[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
         PROPOSED AMENDMENTS TO THE 7(a) AND 504 LOAN PROGRAMS

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                     JUNE 24, 1999, WASHINGTON, DC

                               __________

                           Serial No. 106-21

                               __________

         Printed for the use of the Committee on Small Business



                    U.S. GOVERNMENT PRINTING OFFICE
60-813                      WASHINGTON : 1999



                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
MARY BONO, California                MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 24, 1999....................................     1

                               WITNESSES

Hochberg, Fred P., Deputy Administrator, U.S. Small Business 
  Administration.................................................     4
Giegel, John, Vice President, Congressional Relations, National 
  Association of Development Companies...........................     8
Wilkinson, Anthony R., President & CEO, National Association of 
  Government Guaranteed Lenders, Inc.............................    10
Faulk, Donna, Vice President, Prudential Securities..............    14

                                APPENDIX

Opening statements:
    Talent, Hon. James M.........................................    32
Prepared statements:
    Hochberg, Fred P.............................................    34
    Giegel, John.................................................    61
    Wilkinson, Anthony R.........................................    69
    Faulk, Donna.................................................    75


    HEARING ON PROPOSED AMENDMENTS TO THE 7(a) AND 504 LOAN PROGRAMS

                              ----------                              


                        THURSDAY, JUNE 24, 1999

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:07 a.m., in room 
2360, Rayburn Building, Hon. Jim Talent (chairman of the 
committee) presiding.
    Chairman Talent. Good morning, ladies and gentlemen, and 
welcome. Thank you for joining me this morning to examine the 
proposed changes to the 7(a) and 504 loan programs. I am 
certain that by working together we can continue to improve 
these vital programs and make them even more responsive to the 
needs of small businesses and lenders alike.
    The proposed changes to the 7(a) program merit a brief 
description. It is suggested that the maximum guarantee amount 
on a 7(a) loan be increased to $1 million from the 1988 limit 
of $750,000 in order to keep pace with inflation. A parallel 
proposal exists for the 504 program. Another proposal suggests 
the removal of the provision which reduced SBA's liability for 
accrued interest on defaulted loans since the provision's 
intended savings have failed to materialize.
    The 7(a) program is now facing a problem of early repayment 
of large loans which is jeopardizing the subsidy rate. The 
proposal before the committee seeks to remedy this problem by 
assessing a fee to the borrower or for prepayment within the 
first five years of a loan with a term in excess of 15 years. 
Another proposal seeks to stabilize the subsidy rate for the 
7(a) program at 1\1/4\ percent by requiring the administrator 
to adjust program fees.
    This is similar to the current stabilization process for 
the 504 program. I am especially interested in hearing our 
witnesses comment on these two proposals. They seem to me to 
have merit but I hope that the committee focuses on them and 
asks any questions that members may have. Also, there is a 
proposal to modify 7(a) rules which prohibit loans for passive 
investment. When we last reauthorized the 504 program, we 
modified a similar restriction in order to permit the financing 
of projects where less than 20 percent of its space will be 
rented out when the small business in question will occupy the 
remaining space. We need to discuss providing similar options 
to 7(a) borrowers.
    Allow me to also briefly describe the proposed changes to 
the 504 program. It is suggested that the maximum debenture 
size for public policy debentures be increased from 1 million 
to 1.3 million, and that women-owned businesses be owned to the 
categories qualifying for these debentures. Currently the 504 
program levies fees on the borrower, CDC and the participating 
bank. The bank pays a one-time fee whereas the borrower and CDC 
pay a percentage of the outstanding balance annually in order 
to provide operational funding for the 504 program.
    These fees sunset on October 1, 2000, and it is proposed 
that we continue them through October 1, 2003. Additionally, it 
is suggested that we grant permanent status to the preferred 
certified lender program which will otherwise terminate at the 
end of Fiscal Year 2000. Finally to address the problem of low 
recovery rates on defaulting 504 loans, it is proposed that a 
permanent program be created to handle the liquidation of those 
loans. This would replace a pilot program created in 1997 and 
gives qualified and experienced CDCs the authority to handle 
the liquidation of loans with the approval of the SBA.
    We have a number of witnesses, and I will introduce them 
later. First, of course, I will turn to my distinguished 
colleague, Ms. Velazquez for any opening comments she would 
like to make.
    [Mr. Talent's statement may be found in the appendix.]
    Ms. Velazquez. Mr. Chairman, first let me thank you for 
holding this hearing to examine proposed changes to the general 
business loan guarantee or 7(a) program and the 35 development 
company or 504 program. What we are doing today is updating and 
improving the 504 and the 7(a) loan programs to insure that 
they are run in a reasonable and thoughtful way. And today's 
hearing will present the committee with an opportunity to hear 
from the Small Business Administration, as well as the 
participants from each program on how to best accomplish this.
    7(a) and 504 are two of the most important small business 
loan programs administered by the SBA. They represent access to 
capital for America's small businesses and access to capital 
means access to opportunity. Although SBA administers numerous 
programs that provide financial and technical assistance to 
small firms, the 7(a) program is the agency's flagship loan 
program. It is far and away the agency's largest and most 
important both in terms of number of loans and program level 
supported.
    Under 7(a) loan guarantees are provided to small businesses 
that have been unsuccessful in obtaining private financing on 
reasonable terms. The profits from a 7(a) loan may be used for 
virtually any business purpose and have made the difference for 
countless entrepreneurs. Additionally, under 7(a) loans up to 
$100,000 are guaranteed up to 80 percent and loans over 
$100,000 are guaranteed up to 75 percent with the average 
guarantee being close to 76 percent. Nearly 7,000 banks and 
non-bank lenders are now approved to participate in the 
program.
    Since the program's inception, SBA has made or guaranteed 
more than 600,000 7(a) loans totaling close to $80 billion. The 
7(a) program addresses the financing needs of small firms that 
are often not met in the private capital markets. The reason 
for this is that commercial lenders often do not provide loans 
for the purposes in the amounts and with the terms required by 
small business borrowers.
    Equally important, the 504 program serves economic 
development. Since 1980 more than $20 billion in fixed asset 
financing for over 25,000 small business concerns has been 
arranged by 35 development companies under 504. This represents 
$7.4 billion in CDC debenture authorizations and $12.6 billion 
in private sector and other financing. Currently the 504 
program is supported completely by its fee system, and, 
therefore, requires no direct appropriations from Congress.
    It is my hope that we can work together to maintain the 
zero net subsidy level for the 504 program. I can attest to the 
fact that the 504 program works. Just this week I visited a 504 
loan recipient in my district. This business, an automobile 
dealership, will use the 504 loans to construct a new service 
center. This will enable the dealership to better meet the 
needs of its customers, and as a result expand its business, 
and it will also bring up to 50 new jobs to the community. This 
is why it is so crucial.
    The businesses have access to the capital they need. When a 
business is able to expand everyone benefits. Although 
authorization for the 7(a) and 504 programs does not expire 
until October 1, 2000, it is important that we begin the 
process of reviewing these two programs now. The reason is that 
both lenders and potential borrowers need to have some 
assurance that the programs will continue to be authorized 
after October of 2000 and that it will be authorized at 
anadequate funding level. Therefore, this hearing is timely.
    Mr. Chairman, I look forward to working with you as we move 
to reauthorize these two vital loan programs, programs that 
should be held out as an example of programs where taxpayers 
can see their dollars doing effective work. Thank you, Mr. 
Chairman.
    Chairman Talent. I thank the gentlelady as always. We have 
one panel today, and I do hope that members will focus, as I am 
going to have to leave for a few minutes, but these are 
important proposed changes and I would just really appreciate 
the members' attention to them. Our first witness is the 
Honorable Fred Hochberg, the Deputy Administrator for the Small 
Business Administration. It is a pleasure to have Mr. Hochberg 
with us, and before he testifies, I do feel I have to put 
something on the record.
    We have had a pattern of problems from the agency with 
regard to the committee's rules regarding submissions of 
statements 48 hours before committee hearings. I am, as members 
know, the farthest thing from a stickler for formality. At the 
same time we do have to assume, and this may be more an 
abstraction than a reality, but we have to assume that somebody 
here might actually want to read the statement before we have a 
hearing, and we can't do that if we get it the night before.
    This is a 26-page statement that we received I think at 
8:00 last night. So I know this is well below your pay grade 
and everybody needs to know Mr. Hochberg came up and apologized 
to me beforehand. So I would just ask the agency, if in the 
future, if it could get these statements in, and at least give 
us 24 hours if not the 48, and I would be grateful for that and 
you could redeem yourself considerably, Mr. Hochberg, by 
summarizing your 26-page statement.
    And I do appreciate your willingness, members need to know 
that Mr. Hochberg agreed to be on a panel with others and that 
was really for our convenience, so that we would not have to 
have two panels and two rounds of questioning.
    Mr. Hochberg, it is a pleasure to have you here, sir.

