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



                 HEARING ON REAUTHORIZATION OF THE SBA
                AND THE FISCAL YEAR 2001 BUDGET REQUEST

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, MARCH 1, 2000

                               __________

                           Serial No. 106-45

         Printed for the use of the Committee on Small Business


                   U.S. GOVERNMENT PRINTING OFFICE
71-971                     WASHINGTON : 2001


                      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
JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania      STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
MARY BONO, California                BRIAN BAIRD, Washington
                                     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 March 1, 2000....................................     1

                               WITNESSES

Alvarez, Aida, Administrator, U.S. Small Business Administration.     4
Wilkinson, Anthony R., President, National Association of 
  Government Guaranteed Lenders..................................    45
Mercer, Lee, President, National Association of Small Business 
  Investment Companies...........................................    47
Giegel, John, Vice President for Congressional Relations, 
  National Association of Development Companies..................    51
McCutchen, Woody, Executive Director, Association of Small 
  Business Development Centers...................................    53
Hayashi, Caroline, Association for Enterprise Opportunity........    55

                                APPENDIX

Opening statements:
    Talent, Hon. James...........................................    62
    Velazquez, Hon. Nydia........................................    64
Prepared statements:
    Alvarez, Aida................................................    66
    Wilkinson, Anthony R.........................................    79
    Mercer, Lee..................................................    84
    Giegel, John.................................................    93
    McCutchen, Woody.............................................   101
    Hayashi, Caroline............................................   107
Additional material:
    Statement of the Bond Market Association.....................   110
    Talent Letter................................................   115

 
 HEARING ON REAUTHORIZATION OF THE SBA AND THE FISCAL YEAR 2001 BUDGET 
                                REQUEST

                              ----------                              


                        WEDNESDAY, MARCH 1, 2000

                  House of Representatives,
                       Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building, Hon. James M. Talent 
(chairman of the Committee) presiding.
    Chairman Talent [presiding]. If our first witness will be 
seated, we will start.
    Good morning. Today, the Committee is meeting to conduct 
its annual ritual of considering the administration's request 
for the SBA budget. We are also going to consider our triennial 
ritual of reauthorization of the SBA's programs. I am hoping to 
save the members a little time while still allowing them full 
in put by combining the two exercises.
    I want to start by saying that, in general, I am pleased 
with the budget submission for the year 2001, which means that 
the hearing this year will, as far as I am concerned, have a 
happier tone than it has had in some years past. I am not 
necessarily speaking for my friend, the distinguished 
gentlelady from New York, and I have no inside knowledge in 
saying that. I am just not necessarily speaking for her.
    The SBA's budget request for 2001 is $1.06 billion. This is 
a large increase over the current year's funding--approximately 
$330 million. However, to be fair, a large portion of this is 
disaster loan funding. Thankfully, the 2001 request for the 
disaster loan program is straightforward and adequate. This 
relieves us of a serious bone of contention from past years' 
budgets.
    SBA's request for financial programs is also, in my 
opinion, generally good. It requests $332 million in new 
subsidy budget authority, a $65 million increase over the 2000 
request. Of this request, $132 million is for administrative 
expenses to operate the financial programs. That represents a 
small increase over the 2000 request but a significant $38 
million increase over previous appropriations.
    The request for the 7(a) loan program is $142 million to 
provide $11.5 billion in overall loans. I believe this is a 
reasonable request, as SBA forecasting is usually accurate. I 
am more concerned about this year's loan availability. I will 
be interested in hearing from the Administrator about her 
projections for this year.
    The 504 Program again requires no subsidy, and I believe 
the Committee joins me in supporting the authority to make the 
full authorized amount of loans under this program available. 
However, like other members, I would like to hear about the 
future of the program and its subsidy rate.
    The SBIC Program also receives an adequate request and one 
the Committee supported in its letter to the Committee on the 
budget. If fully funded, the SBIC Program will be able to make 
over $2 billion of venture capital available to small 
businesses in Fiscal Year 2001.
    The Microloan Program is targeted for the most significant 
increase for 2001. It would, according to the request, jump 
from $29 million to $60 million in microloans. While there is 
no shortage of support for this program, and the real dollar 
increase is only $2.5 million, there may be some question about 
the ability to expand that quickly.
    On the technical assistance side of the SBA's budget 
request there is both good and bad news. The good news is the 
Small Business Development Center Program receives an adequate 
though not ample request of $85 million. There is also a $3 
million request for Native American SBDCs, an excellent 
proposal.
    The bad news is that there is an increase in unauthorized 
program funding that would take too much time to list here in 
this opening statement, while at the same time an elimination 
of funding for authorized programs, like the Drug Free 
Workplace Program, which the Congress approved overwhelmingly 3 
years ago.
    Finally, let me state my support for the request for the 
Office of Inspector General. This Committee has long supported 
improved funding for that Office. The only comment I might make 
now is that the increase should be divided between audit and 
investigative functions.
    I want to thank our various witnesses. I will introduce 
them when they testify. We are going to have two panels: First, 
Administrator Alvarez, and, second, the panel of witnesses from 
the small business organizations.
    Before we begin hearing the testimony, I will, as always, 
turn the microphone over to my colleague, Ms. Velazquez, for 
any statement she may wish to make.
    [Mr. Talent's statement may be found in the appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman. I would like to 
thank the Administrator and commend her for presenting an 
ambitious budget request that clearly reflects the 
administration's desire and ongoing efforts to help this 
Nation's small businesses.
    As we are all aware, this country is experiencing one of 
the greatest economic booms in modern history. This 
unprecedented growth has been fueled by the flourish of small 
businesses throughout this country. Today, small businesses 
make up 51 percent of the gross domestic product, and 
contribute 47 percent of all sales in this country. In fact, 
according to the Department of Labor and the Department of 
Commerce, small business-dominated industries produced an 
estimated 64 percent of the 2.5 million new jobs created during 
1996.
    With this in mind, I believe it is critical at this 
historic juncture to assess where we are, how we got here, and 
where we need to go to continue to have a strong and vibrant 
small business community. We have gotten where we are today 
based on the solid support of such established programs as 
7(a), 504, 8(a), microloans, SBR, SBIC, and SBIR. These 
programs, through access to capital, opening doors for minority 
businesses and technology development are the bedrock that has 
helped this Nation's small businesses lead the way into the 
21st century.
    The administration's budget presents a good mix of new and 
existing programs. We are making improvements to the SBIR 
Program through Phase 3 grants that will enable small 
technology firms to be more competitive in the marketplace. One 
priority for Democrats has been making small loans more 
accessible to businesses. This can be done by increasing the 
guarantee on loans of under $150,000 to 90 percent, offering 
small businesses the economic chance they need to exist.
    Innovative new programs that show consideration for future 
businesses has been unveiled in this budget, like PRIME, which 
help low-income communities, and the new Veterans Program, 
which will help those who have served this country.
    Most importantly, the administration attempts to address 
what I believe is the most pressing issue facing our Nation: 
The widening gap between those who have prospered from our 
current economic boom and those that have been left behind. For 
example, in my district of Brooklyn the unemployment rate is 
still 10 percent. These are good, hardworking people who today 
cannot afford to start their own businesses but who want to and 
deserve an opportunity for economic prosperity.
    That is exactly what the proposed new markets venture 
capital company legislation will do. By providing equity 
investment and technical assistance, businesses will have an 
easier time obtaining capital or expanding their businesses in 
poor or underdeveloped areas throughout the country. This is 
not only the right thing to do, but it makes good business 
sense.
    This Committee has an opportunity to make changes, new 
changes that will benefit small businesses and those who are 
looking for economic opportunity in starting their own. Today's 
hearing will assist us in making the kinds of economic 
decisions that not only will help close that widening gap but 
will hopefully keep us on the right economic track for 
continued prosperity in the future.
    I look forward to reviewing this budget in greater detail 
and determining what changes need to be made to better enhance 
small businesses. And I thank you ladies and gentlemen who are 
here to testify before the Committee today.
    Thank you, Mr. Chairman.
    [Ms. Velazquez's statement may be found in the appendix.]
    Chairman Talent. I thank the gentlelady.
    We will go right to panel one, and our witness in that 
panel is the Honorable Aida Alvarez, the Administrator of the 
U.S. Small Business Administration.
    Once again, Ms. Alvarez, it is a pleasure to welcome you 
here.

