where small businesses do not tell us that--and the lenders
tell us that, too. It comes from both sides of the ledger.
The bill that we introduced yesterday includes language to
reduce the loan fees on borrowers and lenders, and a narrower
version of that provision, I want to remind everybody, passed
with the administration's cooperation in 2004, when they
succeeded in taking the 7(a) loan program to zero subsidy. That
was part of the 60 pages that were inserted into the omnibus
late at night that actually cut out all but one Democratic
provision from what had been a bipartisan authorization bill.
So I hope--you know, however well intentioned, the law is
not working, and we need to fix that. The language that we have
put in does fix it. We think it does it in a way that would
address the lending industry's concerns that any funding
scenario provides efficient program levels and stability to the
program, avoiding shutdowns of the 7(a) loan program or
avoiding mandating restrictions on loan sizes or types of
loans, which becomes its own set of problems.
Now, I know the administration remains opposed to providing
any appropriations for that program, and so we have got to work
through this, folks. But, again, I reiterate, I hope we will
work through it by really talking it through and not going
through this, you know, blind process on the floor, which will
incite my anger and others'. There are plenty of ways to choose
to respond. So I hope that we can avoid that kind of response,
and I assure you that given the options available to us as the
majority, we will respond. But I do not want to do that. I
would like to get it worked out. I am a reasonable person. We
are happy to try to find some way to do it. But we need a good-
faith effort to try to do that.
I might add that while the bill was introduced yesterday, I
want to emphasize for the record that there has been a
significant amount of time available to review the fee language
because it is almost the exact same language that our Committee
adopted last summer. It is similar to what the Senate passed as
an appropriations bill in 2006. So there is no surprise here.
There is no ``God, we need to study this. We have to take a
while to know it.'' We have been through this one, folks.
And I might add, OMB has been wrong on calculating the
subsidy rate for the 7(a) loan program for 13 out of the last
15 years. So I really think reasonableness dictates that we
ought to be able to find the common ground on this one.
I know there will be some differences on a few things.
One--let me just mention very quickly--is the microlending
program. I would just quickly make the case that we put less
than $30 million a year into this microlending program, but we
put $200 million into microcredit programs internationally in
2005. We spent $56 for microcredit programs in Iraq in 2006.
And there is a request for about $160 million for microcredit
programs in 2007 as part of the supplemental funding for the
war in Iraq.
So at the same time as we are struggling to get $30 million
for our own country for a lot of pockets of poverty in rural
and urban centers, we are putting severalfold back into Iraq
to, you know, frustration of a lot of people here. Not to
mention the contradiction of our Government killing microcredit
programs because they are ``too expensive,'' even though the
loans are repaid and they work extraordinarily well, and as the
Nobel Prize Committee is awarding the Peace Prize to Muhammad
Yunus for doing exactly that on an international basis. It just
does not make sense, folks.
And so I hope that we can find a way to include this in a
cooperative, bipartisan way. You know, if it were super-
profitable, obviously a whole lot of banks, big banks, would be
doing it. But it is not a loss. It is not a loser for the
Government, and it fills a lot of other structural, social,
educational opportunity needs.
My final comment is on the 7(a) and 504 loan programs. They
provide 40 percent of the country's long-term capital to small
business, and we all understand the benefits. You know, with
longer repayment terms, the small business owner can spread out
their payments, reducing monthly costs. It leverages their
working capital, their ability to succeed, and we have got to
make sure these programs are reaching those people who really
need the financing. And, there are two significant places for
improvement in these programs. One is in the lending to
minorities, and the other is in the lending in rural areas.
Those are two places that sort of leap out at us. And loans to
these markets have been proportionally stagnant or modest since
2001. We continue to hear a lot of concerns that the 7(a)
lending is largely consolidated in about 10 lenders, and we
need to make sure that smaller community banks have an ability
to be able to participate. We tried to address this in our bill
and look forward to your feedback today and, of course, of this
session.
So I want to welcome on a personal note, if I can, Joan
Wasser Gish, who worked for me in Massachusetts, and did an
extraordinary job. She is now a small business owner herself.
And I welcome Chris Sikes of the Western Massachusetts
Enterprise Fund. Thanks for being here, Chris, also.
They have worked on an advisory committee regarding child
care and small businesses, and I just think it would be good to
have that discussion today and for people to sort of focus on
how that fits into the array of efforts that we make here to
try to empower small business people to be able to succeed.
So, again, I want to thank you all. I am going to ask Kevin
Wheeler of our staff to facilitate this roundtable, and Jackie
Ferko of Senator Snowe's staff, and together they will manage
this, as they have in the past. And if other Committee members
come, they will obviously have priority in asking questions or
engaging you, as they might choose to do so. And if any of the
staffs of members have any particular questions, please just
put them in through both Kevin and Jackie. We invite you to do
so. We want this to be a free-flowing, open effort to get the
best information that we can.
So, again, thank you all very, very much, and I hope that
we will have a good record here today that will facilitate our
ability to mark up the reauthorization bill on May 16th and
pass it out of the Committee and on to the full Senate. And we
really look forward to every member's full participation in
this so that we do not wind up at the markup with people
feeling somehow that they have not had a chance to explore
amendments or possibilities. So we look forward to it.
Thank you all very, very much. Kevin?
Ms. Wheeler. The agenda says that we will go ahead and
start with the Microloan program, and out of courtesy to the
SBA, we will let them make their proposals first from their
legislative package. And we will allow the participants at the
table to comment on them and to also offer their proposals.
Tee or Mike? We are so informal that we will just use first
names here.
Mr. Rowe. Well, thank you, Kevin.
Chairman Kerry. The record actually needs to know who the--
--
Ms. Wheeler. I am sorry.
Mr. Rowe. Yes, Tee Rowe. I am the head of Congressional and
Legislative Affairs at the Small Business Administration. Good
morning, everyone. Thank you, Senator Kerry, very much.
I think the Senator has pretty ably summarized SBA's
proposal for the Microloan program; that is, the administration
believes it would be effective for the subsidy of the program
to go to zero by raising the interest rate on the program,
which is currently two points below the Federal cost of funds,
to slightly above the Federal cost of funds, to, I think, 1.06
percent above. This will enable the program to be self-funding
and essentially have an open-ended funding stream for any and
all microlenders interested.
At the same time the administration is proposing that
technical assistance be provided through our existing technical
assistance providers--Women's Business Centers, SCORE, Small
Business Development Centers.
That is a pretty straightforward summary. Thank you.
Ms. Wheeler. You know, may I just add, many of you have
participated in roundtables before, and I forgot to say--we are
so familiar--that I forgot to add that if you would like to
speak or respond, turn your cards on their side, and then we
will call on you. So would anyone like to----
Chairman Kerry. Let me just sort of ask an open question
and some of you can dig into it. What do you say to the sort of
universal response of the members and the people we represent
that this begins to be counterproductive, works against the
purpose of the plan itself? I mean, I understand the market
concept, and I understand the constraints we all operate under.
But just from a practical, operative, in-the-field reality, how
do you respond to this notion, you know, you are kind of giving
to Peter and you are taking from Paul. You are giving us here,
and you are taking over here.
Mr. Rowe. Well, Senator, to some extent I agree with what
you are saying there. I think, however, we cannot view this in
a vacuum. I think it is clear, if you ask the other
participants--for example, I know Mr. Wilson in North Carolina
accesses at least four other Federal funding streams. And what
we are looking at here is a larger question of how much and
where does the Federal Government support microenterprise. Is
there a need for us to begin to coalesce these various
programs?
Chairman Kerry. What other funding streams are you
including?
Mr. Rowe. There is CDFI, Rural Business Enterprise at the
USDA; there are at least several others at HHS, CDBG funding.
Chairman Kerry. CDBG is really----
Mr. Rowe. Yes, it comes through HUD, because for a number
of microenterprise providers, that is a significant source of
funding.
Chairman Kerry. So you are going to count a Medicare
payment? Are you going to count a child deduction? Are you
going to count all those others and put them on the table and
say that is too much?
Mr. Rowe. Well, what I am talking about, Senator, is the
various funding streams that go to the microenterprise lending
institutions, the various forms of grant assistance.
Chairman Kerry. Only those in microlending.
Mr. Rowe. Right.
Chairman Kerry. And you feel that in the conglomerate,
those microlending grants from various sources are somehow
overly generous?
Mr. Rowe. Not overly generous, but I think what we are
looking at is: Has there been a diffusion of effort? Is it
possible that while supporting microenterprise, we are probably
overly broad in our various outlets.
Chairman Kerry. Does that mean we are too generous----
Mr. Rowe. I do not think it is a question of being too
generous. I think----
Chairman Kerry. Are we overly effective?
Mr. Rowe. I think it is more like looking at your bills,
and if you had five different ways of paying your electric
bill, you would say, Why am I not just simply paying one
source?
Mr. Sikes. Good morning. I am Chris Sikes. I am the
executive director of the Western Massachusetts Enterprise
Fund, and thank you, Senator Kerry, for all the support you
have given us through all these years, where you are the
Ranking Member or the Chair for small business and
microenterprise. It has been phenomenal. And as a constituent,
I can say that your support has been steady all the way through
and very proactive, and thank you for that.
I want to frame, if I could, just very briefly just why the
microenterprise program is so effective, because the reason,
the central core of this program is that it marries technical
assistance and lending. When you are making a loan to a
microenterprise, it is the most fragile type of business. They
have the fewest resources. Oftentimes, they are in a highly
competitive market with larger businesses, and when you can
link the technical assistance with the loan, you are forming a
critical partnership for the success of an enterprise.
What we have seen over the years--and we have been in this
program since it was the first year of a demonstration
program--was how effective it is when you link the technical
assistance with the loan. And we have come up with a whole
array of technical assistance products to meet the specific
needs of the businesses in our market. It can be one-on-one
technical assistance. We can put together support groups for
that business. We can put together advisory groups for
business. And the rate of success is seen by the fact that--
roughly you flip the equation, which is generally you see an
80-percent failure in the first 5 years, to an 80-percent
success rate. And I attribute that directly to linking the
technical assistance with the lender, with the microlender. And
it is the flexibility of being an unregulated financial
institution--that intermediary, that is--that allows us to do
that, where a bank cannot do that, and allows us to take the
type of risk in terms of lack of collateral and being a start-
up, et cetera, that no other lending institute can do.
Also, because the technical assistance is tied to the
intermediary, we are the one at risk, so we are there at all
times working with that business. We are seeking the business
out as much as the business is seeking us out, and that has
been a core part of our success.
Chairman Kerry. Let me come to the gist of the proposals
that are on the table so we get at it. I doubt we have
disagreement on technical assistance. We are all in agreement
we need technical assistance. There are two issues on the
table. What is the impact on the interest? And what is the
impact of shifting this to Women Business Centers and Small
Business Development Centers--does it have an impact?
Mr. Sikes. Yes, it has an impact. In terms, first of all,
of the fact that you would go to the SBDCs or the Women
Business Centers, the big difference there is that when the
lender has access to the technical assistance, we are going to
be using our resources with that business directly because we
are in a partnership for the length of that loan. We need that
support to work with them, and we are going to be much more----
Chairman Kerry. So there is a greater synergy to----
Mr. Sikes. And we are going to be more proactive than
anybody else because it is in our best interest to be proactive
to save our loans and to make this----
Chairman Kerry. Why does it not--I mean, this is like a
venture capitalist, you get in, you want to be involved in
decisions because you really want to make sure your loan is
going to be successful. If you lodge that technical assistance
somewhere else, aren't you----
Mr. Rowe. Well, I would say that, unfortunately, when we
look at this, we find that the interlocking nature of many of
the funds, whether it is Mountain Business Works or the Western
Massachusetts Enterprise Fund, is very directly related to the
local technical assistance providers. They make no bones about
either being a Women's Business Center and being a microlender.
And what we believe is we are providing the funding and the
technical assistance for these borrowers.
We completely agree that the microlending intermediary
needs to be hands-on. That is part and parcel of it. What we
are talking about are the multiple funding streams that are
coming out of SBA and trying to coordinate and maximize the
effectiveness of all these outlets we offer.
Chairman Kerry. Do you want to respond to that?
Mr. Sikes. It is the same comment again. I just think that
if you want to see this program work, you have got to allow the
intermediaries who are making the loans have the technical
assistance resource to support those loans. Let us get our
hands dirty, as it were, so we can really work with these
businesses. You handcuff this program to the point where it
will not work if you separate the technical assistance from the
lending.
Chairman Kerry. Mr. Wilson?
Mr. Walker-Wilson. Greg Walker-Wilson, CEO of Mountain
Bizworks, Asheville, NC, also chair of the Association for
Enterprise Opportunity.
We work with hundreds of small businesses every year in
North Carolina, and many of them are low-income, they are
women. Each of these particular funding sources targets the
specific needs that each of those has. Prime is for very-low-
income and low-income.
I really view these bills as the American dream funding
sources. They make the American dream possible. And that is
what this is all about. The organizations like mine and Chris',
we are helping people succeed, pull themselves up by the
bootstraps, and we are able to help them create a better life
for their family. And so we are offering them training and
consulting to hundreds of people. Each of these sources are
unique, and one is focusing on the needs of women's businesses,
others on training for low-income.
The microloans do need to be connected to the training and
technical assistance. We did a study about 18 months ago
looking at the 3-year survival rate of our businesses. We saw a
survival rate of 70, 74 percent. Typically, we see just in the
general population well under 50 percent. When you marry
training and lending together, you have a much higher chance of
success. And that is what this is all about, and that is why it
is so important.
Chairman Kerry. Mr. Kelly?
Mr. Kelly. I am Kevin Kelly. I am the managing director for
policy and advocacy at the Association for Enterprise
Opportunity that Greg just mentioned.
I just wanted to mention one thing, Senator Kerry. When
this proposal was first released earlier in the year about
getting rid of the technical assistance portion of the
Microloan program, we had a call with the Microloan
intermediaries that are part of our membership, and I said I
think I know the answer to this and what you are going to say,
but I want to hear from you. What does this mean? How would
this work in your community? What is your reaction to what the
President's budget is saying here about using SBDCs, Women's
Business Centers, and so forth to do this instead of through
the Microloan program? And informally they said, This does not
work in our community. Some of the SBDCs, for example, they
don't work with microenterprises. That is not part of who they
target.
So even if there is somebody in that same community--and I
heard Mr. Preston talk about the overlap and there are a lot of
them in the same place where the intermediaries are--that does
not necessarily mean they are working with the same type of
entrepreneur or providing the same type of services.
I would echo what Chris is saying because I heard the same
thing on our call with our members who are the intermediaries
who are doing this on the ground. To them this is not a
practical solution to what they are trying to accomplish.
Chairman Kerry. I have got to back to another meeting, but
let me just say to everybody it seems to me that there ought to
be a way. Draw each other out on this. Listen to each other, is
the most important thing. Let's not get fixed in some sort of
ideological place. There is a practicality here. There is a
reality of how the business world works. There is a reality of
how money works. There is also a reality about accountability.