STATEMENT OF HON. FRED P. HOCHBERG, DEPUTY ADMINISTRATOR, SMALL 
                    BUSINESS ADMINISTRATION

    Mr. Hochberg. Thank you, Mr. Chairman. Congresswoman 
Velazquez and members of the Committee, and I do want to 
apologize for the lateness of our testimony. It was inexcusable 
and we will do better next time. Thank you for the opportunity 
to discuss the credit needs of America's small businesses. In 
my oral testimony I would like to touch briefly on some of the 
program initiatives SBA has developed to meet these needs.
    I will also discuss the legislative proposals the Committee 
is considering. Both are addressed at length in my written 
testimony which I ask to be inserted into the record. The 
current budget environment makes it especially important that 
the agency operate in the most efficient and cost-effective 
manner possible. In its 7(a) and 504 programs, SBA is now 
delegating greater authority to its lending partners than ever 
before.
    Today, with 19 percent fewer employees than in 1992, we 
rely on the credit decisions of our lending partners for about 
75 percent of our loan approvals. This means that we must have 
the oversight tools necessary to ensure that we can better 
monitor the performance of our lending partners to protect the 
taxpayers' dollars. To this end, SBA's Fiscal Year 2000 budget 
request includes $8 million to continue the systems 
modernization efforts SBA began in Fiscal Year 1998.
    When completed, we expect the system will enable us to 
better identify and manage portfolio risk. While improving the 
efficiency of the products we deliver is vital, we must also 
ensure that our products are tailored to meet the needs of the 
nation's small business community. One way that SBA has 
attempted to address this challenge is by expanding the range 
of equity vehicles and loan products and services. As you know, 
SBA has developed products from Microloans to LowDoc to SBA 
Express to increase the availability of smaller sized loans.
    And of course our traditional 7(a) and 504 products are 
available to meet the larger capital needs of small businesses. 
SBA is constantly seeking new ways to make it faster and easier 
for small businesses to gain access to capital, yet small 
businesses, particularly newly established companies, tell us 
that the type of credit that continues to be the most difficult 
to get is in small amounts, typically up to $150,000.
    Since 1953, SBA's mandate from Congress has been to fill 
credit gaps and to remove the barriers to entry faced by 
America's small businesses. Recently, Federal Reserve Chairman 
Alan Greenspan noted serious gaps still exist in access to 
capital for small businesses, especially for minority loan 
applicants. While the SBA has a very good overall record of 
increasing access to capital, I am convinced that we need to do 
more, especially for minority and women-owned firms.
    To this end, SBA has been proactively reaching out to these 
constituencies. We have over 80 partnership agreements in place 
with business groups across the country designed to increase 
access to SBA's programs for all segments of society. Despite 
these best efforts, the percentages of SBA lending to these 
communities is simply not adequate. To remedy this, in the 
Fiscal Year 2000 budget, the President announced his New 
Markets initiative.
    The initiative is a sweeping new public/private partnership 
designed to boost business opportunities and to meet the unmet 
needs of small businesses. One of SBA's proposed New Markets 
initiatives is a limited, New Markets Lending Company pilot 
program. Under this pilot, SBA will approve a small group of 
lenders to provide loans specifically focused on the New 
Markets small business segment.
    Chairman Greenspan also noted that increased access to 
loans is not the sole solution to meeting the capital needs of 
small businesses. In various stages of development, many small 
businesses are not bankable. In many circumstances, small 
businesses need more patient capital in the form of equity or 
subordinated debt. To address this problem, SBA's Fiscal Year 
2000 budget includes a number of proposals developed in 
consultation with venture capital experts to make it more 
attractive for Small Business Investment Companies and 
specialized SBICs to invest in distressed rural and urban 
areas.
    The low and moderate income investment initiative 
compliments our existing SBIC program by offering a special 
Low-and-Moderate Income (LMI) debenture. The new tool allows 
SBICs to defer interest payments on LMI debentures for five 
years. To expand equity investments in LMI areas, technical 
assistance may also be needed. To do this, the SBA is proposing 
the creation of New Market Venture Capital Companies that will 
target investments in the range of $50,000 to $300,000. Modeled 
on existing SBIC programs, the New Markets Venture Capital 
Companies will form a new and separate venture capital network. 
The program will offer venture capital solutions along with 
hands-on technical assistance in low and moderate income areas.
    Now let me turn to the proposed legislative changes to the 
7(a) and 504 program. We are interested in the proposed 
legislative changes to the 7(a) and 504 programs provided that 
capital is made available to all small businesses, especially 
those smaller-sized businesses that are just starting out.
    We are concerned that the proposals being discussed today 
appear to be directed towards the businesses and loans at the 
larger end of the spectrum. First, it has been proposed that 
the loan size be increased for both 7(a) and 504 programs. For 
7(a) the proposal increases the maximum amount of loans that 
SBA can guarantee from its current $750,000 limit to $1 
million. Coupled with this change would be the establishment, 
for the first time, of a maximum loan size of $2 million.
    We feel that it is critical that consideration of any 
increase in loan size be coupled with the incentives we have 
proposed to encourage lenders to increase the availability of 
funds to smaller borrowers.
    Chairman Talent. Fred, you, or if you have staff here who 
would prefer to have them do it, tell us what the average 
guarantee rate is now and what the range is on these loans. Is 
it still about like--if one of the other witnesses wants to 
jump in here. I want to frame this for the members while this 
testimony is still fresh in their minds. The average guarantee 
was about 75----
    Mr. Wilkinson. Between 72 and 73.
    Chairman Talent. Okay, 72, 73 percent but that is an 
average so some loans the government guarantees less and some 
it guarantees more, is that right, Tony?
    Mr. Wilkinson. In the fiscal 2000 model it is 72.88.
    Chairman Talent. Okay. In some cases the government will 
guarantee more, in some cases less, is that right?
    Mr. Hochberg. Up to 90 percent.
    Chairman Talent. Okay. I say this because as Mr. Hochberg 
testified correctly, we are talking about a cap of $2 million 
and a cap in the guarantee of $1 million, and there are cases 
where the government may only guarantee about 50 percent of the 
loan. That is worked out between the lender and the SBA on a 
per loan basis, is that how this----
    Mr. Hochberg. On loans over $150,000 the maximum guarantee 
is 75 percent.
    Mr. Wilkinson. That is correct, if the loan size stops at 
$1 million. You can do a $1.5 million loan with a 50 percent 
guarantee.
    Chairman Talent. Okay.
    Mr. Wilkinson. But the maximum guarantee portion cannot 
exceed $750,000 today.
    Chairman Talent. Okay. But the minimum, it does sometimes 
go less than that obviously, a guarantee less than that. Is 
that worked out on a per loan basis?
    Mr. Wilkinson. Well, again there have been loans in the 
past made for $3 million with a 25 percent guarantee.
    Chairman Talent. Okay. And again that is worked out on a 
per loan basis.
    Mr. Hochberg. Well, I think what Tony is saying is that on 
the $750,000 we can guarantee up to $750,000 so on a $3 million 
loan only 25 percent is guaranteed.
    Chairman Talent. Right. You can't go higher than that. I 
see.
    Mr. Hochberg. But we can only guarantee up to $750,000.
    Chairman Talent. I am sorry, but this clears something up 
for me. I ask the committee's indulgence. If it is a lower 
amount total than the loan, will you always guarantee like 
around 72, 73 percent?
    Mr. Hochberg. With the SBA Express loans, which are 
primarily done by preferred lenders, we only guarantee 50 
percent. The lender makes the credit decision using its own 
forms and processing. So we say in exchange for that expedited 
consideration, we will only give them a 50 percent guarantee.
    Chairman Talent. Okay. Thank you. I appreciate your 
clearing that up. You can continue.
    Mr. Hochberg. We feel that it is critical that 
consideration of any increase in loan size be coupled with the 
incentives we have proposed to encourage lenders to increase 
the availability of funds for smaller borrowers. Furthermore, 
SBA believes it is important for us to assess the possible 
adverse impact that the proposed increase would have on the 
availability of 7(a) and 504 program authority for Fiscal Years 
1999 and 2000. SBA continues to support the present Fiscal Year 
2000 budget which does not take into account these proposed 
changes.
    The second proposal is the repeal of the mandate that the 
interest rate be reduced by 1 percent when a lender requests 
that SBA honor its guarantee of a defaulted loan. SBA would 
welcome additional discussion of this proposal and its 
potential impact with this Committee, OMB, and the lending 
community.
    The next provision will allow the establishment of a 
limited prepayment penalty. While SBA understands the basis for 
this request, we feel if such authority is provided it should 
include a provision allowing SBA to repeal the prepayment 
penalty authority if warranted due to a change in economic 
conditions. We also feel that the Committee, SBA and our 
lenders should give consideration to alternatives to the 
prepayment proposal under consideration. These include for 
examples, making the fee optional for lenders, allowing the fee 
only on loans with fixed interest rates, or allowing the 
borrower to elect either a prepayment penalty or an up-front 
fee.
    The fourth 7(a) legislative proposal is for the 
establishment of a subsidy rate floor of 1.25 percent. After 
consultation with the Office of Management and Budget (OMB), 
SBA believes that it must object to any proposal that would 
legislate a subsidy rate floor. The Chief Financial Officer Act 
requires every Federal agency to review its fee structure every 
year. If continued performance warrants it, SBA looks forward 
to being able to consider fee adjustments on their individual 
merits. We support the final 7(a) provision regarding the 
leasing out of an increased portion of the property consistent 
with the regulations that govern 504 loans.
    Let me now turn to the provisions of the proposal 
addressing SBA's 504 program, a number of which we support. SBA 
supports the first 504 legislative provision which would 
increase debenture size. The second 504 proposed change is to 
include women-owned business development within the 504 
program. We agree with this proposal. Furthermore, we believe 
veteran-owned business development should also be included 
among the program's public policy goals.
    SBA agrees with the proposal to extend the sunset date of 
the 504 guarantee fee and the proposal to make the Premier 
Certified Lender Program (PCLP) permanent with some appropriate 
revisions. Under the next proposal SBA would be prohibited from 
selling any defaulted PCLP loans in an asset sale unless the 
responsible Certified Development Company (CDC) consented to 
the sale. SBA cannot support this. Asset sales are not intended 
to be distress sales. Given the critical importance of the 
agency's asset sales efforts, we do not believe that SBA should 
be legislatively restricted from including any class of loans 
in its sales.
    Under the final provision, the current CDC liquidation 
pilot would be expanded and made permanent. An evaluation 
report is due to Congress by September 30, 1999. Preliminary 
indications regarding the success of the pilot are encouraging. 
Yet, we don't have the information and analysis necessary to 
make a definitive conclusion. With that said, however, the 
agency doesbelieve that it is appropriate to expand the pilot 
and make it permanent with appropriate safeguards.
    In summary, SBA finds that many of the recommended 
legislative changes before this Committee have merit. We 
believe, however, it is important to the committee, the SBA and 
the lending community to work together to ensure that the 
proposals appropriately address the issues before us and that 
they do not result in any negative consequences.
    We look forward to working with you on these issues. I very 
much appreciate your invitation for me to appear before you 
today. I would be happy to respond to any questions you may 
have.
    [Mr. Hochberg's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Hochberg. Those were very 
helpful comments on the legislative proposals. I appreciate 
that very much. Mr. John Giegel, who is the president of the 
Wisconsin Business Development Finance Corporation. I am just 
going to go in order across the table.

  STATEMENT OF JOHN M. GIEGEL, PRESIDENT, WISCONSIN BUSINESS 
                   DEVELOPMENT FINANCE CORP.