 STATEMENT OF AIDA ALVAREZ, ADMINISTRATOR, U.S. SMALL BUSINESS 
                         ADMINISTRATION

    Ms. Alvarez. Thank you so much, Mr. Chairman, Congresswoman 
Velazquez, and distinguished members of this Committee. I 
appreciate the opportunity to appear before you here today, and 
I have submitted my written testimony for the record. I would 
like to make some oral remarks accompanied by charts in a 
moment.
    But before getting to next year's budget, Mr. Chairman, I 
wanted to address your concern about the availability of loan 
dollars this year, which has been our concern as well. And I 
would like to share some good news. Last spring, as you know, 
we requested funding to meet the demand for $10.5 billion in 
loans for our 7(a) Program; however, our appropriation was only 
for a level of $9.8 billion in loans. And it turns out that our 
projections were pretty much on target.
    We now project the demand this year to be around $10.3 
billion. To address this shortfall, the President has included 
in his February 25th supplemental appropriation request, $7.6 
million for the SBA. Through a combination of transfers and the 
supplemental appropriation, we will increase the 7(a) Program 
level to $10.3 billion. Our hope is that the program will 
continue to operate as successfully as it has through the rest 
of the year.
    The supplemental also will enable us to transfer, and I 
have requested, $1 million to fund PRIME grants. I know there 
has been a lot of concern about the funding for the Program for 
Investment in Microentreprenuers this year. I have also 
requested a transfer of $0.5 million tosupport the Veterans 
Corporation that was included in legislation passed last year. And in 
addition, we are looking into the possibility of providing free office 
space this year for the corporation at the SBA. We hope that this will 
really get them started. We are already halfway through this year, so 
we think that this might cover their needs. And then of course we have 
requested $4 million for 2001.
    Mr. Chairman, Congresswoman Velazquez, members of the 
Committee, I urge you to please support the supplemental. And 
of course I would be happy to meet with you and other members 
of the Committee to discuss this request and the budget itself.
    There is also another bit of good news I would like to 
share this morning. We were informed late yesterday that for 
the fourth year in a row SBA has received a clean opinion in 
our financial audit report, which is the highest rating that a 
Federal entity can receive. The report, I believe, provides 
further assurance that we are keeping our financial house in 
order.
    So, now, without further ado, I would like to start the 
discussion of the budget and our request for just over $1 
billion for the SBA with charts that highlight why we are 
making this request and what is the condition of this economy 
that makes it appropriate that we request this kind of funding.
    We begin with a chart that I think says it all, ``It is a 
small business economy.'' Congresswoman Velazquez pointed to 
the extent to which the new job creation, for example, is 
attributed to the small businesses in this country. I think 
that this chart presents the budget in the context of this 
remarkable economic expansion, an expansion that is being 
fueled, in large part, by small businesses.
    You can see that the numbers just go up, up, up for our 
core programs, and, as I said, at the SBA I believe we want to 
keep doing our part to keep this historic economic expansion 
going, which is why we are submitting this request. And also we 
want to reach out to those in the inner cities, poor rural 
areas, Native American reservations who have not been reached 
yet.
    The climate has never been better for small business. There 
are now 25 million small businesses in the United States, which 
is 5 million more than in 1990. And our chart reflects this 
amazing economic expansion. What is interesting is since 1993 
we have nearly tripled what is available for small businesses 
while cutting the cost in half.
    In 1993, we made available around $7.4 billion of capital 
and credit at a cost of $352 million. This year, in Fiscal Year 
2000, we estimate we will deliver $17 billion at a cost of $146 
million, which is less then half the cost. Our Fiscal Year 2001 
budget proposes $20 billion of support at a cost of $200 
million. I think this shows that SBA is truly a great deal for 
the American taxpayers.
    Coupled with our desire to sustain the economic expansion 
while penetrating new markets is our solid commitment to the 
financial soundness of our portfolio. And I am very pleased to 
report that in Fiscal Year 1999 we instituted, for the first 
time ever, a Safety and Soundness Examination Program for the 
agency's Small Business Lending Companies and examined all 14 
Small Business Lending Companies. We expect to complete a 
second round of reviews in September. We have established the 
Office of Lender Oversight and a Risk Management Committee. We 
have completed our first full cycle of reviews for participants 
in the agency's Preferred Lender Program, and we expect to 
complete a second round of reviews by April.
    Yes, we have enjoyed dramatic growth in our core programs, 
but speaking to the issues raised by Congresswoman Velazquez, I 
think we are convinced that it is not enough just to continue 
their growth. SBA's success in stimulating small business 
growth is owed to its strategic investments in areas where we 
have identified a gap. That is what we have historically done. 
And this second chart illustrates the continuum of services and 
programs that we provide and where there are still gaps that 
need to be addressed.
    Over time, SBA's programs have evolved to fill gaps in the 
marketplace. This chart shows the continuum of services that 
exist today to meet a spectrum of small business needs. On the 
debt side, SBA first developed the 7(a) and 504 Programs. When 
the need for very small loans was identified, SBA's Microloan 
Program was established. On the equity side, Small Business 
Investment Companies were established to fill the need for 
investments in the range of $350,000 to $5 million.
    Now, as you can see from the lighter shaded area, there is 
a gap today for small businesses needing smaller equity amounts 
in the range of $50,000 and up. And filling this gap is what 
our New Markets Venture Capital proposal is all about.
    Our next chart illustrates why that----
    Chairman Talent. Ms. Alvarez, can I just interrupt for a 
minute? Could you put that last chart up again?
    Ms. Alvarez. Yes.
    Chairman Talent. Now, I just want to make certain that I 
understand, because my understanding was the New Markets 
Program was targeted to--was developed to target additional 
assistance to low-income areas. You emphasize the size of the 
loan.
    Ms. Alvarez. It is an equity investment.
    Chairman Talent. Right, I am sorry. Yes, equity investment.
    Ms. Alvarez. It is a combination of size and targeting to 
areas that are underserved, significantly underserved. So, it 
is geographic and income-based.
    Chairman Talent. Right. So, the President's proposal hasn't 
changed. It is still for--it is targeted for low-income 
neighborhoods, but you also are talking about a size of 
investment.
    Ms. Alvarez. That is right, because in fact those targeted 
areas, as the next chart will show you, have a huge absence of 
availability of equity investments in those geographic areas.
    Chairman Talent. Yes, and that is what I understood, and 
that was my interest in the program.
    Ms. Alvarez. You are absolutely right. That is what it is 
all about.
    Chairman Talent. I am sorry about that; appreciate it.
    Ms. Alvarez. No, no, that is good.
    The following chart shows the incredible differences in 
availability of equity capital. For example, on the left, you 
have the bar chart, which shows private venture capital firms 
in 1999 with assets of nearly $130 billion. Their average 
investment, the size issue, in both large and small businesses 
is anywhere from $6 million to $10 million.
    In 1999, SBA's Small Business Investment Companies reported 
assets of $12.7 billion. Their investments typically range from 
$350,000 to $5 million, with $1.5 million, on average. So, we 
filled the gap there for smaller size investments through the 
SBIC Program. What is interesting is that these SBICs with one-
tenth of the capital of their larger counterparts were actually 
responsible for over half the investments by institutional 
investors last year, which is phenomenal. And this highly 
successful program has returned $131 million to the U.S. 
Treasury as taxpayers' share of profits in SBA's Participating 
Security Program. So, this program is really producing results.
    Mr. Chairman, when I said that they produced half of the 
investments, it is because they make many, many smaller size 
investments, whereas there are huge investments made by the 
private venture companies. It is not the dollar amount in this 
case; it is the number of smaller investments.
    On the very right, you see a sliver--it is practically not 
there--and it shows the assets of the community development 
venture capital industry. These firms are most like the New 
Markets Venture Capital Companies that we are proposing. That 
is where the gap exists. All that is available now--it is a 
combination of what we are doing with our SBIC Program and 
these community development venture capital companies.
    SBICs invested nearly $800 million in low- and moderate-
income areas last year. The fact is that only $66 million of 
that $800 million were New Market-type investments of $1 
million or less. So, what does this mean? It means that out of 
a universe of around $140 billion of venture capital in this 
country, only $200 million was available in smaller New 
Markets-type investments, which went to areas that include 
inner cities, poor rural communities, and Native American 
communities. Again, this is what the New Markets proposal is 
all about.
    The last chart on this topic, which speaks to this 
geographic issue, is this map of targeted New Markets-type 
investments. What this map illustrates is where the smaller New 
Markets-type investments are being made today without the New 
Markets Venture Capital Program. You can see there is a lot of 