I am not suggesting the Government has the best way to handle
all of it, but there is a synergy that we ought to be able to
try to create here where you can get the best of both worlds,
if you can get the Women Business Centers involved in some
intelligent way, but not to the exclusion necessarily of the
other folks' ability to be able to get a handle on it. Let the
marketplace maybe decide. Let people choose, give them the
breadth of that rather than become in a sense picking a winner
or a loser here and deciding a rigid sense of the road that it
is going to go on.
So I urge you to try to explore that as you think about it,
and hopefully maybe be able to come to some kind of an
agreement and consensus on it.
I know we have got a bunch of folks with cards up and a
bunch of other issues to roll through, so let me let you do
that.
Ms. Wheeler. Before we go, I did not hear anybody answer
the question to Tee's comment about multiple sources and why
SBA contends that TA can be provided through these other
sources and not through this complementary program. So if
somebody could--Ron, I will go ahead and call on you.
Mr. Phillips. Thank you, Senator Kerry--who has just left
us. But my name is Ron Phillips from Coastal Enterprises in
Maine. We are a rural CDC and CDFI, if you know those acronyms.
But we have the great pleasure of being on the recipient end of
those multiple programs that the SBA does put out, including
the Maine Women's Business Center and SBDC and 504 program and
SBA microlender and the whole lot. I am not sure whether to
hide under the table or, you know, say a few things here.
But I want to back up the comments that have just started
with the three before me. I think it is a slippery slope to
delink the TA from the loan program, period. It is a debt
instrument and a relationship to borrowers that is so critical
that it would get defused with other programs such as the
Women's Business Center and SBDC. I would be very cautious
about that as a slippery slope.
To the question of those programs being available to this,
I am not even sure that it would be advisable to put those
programs into a relationship to borrowers because of different
goals those programs have. And so I would be very careful about
that.
As far as funding goes, that is probably the nub of the
issue. In fact, from our experience at the local level, as
practitioners, we are struggling for resources to keep those
programs going. We are matching funds from the SBA at a
significant level. We have to raise those annually. We try to
pursue block grant funds. By the way, challenge development
block grant, which is not an eligible activity in a continuous
way. That is more special project-oriented, at least in the
State of Maine. There may be differing plans around that. So I
would say that we struggle with other sources just to keep the
other programs going, especially the Women's Business Center
and SBDC.
As I sit here today, we are putting applications in to just
keep the level of effort. We have much greater demand in the
market than we have counselor time and availability. So in my
mind we should dismiss that as an option.
I think more important is to keep our focus, and we would
hope the SBA would because they are a great institution to be
backing small business in America, including the micro level,
and to delink this TA program from the loan and the important
value of the debt instrument to create employment and self-
fulfillment among small businesses I think would be a very
serious mistake.
Thank you.
Ms. Ferko. First of all, I would like to welcome you from
Maine. Senator Snowe gives her welcome, and she apologizes for
not being here today. I am Jackie Ferko. I am a staff member
with the Committee, and I have been around for 4 years, and
some of you know me and some of you do not.
On the macro level, we would like to say obviously this is
a very--the Microloan program is a very important issue to
Senator Snowe, and we do agree that the technical assistance
really does coincide with the lending portion.
I do have a quick question for you. On a micro level, in
our proposal, in our legislation, you had a proposal to
eliminate the words ``short term,'' and I have been trying to
work with SBA just to make sure what your proposal does, and I
believe it is in order to provide greater flexibility and
ability to provide flexible credit lines to qualified
borrowers. And I just want to make sure that is--I want to hear
from you that is what you want to do in our legislation and
then hear from Tee Rowe to see if that is exactly what it does
and if maybe there is--if we need to address that legislation
in our leg package.
Mr. Phillips. OK. Am I still on here? This refers to the
line of credit type of financing? Well, in our experience that
is not a particularly relevant area to be worried about, so,
just my opinion, it is not something I would want to spend a
lot of time thinking about or worrying about, frankly. We do
more term financing, and that is just fine.
It can get a little bit more costly to handle lines of
credits, though I would say that there are times and places
where that can be useful. But it is a more costly way of
financing microenterprise. So you tend to want to do more of a
term loan. I hope that is helpful.
Ms. Ferko. Sure, and I absolutely agree with you that we
need to address this issue. I am just wondering, you know, does
that provision do--especially from the SBA, does that provision
do what you want it to do?
Mr. Phillips. I have got to look at the language. I mean,
if it is in there--if it does no harm, I suppose it could be in
there. Maybe others would comment on that. But I am just saying
from our experience as a lender, we are not focused on line of
credit language.
Ms. Ferko. Line of credit, OK.
Mr. Phillips. That is all. Thank you.
Ms. Ferko. Tee?
Mr. Rowe. I guess--and when we discussed this, Jackie, I
was trying to understand how the change would have affected the
program. As I understand from what Mr. Phillips says, it has to
do with line of credit financing, though I know that a number
of our intermediaries already offer line of credit financing.
So I know there is an overall cap for a per borrower lending. I
am not sure that the language in the act which says ``short-
term, fixed-rate financing'' prohibits line of credit
financing. I know it does--so, you know, we certainly--if there
is something in particular that that would change and cure, we
are, you know, more than happy to have a discussion on it.
I guess what I am still trying to figure out is what the
end goal is, because certainly there is no problem with
multiple loans from an intermediary to a borrower, and there
is--as long as it is within that overall cap.
Ms. Ferko. OK. Do you have any response to that?
Mr. Phillips. I am not sure where to go with this. If it
does not do any harm, if there are others that are availing
themselves of line of credit uses--is that what we are saying?
As a peer field and network, I certainly would not be one to
stand in the way of their abilities to do what they are doing.
I am just saying that from our experience we do not need that
kind--we do not deploy that kind of capital at this juncture. I
can talk another hour about asset financing. That is another
issue.
So if it does no harm, and there could be options for
others, that would be fine.
Ms. Ferko. Mr. West, do you want to comment quickly?
Mr. West. On the technical assistance issue. I am Dennis
West. I am president of Northern Initiatives. We are based in
the Upper Peninsula of Michigan.
Some of the challenges are the universality of the programs
that were talked about. The nearest Women's Business Center is
in an 8-hour drive from Marquette. The nearest SCORE volunteers
would be a 3-hour drive one way, and if you were on the other
end of the Upper Peninsula, it would be 7 hours one day. The
Small Business Development Centers have two counselors to cover
the 15 counties, and they generally only spend time in the
counties where there is matching support being offered. So the
ability to offer technical assistance to the providers is not
universally applicable, particularly in rural communities.
Our side of the issue is we require monthly statements from
all of our SBA Microloan borrowers. So the SBA technical
assistance is triggered by the performance of the borrower. So
we are able to tailor on a month-to-month basis based upon
accounting needs, based upon marketing needs, based upon e-
commerce needs, ways to help make that business stronger and
better.
And the third point is some of the other programs that were
cited, we find ourselves as we make microloans with a multi-
year credit and to have opportunities like accessing funds,
like community development block grant, would give us
potentially one year of funding on a highly competitive basis,
and yet our exposure is a multi-year credit and a credit that
we are trying to grow.
So those are the three areas I see as problems with moving
the TA in the way that you have suggested.
Ms. Wheeler. Mike, do you want to say something?
Mr. Hager. Michael Hager, head of Cap Access, SBA.
The Senator brought up a great point, and that is, what can
we do to reach a practical solution to this? And our big issue
here with TA is it is a duplicative effort. We duplicate it in
so many of the other programs. That does not mean that we do
not have a location Upper Peninsula of Michigan. But we are
also entertaining the creation of software TA where one can go
online and go through a program that provides technical
assistance. As a matter of fact, we are hoping to have it
developed to meet the technical assistance requirement for
Community Express, for example.
But we have a very nice budget that Congress has provided
the SBA for education, and we have talked about the sources of
that education: the SBDC, the WBC, and the SCORE. Again, we
feel very strongly that let's run this program effectively, and
one way to do that is to stop duplication wherever possible.
Ms. Wheeler. You know, we hear complaints that when the
argument is made that these programs are duplicative, that it
is an oversimplification of technical assistance. And just like
one loan does not serve all borrowers' needs, technical
assistance does not serve all businesses' needs. And so if we
could just go around the table very quickly one minute, try to
respond to the SBA's assertion that it is duplicative, and then
I have another question if you could get at it. Do any of you
receive CDBG money to provide TA to your micro borrowers?
Do you want to go ahead, Greg?
Mr. Walker-Wilson. Greg Walker-Wilson. Let me see if I can
remember all the questions. CDBG, where our central office is
in the one city, Asheville, we do receive CDBG funds. It has to
be only for low- to moderate-income individuals. We do it on a
contract basis. It is sort of a per-fee basis.
The other sources are not duplicative, and while I like the
idea of trying to be more efficient and we try to do that,
online, for example, could help part of the problem, but we are
in the mountains of North Carolina. There are many places that
do not really even have dial-up let alone broadband. And the
clients that we deal with are people that do not fit into the
mainstream. They are lower-income. They have less education.
They do not go to their computer to try to get the answers.
They say, ``I trust those people over there. They are a real
person. I trust them. They have been in my city, and they are
going to help me out and help me figure out how to do it.''
So it may play a role in some ways to do things online. I
think in general the populations we serve would not access
that. Some of the population would. So I think that we have to
deliver them. When we deliver our training and technical
assistance, it is very specifically to the people that we are
serving. And for folks who can go elsewhere, we want them to do
that with financing and whatever. We are not trying to compete
with the banks. But what our needs are, we are trying to figure
out what is it they need. And so if they are lower education,
how do we make it available so it works for them, so they can
succeed and achieve the American dream.
Ms. Wheeler. Chris?
Mr. Sikes. I just want to speak to one example on why
technical assistance is so important. We have a bakery that we
are working with that had a--it had ordered equipment, and they
needed that equipment right away because they were just
growing. There was a problem with the delivery. It threw off
their whole schedule, and it just threw off the whole business,
really. And we had to get in there and really working with them
in saying, OK, how are you going to restructure by the time
that it takes to get the business running well enough until the
equipment arrives.
We provided hours of technical assistance in that case, and
it was not like making an appointment with another technical
assistance provider. We had to be there right away working with
them. We restructured the loan, and we worked out a way for
them to deal with their payables and help them get a schedule
together. All that was obviously to preserve our loan and also
to work with that business in a way that we were partnering
with them. So that is why, again, linking the technical
assistance with the loan is so critical for this program. I do
not think the program can honestly run unless you have the TA
linked to the loan program.
With regard to the block grant program, block grants,
especially for regional funds like ours, are very
geographically based by town. So that means with every single
town you have to have a separate contract with them.
Administratively, it is exorbitantly expensive to do that
unless you can get, you know, some grouping. But then you are
constantly having to go one year after--on an annual basis--on
these contracts. So it is a very costly way, I think, to run
the micro program through block grant programs, again, because
you have got a long-term commitment on a loan, a liability on
the loan, and you have got a short-term technical assistance
grant.
Ms. Wheeler. Mr. West.
Mr. West. We have never received community development
block grant for technical assistance support, and it so far has
not shown up as a priority by our State that would enable us.
Plus we have the complication of having to go through a local
unit of government.
So even if we could get it, it would be hard to do it in
such a way that we could cover a large geographic area because
the applicant would be a county or a city. So it is a challenge
to think that you could use CDBG, particularly in rural areas.
Second, to offer something on the Internet in rural
communities where there is not universality of high-speed
connection, dial-up sometimes is present, but that is a
limitation. And although we respect the use of e-commerce in
various ways to connect people using the Internet, it is very
much in the future and not currently applicable in a lot of
instances.
The third point is that TA is really triggered by the
performance of the business, and it is a conversation about how
that business is doing based upon its financial performance.
And it is not likely that someone is simply going to be able to
look at their financials and immediately go to a Web site and
figure out off a menu of products what exactly they need.
So working with small borrowers or start-ups, usually their
first time in business, it is very important to be able to sit
down with them to review their situation and to help craft a
plan to help continue their support and growth.
Ms. Ferko. Aside from the technical assistance, I would
also like to hear from the microlenders here. How does SBA's
proposal of going to zero subsidy affect you? In a negative
way? In a positive way? I mean, how would that affect you in
lending to the borrowers?
Mr. Walker-Wilson. It would just make the money much more
expensive, and so that affects the bottom line of these small
businesses who are just getting started, and every dollar
counts in their monthly cash flow. And so that is the reality.
And so it is helping them get through in the first loan,
getting their business going, and then our goal is to
mainstream them and get them farmed out to the private sector.
And that is the goal.
So this is only about helping folks get started, having a
loan that they can pay for, have enough flexibility, and then
from there we can send them out to the private sector.
Ms. Ferko. Would you still participate in the program if--
--
Mr. Walker-Wilson. Say again?
Ms. Ferko [continuing]. If it went to zero subsidy?
Mr. Walker-Wilson. I think it would be difficult to, and it
would be much less desirable. I have not evaluated it quite
like that, but I have to be a rational manager of resources,
and so if this is very expensive and it is not good for our
clients, then it would be sort of, you know, the last resort
kind of financing.
Mr. Sikes. I fully concur with what Greg said on that.
There is a lot of capital out there. People will go to lower-
priced capital, to their detriment, because they will lose the
technical assistance and they will not understand how important
that is, the microenterprises. So the cost will definitely hurt
this program, and if you put the high cost and no technical
assistance to this program, I think we are effectively saying
that this program will not work.
Ms. Ferko. I guess we could assume that if you were still
participating in the program, less loans would be made. I mean,
there would be less participants.
Do you have----
Mr. Phillips. I do. I dropped my card there to get in here.
But just on the block grant, I had said that earlier. I think
that is a very difficult source of capital to rely on. But,
more importantly, what I would like to re-emphasize is that
these other programs are also struggling for resources, and the
counselors, whom I worry about, frankly, because we have
several at CEI employed--seven business counselors, by the way,
in the field--they are overworked and overwhelmed, and we are
struggling, too, for their budgets to maintain those every
place we can get those funds for matching and other sources. So
it is very difficult to think about how a program, an
additional program could be put on them aside from the fact of
delinking that program from a very special lending
relationship. As well, we are doing our best--I am sure others
are--to create efficiencies and are attempting to put products
through Web-based technology for access both in training--
especially for remote rural areas in Maine, and that has some
success. So we are, you know, doing some of the efficiencies
and coordination that you are talking about. But to delink
that, I am not sure that would work.
In terms of the zero subsidy, this is a real struggle
because our field is based on helping smaller business with
flexible capital and technical assistance, and pushing us into
the market level is a place you want to eventually get to and
we do get to. But it is very difficult, because we are working
with borrowers that are not quite at that market level. Every
time you ratchet up the interest rate, you are compressing some
aspect of the program.
So to the extent we can maintain the subsidies in this
lending area, it would be extremely helpful. Thank you.