    Mr. Giegel. Good morning, Mr. Chairman, and members of the 
committee. If it pleases the Chairman, I would ask that my 
written statement be inserted into the record. I am John 
Giegel. I serve as Vice President for Congressional Relations 
for the National Association of Development Companies, the 
trade association for SBA 504 Certified Development Companies.
    NADCO represents 250 Certified Development Companies who 
provided 95 percent of all SBA 504 financing to small 
businesses during 1998. No other program can claim to have 
created over 500,000 jobs as the 504 program has done. I am 
also, by the way, the president and founder of Wisconsin 
Business Development Finance Corporation, Wisconsin statewide 
504 Certified Development Company.
    We have provided over $300 million in 504 and 503 financing 
to over 1,000 businesses since 1981. NADCO would like to thank 
you, Mr. Chairman, ranking member and the entire committee for 
your continued support of the 504 program and the CDC industry. 
It has been clear to us that the committee recognizes the value 
of the program to the small business community.
    I come before you today with two purposes. First, we 
believe that there are areas in which the 504 program can be 
improved and extended to provide a greater scope of financial 
assistance to small businesses. Secondly, we feel strongly that 
action must be taken to deal with 504 loan recovery and 
portfolio loss problems. NADCO proposes to address these two 
issues through a legislative proposal we have provided to the 
committee, and I would like to summarize that proposal and its 
impact.
    For the last 11 years, the maximum 504 debenture has been 
limited to $750,000. In 1990, 504 debentures impacting national 
objectives such as rural development were raised to $1 million. 
Given the fact, however, that 504 is targeted to real estate 
and major equipment purchases the rising cost of land, 
construction and machinery have impaired the ability of 504 
investment to assist the small business owner.
    Across the country 30 to 50 percent price increases over 
the past decade is commonplace. Therefore, we propose that the 
basic debenture size be increased to reflect at least the 
modest increase indicated by the Consumer Price Index to $1 
million for regular 504 loans and to $1.3 million for projects 
with national objectives. Also, one of the fastest growing 
sectors of the business sectors is the woman-owned business. 
Many are at the stage requiring costly real estate and 
equipment to achieve the next stage of development.
    We ask that the committee to support women-owned businesses 
by recognizing them as a national policy objective. I might 
also add that we would have no objection to including veterans 
as a national policy objective too. We also urge the committee 
to insure that adequate 504 guarantee authority and the 
necessary fees be reauthorized in this session, namely, $3.5 
billion in FY 2001, $4 billion in FY 2002, $4.5 billion in FY 
2003. The foregoing have addressed improving and extending the 
504. Now I will summarize recommendations to improve 504 loan 
recoveries.
    As noted in SBA's FY 2000 budget, loan defaults have 
dropped from 18.9 percent to 12 percent in four years. CDCs and 
the SBA are delivering an improved program and the Office of 
Management and Budget is better able to forecast default rates, 
so costs have declined for the small business owner. However, 
the same budget also states that recoveries on 504s are in fact 
much less than the 44 percent previously thought and perhaps as 
low as 23 percent.
    We believe that this trend must be addressed and reversed 
now. Delay will have a serious impact on the 504 program and 
its availability to the small business owner. Since 1994 
legislation has authorized the Premier Certified Lender 
Program. The program allows experienced CDCs to underwrite 504 
loans without SBA provided that they reimburse SBA for up to 10 
percent of any debenture loss. This program has operated for 
nearly six years now, reducing processing time and SBA 
personnel time and has not resulted in any increased losses to 
the government.
    Chairman Talent. Mr. Giegel, I want to emphasize something 
here just so the members here understand the potential problem. 
The default rate is going down but the amount that we are 
recovering when there is a default is also going down 
significantly which means that this being pretty good economic 
times we are okay but if we hit some bad economic times we are 
going to have to recover something on these defaults or this 
program is going to be in trouble. I mean is that a pretty good 
summary of what you are saying?
    Mr. Giegel. Exactly, Mr. Chairman.
    Chairman Talent. So you are saying the committee needs to 
figure out and the SBA needs to figure out why we are not 
recovering on these defaults and we need to fix it before 
something happens to the economy.
    Mr. Giegel. Correct.
    Chairman Talent. Which we all hope, you know, we all hope 
the business cycle has been repealed but none of us can count 
on that. I want the members to focus on that because we need to 
do something about it. Go ahead.
    Mr. Giegel. One reason why CDCs do not participate in the 
program is because of SBA's reluctance to allow the Premier 
Lender to be able fully to carry out recovery efforts. 
Therefore, we do ask that the committee act now to make the 
Premier Certified Lender Program permanent and to direct SBA to 
provide comprehensive Premier regulations within 120 days.
    Finally, Mr. Chairman, in 1996 legislation mandated a loan 
liquidation pilot program under which qualified CDCs would 
receive a delegation of authority from SBA to liquidate but not 
litigate loan recoveries. CDCs recognizes that with the 
prospects of government downsizing, we need to step up to 
safeguard the 504 program. We recognize that SBA portfolio 
personnel were immensely more experienced in liquidation but 
even in 1996 caseloads per worker per officemeant long delays.
    In liquidation time is money. CDCs have more resources for 
expeditious recovery and can concentrate on many fewer cases. 
Preliminary results are favorable and many CDCs in the pilot 
program have already shown the ability to perform rapid 
professional workouts in asset recoveries. We strongly urge the 
committee to make permanent the liquidation pilot and endow 
capable CDCs with full liquidation and litigation authority.
    As you can see, Mr. Chairman, there are many issues to be 
addressed for the 504 program if we are to both improve it and 
stabilize the declining loan recovery. NADCO supports the 
legislative proposal provided by your staff. However, we urge 
you to include in your proposal our proposed authorization 
levels for the succeeding three years. We strongly ask the 
committee to take up consideration of our legislative package 
during this session, and we thank you for allowing us to come 
before you today to make comments. CDCs are major stakeholders 
in the 504 program. We want to do everything we can to insure 
its long-term viability. I would be pleased to answer any 
questions.
    [Mr. Geigel's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Giegel. When the questions 
time comes, I am going to ask you to comment on Mr. Hochberg's 
comments about the proposal that we stick the agency's ability 
to sell defaulted loans. The agency is very strongly opposed to 
that. Our next witness is Mr. Wilkinson, Anthony R. Wilkinson, 
President and Chief Executive Officer of NAGGL. Tony, go ahead.

    STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND CHIEF 
     EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF GOVERNMENT 
                       GUARANTEED LENDERS

