[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
SMALL-BUSINESS LENDING: PERSPECTIVES FROM THE PRIVATE SECTOR
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HEARING
before the
SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JUNE 21, 2012
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 112-073
Available via the GPO Website: www.fdsys.gov
_____
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, General Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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OPENING STATEMENTS
Page
Hon. Mike Coffman............................................... 1
WITNESSES
David J. Rader, Business Executive, SBA Lending, Wells Fargo,
Minneapolis, MN................................................ 2
Brett Martinez, President & CEO, Redwood Credit Union, Santa
Rosa, California............................................... 4
Tim D. Dixon, Senior Vice President, Head of Small Business
Administration Lending, Citizens Bank, Warrensville Heights.,
OH............................................................. 5
Robert L. Marquette, President/CEO, Members 1st FCU,
Mechanicsburg, PA.............................................. 7
APPENDIX
Prepared Statements:
David J. Rader, Business Executive, SBA Lending, Wells Fargo,
Minneapolis, MN............................................ 19
Brett Martinez, President & CEO, Redwood Credit Union, Santa
Rosa, California........................................... 23
Tim D. Dixon, Senior Vice President, Head of Small Business
Administration Lending, Citizens Bank, Warrensville
Heights, OH................................................ 36
Robert L. Marquette, President/CEO, Members 1st FCU,
Mechanicsburg, PA.......................................... 46
Questions for the Record:
None.
Answers for the Record:
None.
Additional Materials for the Record:
Millwork & More Letter for the Record........................ 60
Pekel Construction Letter for the Record..................... 61
Written Testimony of Christopher G. Hurn..................... 62
CG&S Design-Build Letter for the Record...................... 70
National Association of the Remodeling Industry Letter for
the Record................................................. 71
Small Business Investor Alliance Letter for the Record....... 72
A&C Kitchens & Baths Letter for the Record................... 76
Total Home Letter for the Record............................. 77
Benjamin Plumbing, Inc. Letter for the Record................ 78
Creative Concepts Remodeling, Inc. Letter for the Record..... 80
SMALL-BUSINESS LENDING: PERSPECTIVES FROM THE PRIVATE SECTOR
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THURSDAY, JUNE 21, 2012
House of Representatives,
Subcommittee on Investigations and Oversight,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building, Hon. Mike Coffman
(chairman of the Subcommittee) presiding.
Present: Representatives Coffman, Tipton, West, Schrader,
and Hahn.
Chairman Coffman. Good morning.
On Wednesday, June 6th, the Small Business Committee held
an oversight hearing with SBA Administrator Karen Mills to
question this administration about its procedures for setting
policy for its financial assistance programs. The Committee
also examined SBA's procedures for lending oversight to make
sure that SBA is protecting taxpayers by conducting proper
oversight of its lending partners.
Today, we are here to follow up on that hearing. Testifying
today are private-sector lending partners who will discuss the
effect of SBA policy on loan processing and how SBA can be a
better partner.
In addition to reviewing SBA policy and procedures, we will
also hear about how other financial regulators are impacting
credit availability for small businesses. The Committee
consistently hears from both bankers and small businesses that
the regulatory environment is harming economic growth. This is
an opportunity to hear more about the regulatory burdens on
banks.
We all know that economic growth will be led by small
businesses. To encourage this important sector to grow and
create jobs, we need an environment where small businesses can
access capital and banks have the freedom to lend without
consistent second-guessing by regulators.
I would like to thank our witnesses for taking time away
from their businesses to testify here today.
If Subcommittee members have an opening statement prepared,
I ask them to have it submitted for the record.
I would like to take a moment to explain the timing lights
for you. You will each have 5 minutes to deliver your remarks.
The light will start out as green. When you have 1 minute
remaining, the light will turn yellow. Finally, at the end of
your 5 minutes, it will turn red. I ask you to adhere to the
time limit.
Our first witness is David Rader, head of small-business
lending for Wells Fargo. Wells Fargo is SBA's top lender by
dollars lent to small businesses and second in the number of
loans. So far in fiscal year 2012, Wells Fargo has already made
over half a billion dollars in loans to small businesses
through the SBA's 7(a) Loan Program. David has been with Wells
Fargo for 29 years.
David, thank you for being here, and we look forward to
your testimony.
STATEMENTS OF DAVID J. RADER, BUSINESS EXECUTIVE, SBA LENDING,
WELLS FARGO, MINNEAPOLIS, MINNESOTA; BRETT MARTINEZ, PRESIDENT
AND CHIEF EXECUTIVE OFFICER, REDWOOD CREDIT UNION, SANTA ROSA,
CALIFORNIA, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION;
TIMOTHY D. DIXON, SENIOR VICE PRESIDENT, HEAD OF SMALL BUSINESS
ADMINISTRATION LENDING, CITIZENS BANK, WARRENSVILLE HEIGHTS,
OHIO, ON BEHALF OF THE CONSUMER BANKERS ASSOCIATION; ROBERT L.
MARQUETTE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MEMBERS 1ST
FEDERAL CREDIT UNION, MECHANICSBURG, PENNSYLVANIA, ON BEHALF OF
THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
STATEMENT OF DAVID J. RADER
Mr. Rader. Mr. Chairman, Ranking Member Schrader, and
members of the Subcommittee, my name is David Rader. And for
the past 5 years, I have been the business executive of Wells
Fargo's SBA lending business. I have been employed at Wells
Fargo for 29 years. Thank you for inviting me here today.
Wells Fargo, as the Chairman said, is the national SBA
lender that offers all core 7(a) as well as the 504 loan
products. We have over 350 dedicated SBA team members, and we
are a growing and profitable business for the bank, holding
loan balances of $7 billion.