Ms. Wheeler. May I ask for a clarification on this? A
component of the Microloan program is that each of the
intermediaries have a loan loss reserve in which they put up
money; they are on the hook for the loans, and if the loans go
bad, then they have to cover them. So, really, how would it
work for an intermediary to be on the hook, to have to put up
the money on these loans but not have control over the TA which
counsels the businesses in order to succeed? It seems like it--
and maybe SBA could tell me how they see that this would work.
How can we expect the intermediaries to put up the money for
these loans but not have the funds to counsel them or have
control? Because while some of these might have Women's
Business Center funding, might have Small Business Development
Center funding, some of them do not. So they would not be
providing the TA, is what I am saying.
Mr. Rowe. Right. Well, we view it as the lending
institution working with the borrower to access the counseling
and make sure that that counseling is effective, whether it is
through an SBDC or Women's Business Center.
Now, of course, as Mr. West pointed out, you know, there
are gaps in rural areas, and these are problems that we have to
surmount. Nevertheless, in looking at the TA costs and then
looking at the spread--and I believe it is a roughly 8-point
spread between what we lend the money out at and what it is
lent out at, just to address Mr. Sikes' comment about people
seeking less expensive capital. We view the slight shift from 2
points below Fed funds to 1 point above Fed funds as a
reasonable cost shift that allows us to expand the program from
a current level of about $20 million based on roughly a $2.5
million subsidy to a much larger program level without any
subsidy, so that not only Mr. Sikes but, you know, any
microlending institution in the country can access these funds,
and we do not have to worry about requesting additional
appropriations.
Ms. Wheeler. And we understand that it is considered a
modest amount, but the feedback we got is that already many of
these funds, because it is not a high-profit business, that
they are already losing money and this would just exacerbate
the situation.
But I want to go back to the loan loss reserve. So if SBA
were to take the technical assistance funding away from these
intermediaries, would they drop the requirement that they have
to put down loan loss reserve funds as an insurance policy for
the success of these loans? Because it seems unreasonable to
expect them to take scarce dollars for an insurance policy when
they do not have control over the management or the counseling
of them.
Mr. Rowe. Obviously, if we created a zero subsidy program,
we would not consider the need for a loss reserve to be as
crucial.
Ms. Wheeler. Right, but they would be paying indirectly
anyway. Their fees would simply go up if their defaults go up,
and right now there is only one loss in the program. So if
there truly is correlation between TA and success and the low
losses in the program and we took that out of the equation,
defaults go up, then the subsidy to provide the program would
go up and, therefore, they would be paying more in fees.
So there seems to be----
Mr. Rowe. OK. I see what you are saying.
Ms. Wheeler. There seems to be a disconnect in the
proposal. So if the TA is not going to be provided to these
organizations, would the SBA drop the requirement that they
have a loan loss reserve fund?
Mr. Rowe. The problem with that is that presupposes that
the absence of the TA funding means that there is a complete
absence of technical assistance available for the borrowers,
and we do not agree with that because obviously we see all the
other various outlets that we fund and have available right
now.
Ms. Wheeler. Well, I think what it supposes is that these
groups are on the hook for these dollars when they are not in
control of the technical assistance. We can come back to it,
but I wanted to get on the record that this would have to be
part of the proposal. It really seems unreasonable that these
groups would have to have a loan loss reserve of 15 percent of
the loans if they do not have control over the TA.
Mike?
Mr. Hager. Kevin, I want to be really clear that we are not
taking away TA. We are offering several venues to participate
in TA.
Ms. Wheeler. Did SBA request money for TA, extra TA money
through Small Business Development Centers, Women's Business
Centers, or SCORE in order to compensate for the additional
borrowers going to those programs?
Mr. Hager. We think there is capacity to do that.
Ms. Wheeler. I am sorry. Was there a request?
Mr. Hager. No. But we think there is capacity to handle the
request for TA.
Ms. Wheeler. OK.
Mr. Hager. And, again, you know, the options that we have
today, one could argue we think we run a really good TA shop
with numerous resources to access that TA, and there could be
an argument that we think our TA would be enhanced over what
takes place today.
Ms. Wheeler. OK. Greg, do you want to make one final
comment? And then we are going to move on to the intermediary
lending pilot program?
Mr. Walker-Wilson. Sure. Greg Walker-Wilson. Just a
respectful different point. We do have several different
sources, like you are saying. We still have waiting lists, and
we still have a budget deficit, and we are leveraging the
Federal funds at least one time over. And it is sort of a
jigsaw puzzle, and a certain funding source can serve a certain
target group, and a certain other funding source can serve
another target group. There is not overlap, so it is just--I
mean, if we had twice as much money, we could serve that many
people. The demand is there, and the creative ideas are there,
and I think that our role is to try to help people, help
businesses succeed.
Ms. Wheeler. OK. Jackie, do you have a question?
Ms. Ferko. No.
Ms. Wheeler. May I ask one more thing? Could someone please
on the record explain to us the distinction between the
Microloan program and the Prime program? Go ahead.
Mr. Walker-Wilson. The Microloan program is specifically to
lend money, and so we have been talking about that. Prime is to
provide training and technical assistance to low-income and
very-low-income, and it has no tie to lending. So there are
many people--take my own organization, for example. Probably 75
percent of our clients just want training or technical
assistance. They do not want a loan. Or they have some other
source. And so if we only put money in the lending, then there
are these other folks that want to start businesses that will
not have options. And so these are ways of providing capacity
building, the prime funds, to helping people have the chance to
succeed, adding management capacity, marketing capacity, and so
forth.
And for the record as well, I just want to point out that
right now the prime funds, only 16 or 17 States are eligible to
access these, and this is meant to be a national program in all
50 States. And I think it is important that that barrier be
lifted so that any program--there are low-income and very-low-
income entrepreneurs in every single State, and to have two-
thirds of the country excluded from being able to participate
is not fair to those folks.
Ms. Wheeler. OK. We are going to go ahead and move on to
the intermediary lending pilot program. For those who do not
know, the bill authorizes a 3-year pilot program, and it allows
SBA to make loans to local nonprofit lending intermediaries,
and then the intermediaries, similar to the SBA's Microloan
program, re-loan those funds to small businesses. The program
seeks to address the capital needs of start-up and expanding
small businesses that require flexible capital, but for some
reason are ineligible for private or other funding. It is aimed
at businesses that desire larger loans than what can be provide
through SBA's Microloan program, loans of sizes between $35,000
and $200,000. The loans to the intermediary would be long term,
of 20 years, at 1-percent interest, and they would have a 2-
year grace period.
I think we have two participants here today who would like
to explain to the Committee why there is a need for this
program and why we should test this to see if it could get at
this gap lending.
Ron, your card is gone. Do you want to lead off?
Mr. Phillips. Thank you again. And to the SBA, they can
take these clam chowders and lobster bisques with them.
Mr. Hager. You cannot do that.
Mr. Phillips. They are under a hundred bucks each.
[Laughter.]
Mr. Phillips. Or whatever it is, $49. Thank you again.
We have, I guess, the honor in some ways of being the first
rural development intermediary lending program in the Nation
when USDA adopted that program in the late 1980s. It was a
program that came out of Maine with one of our colleagues in
Vermont, and it has been a terrific program, well
oversubscribed, I believe, and there are a lot of statistics on
this throughout rural America, and many entities have
advantaged themselves with these kinds of funds and had a
tremendous impact in helping to develop and create jobs among
small businesses in rural communities.
Our proposal is to have the SBA adopt a pilot program to
mimic effectively this successful program.
Ms. Wheeler. This is at USDA, Ron?
Mr. Phillips. Yes, in Rural Development, and I am speaking
out of the experience with that rural development program,
which in our case we have made loans to over 200 small
businesses in rural Maine, and these funds have cumulatively
been recycled to amount to something like $15 million of what
we call sub-debt capital. And we all know what that means. It
is the kind of capital that is near equity that can help
enhance the collateral base of the company so that conventional
financing can be drawn in, especially the bank. And then you
get into this magical area of leverage, and you bring in the
banks to that particular deal. And in our case, we leveraged
$115 million of bank capital.
The SBA program is modeled on this successful effort. There
is no TA assignment to this. The assistance we provide
companies is blended in with what you think of as the arbitrage
between the cost of funds we have and the amount we loan out to
companies.
Some 8,000 jobs, by the way, have been created or sustained
in these projects. One of the projects, by the way, is this
great company in Whiting, ME, down east Washington County, the
poorest county in Maine or among the poorest counties. And they
process gourmet-type clam chowders and seafood and herring
products and so forth. And you can buy them here in Washington
if you are around or at Whole Foods or natural food outlets,
because that is their prime market.
The story here is that there is an entrepreneur that
decides to try to make a go of it, and he and his significant
partner bought a 100-year-old company that was sitting there
not going very far. The name Looks goes way back historically
in that particular county, and he took it--I think they are
employing eight or ten people, and he rebranded the company and
developed a strategy to grow the company, and hopefully it will
do quite well. They have almost tripled employment, and they
are on their way. We hope they are very successful.
Sub-debt money--and even equity capital, but I am talking
about sub-debt money--is very important to help a project like
this get off the ground. I think Machias Bank is involved with
this particular thing.
So my last point--I know I am over my time here. I can go
on and mention so many other companies here. But the SBA is not
the only institution in this, but it is an important voice and
piece to put in it because we cannot use the rural development
money in the urban areas. That is only for communities with
25,000 or less population, so we are trying to mimic this into
the populations of Maine and throughout the country. And I
think you have got a really great program opportunity.
Foundations like the Ford Foundation, the Kellogg
Foundation, the Casey Foundation, and many others have been
buying into this kind of revolving loan type of program. You
are not the only ones there. But to have the SBA, this
venerable institution nationally, in this type of pilot would
be exceptionally valuable as a pilot.
Thank you.
Ms. Wheeler. Mr. West?
Mr. West. Again, I am Dennis West with Northern
Initiatives. We serve 49 rural counties, primarily in Michigan.
Northern Initiatives has been an SBA microlender since 1994,
and we have also been the recipient of USDA IRP loans since
that time, too.
We asked Senator Levin and his staff to help create this
program because what we saw is a gap in the market. Of the $24
million that we have loaned, 55 percent of our loans have been
to start-ups, and 75 percent of our loans come as community
bank referrals. Now, why would community banks make referrals
to us to help the start-up of businesses? Generally, it is
because of the size of the loan, past bankruptcy, often health-
related in a rural area is the cause of the bankruptcy, low
equity or no equity, collateral shortages, or the loan is just
plain odd and they are not sure how to underwrite it.
So typically in our situation we help support a business to
get started and grow, and that is a 3- to 5-year process to get
back into the hands of a community bank. And by the end of that
3- to 5-year process, our borrowers typically are back in
community banks and successful and growing businesses.
What we would ask the Committee's support for this title is
to recognize that what the fund will do is to be able to
revolve. We would expect that this amount of money would
revolve at least four times over the course of the pilot
program the 20 years. So the money will leverage itself.
It will enable us to support the fastest-growing sector of
our local economy, which is start-up and entrepreneurs starting
and growing small businesses. And, frankly, they have capital
needs that are not totally being met by the market, and it
gives us the ability to support them.
But in support of the success of small businesses, it helps
us to continue to grow and have a stronger partnership with our
community banks, so the small business lenders will be the
beneficiaries of this program, but also community banks who are
our partners will be beneficiaries of this program because in 3
to 5 years they are going to be getting growing businesses that
are sound, workable credit.
Ms. Wheeler. James?
Mr. Ballentine. James Ballentine, American Bankers
Association. I wanted to commend the drafters of the language,
but I have some questions in the language of the bill because
the language indicates eligibility for participation and that
the intermediary can have--it looks like up to 1 year of
experience or not less than 1 year of experience in making
loans to start-ups. And I wondered whether that level of
experience was enough to actually be proficient in making loans
through this program if you only have 1 year of experience
versus what it sounds like you all have much more experience
than that.
I also wanted to speak to the availability of
intermediaries in urban communities and whether there were
adequate intermediaries in those communities to serve the
population that you speak of, these start-up businesses.
And my final point was about a 3-year pilot program. I know
that is traditional in Washington, but in light of the fact
that these loans will not have to start repayment until 2
years, whether you would have adequate experience within the
program to determine whether a 3-year pilot was enough or
whether that should be extended to, say, a 5-year pilot.
Those are my basic questions.
Ms. Wheeler. I think that the intermediary drafting
question that you asked applies to the SBA Microloan program,
separate from the intermediary lending pilot program.
On the 3 years, I think we could certainly go back and
discuss making it longer. You are right that it is--typically,
we do reauthorization every 3 years, and so we try to put
everything on sync. This is Senator Levin's provision, and it
has passed the Senate several times, but we could certainly go
back and talk about it.
Your middle question was?
Mr. Ballentine. The availability of intermediaries in urban
communities to serve those particular businesses.
Ms. Wheeler. Whether there would be enough capacity in
order to reach those?
Mr. Ballentine. Whether there are enough intermediaries. I
know there are a thousand, roughly, around the country, and
they are primarily in the rural parts of the country, and
whether there would be urban capacity for the intermediaries.
Ms. Wheeler. Do any of the intermediaries at the table know
the answer?
Mr. West. I do not know the answer, although I will tell
you one of the intermediaries I have the utmost respect for is
in Detroit, Detroit Enterprise Institute, which I think is one
of the best that I am aware of. And I simply do not know the
answer to where capacity exists in a lot of urban centers.
Mr. Phillips. I would agree with Dennis, though I know that
in Maine--and this is from our experience--municipalities where
we would be active here generally do not have a funding base.
They might have a downtown redevelopment association. I know in
Lewiston and Auburn, there is Lewiston-Auburn Economic Growth
Council that has come to us for money, by the way, because they
cannot get block grant funds to refuel some of the lending. So
the demand, I think, is better.
I do not know of any group in Maine, other than us, that
would be active in these markets, that would be eligible, that
would have an entrepreneurship relationship and a business
development relationship as robust as we would have. Now, that
is in our State. I think you are talking about 20--there are 20
pilot----
Ms. Wheeler. There would be enough for 20 grants, as I
understand it.
Mr. Phillips. Twenty, and maybe if this goes, which I think
would be great, there could be more analysis of how this is
going to supplement other areas of the country.
Ms. Ferko. I appreciate you, Ron, for bringing up the Maine
businesses. Too bad you did not bring clam chowder for the rest
of us since we are going to be here until 1:00.
Mr. Phillips. Well, this is for you, then.
[Laughter.]
Ms. Ferko. I do not think I can accept that, either. But I
would like to hear from the SBA their comments on this pilot
program just to see what they are thinking and get them on the
record.
Mr. Rowe. Well, we have looked at this before, and, of
course, it was in the bill through 3778 last Congress. At that
time CBO scored the proposal at about a 37-percent subsidy
rate, which means as it is drafted with the current
authorization, you are talking about probably maybe $55 million
if you got the full $20 million authorized appropriation,
perhaps $55 million being available for intermediaries.