    Mr. Wilkinson. Thank you, Mr. Chairman, Ms. Velazquez, and 
other members of the committee. So Mr. Hochberg does not feel 
alone today, let me issue my apology as well, because my 
disclosure statement was not attached to my testimony, so I 
thought I would just do that verbally on the record that 
neither I nor NAGGL have received any federal----
    Chairman Talent. Misery has company. That is fine.
    Mr. Wilkinson. We have no federal grants or contracts. We 
have signed a co-sponsorship agreement with the SBA whereby in 
ten cities across the country this year we are putting on 
training for lending to new markets. With that I will get into 
my testimony. I want to thank you for holding this hearing 
today. I want to commend you for your efforts to move forward 
this year on a reauthorization bill for the SBA programs.
    Earlier this year NAGGL shared with both the majority and 
minority staff of the committee and with the SBA our 
association's proposed legislative package and I would like to 
briefly go through those. First, as has been mentioned, we are 
proposing increasing the maximum guarantee on an SBA 7(a) loan 
from $750,000 to $1 million. The last time this number was 
changed was in 1988 and just using the Consumer Price Index 
from the first of 1988 to the first of 1998, that amount would 
have increased to in excess of $1,050,000 and if you apply 
projected CPI increases to the first of 2000 we would probably 
get closer to a $1.1 million but our recommendation is to 
increase the maximum guarantee up to $1 million.
    This increase in the maximum amount guaranteed would likely 
result in some new loan demand and we estimate that that 
additional demand would be in the range of $400 million per 
year. We also point out that this proposal would have a 
positive subsidy rate impact since these loans are subject to 
the highest tier of guarantee fee which is 3.875 and thus will 
generate additional cash flow into the subsidy model hence 
reducing the subsidy rate.
    Along with the $1 million guarantee, we propose capping the 
maximum loan size at $2 million. This too should help control 
loan program usage and help cover some of the demand increase 
that would happen with the $1 million guarantee. Next we need 
to deal with a prepayment issue. A substantial number of 
borrowers are obtaining long-term SBA financing but then 
prepaying it during the first few years after obtaining a loan.
    NAGGL is concerned about this. We believe that if the 
prepayment problem continues there could be serious policy 
consequences. A substantial portion of the income received by 
SBA on subsidy loans comes from a 50 basis point fee on the 
outstanding balance of the loan. If prepayments continue, the 
income to the government declines. That means the value of that 
50 basis point fee in the subsidy model would decrease and 
future program users could have to absorb higher fees or we 
would be asking Congress for more money to hit a certain 
program level.
    NAGGL believes that the cost burden of prepayments should 
be borne by those who choose to prepay, not on future program 
users. Our proposal is to establish a prepayment penalty. This 
penalty would be payable to the SBA, not to an investor, not to 
the lender, but to the SBA by a borrower who elects to make 
within the first five years of the loan an excessive prepayment 
on a long-term loan, and we are saying a long-term loan being a 
loan with an original maturity of 15 years or more.
    The phrase excessive prepayment would mean an amount in 
excess of 20 percent of the outstanding loan balance in any 
calendar year. So a borrower could still pay down extra amounts 
over the regular scheduled principal as long as they did not 
pay more than 20 percent in any one year. The rate of this fee 
would be determined by the date of prepayment, 5 percent in the 
first year, 4 percent in the second year, 3 percent in the 
third year, 2 percent in the fourth year, and 1 percent in the 
fifth year, and then after the fifth year there would be no 
prepayment penalty.
    Prepayments on conventional commercial loans both fixed 
rate and variable rate are common. Furthermore, we note that 
SBA's 504 loan program has a prepayment penalty and that the 
Business and Industry Loan Program in the Rural Development 
Division of the Department of Agriculture also provides for a 
prepayment penalty. We believe that this proposal is a sound 
one. It is in the interest of the program and in the interest 
of future borrowers as well.
    Chairman Talent. Mr. Wilkinson, could you take a minute 
because this is a proposal that I want the committee to focus 
on. Give us a concrete example of the kind of prepayment abuse, 
if we can call it that, that you believe is now occurring. Can 
you do that off the top of your head, a hypothetical situation?
    Mr. Wilkinson. A typical transaction would be a borrower 
obtains a 20- to 25-year 7(a) real estate loan that after two 
to three years another lender comes along and offers to 
refinance at different terms, and this is happening more often 
than we have seen in the past. Before the institution of the 50 
basis point fee it really didn't matter. Now those prepayments 
have an impact on the subsidy model and we need to address 
that.
    Chairman Talent. All right. Go ahead.
    Mr. Wilkinson. NAGGL believes that it is time, as further 
reductions are made in the 7(a) subsidy rate, to begin to 
reduce program fees. Currently, there is a one-time guarantee 
feeimposed on the borrower, the amount of which is determined 
by the size of the loan.
    Chairman Talent. Let me jump in a second because--I am 
sorry for the committee but I really want the committee to 
focus on this and I want to make sure I understand it. That 50-
point basis fee is the new annual fee, not just the up-front 
fee, which is my question because that is already paid and gone 
but----
    Mr. Wilkinson. 50 basis points would mean a half percent 
per year.
    Chairman Talent. All right.
    Mr. Wilkinson. Paid on the balance of the loan.
    Chairman Talent. And the subsidy rate is calculated on a 
certain amount of receipts from those basis points and when 
they prepay they don't have to pay the basis points so that 
screws the model up.
    Mr. Wilkinson. The model assumes a certain level of 
maturity in the loans and if those maturities don't materialize 
and are actually shorter then the net present value of that 
half percent per year is going to shrink.
    Chairman Talent. Okay. I am going to ask you what you think 
of Mr. Hochberg's suggestions for alternatives to try and 
control that so be thinking about that when you finish your 
testimony. I will be quiet and let you all testify. Go ahead.
    Mr. Wilkinson. Back on fees, NAGGL believes it is time, as 
further reductions are made in the 7(a) subsidy rate to begin 
reducing program fees. Currently, there is a one-time fee 
imposed on the borrower, the amount of which is determined by 
the size of the loan. Except for loans with guaranteed portions 
of $80,000 or less which have a 2 percent guarantee fee, 
borrowers are required to pay 3 percent on the first $250,000 
guaranteed, 3.5 on the second $250,000, and 3.875 on the 
amounts above $500,000 guaranteed.
    In addition, as we discussed, there is an ongoing half 
percent per annum fee on the outstanding balance of the loan 
that is paid by the lender for the life of the loan. In recent 
years, the 7(a) subsidy rate has fallen due to improved 
underwriting and program improvements. However, federal funding 
for the program has also declined and hence program 
participants have reaped no benefits from an improving program, 
and we believe that borrowers should receive some of the 
benefits and that it is time to begin to look at reducing 
program fees.
    Accordingly, we have proposed establishing a 1\1/4\ percent 
subsidy rate floor. We do not view this as legislating a 
subsidy rate but rather the subsidy rate would continue to be 
calculated as normal and if it fell below a subsidy rate target 
then the administrator at SBA would start reducing fees so that 
the subsidy rate would move back up to the 1\1/4\ percent 
target.
    If broker performance continues to improve or Congress 
enacts our legislative proposals for the increased loan size or 
prepayment penalty there will be additional cash flow for the 
government and we believe SBA should be directed to begin a 
staggered reduction in the amount of fees paid by borrowers. 
First, as monies would be available, we think the rate on the 
first $250,000 guarantees should be reduced to 2 percent. As 
more money becomes available, that the second $250,000 
guarantees could be reduced to 3.
    The amounts over $500,000 at some point in time could be 
reduced to 3\1/2\, and way down the road we could take a look 
at reducing the 50 basis point lender fee. These initiatives 
are interrelated in that they together would help eliminate 
program abuse while enhancing program use for future borrowers. 
We have three other legislative recommendations. First, in 1996 
as part of the changes designed to reduce the 7(a) subsidy rate 
legislation was enacted to reduce the amount of the claim 
against SBA in the event a loan defaulted. We call this the 
default loan provision.
    We thought this would reduce the subsidy rate. It has not 
and very simply the cost of compliance far outweighs any 
benefit we are getting and we ask that this be repealed. 
Second, we ask that the 7(a) program be allowed the same 
leasing provisions that were passed in the 504 program in 1997. 
And, third, we would recommend the following authorization 
levels be included in your reauthorization bill, $14.5 billion 
in fiscal 2001, $15 billion in fiscal 2002, and $16 billion in 
fiscal 2003.
    And we would ask you to note that we are recommending 
flatlining the authorization level from fiscal 2000 to 2001 as 
Congress has already authorized a $14.5 billion program level 
for fiscal 2000. Thank you, Mr. Chairman, and I will be happy 
to answer any questions.
    [Mr. Wilkinson's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Wilkinson. And our last 
witness is Ms. Donna Faulk, who is the Chair of the Government 
Business and Loan Committee of the Bond Market Association, 
also Vice President of Prudential Securities, and we appreciate 
your taking the time to come down and give us your testimony, 
Ms. Faulk.