empty space here. The dots show the locations of community 
development venture capital companies. There are only 25 
located in 16 States and the Virgin Islands. These firms have 
assets of $157 million, but only 14 of the 25 have assets of 
over $5 million, which we consider to be the absolute minimum 
for economic viability. The stars indicate the five states 
where two-thirds of the smaller New Markets-type investments 
were made by existing SBICs, Small Business Investment 
Companies. As the map indicates, even if you combined the $66 
million in comparable SBIC investments, which are concentrated 
in just 5 states, with the SBIC locations, you see that there 
was no New Markets-type investment, zero, in 21 States. There 
is a gap, and there is a vacuum that we are trying to fill with 
this program.
    Chairman Talent. Just make one thing clear for me, and this 
is very interesting--I am kind of glad you went to the depth on 
this aspect of the budget submission--when you say the five 
States in which the SBICs have made New Markets-type 
investments, you are referring to investments that meet the 
criteria both in being a low-income neighborhoods and of being 
the size that you anticipate new markets.
    Ms. Alvarez. Yes, correct.
    Chairman Talent. Because they have bigger investments than 
that in low-income neighborhoods----
    Ms. Alvarez. Correct.
    Chairman Talent [continuing]. But they were bigger size 
loans.
    Ms. Alvarez. That is right. They were not the type of 
investment that we envision for new markets.
    Chairman Talent. Okay.
    Ms. Alvarez. The SBICs are primarily profit-driven, in 
contrast to New Market Venture Capital Companies and the 
Community Development Companies, which are more mission-driven. 
NMVCs will provide a combination of equity financing and hands-
on operational assistance, which we have called technical 
assistance.
    The technical assistance we are talking about is an 
ownership on the part of the new markets investor which results 
in their taking an active role in the actual running of the 
company in areas of corporate finance, structuring, key 
executive recruitment, legal services. The New MarketsVenture 
Capital companies will have the resources and flexibility to ensure the 
long-term success of small businesses they invest in.
    To establish this New Markets Venture Capital Program we 
are requesting $21.6 million, which would support a program 
level of $150 million, and we are requesting $30 million for 
the technical assistance component.
    What I would like to do is take a moment to talk about this 
program's return on investment. First of all, a number of 
people have noted that this is an expensive program. Well, it 
is. It is, initially, because we calculated the cost of this 
program using the most conservative assumptions. And what we 
are anticipating is that the cost of the program will go down, 
probably significantly, as we develop experience with the 
program.
    It is very important, I think, to look at the long-term 
benefits of this program. We did an analysis of the Community 
Development Venture Capital Companies where we learned that one 
job is created for each $10,000 to $15,000 of equity 
investment. Using this as a basis for comparison, $51.7 million 
should generate between 13,300 and 20,000 jobs at a cost of 
between $2,600 and $4,000 each. That is a bargain and does not 
include the indirect jobs which would make the cost even less.
    So, I think that with this modest investment proposed in 
our budget, we would double the amount of capital available to 
our distressed rural and urban communities, and we would create 
a phenomenal potential for jobs in areas like Brooklyn--you 
mentioned a 10 percent unemployment rate--and other rural parts 
of the country.
    Finally, I want to conclude, with the New Markets 
Initiative--we are breaking new ground, which is why I took the 
time to explain it this way. There is another area where we are 
breaking new ground, and that is in the modernization of the 
SBA. We are making substantial investment to really make the 
SBA a cutting edge agency. And I am very enthused about the 
vision that we have set out in our budget to build a new SBA. 
It is what I call Project 2003, because 2003 is when we expect 
to have completed all of this.
    As you know, since 1990, our loan portfolio has grown from 
$17.5 billion to about $50 billion. At the same time, the 
number of our employees has decreased 22 percent, from 4,000 in 
Fiscal Year 1990 to about 3,035 right now. And that number will 
continue to go down. We will have gone down by 146 employees 
this year.
    Project 2003 continues the dramatic transformation. This 
chart gives you an idea what SBA will look like in the year 
2003. We expect to offer our customers online and real-time 
services. This will allow us to give our customers quicker 
decisions on their applications and servicing requests. 
Internally, we will have real-time access to information and 
sophisticated analysis tools to make better management 
decisions--services anytime, anywhere. Obviously, SBA's store 
will now be open 24 hours a day, 7 days a week. Small 
businesses will be able to file applications from their offices 
or even their homes.
    We will do more paperless transactions with our lending 
partners, reducing transaction costs. This is especially 
important for smaller loans that are less profitable for 
lenders. By this summer, we expect to have the majority of our 
loan transactions to be conducted electronically. We will have 
the majority of our lenders basically filing and reporting to 
us electronically, which will be a real difference in what 
information is available. We will be able to ask for and 
collect data that we didn't have in the past or we have had it, 
but it hasn't been accessible to us. This accessibility will 
help us with our loan monitoring and risk management as well.
    Coupled with our desire to sustain unprecedented growth and 
to penetrate new markets is our solid commitment to maintaining 
the financial soundness of our portfolio as well as the 
security of the business that we conduct online. We are very 
sensitive to the concerns that are being raised about the 
security of the information.
    Financial statements will be less costly and less time-
consuming to produce. Subsidy calculations will be improved in 
both quality and timeliness.
    Mr. Chairman, Ms. Velazquez, members of the Committee, this 
budget, I believe, is a very sound budget for Fiscal Year 2001. 
It fully funds the disaster programs and the Small Business 
Development Centers. It supports expansion of the core 
programs--7(a), 504, SBIC--increases microloan programs. It 
does all of this while ensuring the safety and soundness of our 
growing portfolio and building a modern SBA.
    So, I really appreciate the opportunity to appear before 
you here today, and I will be happy to take your questions. 
Thank you.
    [Ms. Alvarez, statement may be found in the appendix.]
    Chairman Talent. All right, I will ask a few and then 
defer, because there is a lot of members here, and I understand 
some of them have to leave. So, let me just ask a couple of 
mine.
    Ms. Alvarez, I appreciate the efforts to support the 
Veterans Business Development Corporation. I would hope that 
$500,000 would be a beginning point and that you would be open 
to more being shifted over.
    Ms. Alvarez. Of course.
    Chairman Talent. And, you know, my enthusiasm for this is 
because I think it can work the way I have seen, for example, 
senior centers work. I mean, I really think this model of using 
a little Federal seed money to plant these centers in places 
where then they leverage all these additional private-public 
dollars and all the activity that the groups that want to 
participate is very powerful, and I would like to get this 
going. So, you are not closed to doing more than that if we can 
get more than that done, are you?
    Ms. Alvarez. No. We were working within our constraints. 
Also, Mr. Chairman, you know we are working in conjunction with 
the Department of Veterans' Affairs, with the Association for 
Small Business Development Centers, with SCORE. We have entered 
into agreements with all of them so that we can maximize and 
not duplicate the efforts.
    Chairman Talent. And what is the status of appointments to 
the board now?
    Ms. Alvarez. It is over at the White House, and they are 
vetting the candidates right now. My understanding is if you 
have individual requests, they would be happy to engage you 
individually.
    Chairman Talent. I think what we did was we--by we, I mean 
the chairman and ranking members of the relevant committees on 
both sides of the Capitol sent sort of a joint list.
    Ms. Alvarez. Yes.
    Chairman Talent. Because we are very concerned that this 
initial group be very savvy veterans' advocates. And I will say 
for my part--and I think the gentlelady feels the same way, 
because she and I have talked of this--I am much less concerned 
about party or political background than I am about just 
getting strong vet advocates from a wide variety of different 
places--some from veterans' organizations, some with experience 
in business--because we have a real chance to draw a lot of 
private business dollars into this.
    I hope you take a moment and make a personal call over to 
the White House and say, ``Let us really concentrate on getting 
a good group,'' and I think we have submitted a very good list. 
So, would you be willing to do that?
    Ms. Alvarez. Absolutely. And I noted that in fact some of 
the candidates recommended were recommended by members from 
both sides of the aisle.
    Chairman Talent. Yes. I know I recommended some--I mean, I 
really don't care about that. I don't think the Committee does 
either, but
    Ms. Alvarez. We have been monitoring it. At this point what 
they are doing is vetting the candidates, and that is the most 
time-consuming part to make sure that once they are announced 
they can get started.
    Chairman Talent. Of course my wife is a veteran, and if the 
President would be willing to consider her that would be fine. 
But assuming that that is not going to be the case, I am very 
interested in that. And let us get that. We all want that to 
get off on the right foot. I know you do too.
    Ms. Alvarez. Absolutely.
    Chairman Talent. And your personal attention would be 
appreciated.