But there are a couple of other questions. First off, you
know, James is correct, the definition of an eligible
intermediary, 1 year of experience, which seems to be a
pretty--an incredibly low bar for an area of lending where you
are talking about loans from $35,000 to $200,000. The other
thing is that, frankly, the way this is drafted, I would
imagine that both CDCs and credit unions would be available
intermediaries since they are not-for-profit organizations,
whether it is a C-14 credit union or a CDC.
I would just go back to the fact that this is a very
significant subsidy, I mean, 1-percent interest over 20 years
with a 2-year grace period, and I noticed there is no interest
rate set for the borrower. So there is no cap here as to what
would be charged between the 1 percent the money is being
borrowed at.
Ms. Wheeler. For the record, I just need to clarify that
while CBO did assign a subsidy rate estimate of 37 percent, it
also said--the quote is that, ``We estimate that the subsidy
cost for the authorized loan amounts would be about $7 million
over the 2007-2011 period.'' So I just think it is important to
say exactly what the cost would be, because 37 percent sounds
so expensive, but the ultimate decision of CBO is that it would
be $7 million over a 5-year period.
Mr. Rowe. Yes, well, they are basing that on $20 million
authorization for 4 years, so that would work out about right,
$7 million a year. And at $7 million a year and a 37-percent
subsidy rate, we can figure that would probably be about $11
million in funding that we would be able to put out as SBA in
any given year.
Again, there is a question: What is the rate cap there and
what is the spread that the intermediary would be expected to
offer? And there is very little here that defines the
responsibility of an intermediary in this program beyond the
actual----
Ms. Wheeler. So SBA would like to see an interest rate
parameter added to the program and to address, as American
Bankers Association pointed out and SBA has pointed out, the
qualifications for eligibility to be an intermediary at----
Mr. Rowe. Well, at the very least, you would expect that if
the proposal was to go through. But the larger question is the
issue of the market niche that we are trying to achieve here. I
will point out that the $35,000 to $200,000 range is probably
the largest part of the 7(a) program. I would venture to say it
is something on the order of 60 percent of the $15 billion that
SBA guarantees in a year.
Ms. Wheeler. I want to move on to the CDC 504 program, but
quickly, Chris, you have had your card up. And then we will go
to Mr. West to respond to----
Mr. Crawford. Thank you, Kevin. I am Chris Crawford with
NADCO, the National Association of Development Companies. We
are the 504 lenders around the country. There are about 260
certified development companies, and those CDCs have many more
offices spread around the country in their States.
As I read the language on page 22, frankly, I assume that
CDCs would be qualified to operate this program. Is that
accurate?
Ms. Wheeler. It was my understanding that your proposal was
that you wanted to specifically name them, and not only to
apply to this program but in general to be defined as an
intermediary so that CDCs could apply for any program that
calls for an intermediary.
Mr. Crawford. Yes. The language here appears to describe
certified development companies. We could probably make it a
little clearer if you did name CDCs in that. CDCs, as you know
and as Ron knows, are microlenders. We do a lot of
microlending. I think we have a fairly successful track record
in microlending as well as large lending. So I think our
industry would be eminently qualified to participate in this
and would certainly offer a number of endpoints, access points,
as James has asked the question on.
Ms. Wheeler. OK. Then we can look into that going into
markup.
Mr. West, did you want to comment on why the 7(a) and 504
loan programs do not serve this financing gap that the pilot is
intended to serve?
Mr. West. In the Upper Peninsula, we have 29 community
banks, and they range in size from $30 million to $300 million,
and many are not SBA lenders and do not have a relationship
with the SBA. And so start-up money and the money to help
support their growth is not always available or easily
available to them.
Ms. Wheeler. OK. Chris?
Mr. Sikes. It is important to mention that the IRP program
is really a subordinate lending program and that the loan
guarantee program is not, and that this really does fill a
different niche which the USDA program has really shown in the
rural setting to fill. And I would say that by increasing the
service area to the urban areas, we are giving a tremendous
amount of financial liquidity to the businesses in the urban
areas.
Ms. Wheeler. Ron?
Mr. Phillips. Just to reinforce what Chris said, that the
differences in this program--of course, it is a pilot--than the
7(a), it is a sub-debt, subordinated debt instrument, and the
7(a) program as a guarantee program still carries with it
certain requirements around collateral coverage for that
guarantee. And this is a much more flexible way of helping to
develop a company and getting them into a more financially--
standard, conventional financing market.
Ms. Wheeler. OK. Mr. West, last comment--oh, and Chris.
Mr. West. I also wanted to add that the kinds of loan that
we find ourselves doing are with low-equity, no-equity
borrowers, history of bankruptcy, not brought on by other
things other than a lack of access to health care, things of
that nature, size of loan, collateral strategies, collateral
availability, for God's sake, we take Airedales (dogs) as
collateral in one loan.
So these are not things that if a regulator saw that a bank
had done them, they would be very pleased to see, because they
in many cases are things that a regulator would not want their
banks to do and would cite them if they did them.
Ms. Wheeler. And is the administration funding the
companion program to this within USDA? This is modeled on a
program within USDA, and is it funded in the fiscal year 2008
budget?
Mr. Phillips. I do believe that it is, yes; even the
President, I believe, likes this program.
Ms. Wheeler. OK. Great.
Jackie?
Ms. Ferko. Just quickly. Tee mentioned that the 7(a)
program covers that niche, but obviously there is a need for it
since we are giving out those grants through USDA.
What do the 7(a) lenders think? Is there any thought that
there is a niche out there for this? I am just curious.
Mr. Kwiatkowski. My name is Chris Kwiatkowski. I am senior
vice president with Popular, Inc. I head up the small business
lending division, and I would like to thank the Senate Small
Business Committee for holding this important roundtable and
letting us participate.
This is probably an underserved niche, as our bread and
butter is the 7(a) program. My division focuses totally on SBA
lending, and we do have 50-plus business development officers
across the Nation, but probably not serving this particular
niche. And the size of the loans are difficult. The smaller
loans take just as much paperwork to generate as the larger
loans do, so it is not very cost effective as a lender to go
after these types of loans.
Ms. Wheeler. Jackie, would you like to let Mr. Wilkinson
go?
Mr. Wilkinson. I am Tony Wilkinson with the National
Association of Government Guaranteed Lenders, and I would like
to just hit one of our numbers. Year to date, about 80 percent
of the loans made in the 7(a) program are for amounts of
$150,000 and under. That said, they are not subordinated debt
loans. They are typical credits. And if this program is
designed to reach lower than what we are doing, then it is
probably a niche that our members are not serving.
Ms. Ferko. Thank you, Tony.
Ms. Wheeler. OK. Let us go ahead and move on to the next
topic, which is the certified development companies, the 504
loan program. We will allow SBA to present their proposals, and
then as we did under the Microloan program, we will let the
participants comment and then make their recommendations.
I am very sorry. We are little behind, so if we could try
to keep it short so that we can move through this. I am sorry.
Mr. Rowe. Well, I will move pretty quickly. There are just
a few proposals.
First off, there are some proposals that came from our
Office of Inspector General, changes to penalty provisions to
include fraud by loan packagers and agents, and to include
fraud under the 504 program; also to extend the current 5-year
statute to 10 years for fraud against CDCs, and also small
business lending companies. The IG has pointed out that a
longer statute is needed because effective fraud prosecutions
often take a great deal of time.
Beyond that, really quickly, there were two proposals: to
harmonize the appraisal policies between the 7(a) and 504
programs so that appraisals by a State-licensed appraiser is
required in either program when real property is being financed
for more than $250,000; and also harmonizing the leasing policy
and setting a common standard of up to 40 percent of a facility
allowed to be leased out in a new or existing building.
The last proposal is a proposal from the Office of Capital
Access. I know there has been some debate between Capital
Access and industry about this. SBA has put forward a proposal
that issuing debentures for 504 that would use a monthly rather
than semiannual payment schedule. One of our reasons is that we
believe a monthly payment schedule would allow borrowers to
reduce their principal balance on a monthly basis and,
therefore, reduce the amount of interest that they are paying
on an ongoing basis.
That sums it up.
Ms. Wheeler. OK. Would the participants like to respond to
the three proposals that SBA highlighted out of their
legislative package? Chris Crawford.
Mr. Crawford. Yes, I would, Kevin. I am Chris Crawford with
NADCO. First of all, I apologize, I just received the
administration's proposal recently, and so we have just begun
to analyze it.
On their authorization request, we oppose their
authorization request. We feel it is too short; we will run out
of money. I would note, responding to Senator Kerry's concerns,
our minority lending is up 15 percent just year to date. Our
rural lending is up 11.5 percent year to date. We have loaned
over $1 billion year to date to minorities. I would hope that
we would not be in a position to run out in 2008, 2009, and
2010 and that Congress would support the higher authorization
levels which are in S. 1256. We support those authorization
levels.
Secondly, changes to the fee provisions, we absolutely
oppose what the administration is proposing. The administration
disclosed those fees to us recently in a meeting, and they
indicated that the cost of a weekly audit would be $25,000 and
that they want to get to field audits to CDCs with portfolios
as low as $30 million. A CDC with that portfolio size receives
only $150,000 a year in servicing fees per year, total fees.
This would take up to 20 percent of their revenues. I would
suggest that smaller CDCs would exit this program in droves.
They simply could not afford to operate under those
circumstances.
They also indicated there would be a fee for the Dun &
Bradstreet scoring system that was created several years ago,
and we calculated that fee could run from $2,000 a year to
$10,000 a year for some CDCs. Those are astronomical costs
given our nonprofit status. So we oppose that fee.
Section 211, maximizing use of electronic technologies.
While we support the computerization of many of the processes
that SBA uses--and Mike knows this--in fact, we oppose the
language that is in their request. It is far too vague. There
is no description of what they would require CDCs to do. As
many folks around this table know, SBA does not have a stellar
track record in implementing new technologies. So we would ask
for much more definition on this because, otherwise, it could
leave CDCs wondering what we should be implementing.
Real estate appraisals. Could I ask Sally to comment on
that?
Ms. Wheeler. Sure.
Ms. Robertson. Sally Robertson with Business Finance Group
in Fairfax, VA. We are a certified development company.
We noted that the appraisal comment was that appraisals
would be required for all projects in excess of $250,000 for
both the 504 and 7(a) program. We would like to submit that
that is perhaps a fairly low dollar amount for appraisals which
cost a minimum of $3,000, and that if an average 504 project
exceeds $1 million, that means that 75 percent of 504 projects
would be subjected to this requirement. That could amount to
some $22 million a year in costs for small businesses.
We would recommend that the appraisal requirement be set at
a $750,000 real estate acquisition size with the exception of a
business acquisition which involves real estate, where you
would definitely need to know the valuation of the fixed
assets.
Then we also wanted to talk a little bit about the leasing
policy. SBA has proposed that small businesses would occupy 60
percent of the facility and allow 40 percent of that property
to be leased out. We believe that that is a serious problem,
particularly in inner cities and rural areas. The primary
reason is that a two-story building would then essentially
become ineligible for 504 because, generally speaking, in a
two-story building, the first floor the SBC occupies and it
leases out the second floor to another tenant. And we think
that that one-size-fits-all rule would make the program
unavailable to many more small businesses, and we think that it
is our motivation to finance more small businesses and try to
keep that more flexible.
I would say that in the District of Columbia or in Boston,
which are inner cities, one of the ways you bring small
business into the inner city areas and the low- and moderate-
income areas is by allowing multiple use particularly of row
house type buildings, where you have a commercial tenant on the
initial floor and a residential use on the upper floor. And if
you eliminate that, you eliminate a lot of jobs to low- and
moderate-income individuals that those small businesses are
bringing in.
Ms. Wheeler. SBA, would you like to respond to NADCO's
request that instead of setting the threshold at 250, that it
be raised to 750 and then also address the leasing numbers? Or
would you like to, you know, submit comment? We can come back
to discuss it, but we would like to give you the chance to
comment.
Mr. Hager. I would like to first of all, if I may, comment
on the fee structure.
Ms. Wheeler. Sure.
Mr. Hager. The fee structure is created, defined as an on-
site review every 2 years. There are----
Ms. Wheeler. Actually, you are talking about fees for
lender oversight?
Mr. Hager. Yes.
Ms. Wheeler. The examinations? OK.
Mr. Hager. Yes. Those are conducted every 2 years. There
are 150 of the smallest CDCs that would receive no on-site
review, therefore, no cost.
The off-site review, which is a--you are familiar with the
Dun & Bradstreet review, and we look at that data monthly. The
CDCs, there are 55 of them that would have a fee of $200 or
less. We would waive that fee. At least it is our intent to do
that. The other fees would range anywhere from $250 per year to
the very largest CDC at $32,000. So, again, we believe
oversight is absolutely critical for the program. As we expand
the portfolio, we simply must expand our role as the oversight
regulator. And we feel that these fees are pass-through fees.
There is obviously no profit margin involved in these. And we
think they are essential for the program going forward.
Ms. Wheeler. Pass through to whom?
Mr. Hager. Whatever we are charged, we pass it through to
the CDC. These are fees that we pay----
Ms. Wheeler. Yes, but then who ultimately pays?
Mr. Hager. The CDC pays.
Ms. Wheeler. But, indirectly, does the borrower ever get
touched?
Mr. Hager. Chris would have to answer that question.
Mr. Crawford. It is my understanding the borrower would not
get touched, except that CDCs are going to be hurting for cash
flow. $32,000 a year for the largest CDC in the country is a
significant amount of money. So I would be very concerned about
that. Pass-through, eventually I would see CDCs having to raise
their charges. Right now, most CDCs charge five-eighths, are
required to charge five-eighths for servicing, of which one-
eighth is going to the agency as part of the guarantee fee to
keep us at zero subsidy. CDCs will almost certainly have to
increase their fees for the borrowers. There is no doubt. So
ultimately there would be a pass-through.
Mr. Hager. We think these fees are very reasonable. If you
compare the other parts of the Government financial services,
the oversight, what they charge----
Ms. Wheeler. Are those nonprofit institutions that you are
using as comparison?
Mr. Hager. No.
Ms. Wheeler. No. So they are banks versus intermediaries,
that is the distinction here.
Mr. Rowe. We would have to say that we are not--I do not
know off the top of my head what the NCUA charges the credit
union industry for their regulatory oversight.
Ms. Wheeler. Sally, did you want to comment how your CDC
might be affected? I do not know where you fall in the spectrum
of small or big.
Ms. Robertson. I think our CDC would probably fall in the
spectrum of a large CDC. We rank about number 10 nationally. I
think while we are very much in favor of oversight from SBA of
CDCs, we think it is extraordinarily important to credit
quality. I think the cost is very high and that perhaps SBA
should look to some budget authorization for at least some of
these fees.
Ms. Wheeler. Mike, did you want to make any comment on the
industry's adjustments to the levels for the appraisals and
for--the appraisal threshold or for the rent specifications?
Mr. Rowe. Well, I will just toss in here that any proposals
we have put forward are just that--proposals, working with the
industry.