 STATEMENT OF DONNA FAULK, CHAIR, GOVERNMENT BUSINESS AND LOAN 
             COMMITTEE, THE BOND MARKET ASSOCIATION

    Ms. Faulk. Thank you, Chairman Talent. I appreciate the 
opportunity to be here this morning to discuss the possible 
improvements to the SBA's section 7(a) guaranteed loan program. 
I am the Chair of the Government Business Loan Committee of the 
Bond Market Association. This association represents both banks 
and dealer firms who are active participants in the bond 
markets. Our particular committee, the Government Business Loan 
Committee, is composed of representatives from firms that are 
active in the secondary market for loans guaranteed by the SBA 
section 7(a) program and for the securities that are backed by 
these loans.
    We believe the 7(a) program continues to accomplish its 
intended goal of providing long-term financing for the small 
businesses who otherwise will not be able to find or qualify 
for term financing. The program generally operates efficiently 
and soundly. An active and robust secondary market in 7(a) 
loans has been and remains a key contributor and facilitator to 
the success of the 7(a) program.
    As long as investors continue to view 7(a) loans as sound 
investments, they will continue to provide capital to the 
program at attractive terms for borrowers. As well as the 7(a) 
program functions there is always room for improvement. We 
strongly support the draft legislation containing proposed 
changes in the 7(a) program. We especially support the proposal 
for modest graduated prepayment charges on the 7(a) loans.
    We believe that the prepayment proposal would strengthen 
this program and bring it more in line with Congress' original 
intent. The main beneficiaries for this prepayment proposal 
would be the small business borrowers whom the program is 
designed to assist. In a program like 7(a) prepayments can in 
some cases be a sign of success. If a small business meets with 
unanticipated success it may be in a position to repay its 
debts earlier than expected.
    However, we are seeing an alarming rate of prepayments in 
the 7(a) loans that suggest not success but misuse. It is 
becoming increasingly common for 7(a) borrowers to pay off 15 
to 25-year loans in the first few months, not the first few 
years, the first few months, of their terms. This is directly 
counter to the intended goals of this program. These prepayment 
patterns alsothreaten the program's efficiency and viability 
for borrowers by raising risks for loan investors.
    As investors perceive the 7(a) loans as subject to 
extraordinary prepayment risks, they will demand higher rates 
of return as compensation. In the end, small businesses will 
suffer through higher financing costs. The prepayment proposal 
contained in this draft legislation would provide several 
benefits. First, it would discourage early prepayments on 7(a) 
loans without penalizing the true small business borrower who 
as a result of his success will be able to prepay his loans 
later in their terms.
    Second, it would help insure that Congress' intent in 
reauthorizing the 7(a) program to provide long-term financing 
for the needy small business is met. Third, it would in the 
end, reduce costs for small business borrowers. We have seen 
this effect in most lending markets when prepayment charges are 
introduced, interest rates on loans fall because investors 
perceive the loans as less risky. Finally, the prepayment 
proposal will help address the most troubling aspects of SBA's 
treatment of premium warranty refund payments.
    We believe the prepayment proposal contained in the draft 
legislation would be a reasonable and welcome improvement to 
the 7(a) program. We urge this committee to adopt the proposal. 
Thank you for the opportunity to hear me today. I would be 
happy to answer any questions.
    [Ms. Faulk's statement may be found in the appendix.]
    Chairman Talent. All right. I thank the witnesses. Let me 
just ask a couple questions before recognizing the ranking 
member. Fred, I know you are concerned about with regard to the 
increase in the guarantee amount to keep pace with inflation, 
that it may have a tendency towards encouraging larger loans 
which is moving in the opposite direction than the agency 
wants, and I agree.
    Now how does the cap on the total size of the loan affect 
your consideration, and that seems to me to be kind of a 
reasonable trade-off. We increase the amount that can be 
guaranteed but cap the total amount at $2 million because right 
now there are loans above $2 million so at least we get rid of 
those big real estate loans and that sort of thing. What is 
your feeling about that as a trade-off?
    Mr. Hochberg. Well, Mr. Chairman, the cap of $2 million 
certainly is a help and a move in the right direction.
    We don't have a real objection to the $1 million level. Our 
concern is whether it can be coupled with enough incentives to 
assist smaller borrowers. Our proposal to help smaller 
borrowers with credit amounts up to $150,000 would reduce the 
fee to these borrowers by $1,000 and would reduce that ongoing 
fee we talked about from 50 basis points to 30. It would also 
reduce the ongoing fee to the bank by about $300 in the first 
year.
    So as long as we have provisions to assist those seeking to 
get these more difficult to obtain smaller loans, we don't have 
an objection provided it is within our budget proposal for this 
year. Our projections of how much we need for Fiscal Year 2000 
did not take into account doing $1 million loans.
    Chairman Talent. Sure. That is a very reasonable concern. 
What about that, Mr. Wilkinson? I mean, first of all, is a 
possible solution to that to postpone implementation of the 
increase until after this Fiscal Year so that we don't have 
those concerns? Do you think that is necessary, number one. 
Number two, what about Mr. Hochberg's statement regarding 
incentives for the smaller loans as part of this? Do you want 
to comment on that?
    Mr. Wilkinson. We would be happy to delay implementation 
until the first of the next Fiscal Year. NAGGL has been front 
and center in each of the discussions to talk about incentives 
for small loans. I would be remiss if I didn't take the 
opportunity to say one of the biggest barriers we have in 
coming up with incentives on small loans is our subsidy model, 
and the overestimate of default that it wouldn't be as 
continually used.
    And I will take us back to 1997 where we started out with a 
subsidy rate estimate of 1.93 and a default rate of in excess 
of 15 percent. That default estimate is now already down to 10 
or below and the subsidy rate is now predicted to be .44. So we 
have got the OMB side of the Administration taking money away 
from us at a time when we are trying to come up with 
incentives. So our concern about the Administration's proposals 
is that they are very expensive. It would take the subsidy rate 
from 1.16 percent up to 1.51 and without additional 
appropriations would shrink the program size.
    Chairman Talent. Yes. Well, you know----
    Mr. Wilkinson. We would rather look at ways to provide 
incentives that are a little less costly.
    Chairman Talent. We are all victims of OMB. It is just 
terrible. And there is a point at which I am going to--we need 
to revolt here and maybe we need to contact Budget Committee 
staff because that is the block here and maybe have a joint 
hearing or something. I want them to protect the ``fisc''. I 
think we all do. This consistent overestimation just inhibits 
the goals that we share on both ends of Pennsylvania Avenue 
about getting these loans to smaller borrowers.
    Fred, you will take back to Ms. Alvarez our desire to help 
out with that. I know you all are sort of caught in the middle, 
but just year after year we get this and it is a concern. And 
we really ought to try and do something to apply some pressure. 
Mr. Hochberg, on prepayment, what do you--are you all trying to 
develop any regulations and maybe, Ms. Faulk and Mr. Wilkinson 
might want to comment on this too, do we need to do anything 
statutorily? Can we do this by regulation?
    Mr. Hochberg. I will have to ask Jane Butler, who is our 
Associate Deputy Administrator for Financial Assistance, 
whether we can do this.
    Ms. Butler. I am Jane Butler, the Associate Administrator 
for Financial Assistance. Our Office of General Counsel 
believes legislation would be required because all of the 7(a) 
program fees exist because of legislative authority.
    Chairman Talent. Okay. Ms. Faulk, they are repaying this in 
months, a matter of months----
    Ms. Faulk. That is correct, sir.
    Chairman Talent. So this is obviously a deliberate thing. I 
mean they are borrowing this money with the intention of 
prepaying.
    Ms. Faulk. That is why we call it a misuse.
    Chairman Talent. And what is it about the market that is 
permitting that, whereas, it didn't permit it a few years ago, 
or are they just awakening to this possibility now? What has 
changed so that they can do this now?
    Ms. Faulk. In terms of the early prepayment?
    Chairman Talent. Yes. Is it the interest rate change or 
something that is making this financially attractive to these 
borrowers or what is it?
    Ms. Faulk. I think that is part of the problem or the 
solution that the economy has been good. There is flush cash 
among the banking institutions. But it is also a situation 
where the lender, who is going to refinance the existing SBA 
borrower, is not going to do the start-up operation, is not 
going to do the credit quality review to get the SBA guarantee. 
He is going to cherry pick that loan after it has been done 
through the SBA program.
    Chairman Talent. Also they are saving on some transaction 
costs. They let the SBA lender----
    Ms. Faulk. And that is due in part to this good economy and 
then the borrower is also, we consider it misusing the program 
for, as we say bridge or construction financing that if he is 
repaying in two to three months because he has found a buyer 
for his start-up operation is complete.
    Chairman Talent. Okay. So he gets the buyer and then he 
gets the cash to prepay.
    Ms. Faulk. He gets the construction complete and he gets 
the buyer take-out. And he is flipping the property.
    Chairman Talent. Okay. I will recognize the gentlelady from 
New York.
    Ms. Velazquez. Thank you. Mr. Hochberg, during this 
committee's hearing on SBA FY 2000 budget, the agency was asked 
whether publication of the 7(a) borrower information on the 
Worldwide Web for Freedom of Information Act reasons was 
contributing to the 7(a) prepayment problem. What have you 
found out?
    Mr. Hochberg. Congresswoman Velazquez, data on loan 
approvals is public information, and as a result, it is my 
understanding that it does not come under the Freedom of 
Information Act. Therefore, we have a policy that all public 
data is made available either by writing to request it from the 
agency or accessing it via the Internet.
    Ms. Velazquez. Let me ask you, do you need to publish all 
information, all the borrower information, you currently 
publish or could the agency modify this information and help 
alleviate this targeting by conventional lenders?
    Mr. Hochberg. It is my understanding we need to make all 
public information available. I would be happy to look into 
that to see if it can be modified in some way so that it is not 
as fully disclosed.
    Ms. Velazquez. One of my concerns is that I want to see the 
7(a) program continue to offer smaller loans to small 
businesses that really have no other borrowing alternative. If 
the committee were to support the proposal to increase the 
amount of the maximum exposure for 7(a) loans from the current 
750 to $1 million, what suggestions would the agency make 
without increasing the 7(a) subsidy rate that might induce 
lenders to make more smaller loans?
    Mr. Hochberg. Any time we offer an incentive it does cost 
money. There is no way to offer an incentive without any cost. 
Our proposal for Fiscal Year 2000 reduces the fees to the 
borrower on $150,000 as much as $1,000 and reduces the ongoing 
fee the bank would pay by $300 in the first year. It does have 
an impact on the subsidy rate, but that has already been 
incorporated into our proposal for this year. So there is no 
additional cost.
    Ms. Velazquez. In response to a question that I sent to 
your agency as a follow-up to this committee's hearing on the 
SBA FY 2000 budget, the agency replied we are pleased that the 
subsidy rate and offsetting fees for the 504 program have 
decreased over the past several years. In the future we will 
continue our efforts to reduce purchases and increase 
recoveries to further drag down program costs. We are 
supporting the 504 pilot liquidation program. What SBA specific 
efforts to reduce purchases and increase recoveries?
    Mr. Hochberg. That is going to be the lion's share of it in 
terms of reducing those kinds of fees. We are also hopeful that 
under the Premier Certified Lending Program that we can achieve 
more efficiencies and we can provide each CDC with more 
authority as we have done on the 7(a) side.
    Ms. Velazquez. Is the 504 liquidation and recovery a 
stipulated priority for SBA district offices?
    Mr. Hochberg. We have the CDC liquidation pilot on which we 
will be giving a full report to Congress at the end of 
September. The results have been very positive. Notwithstanding 
the fact we don't have the full report, we are ready to go 
forward and give that authority over to the CDCs.
    Ms. Velazquez. Mr. Giegel, are you and your colleagues 
seeing any improvement in the Small Business Administration 