    Ms. Alvarez. Good.
    Chairman Talent. All right. I have other questions to get 
into, but I know some members have to leave. So, let me go 
ahead and recognize the gentlelady from New York.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Ms. Alvarez, why are the subsidy reestimates so high for 
the 7(a) Program year after year? Doesn't this high reestimate 
mean the regional subsidy estimate was significantly inaccurate 
and that program users, both the small businesses and the 
lenders, are paying fees beyond what is necessary to support 
the program, and instead are paying fees and income that is 
simply being used to reduce the Federal debt?
    Ms. Alvarez. That is a very good question.
    Ms. Velazquez. Yes, I know.
    Ms. Alvarez. I will ask Greg Walter, as well, to join me on 
that.
    The answer is that we use a very conservative approach to 
calculating these subsidies. We look at the life of the loan, 
which is over a 14-year period, so that while one might argue 
that these loans are performing very well as of recent years, 
we need to go back to when they were not performing so well. 
And, so it is those calculations that are factored in that 
result in a much higher cost which then, of course, results in 
a reestimate and a returning of funds to the Treasury. That has 
been the practice of the OMB--it is not this administration; 
every administration involved in subsidy rate calculations has 
used this approach as a way of protecting the taxpayer.
    Greg, do you want to elaborate?
    Mr. Walter. Good morning. I am Greg Walter, the Deputy CFO. 
I would like to just add one comment. We believe this is also a 
very good reflection on the improved performance that we are 
seeing in the portfolio as a result not only of the economy 
that allows people to pay their loans back more frequently and 
incur less defaults but also our improved attention to the 
portfolio management of the agency. So, we see this as good 
news, and the bottom line is the cost of the program is only 
about 1 percent, or $1 for every $100 we loan. This is very 
great news for small business, we think.
    Ms. Alvarez. Right. As opposed to--it was $5 10 years ago.
    Mr. Walter. Less than 10.
    Ms. Alvarez. Right, less than 10 years ago, and it is $1. 
So, the cost has gone down, notwithstanding the fact that we 
are using a very conservative calculation.
    Ms. Velazquez. Either the Administrator or Mr. Atkins?
    Ms. Alvarez. Greg Walter.
    Ms. Velazquez. What has 7(a) defaults averaged for the last 
5 years, and what is the default factor in the current year 
subsidy model?
    Mr. Walter. First, you have to remember that the default 
history is a long time period. We have a peak and a valley. The 
peak occurs usually in 3 to 5 years after the loans are 
disbursed. So, if you look at loans that have been made in the 
last 5 years, they haven't really fully matured. But the 
evidence that we are seeing so far is that the performance of 
those loans is significantly better than the loans that were 
made in the previous year. And the default history right now is 
averaging probably in the 8 to 12 percent range. The model that 
we are using for Fiscal Year 2001 still includes a subsidy 
default rate of about 14 percent, because it takes into account 
about a 12- or 13-year historical pattern.
    Ms. Velazquez. Has there been a loan underwriting any 
change or is OMB requiring SBA to overestimate loan defaults?
    Mr. Walter. The process that we use for estimating defaults 
is a standard acceptable practice that is used by all the 
Federal credit agencies. OMB requires us to use a historical 
analysis as far back as we have information. We like to try to 
match the time period of the analysis with the average maturity 
of the portfolios. These loans in 7(a) have a 14-year maturity, 
so we would like to have 14 years worth of data to do the 
analysis.
    Ms. Velazquez. So, in essence, what you are telling me is 
that the 7(a) Program is operating at a profit for the 
Government under the present structure.
    Ms. Alvarez. It is helping to reduce the deficit.
    Ms. Velazquez. Ms. Alvarez, I am sure you are aware of the 
troubling trend that during the nineties the number of 
procurement center representatives has decreased from 73 in 
1993 to 55 now. Of those, half performed this function on a 
full-time basis. In that same period of time, contract bundling 
has dramatically increased. We don't have any stronger tool to 
make sure contract bundling is done fairly than CPRs.
    On August 4, 1999, your former associate, Deputy 
Administrator for Government Contracting and Minority 
Enterprise Development, admitted here at a hearing that the 
resources weren't there to handle the problem. In your 
testimony before the Senate yesterday and in your testimony 
today, you admitted that contract bundling is a problem. Given 
that the agency admits there is a problem and in light of all 
the new spending the agency is proposing, why has this not been 
addressed in the budget submission?
    Ms. Alvarez. This is certainly an issue that is brought 
before us with some regularity. First of all, as the head of an 
agency, I need to look at the overall needs of the agency and 
the small business community, and we have made a commitment to 
fiscal discipline and to continuing to streamline the agency.
    And, so when we look at new hires, we try to make those 
very strategically. We don't want to undermine a critically 
important program, and we want to be able to introduce some new 
ones that meet the gaps that we identified in the presentation. 
Overall, we don't look to increase the number of employees at 
the SBA, and that certainly affects our ability to hire people 
in any program, including the contracting program.
    I think, also, overall, there has been a change in the way 
the procurement operates at the level of the Federal 
Government. Part of the reinvention of Government was 
streamlining processes. The result has been that the Government 
is much more efficient and much more economical in how it does 
its contracting, but there has been a downside. We have fought 
ferociously on behalf of small businesses to ensure that they 
continue to receive at this point 23 percent of all the 
contracts that the Federal Government lets, and we monitor that 
with great vigilance.
    Contract bundling has been a concern. I will ask James 
Ballentine to talk about new regulations that we think will go 
a long way to addressing those issues. James, you may want to 
address that.
    I think, Congresswoman Velazquez, with the modernization of 
the SBA, lots of things are going to be different in a very few 
years. We are going to be able to free up people from other 
areas, because we are going to be doing things electronically 
in a paperless way which will reduce the need for people that 
we now have in the mix. What that means is hopefully we will be 
able to rehire new people or retrain in the near future but not 
until we have completed this modernization. I think it would be 
premature.
    James, would you like to comment?
    Ms. Velazquez. Before he comments, Ms. Alvarez, and with 
all due respect, we conducted hearings on contract bundling, 
and Mr. Ballentine was here, weren't you? Were you here?
    Ms. Alvarez. This was before James became the ADA.
    Ms. Velazquez. And my staff in the Small Business Committee 
is conducting a review on Federal procurement and contract 
bundling. And the members on this side aisle, and I am sure on 
the other side of the aisle, has always been complaining about 
the problems that small businesses are facing in terms of 
Federal procurement and contract bundling. And you are telling 
me today that there are new regulations and that it will be 
implemented, but if you don't have the people there and the 
staff to implement those regulations, what good does it make?
    Ms. Alvarez. Your point is well taken. I hear you.
    Ms. Velazquez. Let me just read this for you: In Oregon and 
Idaho, in the Pacific Northwest, and the entire upper middle 
section of the United States--and I have a map here--from 
Montana to Wisconsin and south to Kansas does not have any 
PCRs. The State of Hawaii is currently serviced by the one PCR 
in Arizona who has no travel dollars to Hawaii. Virginia, one 
of the largest procurement dollar volume States has not PCRs. 
Would you be willing to commit today to performing a national 
review for the current PCR allocation and propose a plan that 
provides for more equitable distribution?
    Ms. Alvarez. Yes, I will be happy to take a look at that. I 
think it is a serious situation, and I will be happy to take a 
look at that.
    Ms. Velazquez. Thank you.
    Ms. Alvarez. Would you like James to comment at all on the 
regulations on contract bundling?
    Ms. Velazquez. Sure.
    Mr. Ballentine. Just to identify myself, I am James 
Ballentine, Associate Deputy Administrator, Government 
Contracting Minority Enterprise Development. We have completed 
the regulations at the agency. They have completed public 
comment. The closing date was December 27. We received limited 
comments from the small business community, and we are moving 
forward with the regulations. We hope to publish the final rule 
on these regulations by the end of April in hopes of putting in 
some really good things to control the contract bundling 
situation.
    Ms. Velazquez. Sure. Will you share those regulations at 
some point with the members of our Committee?
    Mr. Ballentine. Be happy to.
    Ms. Velazquez. Sure. Thank you.
    Ms. Alvarez. Thank you.
    Chairman Talent. I thank the gentlelady and could not agree 
with her more about bundling. As she knows, we are developing a 
bill to deal with this, and we sent it over to you last week. 
And I don't expect you to be able to comment on it now, but I 
really hope that the agency will get behind us in doing this, 
because we are not going to--the same situation you have in the 
executive branch. The other committees of jurisdiction probably 
fight for their own agency's right, and it doesn't help us a 
lot to be trying to get some investments in small business and 
that sort of thing in other areas if at the same time the 
Government, with its procurement practices, is just withdrawing 
huge amounts of contracts that small business people would 
otherwise be able to compete for.
    The gentlelady from New York, Ms. Kelly, I understand has 