Now, for example, raising the rate of an appraisal from 250
to 750, obviously, we are talking commercial property, and I do
not know what the standard operating procedure is in the
commercial real estate industry. It may be that a certified
appraisal is really not the norm below a certain level.
Ms. Wheeler. But SBA feels it is important for what reason?
Mr. Rowe. Well, we feel it is important to have a certified
appraisal in order to, you know, protect the interest in the
property and make sure--this is both a fraud and a financial
management issue. Now, the question that Chris raises is
whether, you know, $250,000 is really probably going a little
low for a certified appraisal, which is an expensive
proposition, versus, you know, the more normal course of
business if it is not normal in commercial real estate to be
seeking certified appraisals for smaller properties.
Ms. Wheeler. OK. Thank you.
One other comment, Chris?
Mr. Crawford. I would say that we are absolutely not
opposed to appraisals. We do real estate deals all the time,
and we get appraisals all the time. I think our loss record
demonstrates that. Our default rate is 4.5 percent and
dropping. So I think we are doing good deals, and we are
adhering to standard commercial real estate financing
practices.
Our concern is that this would hit probably 75 percent of
our projects because, as you know, our average loan is
$584,000, average project is approaching $1.6 million. The cost
of those appraisals would be $22.5 million per year to our
borrowers. That is a huge amount of money. But we absolutely do
not oppose the notion of appraisals.
Mr. Rowe. We will go back and take a look and reassess.
Mr. Crawford. Thank you.
Mr. Rowe. But I did want, if just for a second, to discuss
the monthly debenture payment schedule because what we are
looking at here is trying to come up with a possibly more
useful tool for the borrower. On the other hand, I know that
the industry has some concerns as regards to the financing
instrument itself because, of course, debenture financing for
the program is based on a secondary market.
You know, I do not want us to be out there with a solution
in search of a problem. On the other hand, what we are looking
for here is perhaps a more normal and useful product for the
borrower. I do not know if Chris had anything to say on that.
Ms. Wheeler. Go ahead, Chris.
Mr. Crawford. This is a grave concern for us. In fact, we
believe--and we have met with our dealers, two fairly
sophisticated dealers, Merrill Lynch and CS First Boston. We
have met with our fiscal agent, our bond counsel. This would,
in fact, rise the cost of borrowing if we convert to a monthly
debenture repayment, and it would do absolutely nothing in
terms of saving any money for anyone.
Wall Street, and I am sure everyone at this table knows,
works on the basis of risk and risk management. In fact, we
have worked for 22 years to create an instrument, the DCPC, or
the bond that is guaranteed by the SBA. We have worked for 22
years to establish a presence and a known quantity in the
markets in New York where we sell--now we are selling an
average of about $400 million a month in DCPCs. Our spread to
comparable instruments is 14 to 18 basis points. We refer to
our program as Small Business' Window to Wall Street, because
we have brought the kind of financing that Wal-Mart gets and GE
gets to Sam's Sunoco in McLean. And I would suggest that to
tinker with the instrument that has the understanding of the
underwriters, the understanding of our investors, among whom
are the largest and most sophisticated investors in the United
States--and, in fact, the world, because we are receiving a lot
of international interest in our product--this will
fundamentally change the instrument, will create a new
instrument. So we will have the old instrument, the old DCPC,
and we will have the new one. The new one will have absolutely
no track record in the markets. It will take us another 15
years to establish that track record and understanding.
If Wall Street does not understand something, they see it
as more risky. If they see it as more risky, more interest. By
comparison, the SBIC program in March removed the prepayment
requirements of penalties from their program. We happened to
have a 10-year sale. They happened to have a 10-year sale in
March. This just occurred this year. Their rate--both
instruments had the SBA full faith and credit guarantee. Their
rate was 33 basis points higher than our 10-year rate. Thirty-
three basis points. That means that those borrowers for the
next 10 years will be paying more interest than our borrowers
were paying in exactly the same month of sale.
Ms. Wheeler. And the reason would be that the investors
were afraid that people would prepay and, therefore, they would
not have the revenue stream. And so it was not as attractive as
an investment. Is that what you are getting at?
Mr. Crawford. It created unknown.
Ms. Wheeler. OK.
Mr. Crawford. And any time you create unknown on Wall
Street, they are going to charge you for it.
Ms. Wheeler. OK. Thank you.
Mr. Hager. We will go back on this issue. The purpose of
this is to do exactly what it is doing, and taking ideas going
back and reassessing it. So we will do that.
Ms. Wheeler. OK. Thank you.
Ron?
Mr. Phillips. Could I just make a comment?
Ms. Wheeler. Quickly. Sorry. Your microphone?
Mr. Phillips. I am sorry. We are a CDC in Maine, rural
Maine. I would want to look over this and send some comments.
And we have not studied it, but I am inclined to agree with the
comments that just went before. I just want to make sure we all
understand. It is an exceptionally interesting and important
program in rural markets, as well as nationally. We have done
170 projects. Our average venture I think is running around
$350,000, with 3,500 jobs. We just approved a daycare center in
South Portland using these funds, by the way. It is a job
creation program, but it also can finance other services.
So I just wanted to go on record here that it is an
important program, and we hope to make some comments, too, as
well as around this.
Thank you.
Ms. Wheeler. OK. In fact, that is a very good segue into
the next 504 component of the bill that Senator Kerry and
Senator Snowe introduced yesterday, and it is the child care
lending pilot program. For those who do not know, this pilot
has passed the Committee and the full Senate many times, going
back to the 107th Congress, and what it does essentially is it
makes nonprofit child care providers eligible to apply for 504
loans. And we have two participants here today who are familiar
with the genesis of this proposal and will explain to us why it
is important, and then we will open it up for others to make
comments on it.
We will start with Joan Wasser Gish.
Ms. Wasser Gish. Thank you, Kevin, and good morning. My
name is Joan Wasser Gish, and as Senator Kerry noted, I
recently opened my own small business and am a former senior
policy adviser to Senator Kerry.
While working with the Senator, I spearheaded his Child
Care Small Business Initiative, and in 2002, we assembled a
statewide advisory committee, which included representatives
from the small business community, such as the U.S. Small
Business Administration's Massachusetts District, the
Massachusetts Small Business Development Centers, the
Massachusetts CDCs, the Southeastern Economic Development
Corporation, the Center for Women in Enterprise, and
microlenders like Accion USA and the Western Massachusetts
Enterprise Fund, headed by Chris Sikes, who is to my left.
This advisory committee also included a cross-section of
stakeholders from the early education and care or child care
industry. These representatives reflected an array of service
delivery providers that span economic sectors. They included
sole proprietors, home-based family child care businesses, for-
profit child care centers, and nonprofit providers.
Senator Kerry charged this group with making
recommendations to better connect entrepreneurial resources
with child care providers in order to both strengthen the local
economy and improve the overall quality of child care programs.
This advisory committee met monthly for 1 year. One of the
central conclusions this committee reached was the dearth of
lending and other financial resources available to the
nonprofit child care centers specifically. Nonprofits have
barriers to accessing loans through traditional lending
institutions as they operate on slim financial margins and
often lack the capacity to make a sizable downpayment for
capital investments.
Advisory committee members noted that this lack of access
could actually have broader economic ramifications, including
inhibiting economic growth, community development, and worker
availability and productivity. It was the recommendation of
this committee that Congress expand the 504 loan guarantee
program to nonprofit child care facilities, which is the idea
you see embodied in the child care lending pilot program in
Section 416 of the SBA reauthorization bill.
This program would be consistent with the 504 loan
guarantee program as it does help to maintain and strengthen
the overall economy, supports community development, promotes
job creation, worker productivity, and job retention. However,
we also recognize that the expansion of 504 should not be
undertaken lightly. Thanks to the able work of this Committee,
there are numerous safeguards placed in legislative language.
These include initiating this program, first and foremost, on a
pilot basis with a 3-year sunset provision in place; requiring
loans to be personally guaranteed and collateral owned by the
borrower; limiting access to not more than 7 percent of all
loans guaranteed in any fiscal year; requiring eligible
entities to meet the same standards as a for-profit would save
for their nonprofit status; and also requiring reports by the
SBA to this Committee and the House Committee on Small Business
regarding implementation of the program on a 6-month basis as
well as a final report by the Comptroller General to this
Committee and to the House Committee no later than March 2010,
which would enable a very careful assessment of the impact of
the child care lending pilot program before taking any future
steps.
So, with these safeguards in place, I would respectfully
urge the inclusion of the child care lending pilot program in
the SBA reauthorization package, and I welcome any questions.
Ms. Wheeler. Would anyone else like to comment on this
program? SBA, do you have any comments about it?
Mr. Rowe. Well, despite the fact that SBA does make some
limited lending available through the microlending program, in
general we would oppose this provision for the simple fact that
the Small Business Act clearly states that the purpose of the
Small Business Administration is to support private enterprise
in free competition. And we would not support subsidizing
unfair competition from not-for-profit entities which
specifically do not pay income taxes or, for that matter, real
property taxes, have access to grants that are not available to
small businesses that are for-profit, and have access to
contracting opportunities which are not available to for-profit
small businesses.
Ms. Wheeler. And then how does SBA reconcile the fact that
its legislative package proposal this year proposed making
disaster loans available to nonprofits?
Mr. Rowe. Disaster lending is a separate item from our
regular business lending. We recognize in our disaster lending
that we give physical disaster loans to churches and other
religious institutions to whom we would not give loans in our
regular program due to constitutional implications.
Now, if we are going to start blurring that distinction,
then I suppose SBA's response would be to completely get out of
lending to nonprofits in disaster situations. But we do not
propose that. We believe a disaster is a different set of
circumstances from the normal economic life of the community.
Ms. Wheeler. And the agreement has been made to the
Committee over the years since this proposal has been out there
that the child care industry is different than other industries
and that it is worthwhile to try using these loans to get at
this very real workforce issue. Would SBA be willing to work
with the Committee to find something they would be comfortable
with on the pilot given that there is precedent, as you said,
in the Microloan program for making loans to nonprofit child
care centers and the SBA's proposal this year through disaster
loan programs?
Mr. Rowe. Admitting to the precedent set by the prior
administration, we would be comfortable exploring this, but
what we would really be comfortable with is understanding why
the child care industry, I guess, is different in the same way
that any other industry is different from any other. We have a
large number of for-profit family child care centers in
Massachusetts and a number of other States, the majority of
which are run by women and are not offered the advantages that
the not-for-profit child care industry receives. Those family
child care centers run by women in any number of neighborhoods
all across the State of Massachusetts pay property taxes, which
are specifically exempted under Massachusetts general law under
Clause 3 in the property tax.
So we are looking at this as a fair competition issue, and
allowing the not-for-profits to have access to the same funding
stream that the for-profit child care industry has we find just
fundamentally inequitable.
Ms. Wheeler. Chris, and then we will go to Joan.
Mr. Sikes. First of all, I agree that in lending to
nonprofits we do need to be very careful. For example, in my
town the YMCA and the local what they call ``The Body Shop'' is
a for-profit business are at odds because of exactly the type
of things that you have brought up in terms of unfair
competition in the exemptions that the Y gets versus this for-
profit.
I would say, though, that it--and I understand it is a
difficult issue, but I would also say that child care is a
crisis issue in this country and that when we look at the for-
profit centers, they are generally in areas that can require a
higher fee because they are in generally a higher-income area,
and that the areas that we see most of the nonprofit daycare
centers are in lower-income areas where they just do not have
access, as easy access certainly, to the market and market
rate, and yet it is a necessity. And so the subsidy is really
needed.
We are really trying to fill a gap here--and I was, as Joan
said, part of that group--fill a gap in the sense that these
lower-income daycare centers do not have access to traditional
financing, and they need some sort of subsidy, which the 504
really is, in order to provide the essential services that are
needed in the community. And that is why this was brought
forward.
So I do think it is needed to be further explored by the
SBA, and I would ask that they do that and really see if it is
an exceptional basis by which to make a loan.
Ms. Wheeler. Joan?
Ms. Wasser Gish. Thank you. If I may, I would like to
respond to a number of the points that, Tee, you raised.
First and foremost, the child care industry does play a
vital role in supporting private enterprise in free
competition. There are, as you know, 5.8 million small
businesses that hire employees, and many of those hires are, in
fact, parents who are able to work by the availability of child
care.
Moreover, research has shown that quality early education
and care is associated consistently with improved worker
productivity, and studies have shown that availability of
quality child care can reduce employee turnover by 37 to 60
percent.
Conversely, breakdowns in child care availability are
associated with absenteeism, tardiness, and reduce
concentration at work, all of which can have very substantial
impact on the operation of small businesses. It is estimated
that child care breakdowns leading to employee absences cost
United States businesses in excess of $3 billion annually.
Now, nonprofits comprise a substantial share of the U.S.
child care industry. According to the 2002 economic census,
they are 35 percent of all firms with employees. They
contribute to the economy both by supporting parent workers and
also as employers in their own right. In fact, they hire
disproportionately. Job growth in the child care industry is
projected by the Bureau of Labor Statistics to increase by two
and a half times the national rate, and nonprofit firms hire
close to half of all employees in that industry.
Nonprofits are also playing a significant role in community
development. They are choosing, as Chris said, to serve
children and families in economically depressed urban and rural
communities, places that are generally unappealing to for-
profit entities because the for-profits would like to have a
higher parent fee revenue base in order to make their margins.
In many communities, nonprofits are, in fact, the sole
source of center-based child care available, and they play a
very important role, particularly in helping to allow low- and
moderate-income workers to participate in the labor force.
In Massachusetts, for example, 90 percent of the subsidized
care purchased by the State, primarily with Federal block
grants dollars through the child care development block grant
and TANF, is purchased from nonprofit providers.
In talking with Bill Hager from Child Care Services of York
County, ME, he estimated that about half of all subsidized care
is provided through nonprofits in that county. A study in
Minnesota found that 23 percent of all jobs in health care and
16 percent of administrative jobs are directly supported by
child care subsidies, which are likely supported by nonprofit
child care establishments.
In addition, the nonprofits are often hiring from within
the communities in which they locate, and when they are
locating in low-income communities, they are facing very
significant facilities challenges. One of the few States to
study the facilities' needs of the early education and care
industry is the State of Maine, and in the study produced last
year, it was found that improving facility quality is deemed
``an urgent need,'' that facilities are barriers to providing
healthy and safe environments conducive to learning for the
children enrolled, and more than 70 percent of child care
centers in Maine identified facilities as a barrier to
achieving accreditation, which is a proxy for quality within
the field.
In Maine, in Massachusetts, and a lot of other States where
there is aging building infrastructure, these nonprofits have
to go in and remove asbestos, eliminate lead-based paint, fix
leaking roofs, update electrical and plumbing. They have to
make buildings handicapped-accessible. They have to put in
place plumbing and child-size fixtures and other types of
modifications that are necessary in order to create settings
that are conducive to the health, safety, and learning of the
children enrolled. And these entities, which, as I described
earlier, tend to work very closely in terms of receiving
subsidized vouchers and contracts from the State, are actually
prohibited to use their child care development block grant
funding for capital expenditures. And so by accessing the 504
loan guarantee program, we would really allow these programs to
build and expand and upgrade their facilities and equipment.