As the Chairman said, for the past 3 years Wells Fargo has
been the number-one 7(a) dollar lender, approving more than
$1.2 billion in 7(a) loans, representing 3,142 loans. And we
also made history by becoming the first institution to generate
over a billion dollars of 7(a) loans in the program. Our
lending trend continues today, and, through May, Wells Fargo
remains the number-one 7(a) lender, approving $734 million, and
we currently are the number-two unit lender.
These dollars represent significant numbers of both large
and small loans. We believe that the flow of new dollars into
our communities represents a very powerful statement for job
creation and economic development. We want to lend more dollars
to more creditworthy customers, and we believe the SBA agency
is aligned with Wells Fargo to achieve that goal.
As the Nation's number-one SBA lender, we appreciate the
very constructive engagement of the SBA and the interest it has
in our lending perspectives. We regularly participate with the
SBA in an ongoing dialogue on credit policy issues, oversight,
and program enhancements. We also believe there are
opportunities to improve the programs and streamline the very
complex SBA Standard Operating Procedures (SOPs).
The agency's efforts to reduce regulation and process over
the years, especially the SOPs, are welcome. In Wells Fargo's
view, the SOPs can be simplified and clarified further for the
benefit of all without added risk to the taxpayer. For example,
the public September 2011 SOPs lack clarity surrounding stock
ownership rules and Eligible Passive Company/Operating Company
(EPC/OC) structure rules. As a result, many industry lenders
sought standard processing approval rather than Preferred Loan
Program (PLP) approval, resulting in customer delays and added
processing expense for all.
When SOPs are made, the agency must provide the industry
with enough lead time to educate, train, and develop internal
risk systems so we are equipped to best serve our customers and
make loans with enforceable guarantees.
We believe there can be much more transparency in the SOP
vetting process, both with the SBA and the lending industry at
large, as well as with the SBA and the SBA Office of Inspector
General (OIG). From our vantage point, the OIG continues to be
too deeply involved in the vetting process. We find the process
unclear, and we are often surprised at the outcome, hampering
our ability to react and train our teams effectively. We
suggest that the SBA give lenders an opportunity to change the
SOPs and give us time, at least 30 days, prior to any final
release.
We also recommend that the agency revise the current SOPs.
For example: Eliminate the requirement for blue-ink signatures
on necessary SBA forms. Number two, allow loans to individuals
when there is a change-of-ownership transaction involving a
stock purchase rather than just an asset purchase. Number
three, allow 7(a) loans under $350,000 to be approved and
processed under the SBA Express program using lender's
delegated authority. Those are just a few suggestions.
Wells Fargo continues to urge the SBA to focus its
resources on streamlining existing programs, both 7(a) and 504,
rather than creating brand-new programs that serve limited
niches. The recently revised CAPLine program is a great example
of SBA's progress in this regard.
Wells Fargo welcomes practical and prudent lender
oversight. Strong lender oversight will level the playing field
and make the programs more consistent, cost-effective, and
easier to use. We view the SBA on-site review process as
rigorous and an opportunity for us to improve. We take pride in
our substantial compliance with SBA regulations.
We welcome the recent appointment of the Office of Credit
Risk Management (OCRM) director and look forward to a new era
of transparency and collaboration. OCRM's willingness to
discuss key portfolio-monitoring tools is a welcome change that
we appreciate.
There is much work to do. If we work together and share
best practices, Wells Fargo continues to be optimistic about
our ability to help businesses succeed financially while being
good stewards of the SBA program. We look forward to our
ongoing dialogue and partnership with the SBA.
And I would be happy to answer any questions. Thank you.
Chairman Coffman. Great. Thank you for your testimony.
Our next witness is Brett Martinez, president and CEO of
Redwood Credit Union located in Santa Rosa, California. Brett
is testifying on behalf of the Credit Union National
Association, where he serves on their board of directors. In
his 25 years of banking experience, Mr. Martinez served as a
senior executive with the California Credit Union League with a
large southern California credit union prior to joining Redwood
in 2002.
Mr. Martinez, thank you for being here, and we look forward
to your testimony.
STATEMENT OF BRETT MARTINEZ
Mr. Martinez. Thank you.
Chairman Coffman, Ranking Member Schrader, and members of
the Subcommittee, thank you for the opportunity to testify at
today's hearing. Again, my name is Brett Martinez, and I am
president and CEO of Redwood Credit Union, a $2 billion State-
chartered credit union serving 220,000 members, located in
Santa Rosa, California. Redwood is the largest credit union SBA
lender in the country by loan volume.
Credit unions share the Small Business Committee's goal of
increasing access to credit for small businesses through the
reduction of statutory and regulatory impediments. At the end
of the year, there were over 330 credit union SBA lenders.
These credit unions collectively have $800 million in SBA loans
outstanding. The average credit union SBA loan is roughly
$100,000.
Since December of 2007, SBA loans have grown by 90 percent
at credit unions throughout the Nation. SBA-guaranteed loans
are important to borrowers who otherwise would not be able to
get a conventional loan, but they are complicated to make. They
require staff with a special kind of expertise. They cost the
borrower and their lender more to make than conventional loans,
and they take longer to complete.
My written testimony describes how we have been able to use
SBA loan programs to help small businesses in our community. We
find ourselves in a fragile economic recovery. Small businesses
that have survived the recession have largely done so by
rightsizing their business following a path of declining
profits. Many have shown losses for several years. As a result
of their ongoing restructuring, they are beginning to once
again show profits. Ultimately, they are left with a need to
restructure their balance sheets, consolidate debt, and free up
cash flow to grow their business.
We have used SBA programs, including the 504 Refinance
Program and the First Mortgage Lien Pool program, to help our
members stay in business, preserve jobs, and survive through
the economic recovery. These programs expire in September, and
we encourage Congress to reauthorize them. Otherwise, small
businesses will be adversely impacted.