loan liquidation and recovery efforts and specifically what is 
your assessment of the pilot liquidation program?
    Mr. Giegel. CDCs, particularly those who have volunteered 
to participate in the pilot liquidation program, have had some 
excellent preliminary results. Our CDC just obtained a 100 
percent recovery on a project that we have had in the pilot 
liquidation program, and we worked very closely with the agency 
in maximizing recoveries. I will say in our district the two 
senior portfolio managers have retired in the last couple of 
years and the liquidation staff has not been increased.
    So the case load per worker per liquidation officer has 
increased in our district and that naturally this is a concern 
that there are not going to be more liquidation personnel from 
SBA, that their case loads will increase and that we can 
discern no particular priority for 504 recoveries. And, in 
fact, being in the second position often there is more 
difficulty in recovery that they perhaps don't get the 
attention they could deserve.
    Now CDCs and our own included, we have very few cases, 
fortunately, and that is pretty representative industry wide 
and we can devote more resources at a very early stage in these 
recoveries and recover faster.
    Ms. Velazquez. Would you make any changes to these 
programs? Would you recommend any changes?
    Mr. Giegel. Well, the primary improvement is to allow CDCs, 
capable CDCs, to litigate as well as liquidate. Right now we do 
not have the authority to litigate. And in states such as 
Wisconsin, we have to literally turn over all documentation 
when we get to that point to the SBA to litigate. And that 
becomes an involved process with the federal attorney and 
priorities slip even further. So we get time lines a year, 18 
months, in which recoveries become smaller and smaller.
    Ms. Velazquez. Mr. Hochberg, would you like to comment on 
that?
    Mr. Hochberg. SBA's district directors give an equal 
priority to liquidation. There is no priority put on one type 
of loan versus another. In fact, on a quarterly basis they 
review all liquidations that are over 180 days old.
    We are also trying to change our standard operating 
procedures to give field offices far more flexibility to handle 
liquidations. And again as I mentioned, we want to go forward 
with this pilot and make it permanent which would in some way 
take care of this problem entirely.
    Ms. Velazquez. Thank you. Mr. Wilkinson, if this committee 
were to support the proposal to increase the maximum SBA 
exposure from $750,000 to $1 million, what proposal would you 
be willing to accept to make sure that the larger loan size 
does not consume the program level?
    Mr. Wilkinson. Well, first of all, the $1 million 
guarantee, in and of itself, should reduce the subsidy rate and 
a lower subsidy rate in turn would create more program levels 
so part of the increase in the demand would come from the 
reduction in the subsidy rate. Second, the $2 million loan cap 
will cover a significant portion or a good portion of the 
increase in loan volume. And, third, we would just need to 
watch volume.
    It is really difficult to predict exactly how much loan 
volume we would have, and if we started to have significant 
problems we would sit down and come up with some kind of 
solution maybe, defer that side of the guarantee until there is 
enough loan authority.
    Ms. Velazquez. Mr. Hochberg, I have a last question and it 
is regarding the new market initiatives, and I hope that soon 
we will be able to announce it. Will the investment of this 
company be focused only in the areas designated as LMI?
    Mr. Hochberg. The New Market Lending Company proposal, the 
LMI debenture program, and the New Market Venture Capital 
initiative are focused on low and moderate income areas.
    Ms. Velazquez. What is the percentage of that? What would 
represent the percentage?
    Mr. Hochberg. I am not sure I understand the question.
    Ms. Velazquez. In terms of low income areas, how much of 
this new market venture capital will be invested?
    Mr. Hochberg. Our proposal for Fiscal Year 2000 is for $100 
million for this program.
    Ms. Velazquez. Tell me 80 percent, 90 percent, 100 percent 
in low and moderate income areas.
    Mr. Hochberg. I am not sure I have the answer to that 
question. I am going to have to get back to you on what portion 
needs to be invested in LMI areas.
    Ms. Velazquez. With that answer will you please include 
what is the rationale for it?
    Mr. Hochberg. Certainly.
    Ms. Velazquez. Thank you.
    Chairman Talent. Along those lines, Fred, let me ask you, 
are you getting consulted by Treasury in development of this 
New Markets initiative?
    Mr. Hochberg. Are we being consulted by them?
    Chairman Talent. Yeah. I mean is the Treasury--are you all 
having a lot of input into how this thing is being developed?
    Mr. Hochberg. The three pieces that we really have 
responsibility for, the Low and Moderate Income Debenture 
program, the New Markets Venture Capital Program, and the New 
Markets Lending Companies are all SBA initiatives.
    Chairman Talent. That is your deal?
    Mr. Hochberg. That is our deal and we have experience in 
every one of those.
    Chairman Talent. Yeah, that is true. Okay. I just was 
concerned because----
    Mr. Hochberg. The only one that we don't have is the 
Americas Private Investment Companies (APIC), which is HUD's 
program.
    Chairman Talent. Okay. I recognize the other gentlelady 
from New York, Ms. Kelly, one of the other gentleladies.
    Mrs. Kelly. Thank you very much, Mr. Chairman. Mr. 
Hochberg, I am interested in a piece of information, that I 
really was rather unaware of that I read in Ms. Faulk's 
testimony, and that is the premium refund question. I was 
unaware that the premium refund payments that are paid back to 
the SBA are diverted to the master reserve fund. I want to know 
why you decided in the case of the premium pools that any 
premium refunds paid by the lender should not be passed on to 
the investors. Can you give us an explanation for that?
    Mr. Hochberg. I am going to ask Jane Butler to give me a 
hand on that one.
    Ms. Butler. The documents for the individual loans sold in 
the secondary market include a specific provision whereby the 
refund would go directly back to the investor. The documents 
related to the pooled loans don't discuss at all any premium 
refund. All they promise is that the pool holder will receive 
principal and interest on a timely basis whether the borrower 
makes payments on time or not. So the practice is in concert 
with the way the documents read.
    Mrs. Kelly. Who would have wrote the documents?
    Ms. Butler. This was done in consultation between the 
industry and SBA. This provision was actually added in 1984. We 
received legislative authority, but the legislation 
specifically directed that the pool program be established at 
no cost to the government. The premiums that SBA receives from 
prepayments on pooled loans are included in, but do not 
represent a large portion of our account but they do help to 
keep the costs of the program at a zero rate. If we did refund 
the premium, one of the issues has always been how to make such 
distributions on pooled loans to the multiple investors that 
may be involved.
    And also an issue is that there are special benefits that 
come to a pool investor, and then there are some things that 
are not as beneficial, so they receive some benefits by being 
an investment pool as opposed to an individual purchase.
    Mrs. Kelly. Ms. Faulk, would you like to address that?
    Ms. Faulk. Yes. I would. First of all, we do not believe 
that the contractual obligation of the 1086, SBA 1086 contract 
for the single loan going into the pool security negates the 
refund of that premium to the premium investor. We are 
confused, as well, regarding the SBA's position that if I 
didn't put it in a premium pool but I put it in a par pool and 
the premium exposure is in IO holder has a certificate that has 
no language, as well, that says that they are privy to the 
return of the premium.
    Mrs. Kelly. So it sound as though there needs to be a 
better writing in that documentation. Is that correct?
    Ms. Faulk. We believe that the funds should flow back to 
the premium investor, as well as to the IO holder of a single 
IO or to the multiple strip holder of a certificate that as 
well does not have any language giving them provision for the 
return of the premium.
    Mrs. Kelly. I would like to have some clarification, a 
further clarification, from the SBA on how that situation could 
be rectified. I tend to agree with Ms. Faulk. I think that 
there needs to be something in the language so that these 
investors have some understanding. If it is not printed in the 
document, then perhaps it should be printed in the document 
that this is actually what is happening, so that the investor 
understands up front fully in writing.
    The other thing I am interested in, I am wondering if the 
solution on this whole prepayment problem could lie within the 
structuring of banking laws and not with one more law of 
prohibition coming out of with regard to the Small Business 
Administration. I am not sure, but I am concerned about that, 
because when you talk about the way it works with the business 
needing to get the money, the banks are often loathe to loan 
the money to a NAASA business given a number of other 
situations with regard to their inspectors and so forth.
    Once there is a loan made anywhere, then there is a credit 
established. Then that person who has gotten that loan can go 
out and get something that the banks will feel comfortable 
about securing. I have heard repeatedly from small businesses 
in my district that this is one of their problems. I 
understand, and I am in general agreement on the prepayment 
problem, but I have a concern about that.
    I also am concerned, which is a fact that I have also heard 
from my small businesses, about the fact that the SBA people 
are telling my small businesses that it is easier for them to 
make a half million dollar loan. It is just as easy for them to 
do that as it is to make a $50,000 loan on aprogram or for 
these security things.
    I am very concerned that if we raise the limits that we are 
not going to stay with our really small beginning businesses, 
because that is where the money needs to stay focused, so there 
is two main areas that I have of concern here, not necessarily 
related, but I would like you, Mr. Hochberg, to kind of address 
those.
    Mr. Hochberg. Well, I share your concern about the smaller 
sized loans. That is why we have worked hard to come up with a 
proposal that would give a greater incentive to both 
individuals and banks to make smaller sized loans. The 
transaction cost is not that different in terms of preparing a 
loan for $100,000 to $150,000 to $500,000. There is an inherent 
fixed cost and that is why we have been trying to reduce it for 
the smaller sized loans.
    In terms of prepayment, an SBA borrower pays substantial 
fees up front. I am sure there are cases where borrowers prepay 
in a few months, but they have already just paid what could be 
a fee as high as 3.875 percent, so there is some disincentive 
against prepayment. I should just add this point for the 
Committee to consider. When businesses can use conventional 
financing instead of SBA guaranteed loans, that isn't all bad. 
There is some advantage when the small business community does 
not have to rely on the SBA. Ultimately we hope that business 
can move to a reliance on conventional financing.
    Mrs. Kelly. Ms. Faulk, do you want to respond to any of 
that?
    Ms. Faulk. Yes. Again, the major problem that we see when 
that small business borrower takes out that long-term debt and 
prepays it in a relatively short time, and I am talking three 
to six months, the bottom line it hurts the true needy small 
business borrower because we are allocated precious few 
guaranteed dollars. This is a small program of $10 billion.
    When that borrower misuses these term dollars and prepays 
quickly that is not going back into the coffer for the needy 
small business borrower when he needs it. It is gone. It is 
dried up. And that small business borrower abused the program, 
and if we have statistics from Cost Colsin Services Corp., the 
SBA transfer agent, and looking particularly at that large 
loan, that 500 to 750,000 guaranteed loan, that in fiscal 1998 
the loans in that range in the first six months $24.5 million 
prepaid in those large loans. So that says to me there is a 
propensity for the larger loan to prepay that is clearly 
signaling a scare in our community.
    Mrs. Kelly. Thank you very much. Thank you, Mr. Chairman.
    Chairman Talent. I am going to have to go. I want to just 
ask one question and then recognize Mr. Davis. Discuss a little 
bit, Mr. Giegel, the agency's concerns about giving CDCs the 
ability to veto SBA asset sales, please.
    Mr. Giegel. Thank you. Well, CDCs I think are very 
cognizant about losing money as well as a 7(a) lender might be 
who can now exercise that prior consent. We are asking really 
for no more than a 7(a) lender capability of being able to look 
at the overall situation and indeed a CDC certainly doesn't 
want to lose any money but if they perceive that recovery might 
be worked out in a different manner other than an asset sale, 
we would certainly like the opportunity to work that out, and 
this is no more than what a 7(a) lender would have the 
authority to do.
    Chairman Talent. Fred, you want to be able to respond? It 
sounded like this was the proposal that you objected the most 