no problem with me recognizing Ms. McCarthy, because she has to 
go. So, I am going to do that, and then what I will do is go 
back to regular order, and I will correct that by recognizing 
two on this side.
    So, I will go to--Ms. McCarthy is next on the list, and so 
we will just skip Ms. Kelly and go right to you, because you 
have to go; is that right?
    Well, I know, but--do you have time? If you want, we will 
just--my understanding was that you needed----
    Mrs. McCarthy. Fine.
    Chairman Talent. Okay. We will go right to you.
    Mrs. McCarthy. Thank you. And thank you for your comments. 
One of the things I had gone over, and I just wanted to ask you 
if you would clarify it, last year the majority of us here were 
trying to work with small businesses, especially on a drug-free 
workplace, and we see that there is no money--there is not 
funding for this program. Could you explain why or are you 
fitting into someplace else?
    Ms. Alvarez. What we have had over a 2-year period is $4 
million, which we have been able to let about 30 grants with 
that amount of money. And, actually, we are in the process now 
of just getting some preliminary results from those grants. 
What we were looking to do is see how effective this investment 
has been before acting. It was premature for us to be asking 
for additional funding when we really didn't have any practical 
experience on whether these grants were working or not. That 
was the rationale behind not asking for the money this year.
    Mrs. McCarthy. Okay. Just one other thing: On the Women's 
Business Council, I know that, basically, the committees are 
going to be asking you to explain why we had budgeted $400,000, 
and you are asking for $1 million to increase it. Could you 
explain to us why the increase?
    Ms. Alvarez. We are also asking for an increase in the 
number of Women's Business Centers.
    Mrs. McCarthy. Right.
    Ms. Alvarez. What we see is tremendous activity with women 
in business and the need to correspondently respond to that 
activity. Women have also become involved in the contracting 
issue as well. Unfortunately, women are receiving less then 3 
percent of Federal contracts right now. There is a huge 
concern, and we have been working very closely with the Women's 
Business Council and with our own office to expand that.
    The Council is currently funded at $600,000 and is seeking 
an additional $400,000 to expand its economic network, 
procurement, equity capital and research program. There is 
really a lack of data and information on women in business, and 
really they are looking to branch out and bemore responsive to 
what is occurring out there.
    Mrs. McCarthy. Well, my whole point is I am hoping this 
Committee will support the increase. I think it extremely 
important, because working with business women on the Long 
Island, we know that they are there, and we should be doing 
everything possible to help them. So, I support the increase, 
and I am hoping the Committee here will.
    Ms. Alvarez. Yes, and I think, for example, many states 
have asked for assistance in setting up their own councils, 
which is something that we would be doing with this funding. 
Also, there is an interest in creating a Women's 
Entrepreneurial Fellows Program. There are a number of areas 
where we have not had the resources to be responsive, and this 
program would do that. This budget would do that.
    Mrs. McCarthy. Thank you.
    Ms. Alvarez. Thank you.
    Chairman Talent. Okay. I will recognize Ms. Kelly, the 
gentlelady from New York.
    Mrs. Kelly. Thank you, Mr. Chairman.
    Ms. Alvarez, there are a couple of things that I was 
looking at. You spent a lot of your time talking about the $21 
million new program and the New Markets Program.
    Ms. Alvarez. Yes.
    Mrs. Kelly. But there is about $950 million that you have 
asked for in other areas, and I am interested in one particular 
area, and that is the PRIME Act, which is actually already a 
law. That is a $15 million program, and I would really like to 
know what steps have been taken to implement the PRIME Act? 
What have you done with that?
    Ms. Alvarez. I am going to ask Charles Tansey to come up 
here and join me, because he is the principal person 
implementing PRIME. First of all, we are very enthusiastic 
about what PRIME can do in conjunction with our microloan 
program.
    Mrs. Kelly. But what have you done?
    Ms. Alvarez. Charles, do you want to lay out where we are, 
because we have been working on regulations and setting this 
up.
    Mr. Tansey. Yes. Charles Tansey. I am the Associate Deputy 
Administrator for Capital Access. We began work on the PRIME 
implementation in December. We have convened several meetings 
of interested parties, with a number of discussions as to how 
to properly interpret the intent of the bill. We have drafted 
regulations; we have run it by our General Counsel. They are in 
circulation within the SBA right now. We expect that they 
should be going over to OMB shortly.
    We hope that we will be able to make awards this year if 
funds can be made available. It would be essentially a pilot 
this year and we hope that we can make awards as early as 
August. That is our intent at this particular point.
    Mrs. Kelly. So, you intend to get the awards ready and out 
here by August?
    Mr. Tansey. Yes.
    Mrs. Kelly. Is that what I understand?
    Mr. Tansey. Indeed.
    Mrs. Kelly. Will you keep this Committee informed of your 
actions with that, please?
    Mr. Tansey. Yes, indeed.
    Mrs. Kelly. I also wondered when you talked about 23 
percent of the Federal contracting dollars going out, I am very 
interested in how many of those contracting dollars went to 
women-owned firms?
    Ms. Alvarez. That is what I was mentioning a little bit 
earlier. Less than 3 percent did, and we are alarmed by that, 
although, frankly, we have been working very actively with the 
women's community, the National Women's Business Council to try 
to heighten awareness, and also working within the agency 
structures. I actually have entered into agreements with just 
about every agency, to develop a strategy targeted at 
increasing the number of women-owned businesses receiving 
contracts. So, we are pushing very hard to get that number up. 
Our goal is 5 percent.
    Mrs. Kelly. I recognize that, which is why I asked the 
question. My question is when you are saying you are working 
with agencies, are you developing a written plan for them to 
follow----
    Ms. Alvarez. Yes, absolutely.
    Mrs. Kelly [continuing]. And an awareness plan, so that 
every procurement office there, including those that are 
involved with our, for instance, our international people--the 
embassies and so on--those people all understand that that is 
where we are trying to go?
    Ms. Alvarez. I have not only had conversations with them, 
but I have in writing commitments from them, and we are 
monitoring their commitments. There is a lot of good will and 
good intent on the part of the agencies. It is a combination of 
not only ensuring that it is a top priority for them, which I 
believe it is, but also women have not been involved in this 
arena in the past, and developing an awareness and a desire to 
pursue these contracts is something that we also have to work 
on the outreach part.
    Mrs. Kelly. Well, I think women have been in business for a 
long time. I started my first business in 1963.
    Ms. Alvarez. Right, but they haven't been Federal 
contractors.
    Mrs. Kelly. Well, this is true. I also want to ask you, 
Administrator Alvarez, about the fact that one of the major 
emphasis that we have in Congress this year and past years has 
been the Drug-Free Workplace Program, and I see there is no 
request in this budget. I do not understand your total 
disregard for the need for us to support drug-free workplace 
programs. Why is there nothing included here?
    Ms. Alvarez. We have $4 million. We have awarded 30 grants. 
They were awarded towards the end of last year. We are in the 
process now of evaluating the effectiveness of those grants. We 
really had no basis, at this point, for requesting additional 
funding, because it was very new, and there was no product, no 
outcome. We are hoping to see how effective these grants have 
been in reducing the use of drugs in the workplace and go 
forward from there.
    Mrs. Kelly. When did you award the first drug-free grant?
    Ms. Alvarez. It was towards the end of last year, September 
17th. It was a program that took awhile to get up and running. 
We were working across agencies, and I wish we had awarded them 
sooner, but we just couldn't. It was just very difficult to get 
everybody agreeing on things.
    Mrs. Kelly. Can you explain the difference to me between 
the business information centers, One Stop Capital Shops, and 
the assistance that is offered by the Small Business 
Development Centers? I would like to have you further describe 
how the efforts of these sites can be coordinated. It seems to 
me we have a lot of different organizations out there that may 
be overlapping in a way. And I also wonder how many businesses 
are being served by these agencies?
    Ms. Alvarez. We have an array of services. In fact, we have 
an entire department devoted to programs that provide technical 
assistance, because there are different needs, in some cases 
specialized, and they require different programmatic responses. 
Our biggest program, of course, is the Small Business 
Development Center Program, which is, by and large, based out 
of universities. The assistance received there by small 
businesses is in helping them develop business plans, marketing 
plans. They may involve one or a few sessions, but it is not an 
ongoing involvement.
    We also have SCORE volunteers, retired executives, who 
operate out of various locations--sometimes out of the Small 
Business Development Centers, One Stop Capital Shops, et 
cetera.
    One Stop Capital Shops are located in Empowerment Zones, 
which is not where the Small Business Development Centers are 
located. And One Stop Capital Shops, as the name implies, is a 
coordination of different agencies, local government, and 
community organizations, all located in one place to be of 
assistance to small businesses in those communities. We have 
within each One Stop center a Business Information Center.
    A Business Information Center is a collaboration between 