My written testimony describes efforts that CUNA has taken
to encourage SBA to improve its programs through reduced
regulatory burden, increased transparency, and a streamlined
application program. In general, we have seen improvements in
this area over the last several years. However, other lenders
who do not have the experience that we do still may find the
process very complicated. To that end, it is important for SBA
to continue its efforts in this regard and continue to engage
lenders when it modifies SOPs and other policies.
Enhancing access to credit for small businesses is an
important part of promoting job creation and the economic
recovery. There is significant demand for credit from small
businesses. During the financial crisis, credit unions expanded
business lending to their members while other lenders pulled
back. Many credit unions that contributed to the vast majority
of this growth are now becoming severely constrained by the
statutory cap on credit union business lending.
Redwood is one of these credit unions. We are at 75 percent
of our capacity, and we will only be able to lend to business
members for the next 18 months. The cap will not only affect
our ability to offer conventional loans but also our ability to
offer SBA loans. That is why we are strongly encouraging
Congress to increase the statutory cap on credit union business
lending.
Representatives Ed Royce and Carolyn McCarthy have
introduced legislation to allow experienced credit unions
operating near the cap to apply to NCUA for authority to lend
beyond that cap. We estimate that the Royce-McCarthy
legislation would inject $13 billion into new capital and to
small businesses in the first year after enactment and create
140,000 new jobs, all at no cost to taxpayers. We appreciate
the several members of the Subcommittee that have cosponsored
the legislation.
Some banking trade associations strongly oppose the Royce-
McCarthy bill. They suggest it is unnecessary because the
guaranteed portion of an SBA loan does not count against the
cap. However, SBA is not a solution to the cap limitations.
Notwithstanding their merits, SBA loans clearly are not a
substitute for conventional business loans.
At the same time, increasing the cap on credit union
business lending would almost certainly lead to an increase in
SBA-guaranteed lending. Some small businesses, both that
qualify for a conventional loan and those that require a
government guarantee, would have more access to credit to start
growing their business and create jobs. We encourage Congress
to enact the Royce-McCarthy legislation.
Thank you again for the opportunity to testify today, and I
am happy to answer any questions.
Chairman Coffman. Thank you for your testimony.
Our next witness is Timothy Dixon, senior vice president
and head of SBA lending at Citizens Republic Bancorp. Citizens
serves customers in Michigan, Ohio, and Wisconsin. Tim has
close to 30 years of commercial banking experience, serving as
executive vice president of commercial banking at SkyBank
before joining Citizens Republic. Tim is testifying on behalf
of the Consumer Bankers Association.
Tim, thank you for being here today, and you have 5 minutes
to present your testimony.
STATEMENT OF TIMOTHY D. DIXON
Mr. Dixon. Chairman Coffman, Ranking Member Schrader, and
members of the Subcommittee, my name is Tim Dixon, and I am
senior vice president and head of Small Business Administration
lending for Citizens Bank. Citizens Bank serves communities
located within Michigan, Ohio, and Wisconsin, with 219 branches
and 249 ATMs. We are a community-oriented institution, with a
majority of our revenue being derived from our core bank, which
is heavily oriented toward small business.
Citizens is a preferred SBA lender, with dedicated
specialists to fast-track the process, and we also have
expertise in other State and local loan programs. While we
utilize a number of the SBA loan programs across the bank, the
majority of our loan volume is 7(a) Express, with an average
loan size of $60,000.
I am also a member of the Consumer Bankers Association's
Small Business Banking Committee, which includes the top
business bankers in the country, who share the common goal of
helping small businesses meet their financial needs.
Headlines highlighting weak consumer confidence and high
unemployment have created a great level of uncertainty for
small-business owners. Many business owners are cautious to
take on additional debt or to hire new employees with the
current level of economic uncertainty. Continued reports of a
possible double-dip recession only further the concerns of
business owners and the confidence of American consumers.
SBA lending has played an important role in helping small-
business owners meet their financial needs in difficult times.
While SBA lending remained strong in the first half of 2012,
overall numbers appear to be lower than those of 2011, a banner
year for SBA. Much of the difference can be attributed to the
expiration of loan enhancements provided under the Small
Business Jobs Act.
Short of reinstating these temporary provisions, today's
hearing is an opportunity to highlight positives and identify
ways to improve the SBA programs. CBA's Small Business Banking
Committee compiled a list of recommendations focused on the
SBA's 7(a) and 504 programs and sent them in a recent letter to
the SBA and Congress, highlighting our suggestions to improve
the efficiency and effectiveness of these valuable programs.
The SBA incorporated a couple of our recommendations in its
most recent revision of its standard operating procedures, or
SOP. However, CBA believes there are still a number of changes
the SBA can make to help increase lending.
As detailed in our written testimony, the Consumer Bankers
Association suggests a number of enhancements to the 7(a) and
504 programs. Most notably, we suggest a streamlined 7(a)
process by allowing preferred lenders to use Express loan forms
and processes for all 7(a) loans. For 504 loans, we encourage
the reauthorization of the Refinance Program, which is
currently scheduled to sunset in September.
The SOP is a complicated document, and while having the
ability to make slight tweaks can be beneficial at times, quick
and frequent changes to the SOP process can create real-world
challenges. As the terms of the SOP are ever-changing, it
creates practical challenges to interpret revisions, train
staff, update systems, and be in compliance if these changes
are coming too frequently. The ability of an institution to
keep up with changes to the SOP can have large compliance cost
implications, which can adversely affect lending.
Furthermore, the clarification of SOP terms can be time-
consuming and difficult. For example, the improvements to the
CAPLine program issued in late 2011 do not provide clear terms
for loan qualification. In response to industry inquiries, the
SBA took over 6 months to provide adequate clarification. And
so we recommend a more methodical and consistent approach to
SOP policy changes.