strongly to. Is that a fair statement?
    Mr. Hochberg. That is a fair statement. My understanding, 
and I am going to have my staff correct me if I am wrong, my 
understanding is that 7(a) lenders can simply not agree to 
participate, but they can cherry pick and decide which loans 
they will let be sold and not be sold.
    Ms. Butler. Actually it is slightly different than that. At 
this point in time under the contract with which 7(a) lenders 
operate with SBA, they can refuse to allow a loan to be sold at 
an asset sale. However, we are revising that contract, and 
under the terms of the new contract the lender could refuse to 
have its portion of the loan sold, but it could not refuse to 
have the loan sold at all. SBA could still sell its portion.
    Chairman Talent. So their rights are not statutory at this 
point. They are under a contract with the agency.
    Ms. Butler. That is exactly correct.
    Chairman Talent. Well, it does sound like at least you 
would be open to some kind of proposal, administrative or 
statutory, requiring a consultation or something like that. 
That sounds like something the agency would be more open to.
    Mr. Hochberg. Our overriding objective is to continue asset 
sales so we can focus our resources on helping small businesses 
and not be involved in the liquidating and servicing of loans. 
That is the direction that Congress and the Administration have 
set for SBA. We are just trying to keep moving in that 
direction as best we can, but of course we will look at any 
alternatives to improve it.
    Chairman Talent. Do you want the last word, Mr. Giegel?
    Mr. Giegel. Well, we are all prudent lenders, I think here, 
and an asset sale we regard as absolutely the last resort. I 
think we can all be reasonable here if that is what we perceive 
if that is the best solution we can agree to that. But we 
obviously would like to say in certain instances that more 
standard recovery might be a better solution.
    Chairman Talent. Well, I haven't conferred with the ranking 
member on it, but my initial reaction is, if the agency feels 
that strongly about it, maybe we ought not to give you an 
absolute veto but perhaps some requirement of consultation. As 
you say, we all are out for the same thing. So if we have some 
kind of regular working procedure, I would think we could 
protect your interest that way. I haven't closed my mind on it, 
and I haven't talked with Ms. Valezquez about it but that is my 
initial reaction. Okay. I will recognize Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. Mr. Geigel, could you 
give me a profile of the typical 504 borrower?
    Mr. Giegel. Well, the typical 504 borrower certainly can 
run the gamut of any and all small businesses out there. We 
have, for instance, done everything from custard stands to 
industrial buildings. They tend to be though entrepreneurs who 
have several years of activity, established a business and 
reached a point where they may be in leasing a building or 
leasing machinery, and it comes to a point where prudently they 
need to either make an expansion to meet an established market 
need, or they need to acquire some major pieces of equipment to 
meet this next expansion.
    So, generally, these are clientele, which for a variety of 
reasons, don't meet traditional lender requirements 
particularly from the collateral point of view, but which the 
504 in its second position can help the lender make a decision 
to make the loan. These initial loans are generally on the 
smaller side in these early deals. We are looking probably at 
debenture sizes in the $200,000 to $350,000 range, total 
project perhaps in the $600,000 to $700,000 range.
    What is crucial though is that we have been doing this 
since 1981 that there are subsequent expansions. Perhaps a 
couple of years after that initial expansion they need 
additional machinery. They still don't have quite that track 
record, particularly on things like machinery with the heavy 
discounts imposed on machinery to make these types of loans. So 
we are often involved insecond and third involvements with 
these small businesses as they continue to make expansions.
    Mr. Davis. What would you consider to be the biggest 
problem that the program has if you had to cite a problem?
    Mr. Giegel. It is hard to know where to begin actually but 
the one biggest problem, I think it is a matter of, if you 
will, communication to getting out to the small business 
community to the small business owner about the advantages of 
the 504 program. CDCs, whether they are local, city wide, 
county, multi-regional or even statewide, usually have fairly 
small, if you will, advertising budgets. I don't know of any 
CDC that takes out TV ads talking about that there is a 504.
    So it is very difficult for the CDC industry to get down to 
individual small businesses. I mean we undertake seminars, talk 
with chambers and all the regular, shall we say, low cost 
marketing avenues, but it is still hard to reach all those 
small business entrepreneurs about the particular advantages of 
a 504 program. I think if we had that ability to better 
penetrate the marketplace, we would probably be back here 
asking for more appropriation authority to be able to meet the 
demand that we think is out there.
    Mr. Davis. Thank you. Mr. Hochberg, let me first of all 
just express my appreciation to Administrator Alvarez through 
you for the strong presence that the SBA had had in the mid-
West especially in the Chicago region. Any number of times, I 
can recall opportunities that have existed where the New 
Initiatives Program and other activities and Y2K and the whole 
business has been articulated many, many times in an effort to 
make sure people are in fact aware.
    It seems to me that defaulted loans especially from a 
lender's perspective is some concern and consideration. Could 
you explain to us the process of selling those?
    Mr. Hochberg. I just want to make sure I understand your 
question, Congressman. Our asset sales regarding 7(a) loans, is 
that what you mean?
    Mr. Davis. Right.
    Mr. Hochberg. We have a portfolio approximately in the 
range of $8 to $9 billion worth of loans to sell. About $1.5 
billion are either old loans that were direct loans from the 
SBA or loans that we have taken back from the banks. The 
balance are disaster loans that SBA still makes on a direct 
basis. Our first asset sale is scheduled for August. We are 
hopeful that is going to go successfully, and based on the 
result of that sale, we expect to continue asset sales over the 
next few years. By selling off those assets, we will be better 
utilizing our people to perform more oversight work instead of 
the commercial work such as servicing loans.
    Mr. Davis. Are those targeted or skewed in any particular 
direction? Do you try and convince any particular purchasers to 
buy those?
    Mr. Hochberg. In this first sale there will be a somewhat 
smaller pool, so that small investors can bid if they are 
interested.
    Mr. Davis. Thank you. Mr. Wilkinson, do you think that the 
process of recovery, the effort towards liquidation and 
recovery have much to do with lenders decisions whether or not 
to participate in these programs? I mean are they deterrents 
currently, are there ways that we can perhaps improve them?
    Mr. Wilkinson. From a servicing and liquidation perspective 
in the 7(a) program things really run quite smoothly because 
the lender would follow SBA standard operating procedures, but 
they would actually conduct the liquidation activities. So it 
is a standard piece of business that lenders do every day, so I 
would not view that as a deterrent to getting into this 
program. I think if anything it would be for a new lender the 
fear of learning all the new regulations, the standard 
operating procedures, but what we are finding once engaged 
lenders are not having much trouble with it.
    Mr. Davis. And, finally I guess, my last question is for 
Ms. Faulk. Could you think of ways, we are talking about 
changes, to me all changes are designed to be productive, that 
is to make things better to increase, improve, do better than 
whatever it is that you are doing. How do you view the changes 
that we are proposing right now in terms of the overall 
abilities for people to make use of the SBA programs, 
especially the two that we have singled out?
    Ms. Faulk. I see them as extremely beneficial to the small 
business borrower and that is our objective and that is the 
mission of Congress is to provide the long-term financing to 
the small business who has no alternative for term debt in the 
conventional market and I think the prepayment charges that the 
draft legislation is recommending is warranted and I think will 
be protective to the ongoing success of this program.
    Mr. Davis. Thank you very much and I thank you, Mr. 
Chairman.
    Mr. Manzullo. Thank you, Mr. Davis. I am intrigued with 
apparently there is some dispute regarding the mission of the 
7(a) program. More particularly, Ms. Faulk, you made the 
statement, which at first blush I would agree with, that people 
who got the 7(a) loans in the first place and were able to 
repay within a matter of a short period of time could have 
obtained the loans through conventional financing. Would that 
be a correct statement?
    Ms. Faulk. In part, yes. With the liquidity in the 
marketplace, there was or is an alternative for a different 
loan for their project other than SBA financing, but the flip 
side to that coin is that the conventional lending community is 
still adverse to lending to a small business borrower. So it is 
easy to sit on the sidelines and let this borrower and a lender 
go through the credit quality approval of getting the term SBA 
loan, and then after the start-up is complete, offering a 
refinancing loan in the first three to six months that is 
attractive to the borrower versus his term loan in the SBA 
program.
    Mr. Manzullo. So maybe we need, as a prerequisite to get a 
7(a) loan, that the potential borrower be turned down by 
conventional financing, which is the way SBA started.
    Ms. Faulk. I think that was the initial mission of SBA, 
back in the '70s, when we were beginning that the rule was you 
had to be turned down by two banks before you could go--and 
this is when SBA was still doing some direct financing as well 
but early in the '70s in the inception of the secondary market 
that was the benchmark, that you had to be turned down by two 
conventional lenders before you could approach a lender and use 
the SBA program.
    Mr. Wilkinson. If I might jump in. One of the things it did 
create was a very hardship for a borrower to go face a lender 
and get a no letter, hand it to them. The second point would 
be, we need to take a look at what was the number of loans that 
prepaid in the first few months that we are talking about in 
relation to the 45,000 loans that were made last year. It is a 
very small, small percentage. We are not talking about a vast 
majority of the portfolio. We are talking about a couple 
handfuls of loans.
    Mr. Manzullo. What is it, 9 percent, Ms. Faulk?
    Ms. Faulk. It was 9 percent just in fiscal '98 and only on 
the $500,000-$750,000 loan. That is not the whole universe of 
that. That is only the loan sold in the secondary market. We 
cannot even address the total picture of what was not sold in 
the secondary market. The statistics are not available.
    Mr. Manzullo. What bothers me is the purpose of the SBA is 
to extend credit to people who would otherwise have a difficult 
time getting credit. If there is a need for short-term 
credit,which there may be, I think we are making certain assumptions 
here. I have been in small business my entire life and banks want to 
see a track record. Even if it is six months, then perhaps we should be 
addressing some legislative changes and higher fees, maybe in the terms 
of prepayment penalties as you are suggesting.
    But the problem I have when you talk about prepayment of 
penalties is that some people would be stuck with high interest 
rates. We had a hearing about two years ago about people who 
wanted to pay off their 504 loans were stuck with 18 percent 
interest, and then they couldn't do it. They were stuck with 
that, and I don't have the answer to it. In Illinois it is 
illegal to have a prepayment penalty on a residence. It is 
obviously different on a commercial enterprise, but I think we 
ought to be taking a look at examining where the need is in the 
market. And if there is a need for short-term financing, some 
interim financing until a start-up company as you say can show 
a record, then the interest rate should be perhaps even higher 
than the conventional market.
    Ms. Faulk. We have suggested to the SBA as an alternative a 
possible short-term program and we would clearly promote with 
Congress that if you wanted to cut out a certain portion of the 
allocated dollars for this particular interim financing to 
prohibit the misuse of those who really need the term debt and 
we would advocate it.
    Mr. Manzullo. When you use the word misuse, what you are 
saying is that potential borrowers are simply looking at the 
SBA loan as one of a series of things that they could do to get 
start-up capital, even if they planned somewhere down the line, 
at the time they are signing the document to get the SBA loan, 
they are really going to take out another loan in three to six 
months. I just think we need to do some work on that, because 
if we are not serving a need in the community that is not being 
fulfilled then we have to question our existence.
    I have a question here for Mr. Wilkinson. In your testimony 