the private sector and SBA. The private sector normally 
provides hardware and software packages and assistance in 
setting it up. We work within the community and find the space 
and maybe research assistance. The business person will come 
in, and we will direct them to this library, if you will, and 
we will even train them on how to use the software packages so 
that they can develop their business plans. We have USEACs, 
which is our U.S. export assistance centers. Again, that is a 
coordination and collaboration across agencies, SBA, Commerce 
Department, and Ex-Im Bank for the purpose of encouraging small 
businesses and supporting them in their pursuit of exporting 
transactions.
    We have Women's Business Centers that provide specialized 
support to women who often have specific circumstances in their 
lives that are different from other business people. Some of 
them specialize in helping women who are coming off of public 
assistance and welfare. Some of them specialize in helping 
women access venture capital where there is a huge lack of 
venture capital available to women in business.
    I actually have a chart here that goes through each one of 
our assistance programs and outlines how it is that we help 
small businesses in a particular way.
    Mrs. Kelly. Are these centers linked? Because we really 
want to make them linked--make sure that they are linked, 
because the more assistance, the better. And do your district 
offices administer all these programs and oversee all these 
programs?
    Ms. Alvarez. Our district offices, for example, with the 
Small Business Development--
    Chairman Talent. If you would yield just for a second?
    Ms. Alvarez. Yes, sir.
    Chairman Talent. Maybe the gentlelady can make this the 
last one, and then we come back later if you have more.
    Mrs. Kelly. Yes.
    Chairman Talent. Okay. Go ahead.
    Ms. Alvarez. And I would be pleased to meet with you and 
talk with you in detail about this.
    We have online Women Business Centers; we have SCORE 
counselors online across the country, obviously, providing 
advice and expertise wherever they are needed. I wish we could 
link the Small Business Development Centers, but by law, they 
are meant to stay within their states. I have repeatedly said I 
would like to see all these SBDCs linked across the country so 
that if one has a particular expertise, it could be accessed by 
someone in a different state, but apparently that is not 
possible right now.
    Mrs. Kelly. Thank you very much.
    I have run out of time. I do have more questions, but I, 
unfortunately, am one of those people who has to leave, so I 
hope you will hold the record open so I can submit those 
questions in writing.
    Chairman Talent. Sure. Well, let us do that right now, as a 
matter of fact. Without objection, we will hold the record open 
for 10 days.
    And, also, I meant to mention, Ms. Alvarez, I would like 
to--I didn't see some of your statements regarding the NMI in 
your written testimony, so I would like to be certain that you 
include and copies of those exhibits also for the record.
    Ms. Alvarez. Yes, sir.
    Chairman Talent. I thank the gentlelady. Her lines of 
questioning was very good. I didn't interrupt for that reason 
but only because we have other members.
    Now, we are going to go in this order, which is the order 
in which people came: Mr. Pascrell, Mr. Phelps, Ms. Christian-
Christensen, Mr. Hinojosa, Mr. Davis, Ms. Napolitano, Ms. Tubb 
Jones, and Mr. Baird.
    Mr. Pascrell?
    Mr. Pascrell. Thank you, Mr. Chairman. Good morning, 
Administrator; good to see you again.
    Six contracts worth $3.7 million were awarded as a result 
of the HUBZone preferences in Fiscal Year 1999. Based on the 
numbers that I have, figures that I have seen, this works out 
to be 0.002 percent of the Fiscal Year 1999 dollars rather than 
the goal that we had established at 1 percent. If we are 
spending $2 million on the program and there is only 3.7 in 
contracts to show for it, to me, this does not seem like a very 
good return.
    I would ask you to look very carefully at that, because I 
believe that the Federal contract preferences which were 
associated with the HUBZone approval is a critical program, and 
it can work out very nicely. And if there are difficulties in 
implementing it, we want to know about it, not before the horse 
is too far out of the barn and down the road.
    Coupled to that is something I want to bring to your 
attention. We had a Small Business Subcommittee field hearing 
in my district not too long ago, and the HUBZone was one of the 
targets, one of the focuses. We came up with this kind of a 
situation, and I think it is pretty common: Some businesses can 
take advantage of this program, but they are actually and 
physically across the street from the zip code and the district 
which enables them not--which would enable them to be part of 
the HUBZone district. I think that this has to be reviewed, and 
we need to be a little bit more flexible in who is eligible and 
who is not eligible. Because what this does frequently is pit 
one town against another town, and I think that that, in the 
long run, will have a negative effect in terms of what we want 
to do. Have you heard about this, and what do you think?
    Ms. Alvarez. I think HUBZone has the potential to be a 
terrific program, and I am pleased with the results we are 
seeing already. Anytime you start a brand new program with 
limited resources, it takes awhile to get it set up and also to 
get the word out. Outreach is a key part of any new program. 
And we started out with very limited resources, two employees.
    One of the things that we did do that took time was we 
decided that we wanted to create a new program that would be 
consistent with a modernized SBA. The only government 
contracting program right now where we can do everything 
electronically is the HUBZone Program--everything from 
identifying your eligibility to applying. It is the model, and 
we intend to integrate the other contracting programs into that 
model so that in the future, whether it is 8a or SDB it is 
going to be a simplified application on line. That took 6 
months to do in the first year of a program. That is not by way 
of apology, but it is by way of explanation.
    We had $2 million, which is not a lot. We are asking for $5 
million. We need to hire more people. We need to do more 
outreach. In the process, again, as with any program, we have 
discovered that we need more flexibility; you are absolutely 
right. And, so we have been rewriting our regulations and 
revising them so that we can let more folks into this program, 
because in the end it is going to be really a terrific program. 
It is geographic and income-based, and it is going to create 
jobs.
    Mr. Pascrell. How soon can we see some changes and results 
of that flexibility within this program?
    Ms. Alvarez. James, do you want to comment on where we are 
with the revised regs?
    Mr. Ballentine. Yes, Congressman, we intend to publish the 
revised regs at the end of April. We anticipate the revised 
regs being final in July of this year.
    Mr. Pascrell. And just one final question, Mr. Chair.
    What can we look for--I mean, give me some parameters in 
the example that I used, for instance. I think it is a good 
example; this is happening all over the place. How do we bring 
that community across the street, in another zone, in another 
zip code to make it eligible?
    Mr. Ballentine. The revised regs will not address that 
issue. The HUBZone Program is designed by census tracks. The 
census tracks are, of course, based upon the low income housing 
tax credit program administered by the Department of Housing 
and Urban Development. We would have to really revise the 
program and refocus the program if you are going to change 
these census tracks. And that would be something that we would 
have to work with the Department of Housing and Urban 
Development to do.
    Mr. Pascrell. Then you are not answering my question, 
really. If we are going to continue to use the same basis, the 
same demographics, the same census tracks, or enumeration 
districts, whatever, we are going to come out with the same 
conclusion.
    Ms. Alvarez. I think the key here, Congressman, is that 
HUBZones were designed so that the principal place of business 
for a company would be located in the HUBZone, because the 
intent was that they would hire 35 percent of the employees 
from the HUBZone, and they would generate economic activity in 
the HUBZone. That is why it is hard to have flexibility around 
the area of where the company is located. If the company wants 
to relocate its principal place of business, they can do so. We 
can have some flexibility. But otherwise we run the risk of 
companies who are not in the HUBZone wanting to conduct 
business away from the area where we desire to create jobs.
    Mr. Pascrell. That is absolutely unsatisfactory, that 
response. So, what you are telling me is that you don't intend 
to change the definition of a HUBZone.
    Ms. Alvarez. We will be happy to pursue it.
    Mr. Pascrell. Excuse me, if I may. What I am talking about 
is where you have a HUBZone on one side the street--I remember 
the discussion and how this got started. And on the other side 
of the street, which may happen to be a suburban community, 
which hires many of the very people that live in the 
communities and urban areas that we are trying to help--I live 
in one of those areas. But it seems to me that we are punishing 
the business simply because it physically is not inside that 
HUBZone. That, to me, divides communities and has a 
philosophical negative impact upon what we are attempting to 
do. In the long run, we accomplish nothing. We are supposed to 
be bridge builders.
    Ms. Alvarez. The purpose of the program is to create not 
only jobs but an infrastructure in communities that may be 
across the street from a suburb, but the moment you physically 
locate a business in an underserved community, you create the 
need for other businesses to serve that business. You are 
right, there is a philosophical difference. The point of the 
program was that companies would be locating in places where 
they might not ordinarily locate, hiring people from those 
communities in their neighborhoods. That was really the intent 
of the program.