Finally, effective SBA lender oversight is another area of
concern. Members of the CBA have found that the SBA audit
process can be a very time-consuming exercise and is not always
useful to assess and mitigate risk. A more transparent and
streamlined audit process would go a long way in improving
lender efficiency. Lender oversight should be a means for the
agency to identify variances from established lender benchmarks
and provide a reasonable process for lenders to remedy
deficiencies.
We applaud this Committee's continued efforts to improve
the efficiency and effectiveness of the SBA's programs. I thank
you for the opportunity to appear here today, and I would be
happy to answer any questions you may have.
Chairman Coffman. Thank you for your testimony.
Robert Marquette is president and CEO of Members 1st
Federal Credit Union, located in Pennsylvania. Members 1st
Credit Union has over 200,000 members. Robert is testifying on
behalf of the National Association of Federal Credit Unions,
where he serves on their board of directors.
Mr. Marquette, you have 5 minutes to present your
testimony.
STATEMENT OF ROBERT L. MARQUETTE
Mr. Marquette. Good morning, Chairman Coffman, Ranking
Member Schrader, and members of the Subcommittee. My name is
Bob Marquette, president and CEO of Members 1st Federal Credit
Union, and I am testifying today on behalf of NAFCU. Thank you
for holding this important hearing. I appreciate the
opportunity to share our views on small-business lending from a
lender's perspective.
Credit unions currently operate under an arbitrary business
lending cap of 12.25 percent of total assets. This artificial
cap acts as a barrier to credit unions meeting the needs of
their small-business members. It should be noted that the
government-guaranteed portions of SBA loans do not count toward
the member business funding cap, but the nonguaranteed portions
do. This could cause a credit union to scale back participation
in SBA programs as they approach the arbitrary cap.
A 2011 SBA study indicates that credit union business
lending increased before and during the financial crisis, while
banks decreased. This demonstrates that credit unions continue
to meet the capital needs of their business members even during
the most difficult of times. In addition, the study found that
bank business lending was largely unaffected by changes in the
credit unions' business lending.
We urge Subcommittee members to support the bipartisan
legislation, H.R. 1418, the Small Business Lending Enhancement
Act, which addresses the arbitrary business lending cap.
Our Nation's Main Street businesses also recognize that the
artificial cap hurts job creation and their access to capital.
Like us, they support and urge passage of H.R. 4293, the
Restore Main Street's Credit Act of 2012, introduced by
Subcommittee Ranking Member Kurt Schrader.
At Members 1st, we launched our member business lending
program in January of 2003 but are unfortunately approaching
our arbitrary cap today. Our average member business loan is
$185,000, while the median size is only $60,000. We estimate
that Members 1st business loans created 52 new jobs in our area
and helped save 269 more in 2011.
At Members 1st, we entered the SBA 7(a) program in late
2010 and have originated two 7(a) loans. We have also
participated in the SBA 504 program for a longer period and
have originated three loans in that program.
Both 7(a) loans were for existing firms that were expanding
and provided additional capital. However, both loans took
nearly a year to fund. The SBA 7(a) process was time-consuming
and burdensome. It left us with the impression that an
established business lender, such as Members 1st, seeking to
enter into the SBA marketplace is at the bottom of the SBA
priority list. The multiple tiers within the SBA 7(a) program
give larger lenders a competitive advantage over small
institutions. Members 1st has stopped actively marketing our
SBA 7(a) loans until we find a solution that can more
efficiently meet our members' needs.
Members 1st has had success using the SBA 504 loan program.
That program and the USDA Business and Industry Loan Program
have been well received by our members. Both programs treat all
incoming applications equally, regardless of our history with
the agency.
NAFCU is pleased that SBA Administrator Karen Mills has
been open to meeting with credit unions and hearing our
concerns about SBA programs. We hope that this dialogue will
continue and ultimately be productive in addressing our
concerns.
One way for the Subcommittee to help address these concerns
is to support H.R. 4191, the Credit Union Small Business
Lending Act, introduced by Subcommittee Ranking Member Kurt
Schrader and full Committee member Representative Steve Chabot.
This bipartisan bill would amend the Small Business Act to:
one, direct the SBA Administrator to implement a program to
increase credit union participation in the SBA small-business
loan program; two, simplify the application process for such
participants; and, three, provide a guarantee of up to 85
percent for loans made in underserved areas. These steps would
make the process easier for credit unions to become more
involved in SBA lending and open the door to more access to
credit for those small businesses and communities served by
them.
In conclusion, we recognize that small businesses are the
driving force of our economy and the key to its success. While
the SBA lending programs are providing much-needed
opportunities to businesses, there are still obstacles
preventing them from reaching their full potential. That is why
we, on behalf of our Nation's credit unions, their 94 million
members, and our Nation's small businesses, urge the
Subcommittee to support legislation such as H.R. 1418, H.R.
4191, and H.R. 4293 to make it easier for credit unions to aid
our Nation's small businesses and create jobs.
We thank you for your time and the opportunity to testify
before you here today on this important issue to small
businesses, credit unions, and our Nation's economy. I would
welcome any questions that you may have.
Chairman Coffman. Thank you for your testimony.
The first question is for Mr. Rader and Mr. Dixon. I often
hear from financial institutions that while entities in
Washington encourage them to lend more, regulators on the
ground are in fact requiring them to increase capital reserves.
Have you experienced this? And, if so, how has this decreased
the amount of loans that you can make?
Mr. Rader.
Mr. Rader. Mr. Chairman, our SBA lending business is
providing capital to small businesses, and Wells Fargo has
always been in a good position to provide that capital. So
while we implore and applaud the SBA to reduce regulation and
enhance and modify SOPs, we absolutely have not seen a decrease
in our lending because of capital concerns at Wells Fargo.