Now, you mentioned access to grants that nonprofits might
enjoy that would not be available to for-profits, and while
that is true, it is also true in a very limited sense almost
exclusively for those nonprofits that are in States with a
very, very strong philanthropic base. On a national level, you
might consider Massachusetts to be one of those places, but
places like Maine and Montana and Oklahoma and pretty much most
of the country, availability of grants is simply not there to
meet those gaps.
You also raised some concerns about for-profits being faced
with unfair competition, and because in Massachusetts and in
many other States around the country the nonprofits are
locating themselves in communities that are generally
unattractive to for-profit providers, in most cases that
concern is probably not going to be realized. The nonprofits
are at more than 95-percent capacity in Massachusetts. There is
a wait list of about 19,000 children, which is almost
exclusively concentrated within urban and other low-income
communities in the State.
In Maine, a study estimated that only one child care slot
is available for every four children who need care so that
parents can work, and there is a wait list there of over 43,000
children. And the Maine Office of Child Care Service and Head
Start projects shortages would be particularly acute in five of
Maine's counties--Cumberland, Lincoln, Knox, Waldo, Penobscot,
in particular.
So with all of those factors in place as well as some
longer-term trends projected in terms of women's participation
in the labor force and some national movement toward providing
universal pre-kindergarten, it is anticipated that there is
likely going to be both increased enrollment and increased
demand, and there would certainly be room for both for-profit
and nonprofits because they do serve such different segments of
the demand side.
Mr. Rowe. I appreciate all of that, and I have read your
very interesting paper on universal pre-care that you did for
Progress Policy. But we are not here to talk about the need for
daycare generally nationwide. That is not the point. The point
right now is the propriety of using a small business program
for non-small businesses, not-for-profit organizations.
The fact of the matter is they do compete, and compete
unfairly. Without paying income taxes, very often not-for-
profit organizations are able to take employees away because
they are able to offer better benefits. They do not pay
property taxes. Again, I bring that up.
Every family child care center in the State of
Massachusetts, just for instance, has to pay property taxes.
The State tried to, unfortunately not very well, create an
exemption for small businesses on property taxes. That was
taken up by exactly five townships in the State of
Massachusetts. We are talking about a very wealthy State that
cannot support its small business base.
Ms. Wheeler. But the State endorsed this proposal, in fact,
came here and testified on behalf of it in 2003 at the last
reauthorization, one of the many times it has passed. So while
they may have disagreement----
Mr. Rowe. Because the State of Massachusetts has a long and
unfortunate history of supporting not-for-profits to the
detriment of the small business community. And, frankly, we do
not see the propriety of using a small business program for
not-for-profit institutions.
Ms. Wheeler. They are not going to have tax revenues if
people are not working and people do not have places to put
their children.
Mr. Rowe. Again, it is not an issue of the availability of
daycare, which we can all agree on, as a useful item for our
economy. It is a question of how we are going to support both
the small business sector and the nonprofit sector in daycare.
And SBA believes that it is not appropriate to use our programs
for this.
Ms. Wheeler. But they do for microloans, and now they are
asking to do it for disaster loans.
Mr. Rowe. Again, you are asking me to support a prior
administration's decision, and I am going to tell you that,
yes, they supported that to a limited extent in the microloan
industry. But I am going to tell you----
Ms. Wheeler. I am just talking about the double standard
that we see here and what is on the books and what has been
proposed and what is in this proposal that has passed----
Mr. Rowe. Again, there is no double standard there. As I
told you, disaster assistance is a completely different item
from our organized assistance for the mainstream of our
economy.
Ms. Wheeler. Shall we turn to Chris Crawford? Do you want
to make some comments? Microphone, Chris.
Mr. Crawford. I am sorry. Thank you. Chris Crawford with
NADCO. We have had a number of discussions about this. As Tee
and Mike probably both recognize, I would normally not support
lending through our program to not-for-profits because I well
understand our mission. I would also suggest that daycare for
any of you folks that live in Washington--I have raised a son
and now am watching grandsons be raised. My daughter-in-law
happens to work in the daycare industry, so I have very
personal experience with it. I would suggest that lack of
daycare is an economic disaster in this country, especially in
the urban areas.
My daughter-in-law, who has worked in several different
organizations, indicated to me there is not one that did not
have a lengthy waiting list for kids who could not get in.
Those are almost invariably, as Joan pointed out, generally
mothers who are wanting to work who cannot work because of
that. My own daughter-in-law cannot afford to pay for the
daycare that she is working in.
I would suggest that not-for-profit daycare is certainly a
needed program. I do not believe that it will result in what I
would call excess capacity in this country. I am not sure there
will ever be excess capacity.
So I would suggest that it is something that needs to be
addressed some way by this Congress.
Ms. Wheeler. And I just wanted to clarify for the record
that NADCO did bring concerns to us when this pilot was first
initiated in the 107th Congress and that we worked through its
members concerns about underwriting standards, collateral,
safety and soundness issues, and that the 504 trade
association, NADCO, signed off on the language and is
comfortable with the underwriting standards that we have for
the pilot program.
Mr. Crawford. You are absolutely correct. You worked very
closely with us, and I believe that these--we have a long
history of solid underwriting, as I have said before, and our
track record demonstrates it. I am all too aware that we work
at zero subsidy, which Mike is certainly concerned about, and
we have absolutely signed off on your proposal.
Ms. Wheeler. I would like to add that there was a letter
from the president and chief operating officer of Omni Bank in
Houston, TX, that said, ``Designation as a nonprofit business
does not equate to an inability to pay loans or other
expenses.'' And the National Black Chamber of Commerce has
submitted comments where they are strongly endorsing this
because they see it as a local economic development issue,
supportive of small businesses, and believe that this is a
worthy cause to give this a try for 3 years. And CBO has not
attributed a cost to it of harming the program at all.
Joan, did you want to add something--we need to move on to
the 7(a) program. We can come back after 7(a), but do you want
to make one more comment? And then we will go on.
Ms. Wasser Gish. Yes. I just again wanted to respond. I do
think that there has been an opportunity for comment and input
from a variety of different quarters, including SBA, the CDCs,
and others. And in that I do think that there are safeguards in
place that do reflect the sensitivity of the change that is on
the table through the child care lending pilot program. And
because those are in place and because this is a pilot and it
is something to be learned from, there will certainly be
opportunities to address any types of issues that would arise
from it. And because of the particular nexus between child care
and the small business economy in particular in the Nation,
this would seem to be an appropriate provision to include
within the bill.
Thank you.
Ms. Wheeler. Jackie, did you want to make any comments
before we go on to 7(a)?
[No response.]
Ms. Wheeler. First I want to tell everyone--oh, can we come
back? Is it on the child care? Can we come back to that? Just
because I know some people need to leave, and I appreciate
everyone's patience. Let's go on to the 7(a) loan program, and
then when we wrap that up, if others want to make general
comments on what the Committee should do or about your
organization, things that are important, we will continue. Is
that OK? All right. Let us move on the 7(a) loan program, and I
am just going to flip the order for a minute from leading with
the SBA because Tony Wilkinson, who represents the 7(a) lending
trade association, NAGGL, has to catch a plane, and then we
will go to SBA to present their proposals. Is that OK, Jackie?
Ms. Ferko. That is fine.
Mr. Wilkinson. I am fine. My flight is not until 2:05 if
they want to go first.
Ms. Wheeler. Oh, did you want--OK. Well, Tee?
Mr. Rowe. Yes. Again, I will be brief because I know we
have got time constraints. I had mentioned the real estate and
leasing proposals previously. SBA is also seeking some
additional supervisory and enforcement authority for small
business lending companies. Small business lending companies,
as you all may know, are the 15 SBA-licensed 7(a) lenders.
SBA is also asking for legislative authority to enable our
lenders to use the systematic alien verification for
entitlement program that is run through the Department of
Homeland Security. This would eliminate the current rather
cumbersome verification process and enable SBA and its partners
to meet the requirements in the Small Business Act that our
programs only be used by resident aliens and citizens.
The last item is SBA is proposing a guarantee fee for the
secondary market under the prompt payment guarantee in Section
5 of the Small Business Act. The fee would not be imposed in
either fiscal year 2007 or fiscal year 2008. SBA is merely
looking for this fee as a possible fee to keep that prompt
payment guarantee at zero subsidy.
Currently the market keeps the program at a zero subsidy,
and the secondary market works at a wash. But long-term
projections, we are worried it may get upside down, and a minor
fee, which would be paid by the institutional investors who
purchase the securities, would keep that in balance.
That is the entirety of it.
Ms. Wheeler. Tony?
Mr. Wilkinson. Again, Tony Wilkinson with the National
Association of Government Guaranteed Lenders, and I appreciate
the opportunity to comment today. I just would like to touch on
a couple of SBA's points.
I would like to agree with Sally Robertson on the oversight
fees. You talked about the 504 fees coming up. The SBA has in
process right now a rule--they solicited comments on lender
oversight fees in the 7(a) program, and those fees could be
upward of $150,000. And I know most folks have opposed the
charging of those fees and would hope that this Committee would
take a look at that proposal and see what they have in mind. I
am under the impression that SBA is moving forward, and it
appears to be--well, let me just go to the secondary market
fee. This is the third time, I believe, that SBA has requested
a secondary market fee--the ability to charge a secondary
market fee in their budget, yet they always put a zero subsidy
cost along with it. So they are just simply looking for the
authority to charge the fee.
It is my understanding that there are out-years--that they
are looking at somewhere in the neighborhood of 2017 is where
potentially there might be a problem, and I think with that we
have plenty of time to figure out whether we really do have a
problem. And as we have learned over the last few years, if
there is the ability to charge a fee, they are going to charge
a fee. And do not think for one minute that a fee on the
investor does not end up being charged to the borrower, because
it will be.
Now, if there is a fee that is truly needed, then let us
sit down and talk about it, because the one thing we simply
cannot have happen is that the secondary market would close
down because we are a 1- or a 2-basis-point fee away from
solving a problem. So if there is a problem, please disclose
it. Let us talk about it. We will work through it. But my
understanding is this is a problem that is at least a decade
away, and so I would question why we would need to put forward
a fee authorization today.
I would like to comment quickly on S. 1256. NAGGL endorses
this bill. This bill would substantially improve small
businesses' access to capital in many ways, including improving
the ability of small lenders to participate in the program,
particularly through WAC pools or weighted average coupon
pools. This is a proposal that NAGGL has had out for 10 years.
I do not think the SBA disagrees with this at all. It has been
more of a timing thing as to getting around to it. This would
improve the efficiency of the secondary market and I think
would help bring a lot of community banks back to the program
as pricing on Government-guaranteed portions of 7(a) loans
would improve. And, thus, if we get more lenders involved in
the program, it will improve the ability of small businesses to
access the program.
With respect to the idea that 7(a) fees need to be reduced,
NAGGL agrees with that proposition. Just a quick history
lesson. Over the last umpteen years, anytime there was a need
to increase fees, those fees were imposed on the largest
borrowers. Anytime there was an ability to reduce fees, the
fees were reduced for the smallest of borrowers. So today we
have a mismatch between large loans and small loans such that
the largest loans pay more than double fees that the small
loans do. And on some of our largest loan requests, those fees
are more than $50,000, which is very, very expensive. So if
there was a way to look at a fee reduction targeted to the
largest borrowers or to get our fees more in line, that would
be something that we would seriously look at.
That said, any fee reduction that would come forward must
not result in any kind of program curtailments or shutdowns, as
we have seen in the past. What we learned in the past was the
costs of shutdowns and program caps and program restrictions
was far greater than any of the fee reductions that came
forward. So we would ask that Congress not put anything in
action that would result in a program cap or a program
shutdown.
Finally, we are realistic and we want a bill. There are a
lot of good things in this bill. But we also believe that
unless the administration says it is willing to accept
authorization language to reduce fees, they will simply place a
hold on this bill, and this bill will not move. I hate to say
that, but I believe the administration is adamant about the
7(a) program not going back on appropriation, and hopefully
this can get resolved soon so that the other pieces of this
bill can move forward.
Thank you.
Ms. Wheeler. Anyone else around table like to make a
comment?
Mr. Crawford. We are on 7(a)?
Ms. Wheeler. Yes, we are on 7(a).
Mr. Kwiatkowski. My name is Chris Kwiatkowski, and I am
with Popular, Inc. Popular, Inc., is a 113-year-old financial
services institution that was founded in San Juan, PR, and it
was founded to serve the underserved. And the North American
subsidiary of Popular, Inc., is Banco Popular North America,
headquartered in Rosemont, IL.
Since 1961, being in the States, we have participated in
the SBA program, and since our institution's mantra is to serve
the underserved, the SBA programs are crucial to our ability to
do so.
We are a member of NAGGL. We do support what Tony has put
forward. There are just a few things that I would just like to
reiterate.
First of all, the oversight fees would be exorbitant,
excruciating, and would chase lenders away from this program.
This program does not exist without lenders like Popular, and
to charge over $100,000, as we would be charged, being the
fourth largest SBA lender in the Nation now, that would
seriously curtail our interest in the programs. So we are very
concerned about that.
Restoring funding to the SBA. I myself--just a little
background, my career started at the SBA. I worked at the SBA
for 3 years. I then went on to work for one of the largest
banks in the Nation. I owned my own small business. I have
worked for the Nation's largest non-bank SBA lender, and I have
been here at Popular, Inc., the number four SBA lender, for the
past 2\1/2\ years heading up this institution. So I have seen
small business lending from all sides.
I have seen the SBA head count severely diminished, and to
the points that these other gentlemen brought up before who are
in rural areas and locations outside of these metropolitan
areas where the SBA offices are located, the staff has been
seriously demoralized for the SBA. They cannot reach the people
they are trying to reach. They cannot carry out the mission of
the SBA. They have been reduced to marketing outposts, and they
cannot even effectively do that very well.
So an agency that brings so much good to the economy has
been seriously hampered in delivering that service, and we
would wish to see restored funding to the Agency.
Increasing loan limits, this is in the bill. I think all of
NAGGL is for this. We would love to see the SBA 7(a) loan
program increased to $3 million. This would help us serve a
much larger market, and it supports and benefits all parties
involved--the Government, the private sector, the borrowers.
7(a) simplification. One of the most popular and successful
programs the SBA has rolled out lately has been the Express
loan program. It allows lenders to lend on their own
documentation with a single-page form and with a diminished
guarantee. It has been very popular because banks have to have
technical expertise to participate in the SBA program.
I would love to see that same sort of ingenuity applied to
the 7(a) program as a whole to help uncomplicate it. As I said
before, we have to find specialized personnel to help
administer this program. The program has become a program of
the have and have-nots. As somebody pointed out earlier, ten
lenders do the vast majority of the lending in the Nation, and
it is not easy to find that talent. It is expensive talent, and
most lenders will not participate in the SBA program, or if
they do participate and their guarantees get repaired or
denied, they do leave the program. And, again, without the
lenders, there is no viability to the 7(a) program. So I would
love to see some sort of simplification to that program.