you recommend a floor subsidy rate of 1.25 percent. If the 
subsidy rate drops below that then fees to borrowers are 
reduced, I would like to see a zero subsidy rate for the 7(a) 
program because then Congress would not have to appropriate 
money for the program. What do you think about this?
    Mr. Wilkinson. Well, one of the purposes of our 
recommending a subsidy rate floor was to get into the whole 
discussion of what is the role of government in this program. 
What kind of congressional support are we going to get? There 
is nothing magical about a 1.25 percent, maybe it is 1 percent, 
but we have a fear based on the gyrations we have seen coming 
out of the OMB subsidy model, that in one year we could get a 
big spike in the subsidy rate estimate that would require huge 
fees. And if we had not been on the appropriation radar screen, 
it is going to be tough to get money for what would appear to 
be a new program even though it has been around for many, many 
years.
    So we are reluctant to move to a zero subsidy rate. That 
said, it appears that looking through the re-estimates in the 
subsidy model from '96, '97 and '98, we are on our way to in 
fact having been at a zero subsidy rate and the money is 
flowing through to the benefit of the Treasury, so that 
borrowers are actually paying fees higher than they would have 
to today that based on the re-estimates we probably were 
already at a zero subsidy rate, but the money is coming out of 
borrower's pockets and flowing to Treasury.
    Mr. Manzullo. Ms. Tubbs Jones.
    Ms. Tubbs Jones. Actually I will give my time to Ms. 
Napolitano who has been here longer than I have, so I will 
yield to her.
    Mr. Manzullo. Ms. Napolitano.
    Ms. Napolitano. Thank you, Mr. Chair. There are several 
issues that, as I was listening to your testimony, have kind of 
rattled around in my head in regard to women-owned business 
loans. And, specifically to Mr. Hochberg, what outreach or how 
can you quantify loans that have been made to women-owned 
businesses? We discussed veteran-owned businesses. Right now my 
concern is women-owned businesses specifically because in 
California we have a large--we heard today it is an increasing 
segment of the business population, women-owned business. How 
are we providing the attractiveness to assist a lot of the new 
entrepreneurships?
    Mr. Hochberg. Thank you for asking that question. We track 
our loans to women-owned businesses, as we track our loans to 
minorities and veterans, on a weekly basis.
    Ms. Napolitano. By area or by----
    Mr. Hochberg. We track it nationally and we also can track 
it by congressional districts. Our outreach efforts are 
supported through our Women's Business Centers. They offer 
hands-on counseling on how to write a business plan, how to 
acquire more economic literacy, and other basics. We also use 
our Microloan program as a way of helping startups and home-
based businesses.
    Ms. Napolitano. Only through your women SBDCs?
    Mr. Hochberg. Through the Women Business Centers, and the 
Small Business Development Centers (SBDCs). In addition, we 
have signed over 80 agreements with organizations around the 
country, such as national organizations of business owners, 
Hispanic Chamber of Commerce, the African American chamber of 
commerce, to try and make sure that their membership is fully 
aware of the programs and services we have available.
    Ms. Napolitano. I have a reason for asking, because I have 
gotten some of the statistics from SBA in regard to the centers 
in the area and those that do outreach to small business. I 
have one in my area. And I am concerned because we don't seem 
to be putting an emphasis on that particular segment of 
business. And I don't know what your statistics may show in 
regard to the default statistics on women-owned business, 
whether or not it is working out, whether or not they need 
assistance. Where does that lead to? Are they being successful? 
Are we assisting them to achieving the goals of becoming the 
new entrepreneurs that are going to be in business ten years 
from now.
    In the end I am looking for the jobs that they are 
providing. That said, I need to know how much is actually being 
focused on women and women-owned business systems.
    Mr. Hochberg. We just authorized grants to fund another 24 
Women's Business Centers this month so that will certainly help 
increase the number we have across the country.
    Ms. Napolitano. Okay. But are you targeting them to 
specific areas where the greatest need may be found, and if so 
how are you looking at that targeting?
    Mr. Hochberg. I would encourage any organizations within 
your district to apply. We would like to look at them when we 
open the program up again for grants next year. We are always 
looking to expand this outreach and to find more intermediaries 
to help us in this area. One of the things we also want to do 
is to make much clearer the connection between our loan 
products and micro-lending, so that it is not just handholding, 
but it is really helping them start and grow a business.
    Ms. Napolitano. That was one of my questions. The second 
one, we keep talking about the debt that SBA has not recovered. 
You mentioned a figure of the current funding that we are now 
being shorted because it has not been repaid. How much was that 
amount?
    Mr. Hochberg. I am not sure I understand the question.
    Ms. Napolitano. Well, how much debt is out there that has 
been defaulted?
    Mr. Hochberg. I referred to about $8 to $9 billion in debt 
that we hold. That is not all defaulted debt.
    Ms. Napolitano. I am looking at what is the default amount.
    Mr. Hochberg. Let me check.
    Ms. Butler. We will have to get back to you.
    Mr. Hochberg. Yes, I have to get back to you with that 
amount.
    Ms. Napolitano. Can you give me a ballpark figure?
    Ms. Butler. It is a very small percentage over time. It is 
less than 10 percent.
    Ms. Napolitano. Okay. Then possibly you have a recovery 
rate, even though it may be slow in coming back. Is that 
correct?
    Ms. Butler. That is correct.
    Ms. Napolitano. Okay. You are willing to sell a portion of 
that or some of it, right?
    Mr. Hochberg. Yes.
    Ms. Napolitano. And which portion is this that you are 
willing to sell? I am trying to figure out which is the one 
that pays you back on a regular basis even though it is late, 
well, some of it may be late, and which one is really defaulted 
that you are going to have collectors go after them.
    Mr. Hochberg. Our asset sales program includes both those 
who are paying us back on time and those who are not.
    Ms. Napolitano. Okay. That explains it. Okay.
    Mr. Hochberg. It includes both. I should add, 
interestingly, as we have talked to the borrowers about perhaps 
selling their loans, many of them have immediately become 
current or paid the entire loan off.
    Ms. Napolitano. Okay. Then the other question has to do 
with the--okay, so much for that.
    Mr. Manzullo. I would like to go to Ms. Jones Tubbs, at 
this point, so we can get in at least five minutes on her part.
    Ms. Tubbs Jones. Thank you, Mr. Chairman. Thanks, Gracie. 
For the record, that is Congresswoman Napolitano. I am going to 
try to make my questions kind of short. I have one for each of 
you. Ms. Faulk, do you have any other proposals to address the 
prepayment issue whether or not loans are increased?
    Ms. Faulk. Well, again, proposals----
    Ms. Tubbs Jones. That we haven't given you the opportunity 
to speak to.
    Ms. Faulk. No, ma'am. We have made a similar recommendation 
back in September to the Oversight Committee as an alternative 
for the short-term borrowing abuse that SBA considered creating 
as a short-term financing program.
    Ms. Tubbs Jones. Okay. Thank you very much. Good morning, 
Mr. Hochberg. How are you, sir?
    Mr. Hochberg. Good. Good to see you.
    Ms. Tubbs Jones. I want to, for the record, express my 
thanks for the support the SBA has given me as I have worked my 
way through learning what it means to be a member of the Small 
Business Committee and the attendance at our event in 
Cleveland, however long ago it was. I am losing track of days. 
But I have one particular question I would like to ask. In your 
statement you say that we rely on the credit decisions of our 
lending partners for about 75 percent of our loan approvals.
    We place greater reliance on the experience and expertise 
of its lending partners to perform. Do you have any information 
that would distinguish between what types of loans you are 
giving now under that setup as compared to the loans that were 
being administered or given out when SBA was responsible for 
this process, and you don't have to give that to me today, but 
if you could give me some comparisons down the line I would 
like to have it.
    And I also would like to know has it changed the face of 
the borrower, meaning are there more minority loans, less 
minority loans, more women's loans, less women's loans, 
anything that you could tell me the impact this had. I am just 
curious as to whether or not it may be a good practice and then 
maybe it may be something we need to assess one way or another. 
So that was my question for you.
    For you, Mr.--let me get your name correct. I am sorry. Mr. 
Wilkinson, you stated that you need a better way of penetrating 
the 504 market in order to let people know what is available 
under that program. Is that correct?
    Mr. Wilkinson. That is one of--a major problem, yes.
    Ms. Tubbs Jones. It is a major problem. Can you tell me who 
are the members of your group that exist in the 11 
congressional districts of Ohio? You don't have to give them to 
me today but I would like to have them because I would like to 
assist them in my district in getting information out about 504 
opportunities. And I would suggest that you might make use of 
other members of Congress that are on SBA committee to help you 
do that.
    And it is not--so it is real clear for the record, it is 
not for political purposes. It is in our best interest to have 
small businesses in our districts to do a good job, and if 
there are programs available to them, then we need to get on 
the stick and do what we need to do to let those programs be 
known about. So do you want to get that for me, please? Thank 
you.
    My last question, Mr. Geigel, in Mr. Hochberg's statement 
he references a statement by Federal Reserve Chairman Alan 
Greenspan as follows. Some of the studies have found 
discrepancies in the turn-down rates by minority-owned small 
business applicants and that not all of the cited differences 
could be readily explained by income, balance sheet factors or 
credit history.
    To the extent that market participants discriminate 
consciously or more likely unconsciously credit does not flow 
to its most profitable uses and the distribution of output is 
distorted. In the end costs are higher, thus real output is 
produced and national wealth accumulation is slowed. By 
removing the noneconomic distortions that arise as a result of 
discrimination we can generate higher returns to human capital 
and other productive resources, and it goes on and on and on 
with that.
    But my question to you representing the National 
Association of Government Guaranteed Lenders, what is it that 
you are willing to do or your group is willing to do to assure 
that the loans--that you are more responsible for now than ever 
that SBA has given that responsibility to you go to women and 
minority-owned businesses when you can't even--sometimes it is 
not even documented.
    Mr. Wilkinson. Sure. I would be happy to answer that. First 
of all, Mr. Hockberg started off I believe earlier today with 
the number that SBA has 19 percent fewer employees today than 
they had in 1992. At the same point in time, the program has 
grown four-fold, so for the agency to be able to get the money 
in the hands of small businesses, they had to rely on the 
private sector.
    Ms. Tubbs Jones. Understood. I don't have any question 
about that.
    Mr. Wilkinson. I am just trying to answer part of his 
question. Now what we have done over the last year with the 
agency, we have entered into a memorandum of agreement. We 
areengaging in training exercises all over the country on lending to 
new markets. We have--Mr. Davis will enjoy this. We have Dick Turner 
from South Shore Bank in Chicago was our lead instructor who helped us 
put the class together.
    We are doing 25 lender sites. We are also doing ten 
intermediary sites where SBA is our co-sponsor, and those are 
underway and the last few have been very well attended. So 
beyond that we are willing to sit down and look at a whole host 
of possibilities. One of the things we have tossed out is 
perhaps on smaller loans we can go back to a 90 percent 
guarantee. We don't think that would cost very much on a 
subsidy front and would be an incentive to get down into the 
$150,000 and less loans. Beyond that, again, we are willing to 
sit down and talk as to what we can do to make this work.
    Ms. Tubbs Jones. A quick follow-up, Mr. Chairman, I am 
hosting a small business seminar in my community on September 
24 of this year. Could you let me know who the people are in 
your organization in the 11 congressional districts in Ohio, so 
I can call upon them to participate in that workshop. Thank 
you, Mr. Chairman.
    Mr. Manzullo. Thank you. We thank you for coming to us this 
morning. We got everybody's questions in, and hopefully 
everything answered. We have to go and vote. This committee is 
now adjourned.
    [Whereupon, at 11:55 p.m., the committee was adjourned.]




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