Chairman Coffman. Mr. Dixon.
Mr. Dixon. Yes, Mr. Chairman, you know, I think we have
continued to see growth in our SBA loan portfolio. We don't
feel constrained or feel that the regulatory burden is causing
us, you know, difficulties in continuing to grow the portfolio
and support small business.
Chairman Coffman. Great.
And a question to all the witnesses. We can start with Mr.
Marquette. Are small businesses confident, in your view, about
their ability to access credit and grow their businesses at
this time?
Mr. Marquette. What we have heard from small businesses in
our area, they have seen some kind of a retrenching of business
lending in our area. For whatever purpose, for whatever reason,
I am not sure.
We have seen a significant increase in the number of
applications that we have received. But because of that
business cap that we have, business lending cap that we have,
we have to be more selective. We have to operate within that
cap, and we are about 90 percent of our cap right now.
So we have seen some retrenchment. It is easing up a little
bit. And credit unions have really stepped up to the plate in
order to be that dependable source of business lending that our
businesses need.
Chairman Coffman. Mr. Dixon.
Mr. Dixon. As we talk to business owners and look at the
research, you know, I think while there has been recovery in
small business, business owners have learned something. They
are cautious; they are keeping available credit in their hip
pocket, if you will, for a rainy day.
So I think some of the challenge with loan demand has been
just small businesses not requiring as much credit. But where
we have creditworthy borrowers, you know, we feel the markets
are competitive and the access to capital is there,
particularly partnering with SBA.
Chairman Coffman. Uh-huh.
Mr. Martinez.
Mr. Martinez. We are seeing an improvement in that area. I
will just give you an anecdote. Redwood Credit Union started
SBA lending in 2008, and we immediately became the number-one
SBA lender in our area. That wasn't because we were doing a
significant number of SBA loans; it was because we were
continuing to lend. A lot of the local banks had pulled back.
So we are seeing that start to improve. We are still the
number-one SBA lender in our area, but improvement is there. A
big impact over the past 4\1/2\ years, though.
Chairman Coffman. Mr. Rader.
Mr. Rader. Mr. Chairman, we are seeing better financial
statements from our small-business borrowers. We do believe
their revenue trends and their profitability trends are
improving. We have in our business, in our SBA business right
now an increase in applications, an increase in new loan
activity and submissions for credit. Our approval rates are
higher this year than last year. And our approved pipelines,
both in the 504 as well as 7(a), are up.
So we are encouraged by that activity, and we believe that
we have the tools, especially with the new revised SOPs on the
CAPLine program to provide larger working capital loans, that
we will have the tools necessary to continue that slow
improvement and progress on borrowing.
Chairman Coffman. Okay.
As you go through audits for both banking regulators, in
the case of credit unions, your regulators, and the SBA, do you
feel that the two entities are working together, or are they
just completely separate?
Anybody who would like to answer that.
Mr. Martinez. I will go ahead and start.
I know NCUA is very supportive of SBA and has actually been
talking to SBA and talking to Congress about their support
there. So NCUA credit union regulators are very supportive.
Chairman Coffman. Okay.
Anyone else?
Mr. Dixon. Our experience has been that the SBA is
listening and we have a good working relationship, but we think
there is work to be done in the audit and oversight area. And
as we talk among the banks at CBA, we have made some specific
recommendations to just improve the efficiency of that process.
Chairman Coffman. Okay.
Mr. Martinez, according to your testimony, approximately
2,000 credit unions engage in business lending. Why so few?
Roughly, I think, 300 are offering SBA business loans and
products to their members.
Mr. Martinez. Yes, those numbers are accurate.
I know this hearing isn't about the business lending cap,
but it is the number-one impediment for credit unions to get
into both commercial lending and SBA lending. Those that are
already in it are managing to a cap, and those that see the cap
as a reason for them to not get into something that they are
going to shut down is a reason that they are not getting into
that.
Chairman Coffman. Okay.
At this time, we will make some rounds to the Members. And
I think we will hopefully have a second opportunity for rounds
of questions.
Ms. Hahn.
Ms. Hahn. Thank you, Chairman. This is actually my first
hearing as a member of this Subcommittee, so I really want to
thank you for holding this important hearing on the state of
lending for our small businesses.
And thanks to all the witnesses for being here today.
You know, since I have been on the Small Business
Committee, I have really made an effort to go out and talk to
many, many small businesses personally, hundreds personally I
have talked to. And I wanted to find out, what is it, what do
you need from us, do we need to get out of the way or do we
need to get involved, to make it better?
And the number-one thing my small businesses have told me
that they needed was better access to capital. They need more
customers, number one, so they wanted the economy to improve
and they want folks to have jobs so they can be customers. But
the second thing was, they felt like if they could get access
to capital, that they would expand, they would hire, and it
really would be about job creation.
One of the things I also heard was the burden of paperwork
to fill out for an application for a small-business loan. And I
introduced H.R. 3836, the Small Business Paperwork Reduction
Act, which would reduce the amount of paperwork needed for a
loan of, I think, $250,000 or under from 12 pages to 2--
something simple that I think we can do to help folks, you
know, at least get through the process of application.
I am really pleased to see our credit union witnesses here
today. I am a big fan, as you know, of credit unions. I am also
a fan of Wells Fargo. I am an equal-opportunity borrower. I
have borrowed from Wells Fargo, and I have borrowed from my
local credit union.
But I do think that you made the case very clear, as you
have in the past, about the lending cap. I am a cosponsor of
the Small Business Lending Enhancement Act, which will raise
the lending cap for credit unions. I believe that our credit
unions really are there in the communities. They are like the
community banks. They know their members; many of them know
them by name. They help them, not only with the loan, but just
with, kind of, overall counseling about becoming financially
sound in their dealings. So I appreciate that. And I hope
Congress will pass that.