As Tony said, reducing the fees, an exorbitant amount of
fees is paid by the larger loans. Larger loans do create a lot
of jobs, a lot of tax base, and we need to keep that in mind
when we are looking at the 7(a) program.
Thank you.
Ms. Ferko. Kevin--and I think you would echo my same
comments on here--and, Tee, I have told you this many times.
Those oversight fees, we have serious concerns about those. I
know there are many banks in Maine that have written to Senator
Snowe saying that they are concerned and that they would not
participate in the program. And I am sure that is the same for
Massachusetts, too.
So before you move forward with making any action, the SBA
does, I would like for you to give us sufficient notification,
number one, whether you are going to move forward on it, and
just let us know what your plans are on that. I think that
there is a lot of serious stakeholders in this, and I know many
other banks have said that. They plan on not participating in
the program.
Ms. Wheeler. Before we go on to James and Todd, may I just
ask SBA where they are on the reg regarding the lender
oversight fees that participants have raised concerns about.
Mr. Hager. It is in process.
Ms. Wheeler. As final?
Mr. Hager. This has been cleared by OMB, and it is going to
the Federal Register.
Ms. Wheeler. I am sorry. If that is the case, can you
explain to us when this would start to impact the lenders that
participate in the 504 and 7(a) loan program?
Mr. Hager. The 504 is not included in this. Janet, what is
the effective date of this?
Ms. Tasker. Well, it is scheduled to be published I believe
on May 4th. I believe there is a 30-day effective date.
Ms. Wheeler. In 2 days? Great.
Ms. Tasker. It has gone through the proposed rule and
comment process and, you know, a final rule has been developed.
Ms. Wheeler. But, again, the effect is that when this is
released on the 4th, the fees that we have talked about will be
imposed on these lenders.
Ms. Ferko. For the 7(a) loan program, right, only.
Ms. Tasker. For the 7(a) loan program.
Ms. Wheeler. Right, and there will be----
Ms. Tasker. Smaller lenders, those lenders that would--you
know, again, it is an issue of on-site reviews or every other
year, unless there is a problem, then we need to go in more
frequently. In addition, there is--for really small lenders, we
only look at those that are 10 million and above, and then for
really small ones that are assessed, the outside market fee, if
it is $100, $200, we waive it completely.
Ms. Wheeler. But the issue is not whether people agree that
there should be oversight. I think there is agreement that we
need soundness. But the question is the imposition of
additional fees on our lending partners and how much they would
be, right? Isn't that the disagreement at this table? The
lenders are not saying they do not want oversight. We
understand that argument. It is just that the fees they say
they cannot stomach. So--oh, I am sorry. May I just go to Todd.
Todd, do you want to comment on the fees?
Mr. McCracken. No.
Ms. Wheeler. Could we just finish this very quickly? Who
else has a comment on the fees? All right. Go ahead.
Mr. McCracken. I only wanted to step back a little bit and
look at the picture that I think the small business community
is facing there. We released a survey of small companies just
last week where we asked companies specifically about their
access to adequate financing, and we have seen a full 10-
percentage-point drop in the number of companies that say they
have access to adequate financing in the last 7 years. In fact,
while they were steadily improving for quite a few years, we
are now seeing members that are--we are going to go back down
in response to that question, approaching what we were seeing
as we were emerging from the credit crunch of the early 1990s
for the first time in quite some time.
At the same time, we are seeing a marked jump in the number
of companies that say they are carrying balances of some
significance on their credit cards every month, and it is not
because they are suddenly getting a great deal from the credit
card companies. They say that their terms on their credit
cards--by a six-to-one margin, they say the terms on their
credit cards have gotten worse in the last 5 years. So,
clearly, all is not well in the credit and capital markets for
the small business community.
So I would like to say that by way of backdrop that this is
not the right time, I do not believe, to be increasing fees on
lenders and borrowers, and, in fact, we believe it is the right
time to begin looking at ways to restore Federal appropriation
for the 7(a) loan program and to begin to roll back the fees
that you already have in place. And to that end, I think the
bill, the provisions specifically in the authorization bill you
have put forth begin to move us in that direction and I think
ought to begin to help address any emerging credit issues
before they fully blossom.
Ms. Wheeler. And, Todd, just remind everybody for the
record your organization.
Mr. McCracken. Oh, I am sorry. My name is Todd McCracken. I
am the president of the National Small Business Association.
Ms. Wheeler. OK. James, did you want to go ahead.
Mr. Ballentine. James Ballentine, American Bankers
Association. I wanted to associate myself with Tony's remarks
and Chris' remarks as well. On the issue of the fees, I think
at some point we are going to have to carve an ``F'' into SBA
and just put, you know, associated with fees there, because
everything is a fee now related to this 7(a) program. And
whether it be oversight, whether it be the annual fee,
whatever, those fees continue to go up. And we would like to
sit here and say that those fees are not passed on to the
borrower, but they are passed on to the borrower in some way,
shape, or form. So to the extent that SBA is there to help
these small businesses, these fees are not helping the small
businesses at all.
I wanted to commend the drafters of the bill as well. There
are several provisions in there which ABA is in support of--the
preferred lenders program, obviously--but I also wanted to
commend them on the Minority Small Business Development portion
of the 7(a) title and the rural lending outreach program, which
I think is significant to help reach some of those smaller
lenders that are involved in the 7(a) program.
When we speak of the oversight fees and we say that those
fees are largely going to be waived for the lenders that are on
the low end of the scale, well, there are over 2,000 lenders
that are involved in the 7(a) program. If you go below the top
20, the number of loans below that top 20 decreases
significantly, and you have a number of lenders within this
program that only make one or two loans.
So I would encourage the Committee not only to look at the
oversight issue, oversight fees--I do not know if we can do
anything about that since we are, you know, 2 days away from
it--but I would also encourage the Committee to look at the
7(a) program in its entirety. I think the program has a certain
level of staleness to it that needs to be addressed as we
attempt to get more lenders involved in this program.
Ms. Wheeler. Paul, you have been scarily quiet. Would you
like to say anything?
Ms. Merski. Just to continue on the fees, I find it
somewhat preposterous that the SBA needs additional fees to do
something when there are several regulators already in the
banks examining the entirety of the banks' loan portfolio. I
see it as simply a money grab of fees from the SBA to
reduplicate a lot of the regulatory work already done by the
FDIC, by the OTS, by the Fed. When these regulators come in,
they examine all the banks' loan portfolios, including every
SBA loan in that portfolio. So it is somewhat preposterous that
yet another agency would be levying fees in addition to the
fees that banks are already paying to have these loan
portfolios examined.
So we strongly object, and hopefully Congress can step in
and solve this problem.
Mr. Wilkinson. I would like to comment again on James'
point of fees. I think if you look at the trend, first it was
to take the 7(a) program to zero appropriation. Then there was
a proposal and in last year's budget, I believe, you wanted $7
million to cover your overhead. Then there is a secondary
market fee. Now there is a lender oversight fee. And if you
just look at the trend, the trend is, you know, let's reduce
Government expenditures in this program, period.
And I think at some point in time we have got to raise our
hand and say: Where are we going? You know, this program has
switched from 90 percent of the loans going into the district
offices for loan approval where you had to have massive amounts
of staff to process loans, to today where 95 percent of the
loans go through expedited procedures, so we are doing all that
work for you now, yet your budget has taken a significant hit
downward and you continue to try to pass loan fees. We are just
raising our hands saying it is time to slow down here, that
part of this is your responsibility, in particular the cost of
the overhead at the agency. And I just think the lender
oversight fees are one that the agency should cover.
Mr. Kwiatkowski. I have a question. I am familiar with the
PLP audits that we go through every other year, and it has been
a normal course of business that we pay for those. Why is there
this new oversight beyond that? Because as Paul pointed out
here, we are subject to Fed audit. We are subject to our own
internal audit. We are subject to the PLP audit. What is this
one more oversight?
Mr. Hager. We do oversight on loan portfolios every month.
For example, the D&B system that we contract, we compare you
against your peer group of banks. We are under extreme scrutiny
to make sure that we are managing that portfolio, managing the
growth, which today is at the all-time highest, and to, you
know, grow the portfolio and not have increased risk management
is just something unacceptable. We have got to do this.
We do think that--you know, I hear a lot about fees, and I
hear a lot about the fee increase. Practically every month
someone brings up fees. I want to show you something.
The myth is we have been raising fees in 7(a) and 504. Look
at these lines. The only time that the dip--this is a
congressional dip for a couple of years. But some of these fees
go back to the 1990s and they have never been changed. And when
you look at 504 fees--I know you are all familiar with this.
Look at what is going on with fees. We are working very hard to
achieve this. One way we can achieve it is lender oversight,
making sure we are managing the portfolios, we are eliminating
risk, we are addressing risk.
But here is the fee structure, and I am really puzzled
every time I hear the fact that our fees are going up and up
and up and up. Look at this. It is not true.
Ms. Wheeler. Well, I think that there needs to be a
clarification. One, we are talking about 7(a) fees, and----
Mr. Hager. This is 504.
Ms. Wheeler. I understand that, but there was a chart up on
7(a) fees. And I have seen the press scolded for printing that
the administration doubled the fees and rebuttals from the
administration that that is not true. And I think it is
important to note that that is not quite accurate. While, yes,
Congress holds the only power to change the law and it has
changed the law, the reason the fees did not become permanent
as Congress was proposing during the 2003 reauthorization is
because SBA wanted to go to zero subsidy. In order to take it
to zero subsidy, the fees were raised.
That was not in a House bill. That was not in the Senate
bill. In fact, when we went into the appropriations season for
that omnibus for 2005, there was money that had been put in on
the House side to restore appropriations as well as on the
Senate side.
Mr. Hager. What year was that? Excuse me.
Ms. Wheeler. 2004.
Mr. Hager. OK.
Ms. Wheeler. December of 2004. I believe it was the 4th of
December, possibly 108-664. I do not know.
[Laughter.]
Ms. Wheeler. I believe that it was in that bill----
Mr. Hager. Are you sure it was not 665? No.
[Laughter.]
Ms. Wheeler. The omnibus 2005 bill is where SBA succeeded
in taking the program to zero subsidy. In order to get there,
the proposals that were put forward by both the House and
Senate were eliminated and the fees were raised in the program.
So I think it is important to know----
Mr. Rowe. Well, to be fair, Kevin, those fees were not
raised. They were restored to their prior level.
Ms. Wheeler. But, no, let's note the distinction here. The
legislation pending in Congress was to make those permanent,
and the genesis of those fees going down was that, if we go
back and look at the record, as Senator Bond's staff noted, the
fees were increased at one time when they took the program,
they said, oh, the costs are going up, the business community
is going to have to contribute a little bit more so that you
all can get to the program levels that you want. And the
industry started coming to us and noticing that the subsidy
rate--and I am sorry to get very technical here. The accounting
method by which they determined how much it cost to run these
programs was seriously broken, and it was referred to as ``a
black box.'' And nobody could figure out where these cost
estimates were coming from. And, of course, this is not a
partisan issue. Both sides were running OMB during this, and
what they said was if we cannot get OMB to cooperate and to fix
this subsidy rate problem, then Congress will lower the fees
because the GAO study came out and concluded that borrowers and
lenders had been overcharged by almost $1 billion. I think it
was $980 million or something.
So Congress took it into their hands to lower the fees
until we could get traction. So then comes the new subsidy rate
model, the econometric model, and what do we see the first year
that it comes out in the President's budget? It is wrong by 67
percent. And if we look at the President's budget this year,
every year that it has been in place, it is still off. It has
been operating at a zero subsidy.
So please do not present the fee increase as the doing of
Congress.
Mr. Rowe. You know GAO said that the econometric model is
completely reasonable, and, yes, it is not exact. It cannot be
exact. No one can make one that is exact.
Ms. Wheeler. I understand that, but please do not present
to the public----
Mr. Rowe. The re-estimates have been downward----
Ms. Wheeler [continuing]. That Congress is the one----
Mr. Rowe [continuing]. For the past few years.
Ms. Wheeler [continuing]. Who raised those fees or draw
disingenuous nuances that they did not go up, they just lapsed.
That was not Congress' intention----
Mr. Rowe. The fees were lowered after 9/11----
Ms. Wheeler [continuing]. And we went into that session
making those lower fees permanent. And I do not know anyone in
this room who was part of those negotiations who would disagree
with the facts there. So, please, do not say that. The
administration wanted this program to go to zero subsidy----
Mr. Rowe. I am not denying that----
Ms. Wheeler [continuing]. And to get there, those fees----
Mr. Rowe [continuing]. Any more than the Clinton
administration did not want it to go to zero subsidy. They did,
too. It is a good policy. It gives us a good solid program.
Ms. Wheeler. But there is disagreement over that, and that
is not what this is about. I am asking, please, from the
Committee's perspective, do not distort the facts of whose
proposals belong to whom.
Now, on the fees, can we go back to the review fees? In 2
days, these go into effect. Is there any way--because we hear
grave concern at this table that it would be harmful to access
to credit through the SBA's program. Is there any way that we
can work with the administration before those are finalized?
Mr. Rowe. I do not know. It is possible for the
administration to withdraw that. It is. I would not lie to you
about that. But, honestly, I do not know whether it is
probable.
Ms. Wheeler. And is the administration going to have anyone
place holds on the reauthorization bill if the current language
on fee reduction allowing appropriations for fees, should there
be any still in the bill when it comes before the full Senate?
Mr. Rowe. The administration's position is that the 7(a)
fee, zero subsidy policy, makes the most sense for the program,
and that there is honestly no fiscal necessity for lowering
fees in the program. The current fee structure is almost
identical to the fee structure in place in 1996 and forward.
And, frankly, we have all seen the CBO estimate to lower the
fees in the program or eliminate--to eliminate the fees would
cost approximately $600 million; I think about $589 million to
be precise. To just cut the fees in half would be about $300
million. And the cost savings we are talking about there are
honestly de minimis. To the average borrower, it is perhaps $10
a month; to a lender, $657 on the annual ongoing fee.
And, frankly, $300 million could be better spent elsewhere
because what that does is puts us in the situation of, if you
will, a first-to-the-courthouse program. If we run out of
appropriation support, then everybody who comes in later in the
year ends up with a higher fee. The administration does not
support a situation where a borrower is going to be penalized
for wanting a loan in September as opposed to May.
Ms. Wheeler. May I just clarify, in case there is a
confusion, that the language in the bill does not require full
funding to get to a program level that the industry is
proposing, such as $18 billion. What the language in the bill
does--and it has passed several times, and a version of it was
passed as part of that omnibus 2005. What it says is that if
there were appropriations or if there were excess fees charged,
that the administration could reduce the fees on borrowers and
lenders. What is in law right now is not workable because there
is the qualifier that it must be a zero subsidy, and it creates
a catch-22, and it only applies to borrowers. It would not
reduce the fees on lenders, too, and we have heard concerns
that should there ever be the occasion, the opportunity to
reduce the fees, that it should apply to both lenders and
borrowers.