    Mr. Pascrell. You can't expect a business, simply because 
it lives just out of the zone, to up and relocate physically, 
if they could, into the HUBZone. I am talking, more important 
than the example I gave, philosophically, that isn't reality. 
And I tell you this from experience, being a mayor, being a 
State legislator, we ought to be working with each other.
    And this divides communities. It is like what we have in 
New Jersey--enterprise zones. The enterprise zone stops at Main 
Street. On the other side of the street is another town as if 
it is a foreign country, and it is not. Believe me it is not.
    Thank you.
    Ms. Alvarez. Thank you.
    Chairman Talent. I thank the gentleman, and I think the 
message perhaps for the Administrator, not to speak for the 
other members, is that there are some concerns we have. I mean, 
I mentioned the Veterans Program, and I appreciate your 
response there. And Ms. Velazquez talked about procurement 
assistance, and Mr. Pascrell has talked about HUBZones. And 
this is a cooperative effort. I mean, I understand that you 
have your priorities, and most of them I think I agree with, 
but we certainly want attention paid to----
    Ms. Alvarez. I would be very happy to pursue this. I am 
trying to set out what the thinking was behind the HUBZone 
Program, and we are being flexible, which is why we have new 
regs that are being proposed. This is one area that is not 
included in that reg process, but we can look at it and try to 
be as flexible as we can. I appreciate that.
    Chairman Talent. Yes, if there are changes that are needed 
in the statute for something----
    Ms. Alvarez. Yes. Maybe there are changes needed in the 
statute, because I think----
    Chairman Talent. That would be very helpful.
    Ms. Alvarez [continuing]. It goes beyond the regulatory 
process.
    Chairman Talent. It is very helpful with you having 
grappled with it on a hands-on basis, to say, ``Look, we have 
tried to do this, and we can't. Now we need this.'' And that 
makes it much easier for us rather than trying to anticipate. 
Because I would rather not have to go to the statute if you 
have the regulatory authority.
    Ms. Christian-Christensen is next.
    Ms. Christian-Christensen. Thank you, Mr. Chairman.
    Good morning.
    Ms. Alvarez. How are you?
    Ms. Christian-Christensen. Fine. I wanted to congratulate 
you on your audit report and----
    Ms. Alvarez. Thank you.
    Ms. Christian-Christensen [continuing]. All of the other 
successes that you have outlined for us this morning. And thank 
you, of course, for the support that you have given to my 
district in many of the areas that you discussed.
    We are also very interested in the New Markets Initiative.
    Ms. Alvarez. It looks good, doesn't it? I like it. I like 
it. We need to get a camera. Sorry.
    Ms. Christian-Christensen. That is okay. No, we like it 
too.
    We are very interested in the New Market Initiative also, 
and as you reach out to the Native American and the other rural 
areas, we hope that the territories will also be given some 
special consideration.
    I have maybe two questions. One is about farming, and the 
Committee has had several hearings on agricultural issues. The 
most recent was regarding saving the family farm. The Fiscal 
Year 2001 budget submission has a component that addresses 
Native American-owned business technical assistance, and the 
Fiscal Year 2000 submission had a component that addressed 
veteran-owned businesses. Is the SBA looking at each one its 
technical assistance programs to see what kind of assistance 
can be provided to farmers?
    Ms. Alvarez. Yes, we are. And Charles may want to speak to 
the fact. We have been involved in rural roundtables, looking 
at all our programs to see how we can adjust and be responsive 
to the needs of the rural communities. We also think, for 
example, the New Markets Program will be terrific for rural 
communities where there is really a lack of access to equity.
    So, Charles, I don't know if you want to add something, but 
we are actively pursuing a rural strategy at the SBA.
    Ms. Christian-Christensen. Yes. And maybe in the comment 
they might want to comment on a memorandum of understanding 
that will allow USDA lenders to participate in the 7(a) Loan 
Program that is being proposed?
    Mr. Tansey. Yes. Charles Tansey, ADA Capital Access. We are 
pursuing a memorandum of understanding with the USDA. The idea 
was to try to build momentum back into rural areas of the 
country. We have seen a distressing trend away from the use of 
some of the SBA programs, particularly in states with large, 
rural areas, and we want to find a way to rectify that. We have 
determined an effective strategy would be to work hand-in-hand 
with the USDA, particularly with their intermediary lending 
partners, or lenders, who are already out in rural areas where 
either our lending partners don't have a presence or our 
districts don't have presence. They could use the 7(a) Program 
in particular to augment their limited resources. That is the 
first piece of it.
    There are a whole series of other things that we are 
looking at, and we are trying to make adjustments for our 
program so that we can build momentum in the rural areas. I 
think that is a general outline. Every month we are having a 
rural roundtable in various parts of the country to hear what 
people have to say about what needs to be done and how we can 
work with other agencies in addition to USDA. We will have a 
report on that sometime in June or July.
    Ms. Christian-Christensen. Thank you for that answer.
    We have several members on our Rural Business Enterprise 
Subcommittee that might be interested in having some of those 
roundtables held in their districts, and we will share that 
with you.
    Ms. Alvarez. We would be happy to pursue that.
    Ms. Christian-Christensen. Thank you. And I have a question 
also about the small, disadvantaged business. That is something 
that I am very concerned about. And as of 10-1-99 if a firm is 
not SBD certified, it won't be recognized as a minority-owned 
business by the Federal Government as far as procurement. And 
if they are not certified, also the large prime contractor 
won't get credit for using the SBD as a supplier to meet its 
goals.
    The application seems very complex, and I would be 
interested in hearing what is being done to make this 
application process easier?
    Ms. Alvarez. I agree. We are simplifying the application. 
We are actually looking to combine the 8(a) and SBD application 
and ultimately do it electronically.
    James I don't know if you want to comment further on that 
process.
    Mr. Ballentine. We do indeed intend to simplify the 
application. We agree with you, as well, that it is a 
complicated application, and to some extent the 8(a) 
application is also very complicated. As the Administrator 
mentioned, we are planning to streamline that. We, in fact, 
hope to have that totally completed, cleared through the Office 
of Management and Budget by the end of this month.
    Ms. Christian-Christensen. Thanks. Let me give my 
colleagues an opportunity to ask some questions. Thank you very 
much.
    Ms. Alvarez. Thank you, Congresswoman.
    Ms. Velazquez [presiding]. Yes, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Madam Chairman.
    I am very pleased to be able to listen to the presentation 
that you made as to how you anticipate SBA will look in the 
year 2003. We look forward to helping you get there, and that 
it will indeed be easier to create those New Market Initiatives 
that you talked about and access the capital for all women and 
minorities to get into business or expand their businesses. In 
this New Market Initiative, I know that there are some 
regulations that are supposed to be published. When will they 
be out?
    Ms. Alvarez. Well, first, we need authorizing legislation. 
We have a proposal from the Senate side, and we are hoping to 
have one from the House side shortly.
    Mr. Hinojosa. Do we have one?
    Ms. Alvarez. We do have appropriations, but we don't have 
the necessary legislation.
    Mr. Hinojosa. Well, has anybody in the House of 
Representatives initiated that?
    Ms. Alvarez. We have been working very closely with 
Congresswoman Velazquez to ensure that we will have some 
legislation on the House side. She might want to comment on it.
    Ms. Velazquez. There is going to be a meeting between the 
staff of SBA and my staff. Once we finalize the changes that 
have been made, it will be introduced probably next week.
    Mr. Hinojosa. Excellent. Those of us who have empowerment 
zones, especially rural empowerment zones, are desperately 
waiting for that to get started, and if you need authorization, 
Madam Chair, I want to be sure that you know that I want to be 
part of that. I want to help, both in being a co-sponsor and 
being on the House floor to speak in favor of it.
    Ms. Alvarez. Very good.
    Mr. Hinojosa. You and I also had a discussion at the end of 
last year regarding efforts by some associations who were 
trying to change the definition of a small business to be less 
50 percent. And I just want you to bring me up to date. Has it 
been cleared that we are going to stay with the 51 percent, as 
I know I am in favor of?
    Ms. Alvarez. Yes. The National Minority Suppliers 
Development Council was exploring redefining what constitutes a 
small business from the standpoint not only of ownership but of 
control. I think their intention was to make as much equity 
capital financing available to those businesses as possible.
    We are very supportive of having more venture equity 
capital available for minority-owned businesses, but we were 
very clear that the law defines minority ownership as 51 
percent ownership and that we will continue to support that. It 
is the applicable law with respect to all Federal programs, and 
we believe that it is a way of building minority businesses by 
ensuring that there is 51 percent minority ownership and that 
there is no misrepresentation of who really owns the company.
    We have been on the record. I believe that the council did 
go ahead and pass a resolution.
    Ms. Velazquez. At the end of January they changed.
    Ms. Alvarez. Yes.
    Ms. Velazquez. From 51 percent.
    Ms. Alvarez. But that does not affect the law, and it 
doesn't affect our interpretation of the law. My concern was 