You know, Mr. Rader, what I am going to ask you is, one of
the other things I heard from my small businesses was that
sometimes the commercial banks will add a couple of
requirements that the SBA does not require in their loans--for
instance, collateral, real estate collateral. In other words,
the Small Business Administration doesn't put that as a
criteria to make the loan, but then sometimes the commercial
banks will add that because your auditors would require that.
Is there a way that we can reconcile that? Because I heard
that over and over again, that what the Small Business
Administration put on as a requirement, you all added to that
and sometimes made that then the breaking point that small
businesses were unable to comply with.
Can we reconcile that?
Mr. Rader. Yes, Congresswoman, I would be happy to
understand the details of your clients' situation. The SBA
rules basically say that if a borrower does not have 100
percent collateral coverage in their real estate loan or in
what they are purchasing, that we have to take all available
collateral.
That is an SOP rule. That is what we follow. And that is
currently something that is a good lending practice, but also
it hurts demand and the ability to provide loans for those
customers who don't.
So there is a delicate balance of making sure----
Ms. Hahn. So you are not adding any?
Mr. Rader. The SBA programs and the rules of the SOP
require all available collateral.
Ms. Hahn. Okay.
And let me go back to the credit unions. Either one of you
can answer this. You have made it pretty clear on what you
think we can do. So, specifically, is there anything else that
you see Congress doing that could increase the amount of loans
that our credit unions can be making out there to our small
businesses specifically?
Mr. Martinez. I will go ahead and start.
You know, besides the cap--that is to keep people in--is,
make the entrance easier. It is a little daunting process. We
were able, over the past 4\1/2\ years, one of the banks in our
area pulled back, so we were able to attract people that had
significant experience, so it wasn't as daunting for us. But if
you don't have that experience, it is a relatively daunting
process to get involved.
And then additional training. There are not a lot of people
out there that are trained in this. You don't take internal
staff and say, go be an SBA expert. It is very technical.
So I would say those two things: make the process easier,
reach out to credit unions; and provide additional training.
Ms. Hahn. How are our local SBA regional administrators,
how are they doing on the ground with all of you?
Mr. Dixon. Our experience is they have been very
accessible, want to be out in the communities, work with the
banks, establish a dialogue. So I feel we have a good working
relationship with the three States we are within in the region.
It has been a very positive experience.
Mr. Rader. And, Chairwoman, I would echo that. You know,
Wells Fargo is a community bank. We have our SBA lending
officers in most of the communities or big communities across
the country. We have a very good relationship with the local
district offices, with the SCORE program, as well as some of
the most larger CDC organizations. So that is a big part of our
outreach and an important part of the process.
Chairman Coffman. Thank you.
Mr. West of Florida.
Mr. West. Thank you, Mr. Chairman and Ranking Member.
Thanks to the panel for being here today.
A couple months ago, the National Federation of Independent
Businesses put out a survey that said about 8 percent of small
businesses are looking to grow and expand. When you talk to
these individuals, when you have them here in front of our
hearings, three things: tax policy, regulatory environment, and
lack of access to capital. Last week in Palm Beach Gardens, we
had a small-business roundtable with Regents Bank. Once again,
the exact same thing. And so there is a serious concern about
the regulatory environment that is out there that is precluding
the right type of lending.
So the question I have first is, how have you seen, if you
have seen it at all, any type of effects from Dodd-Frank and
what that is having on small-business lending practices and
procedures in your respective financial institutions?
Mr. Rader. Congressman, again, the SBA programs are
primarily driven by the SOPs. So we are focused, as an SBA
lender, on following those rules and suggesting good changes to
those rules that prevent the barriers of entry for getting an
SBA loan. So, at this point, for our lending institution, the
Dodd-Frank rules impact our larger bank, obviously, but, again,
we are focused on SBA and the SBA procedures.
Mr. West. But, you know, one of the recurring things,
especially--I mean, Wells Fargo is a tad bit bigger than a lot
of your small community banks, which are the lifeblood to small
businesses. And what they are having a problem with--and that
is why I am trying to get an understanding if you all are
having the same problem--is examiners and regulators coming
down based upon the rules of Dodd-Frank--you know, this is
above and beyond the rules of the SBA--that are reclassifying
good-quality loans that you all have said are okay, and they
are transferring that over to negative assets, and a lot of
these financial institutions cannot carry that much negative
asset.
So that is my question. Are you all seeing that type of
trend as well?
Mr. Martinez. On the credit union side, we are not. On the
SBA, I agree with Mr. Rader. You know, we are focused on SBA
SOPs. But Dodd-Frank, on the regular business side and consumer
side, we are not seeing really much impact to that.
Mr. West. Okay.
Then the next question I will ask is, how often does the
Small Business Administration come down and do reviews of your
loan portfolios?
And then also, how often do you have sharing of best
practices with the SBA so that you have a voice in the
streamlining of processes and procedures?
Mr. Rader. Our Wells Fargo SBA business routinely gets
audited at least once a year. Our last audit, we got the final
results in August of 2011. So we are most likely due soon for
another on-site exam.
We continually have dialogue with the SBA agency personnel
in policy, in new product development. We wish we had a more
transparent voice and transparency in understanding their
vetting process, because we do have a lot of ideas to
streamline programs and eliminate some of the inefficiencies
that we see.
Mr. Dixon. As we talk about the topic, Congressman, in CBA,
you know, the audit process depends on the type and size of
institution. But our audits are every other year, and then
there is a continued quarterly review of our loan portfolio.
And, you know, we think, as we pointed out in our
testimony, that there are opportunities to make the process
more efficient, more timely. And I think that will be better
for all of us.