So I want to make clear that while we understand the
administration does not want appropriations, this does not
mandate appropriations. What it does is fix the current
language and make it possible to reduce fees should there ever
be an opportunity to do it. And so I just want to make that
clear because I think that there could be a distinction that
this would cause shutdowns, that it is so expensive, that
somehow we are going to have to come up with $600 million in
order to keep the program running, and that is not the effect.
Mr. Rowe. Now, and that is not what I said. What I said
was----
Ms. Wheeler. OK.
Mr. Rowe [continuing]. That any reasonable reduction--or I
would not even say ``reasonable,'' but that to have any
noticeable reduction in the program, it would cost something on
the order of $300 million.
Ms. Wheeler. OK. I just make that point because it is
important that if the administration is planning to put holds
on this bill, the holds would not--it seems to me that the
holds are not necessary because it does not interfere with zero
subsidy or demand the appropriations. It is fixing something
that is currently in law. So----
Mr. Rowe. Well, no authorization bill can ever demand an
appropriation----
Ms. Wheeler. I understand that, but----
Mr. Rowe [continuing]. Unless it is a mandatory account.
Ms. Wheeler [continuing]. There is a distinction here, and
so if the goal is--and I think Senator Kerry made it clear that
he wants a bill, a reauthorization bill. We have not had a real
reauthorization bill in years. And everybody has worked very
hard in the industry. We keep spending people's time and money
to come up with proposals that would improve upon these
programs, that if we want a bill, that it does not seem
reasonable to put a hold on a bill when it would not interfere
with the policy stand of the administration.
Mr. Rowe. I guess we are going to have to agree to
disagree.
Ms. Wheeler. OK. Tony, did you want to say something?
Mr. Wilkinson. Yes, if I could. The NAGGL members account
for over 80 percent of all the 7(a) loans that are made
annually, and our members have made it very clear that they
have been pleased with the fact that there have been no program
disruptions over the last couple of years.
That said, large loan volume since we have gone to zero
subsidy has gone down. The SBA has done a very nice job with
the express program. There are 10 to 20 lenders who are fully
utilizing that program, and that is where we have seen the big
growth in numbers. So we have got about 80 percent of our
numbers of loans being done by the 20 most active express
lenders, and they are doing loans with an average loan size of
about $50,000.
But the old regular meat-and-potatoes 7(a) program is still
there, and it is done by a broad-based group. The problem is
since 2005 our large loan volume is slipping, and that is where
we are focusing, on the fees on large loans as perhaps a way to
get some volume back into the larger loan category.
That said, we just simply cannot have program caps and
shutdowns because that is very disruptive and very difficult to
manage a lending operation if you are always worried about are
we open tomorrow or are we not. Our members have liked business
as usual for the last 2 years.
Ms. Ferko. Tee, again, I want to revisit this oversight
issue, the oversight fee. In 2 days, something is going to
change, and we need to address this now. I mean----
Mr. Rowe. Well, the rule goes final in 2 days. It does not
get implemented for 32 days.
Ms. Ferko. Now, you received overwhelming criticism back in
October and November during the comment period. Why wasn't that
taken into account?
Mr. Rowe. Well, Mike, maybe you can answer.
Mr. Hager. The comments were carefully assessed. We come
back to the same issue. The way we have stabilized, we believe,
the fee structure is through managing the portfolio. This
enables us to--managing the portfolio from a quality
standpoint. This enables us to expand that oversight of that
portfolio. It enables us to place in-depth analysis of lenders
on a priority, and we believe over time it will be good for
everyone. And, yes, we did solicit comments. We addressed the
comments to the extent possible. But we also felt that we had
to increase the oversight of the program.
Ms. Ferko. So you are saying what currently in the
structure, oversight structure of the program----
Mr. Hager. That is correct.
Ms. Ferko [continuing]. Is not appropriate.
Mr. Hager. We think it needs to be enhanced, and that is
what this program does for us.
Ms. Ferko. Kevin, could you--I have not heard from SBA that
this needed to be enhanced. Have you?
Ms. Wheeler. Again, what I hear is a distinction here only
on money. There does not seem to be a disagreement on
oversight. There seems to be a disagreement on who should pay
for it. And so the feedback we are getting is that it will be
harmful to the small businesses, and that is really who the SBA
is supposed to be serving. We want to keep that access to
capital open. And so I think that there really--the Committee
would like to see SBA come talk to us and see where we can--if
there is some way to find a more reasonable approach.
Mr. Rowe. And in implementing this, the administration was
operating off of the authority we have been given and operating
off of what we consider to be fairly regular practice among
financial regulatory institutions.
Now, as Paul mentioned, OCS, OTC, FDIC all come in and
examine banks for safety and soundness and other financial
aspects. But the fact is they do not pull SBA-based loans
unless they happen to grab one by accident in a random audit.
Our oversight is very specific to our portfolio, which, you
know, our guarantee operates as a little bit of a shield for
the average bank, and as something that the FDIC will not
normally examine very carefully. So that leaves it in our lap.
Now, the cost of the fees, again, that is a separate issue.
Mr. Hager. You asked specifically what this does. This
enables us to move the audits, reviews, from the current level
of about 50 a year to 250--again, significantly broad--and the
same review process but more of it.
Ms. Wheeler. Again, nobody is arguing----
Mr. Wilkinson. No, we absolutely support the oversight
function. I think my overriding concern is the continuation of
trying to push your overhead costs out to the lenders. This is
a fee that is going to hit the existing portfolio that we did
not know anything about at the time the loans were made. So it
is now an add-on fee to a loan that is already on the books. It
will impact the pricing structure for borrowers going forward
because we have got to recoup our costs somehow. I mean, at the
very least, it almost needs to be a fee on a go-forward basis,
on new loans we originate. But we do not want to have any
hiccups in our credit quality. We are all for lender oversight.
That is an appropriate function for you to service. I
absolutely do not want to come to the Hill and argue about a
subsidy rate problem because of bad credit. I do not want to be
here doing that. But I do question, you know, whose
responsibility is it to pay for these reviews now, and I just
think it is an overhead function of the agency that should come
out of your budget.
Ms. Ferko. Annually, how much would these fees cost, these
additional oversight fees?
Mr. Hager. It would be between $20,000 and $25,000 a
review.
Ms. Ferko. Totally?
Mr. Hager. Biannually. It is not every----
Ms. Ferko. Annually? OK.
Ms. Wheeler. No. Weren't you asking how much it would cost
for the SBA to do the----
Ms. Ferko. Yes, I mean, how much in appropriations instead
of for the lenders.
Mr. Rowe. If we did not charge the fees and had to cover
the overhead, it would probably be $7 or $8 million, as just an
estimate.
Ms. Wheeler. I think the SBA is losing ground here.
[Laughter.]
Ms. Wheeler. I think we have gone over this issue enough,
and I feel sorry that so many people have been here and have
not had a chance to comment. Let's just say for the record we
understand that this is a problem, and hopefully we can talk to
SBA about this before the final reg is released, and let's go
to the other people at the table who have their cards up.
Mr. Hager. Excuse me. Just one, if I may.
Ms. Wheeler. Sure.
Mr. Hager. The lender reviews, the audits, we also have in
that a cost for the D&B expense that I referenced earlier. So
it is a combination of that. But the number that Tee mentioned,
the total budget for this is about $8 million.
Ms. Wheeler. Right, and that includes the----
Mr. Hager. Which includes the D&B cost.
Ms. Wheeler. OK. As I said, that weakens SBA's
justification for charging this if it is not saving $7 million
versus the potential unintended consequence of driving lenders
out of the program or ultimately increasing the cost of SBA
loans to borrowers. So I think we have been over this.
Ann, did you want to say something?
Ms. Sullivan. Just two comments on the issues we discussed.
I am Ann Sullivan with Women Impacting Public Policy.
First of all, it gives--the people I represent are the
borrowers. They are the end users. So it gives us great pause,
sitting here listening to this discussion, the comments of the
lenders, that increased fees will decrease participation in the
programs. That is counterproductive to what certainly my
membership is interested in.
Second of all, I just wanted to go back to the Women's
Business Center microloan discussion. We are all for cross-
pollination, so it sounds like the microlenders sitting here
with their technical assistance, I just want to encourage that
any cooperation between Women's Business Centers and their
assistance can be coordinated. I know that in rural areas you
have mentioned it is not possible, but there are a lot of Women
Business Centers that I think are trying to serve the same
population that you are, and we just would encourage them to
work together.
Ms. Wheeler. Paul, did you want to make a comment? Do you
remember what your question was? I know your placard has been
up for a long time.
Ms. Merski. Not to beat a dead horse here, but I was going
to ask if the SBA had checked with several other banking
regulators, if they would, in fact, be able to expand their
audits or oversight in the process of already being in the bank
to look more carefully at the SBA loans if they are not, which,
frankly, I think they are already looking into these SBA loans,
particularly for banks that have large SBA loan portfolios, and
why the SBA would need to charge an additional fee for
something other regulators are already in the bank doing. And I
would be curious to see if they have checked with the Federal
Reserve, the FDIC, the OTS, State bank regulators, if they, in
fact, look at this before imposing a new fee and going ahead
with additional oversight in the bank, which will be costly to
the bank in time and resources in the bank in addition to the
fee.
Ms. Wheeler. Giovanni, would you like to make a comment?
Mr. Coratolo. Giovanni Coratolo. I am Director of Small
Business Policy for the U.S. Chamber of Commerce. We represent
4,000 State and local chambers, and I will tell you the 504
program, as well as the 7(a) program, is critical to those
State and local chambers. We are very engaged in access to
capital for small business. We were involved several years ago
in several battles involving subsidy as well as the econometric
model. Over the last several years, I guess we have been on the
sidelines. We do look toward Tony as well as Chris as far as
the leadership in those programs, and we do subscribe to most
of what they have said as far as the health of those programs.
I would strongly encourage SBA to look at what they have
said as far as the comments they have had as far as the health
of those programs, and we will certainly look to see how this
proceeds in the future as to whether we get involved again and
to making sure that the SBA 7(a) and 504 programs stay healthy
for the future.
Ms. Wheeler. And has the U.S. Chamber of Commerce seen,
like NSBA, any survey or anecdotes from their members about the
increased need for SBA's programs as they rely more heavily on
credit cards or about needing more access to capital?
Mr. Coratolo. We have done several surveys, one involving
the minority business lending, and we find that it is an
underserved community. As far as over time, we see the health
of those programs waning a little bit. As far as when we are
talking about 504 and 7(a) as we go into the future, we are a
little concerned as to its ability to service our small
business needs. And, you know, we have not seen any direct
surveys like Todd has put forward, but at this point we are
still on the sidelines, but we can be encouraged to be brought
into the fight.
Ms. Wheeler. OK. I want to allow anyone else to make
comments, and everyone should else feel free to go. Thank you
for participating. We really appreciate your time and your
patience waiting your turn to make comments. But as I said, we
will just spend maybe another 15 minutes to tie up loose ends
since we got off to a bit of a late start.
Chris? Oh, I am sorry. Jim Morrison. I am very sorry. We
would like to hear from Jim Morrison. He has not had a chance
to speak.
Mr. Morrison. Excuse me. I am Jim Morrison. I am the
president of the Small Business Exporters Association of the
U.S. I have just a point about one section of the bill I would
like to comment on.
Ms. Wheeler. Is your microphone on?
Mr. Morrison. Section 309. We really do appreciate the
Committee's responsiveness to the needs to increase the loan
sizes of the international trade loans and utilize the
refinancing terms and the collateral terms offered for the
other loans. That is a very positive aspect of this bill. We
also appreciate the Committee's support on the size of the
guarantee.
Ms. Wheeler. And the guarantee is important as an incentive
to lenders?
Mr. Morrison. That is correct, because there is foreign
risk involved, and a guarantee is quite important.
Ms. Wheeler. OK. Thank you.
Chris?
Mr. Crawford. Thank you, Kevin. First of all, I want to
thank the Committee for the hard work on the bill. We strongly
support this bill, as you know already.
Ms. Wheeler. Is your microphone on?
Mr. Crawford. I am sorry. We are concerned--there is one
section under the definition of CDC, use of excess funds. We
are very concerned with the ethics issue. We are concerned with
where SBA is going in terms of pushing CDCs to expand, expand,
expand, take greater risks potentially in the future, serve
markets they are not naturally serving, they are not used to
serving, opening CDCs willy-nilly. There are some IRS
regulations that address the question of what are not-for-
profits for, what are they supposed to do, what are they not
supposed to do. We would urge the SBA to take a look at those
IRS regulations--I happen to have a copy here for your
benefit--and be cautious in terms of this continued expansion
of CDCs, their role, the authorities of their staffs and
associates, especially.
Ms. Wheeler. I think the Committee in the bill makes clear
that there is a distinction between lenders and the
intermediaries and the purposes they serve, that banks are
strictly for lending, whereas CDCs have a special role in not
only providing capital but spurring community and economic
development. And so we will work with you, if you are concerned
about that provision. We feel that the Committee worked it out
between the Chairman and--well, let's just say Senator Kerry
and Senator Snowe in the last Congress, and so it was
incorporated it in this bill. But we are happy to work with you
to address your concerns.
Mr. Crawford. Kevin, you have actually done a marvelous job
doing that, and I appreciate what you have written in 1256. But
I urge the administration to look more cautiously at the way
they are implementing regulations and proliferating
regulations, not the least of which, obviously, is this big
surprise on the fees.
Ms. Wheeler. OK. Thank you.
Joan, did you want to have any more comments on the child
care?
Ms. Wasser Gish. No.
Ms. Wheeler. SBA, Ron, Paul, Sally?
Mr. Phillips. The only thing I wanted to say earlier about
the child care, because I did mention we had financed a child
care facility in South Portland with the 504, that was a for-
profit. We do a lot of financing of child care facilities in
the State of Maine, both nonprofit and for-profit. On the
nonprofit side, I just want to back up some of the comments
made, that the whole goal here is to get affordable child care
to the private sector, and that is the ultimate goal. And
nonprofits tend to be working with those harder-to-serve and
people who cannot pay as much as in the for-profit side. And so
we have a lot of evidence for that, and that is why this
program probably would not be competing at all, but just be a
complement if you were able to open this up. So that was one
thing.
And I did want to thank Senator Snowe, too, and Senator
Kerry for this. I thought and we all think quite a visionary
and innovative bill that is put forward here with different
components. Thank you for your work, and the Senator for that,
too. Thank you.
Ms. Wheeler. Thanks, Ron.
Ms. Ferko. Thank you.
Ms. Wheeler. SBA, anything else?
[No response.]
Ms. Wheeler. Thank you, everyone. We appreciate it.
[Whereupon, at 1:14 p.m,. the roundtable was concluded.]
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