Mr. West. Okay.
How long is the normal turnaround on an audit report, on
average?
Mr. Rader. We had our on-site audit last June, June 2011,
and we received almost instantaneous feedback on what we were
doing well. We did receive the official report in August of
2011.
Mr. West. Okay.
Mr. Dixon. You know, there is an exit conference after the
on-site audit is completed, but in talking with members of the
Committee, you know, the full closure could be out as much as
12 months. When you receive a final report and respond to the
open questions and bring it to close, it could be that long.
Mr. West. Good or bad?
Mr. Dixon. We think that is a little lengthy. And there are
opportunities to compress that timeframe, working with SBA.
Mr. West. Thank you, Mr. Chairman. I yield back.
Chairman Coffman. Thank you, Mr. West.
Mr. Schrader of Oregon.
Mr. Schrader. Thank you, Mr. Chairman.
I appreciate the panel's being here today. You guys are all
star actors in the lending program as we try and get small
businesses, medium-size, and even large businesses back on
their feet again. So I really appreciate all the work you are
doing.
I appreciate the comments by both Mr. Rader and Mr.
Martinez that Dodd-Frank is not impacting small banks, the
community banks, or credit unions. That is not where it was
intended to. We want to keep our attention on that, though. You
know, sometimes our good folks in the agencies sometimes have a
tendency to extrapolate what is supposed to be for the larger
institutions, and I think that might be what Mr. West was
getting at. So if we can be in assistance in making sure you
are not in the cross-hairs of those that pose a systemic risk.
So I appreciate that clarification.
Having said that, I am curious about improvements. We are
dealing with the small-business side of things in this
Committee, and we have gotten a new Administrator in the last
few years. It would appear to most of us, I think, on the
Committee that things have turned for the better. Some of your
testimony would seem to indicate that. So, as you go through, I
would like your ``yes'' or ``no,'' it has gotten better or, no,
it is still a little Byzantine progress.
A comment for Mr. Rader, in particular. Talking about the
SBA being responsive, you list some things in your testimony,
you mentioned a few. Has the SBA responded to those? And what
do you think their tendency has been recently in terms of
improved regulatory framework?
Mr. Rader. We are seeing a positive new era of transparency
within the agency, so my vote would be, yes, it is getting
better. We have constantly talked to the agency officials about
credit policy and process. We think we have a good dialogue
there.
However, we do not understand the vetting process. There
needs to be more clarity. And I believe the agency is intending
on providing that, and we are making slow progress.
Mr. Schrader. Good. Good, good.
I guess, Mr. Chair, I hope we kind of follow through on
that to make sure that that is occurring and work with both the
agency and the lenders out there.
Mr. Martinez, you talked a little bit about, as did Mr.
Marquette, about trying to improve our opportunities with
credit unions. They got left out of the Small Business Lending
Fund last cycle, if you will. And I was pretty disappointed
about that, because, as you have indicated, you also are, like
our community banks, very interested in getting this economy
back on track and our small businesses up and running.
And I was concerned about the testimony that, you know, Mr.
Marquette also talked about, of the 2,000 banks, credit unions
that are doing small-business lending, 500, almost 25 percent,
are at their cap. Could you guys talk a little bit more about
how important it is, as, you know, frankly, you have seen an
influx perhaps of new customers, that raising that small-
business cap might be?
And I don't want to take business away from one outfit, you
know. I think all boats should rise here, at this point in
time.
Mr. Marquette. We have seen a significant demand coming in.
And we, too, are at about 90 percent of our cap, so we have to
be more selective. We do that through pricing and be more
selective in terms of the loans we grant. But we are also
trying to expand the communities that we serve, too, and the
cap is an impediment.
The SBA programs are helpful, in that, again, the
guaranteed portion of the 7(a) programs don't count toward the
cap. But, again, the process that we go through, since we are
not a preferred lender, is very time-consuming, so it is very
burdensome to us. We have not been as successful as Mr.
Martinez in terms of getting expertise that specializes just in
SBA loans in our particular area, and that would be very
expensive for us to do.
So anything that SBA could do to help us streamline that
process and maybe have it work a little bit more efficiently,
like the 504 program, would be much helpful in terms of our
even expanded effort in that program.
Mr. Schrader. Mr. Martinez.
Mr. Martinez. Yes, thank you for the question.
We are seeing increased requests for SBA loans. There are
two programs that I mentioned, the SBA 504 refi program and the
First Mortgage Lien Pool program. Those two programs are very
important to us, and both of those sunset in September. The
refi program, for those businesses that their loan is becoming
due and their loan-to-value is upwards of 90 percent, the SBA
program is really the only product for them.
For our credit union, we are having to sell our 504s. We
have the sunset coming up in September for the First Mortgage
Lien Pool program. We are having to sell our 504s to the
secondary market just to give us room to create some room in
our cap. Unfortunately, it is only going to give us about 6
additional months at the rate that we are going.
But those programs allow for a little bit of levers to be
pulled, and I think that they are very important. If those
programs weren't there, we wouldn't be able to help businesses
that are refi-ing, and we would hit our cap sooner if the
pooling program goes away.
Mr. Schrader. Thank you.
Could I ask one more question real quick, Mr. Chairman?
Chairman Coffman. Yes, go ahead.
Mr. Schrader. I appreciate that.
Mr. Dixon, you talked about the loan enhancements. Everyone
has talked about the value, I think, a little bit of the credit
loan guarantees. Sometimes I get feedback from folks back home,
some of the lenders back home, that that is not as important. I
mean, you always want a sound loan; that is the real bottom
line.
But could you comment, real briefly, because I am over my
time limit, real briefly on how important those loan guarantees
are that are expiring, whether it is in the refi program or
whatever?
Mr. Dixon. Yeah, let me speak, Congressman, to the 504 refi
program. Our experience, in just talking with the CBA member
banks, is that program is continuing to gain momentum. It has
been a great tool to help small business in this interest-rate
environment. It allows them to get access to very attractive
capital. And we would really like to see that program extended.
We think it does nothing but gain momentum.
Mr. Schrader. Thank you very much.
Thank you, Mr. Chairman.
Chairman Coffman. Mr. Tipton of Colorado.
Mr. Tipton. I am fine, Mr. Chairman.
Chairman Coffman. Very well.
Let me, since they are going to call a vote soon--and if
anybody has any additional questions, I will come back around.
This is a question for all of you. Do you encourage small
businesses to apply for an SBA loan because of concerns that
banking regulators will question the loan if made
conventionally? Would anybody like to respond to that?
Mr. Martinez. I will comment.
When we have a business come in, we sit down and look at
them and explain all the loan options. We don't push them into
any particular loan. If they can go conventional, that is the
best product for them, and we go conventional. And then on the
SBA program, it is laying it out and not driving them into a
specific product because it is better for us.
Mr. Dixon. Congressman, I think we find that we let that
decision be made one client at a time as we look at a loan
request and decide if any of the SBA programs will make the
difference in getting that small business the credit that it
needs.
Mr. Rader. Mr. Chairman, I believe the best course of
action for our clients and our borrowers is to give them
financial options--so, conventional, 7(a), 504--making sure we
profile the borrower for what their needs are and where they
are going with their business. And so, we do not steer.
Chairman Coffman. Okay.
For additional questions then, Ms. Hahn of California.
Ms. Hahn. Thank you, Mr. Chairman.
Mr. Marquette, in your testimony, you talked about the
process that your credit union went through to begin offering
SBA loans, and you said new lenders were feeling like they were
on the bottom rung of the SBA priority list.
What do you think SBA could and should do to encourage, you
know, new lending partners out there in this quest that I think
we are all having to provide small businesses with more access
to capital?
Mr. Marquette. As I mentioned, we have been having
discussions with the SBA Administrator, Karen Mills. She has
been very open.
The issue is the 7(a) process. It seems that they are more
interested, in our perspective anyway, in the larger loans and
larger institutions and larger employers. In our particular
area, our niche is the smaller loans, the smaller employers.
About two-thirds of our business loans are to employers that
have less than 20 people working for them. So that is our
particular niche.
They could reach out more to smaller institutions. They
could ask those smaller institutions, what are the impediments,
what are the processes. We can't afford to put an SBA expert on
staff. We worked very closely with a community development
corporation to help us with the 7(a) program, and even with
their assistance it took us 1 year for the two S-7(a) programs
that we did.
We do, however, on the 504 programs, since we go through
the CDCs, they seem to have a better relationship with SBA in
terms of processing those loans and have been much more
successful in those.
Chairman Coffman. Thank you, Ms. Hahn.
Mr. West of Florida.
Mr. West. Last question. You brought up a lot of great
recommendations that you were discussing. Have you provided any
of those recommendations over to the SBA, Mr. Rader?
Mr. Rader. Yes, we have, Congressman.
Mr. West. Okay.
And the next thing: When the SBA--I know they have come up
with some new practices and new procedures. Do they send those
out to get maybe a buy-in or a comment from financial
institutions first and foremost? Or do you kind of get the, you
know, ``surprises are not just for birthdays'' effect?
Mr. Rader. As I have spoken in my testimony, the agency
could do a better job of giving us a better lead time when they
do make changes. We have to do a lot of training and investment
in education and develop risk controls for these programs. And
when we get a new SOP that is announced, for example, on May
25th with an effective date of June 1, it doesn't give us the
proper time to train our people to help our customers.
Mr. West. And last question: The preferred lending status,
do you find that is an easy status to attain? A little bit
difficult?
Do you understand how to attain that status? Across the
board.
Mr. Rader. Yes, we understand how the process works and how
the process doesn't work. So, yes.
Mr. Martinez. We are a fairly new preferred lender. We
started in 2008. And we were actually kind of cautious to go
into that preferred-lender status, so we could have gotten it
earlier than we did and felt comfortable with the process of
having SBA continue to look. So I don't think it was
burdensome. It was a decision that we made when we were ready
for it.
Mr. West. Okay.
Mr. Dixon.
Mr. Dixon. Congressman, we have been a preferred lender for
many years. I think we find it works well, and that status is,
you know, reviewed and renewed each year. But that process
works pretty smoothly for us.
Mr. Marquette. As I said, we are just new in the 7(a)
program, and our experience has been less than acceptable. So
we are still exploring it, and we will look into that in the
future.
Mr. West. Thank you, Mr. Chairman. I yield back.
Chairman Coffman. Ms. Hahn of California for an additional
question.
Ms. Hahn. I just wanted to follow up on what Congressman
West asked Mr. Rader.
Would it be possible for you to provide to the members of
this Subcommittee the list of the SOPs that you are encouraging
the SBA to look at? And then maybe we could follow up with the
Administrator to see where they are at, what is the status, and
if there is anything that we could do to follow up on that.
Mr. Rader. Absolutely. Wells Fargo can provide that.
I would also encourage the chair and Committee to check out
the National Association of Government Guaranteed Lenders
(NAGGL) Association recommendations, as well.
Ms. Hahn. Thank you.
Chairman Coffman. Very well. I want to thank all the
witnesses for testifying today.
For us to get this economy moving, it is going to take
small business. And for small business to lift us out and
create some jobs, it is going to take access to capital. And
you are all integral to that process, so thank you for what you
do.
The hearing is adjourned.
[Whereupon, at 11:00 a.m., the subcommittee was adjourned.]
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