that there shouldn't be confusion out there. A private entity 
redefining what constitutes a minority-owned business has no 
applicability to our definition of what constitutes a minority-
owned business. Fifty-one percent ownership is the law.
    Mr. Hinojosa. I certainly support the law, and I think that 
there are exemplary programs out there where large 
corporations, like Burlington Factories, have gone in and found 
medium-sized businesses and done limited liability partnerships 
where they buy 49 percent equity in that company and thus 
accomplish exactly what the other group was trying to do by 
saying we needed to have it at less than 51 percent. And there 
are still other large companies, like ConAgra, that are again 
using that limited liability partnership example and doing it 
successfully with only 49 percent.
    So, I think that we need to just take those exemplary 
programs, highlight them throughout the country so that those 
medium size or small businesses can pursue moving to expand 
their facilities into some of the empowerment zones and help us 
create jobs in those places that just need so much help.
    Lastly, there was another one here that--on e-commerce, it 
seems that when you were meeting with the folks over at the 
U.S. Senate, in your testimony you said that $5 million of your 
budget is to expand training, offering classes on topics like 
building a web site, conducting e-commerce on the Internet, 
marketing your business online, and on and on. But according to 
the staff, they feel that with the way this is going that the 
money is dedicated for other items. What are they?
    Ms. Alvarez. I don't know what they would be. We had a very 
successful Y2K initiative at the SBA where we conducted 
hundreds of seminars and forums around the country. We estimate 
that about a million small businesses came to seminars, 
summits, conferences that were focused on technology. And my 
first reaction was let us keep the momentum going, because it 
is clear that there are thousands, millions of small businesses 
out there who recognize that they have to use technology to be 
competitive.
    Part of the proposal would cover e-commerce summits around 
the country, a high level of visibility for the role of e-
commerce and technology in small businesses. We are only 
beginning to scratch the surface on what we can do with online 
classrooms and other online activities. We know that government 
contracting is going to be conducted online more and more. And, 
so we need to make an investment that involves people and 
resources and activity to get our small businesses prepared.
    Mr. Hinojosa. So, do you have the staff now that can go and 
help us conduct an e-commerce summit in our region?
    Ms. Alvarez. What we did was we took regional and local 
staff, combined it with experts from central office, and we 
pulled together the summit, and if you are interested, we would 
do that.
    Mr. Hinojosa. Yes, I am.
    Ms. Alvarez. Yes.
    Mr. Hinojosa. Thank you.
    Thank you, Madam Chair.
    Ms. Velazquez. Thank you.
    Mr. Davis.
    Mr. Davis. Thank you very much for your testimony and your 
responses to the questions that have been raised.
    Let me just begin by first of all commending and 
congratulating your agency for the very aggressive work that it 
has done throughout the country especially as you have promoted 
the New Markets Initiative and especially as you have responded 
to questions and concerns that we have raised about contract 
bundling. And let me just say I appreciate the fact that there 
are going to be new regulations coming soon, although I may as 
well just state for the record that as far as I am concerned 
looking for contract bundling to assist in the development of 
small businesses is like looking for light in a dark place.
    And I appreciate the fact that your agency has tried to 
squeeze out some regs that might in some way prevent the 
further harm that contract bundling can do for small business 
development, but I think that you have been at a terrible 
disadvantage in trying to implement that legislation and make 
it consistent with the goals and objectives of the Small 
Business Administration. So, I just want to say that----
    Ms. Alvarez. Thank you.
    Mr. Davis [continuing]. I appreciate the--the other concern 
I have is with the New Markets Initiative. In the county in 
which I live, Cook County, Illinois, which is the second 
largest county in the country, 5.1 million people in our 
county, and in that county only 14 percent of all loans that 
have been made in Cook County have gone to low-income areas. 
And there are a lot of low-income areas. As a matter of fact, 
in my district alone, I have over 165,000 people who live at or 
below the level of poverty.
    And, so my question is that even with the proposed New 
Markets Initiative--and I also know that many of the SBA 
programs have been aggressively marketed, that people have in 
fact attempted to make use of them. You have got some good 
staff out there. But in spite of all that, when you look at the 
bottom line, the real deal is that the resources are not 
getting to the people who need them. The help is not getting to 
the people, in many instances, nor the communities that really 
need it. Do you think that the request in the New Markets 
Initiative is really enough or I am saying, should we get 
things moving, will this be enough to really make a 
significance difference or impact throughout the country?
    Ms. Alvarez. Thank you very much, Congressman. I think that 
is a very thoughtful question. And the presentation I made on 
the New Markets Venture Capital Program only highlighted a 
program which is new and requires legislation, and therefore I 
went to some length to explain what that was about. We actually 
have a much bigger strategy to address precisely the concerns 
that you have raised.
    On the loan side, on the debt side, and on the technical 
assistance side we have focused on smaller size loans, because 
that is where the greatest need is in communities that are 
underserved. And to address that we have asked to double the 
size of the Microloan Program. It is the reason we are very 
supportive of PRIME, which will help microenterprises and the 
microlenders to really serve those communities.
    We have also asked for an increase in the guarantee for 
small size loans. The reason is that we have seen a significant 
drop in activity by our regular lenders in the smaller size 
loan area. When we introduced LowDoc we had a phenomenal 
success with it. It had a 90 percent guarantee attached to it. 
The moment we changed that guarantee to 80 percent, we started 
to see the numbers fall off, and we started to see many of the 
smaller lenders get out of the program.
    So, in response to the criticism and the concerns we have 
gotten from the lending community, we are proposing a 90 
percent guarantee for smaller size loans. We hope that that 
will encourage more activity on the loan side. That needs to be 
accompanied by equity investments. A company that would receive 
an equity investment through the New Markets Venture Capital 
Program would be a growth company, and so they would be much 
further along, for example, than a microborrower. Still, they 
would operate in precisely those communities, and that kind of 
an investment of capital would create jobs in those 
communities.
    And that also gets further, I think, enhanced through the 
HUBZone Program. The idea behind the HUBZone Program was, 
again, locating businesses in geographically distressed 
communities to create employment for folks in those communities 
as well as an infrastructure. So, I think we have really a 
three-pronged strategy for New Markets that cuts across lending 
and technical assistance, equity investments, and contracting. 
We are looking at the smaller businesses, because that is where 
we think that there is a lack of capital, credit, and presence.
    Mr. Davis. Thank you very much.
    And, Mr. Chairman, I also want to commend both you and the 
ranking member for looking at these issues legislatively, 
because I think that in many instances we have given the Small 
Business Administration mandates, but at the same time they 
have had some handcuffs on. We have said, ``Go out and do this, 
but you have got to do it in compliance with the laws, the 
rules, and regulations that are established legislatively.''
    And as one who has been interacting with the Small Business 
Administration in low- and moderate-income communities for 
about 30 years now, I am convinced that in many instances what 
we have done is we have set up programs, mandates, but in many 
instances the restrictions were so tight that individuals 
couldn't reach the goals that we had set for them. And I am 
just pleased to know that there is a level of awareness that 
have us trying to address legislatively some of the impediments 
to the implementation of the Small Business Administration 
mandate. So, I thank you very much.
    Ms. Velazquez. Thank you, sir.
    Chairman Talent [presiding]. The gentleman always makes a 
very good point, and this is a--there is a kind of a creative 
tension that works here. And what I would just encourage the 
Administrator to do is where she feels she needs additional 
flexibility to meet our time limits to be aggressive in letting 
us know that so that we can work with her.
    And conceding full marks for the difficulty of these 
things, we still need to have them done. I think the point Mr. 
Pascrell made about the HUBZones, the regulations should not 
have taken as long as they have taken to produce. And if there 
is problems, we need to work with them and get them done. And I 
don't understand the Administrator to be saying anything 
different than that. One of the reasons we have these hearings 
and why I appreciate the members' participation is to flag for 
the Administrator areas where we are concerned----
    Ms. Alvarez. Yes; appreciate that.
    Chairman Talent [continuing]. And make sure that--because 
she is very busy, and make sure that we impress upon her in a 
forum which can't be ignored, frankly, our intention to make 
sure that these things are done.
    Ms. Napolitano, I appreciate your patience.
    Ms. Napolitano. Thank you, Mr. Chair, and with this 
patience I learn, because I listen more than I can speak.
    Thank you very much, and I echo the sentiments of my 
colleagues about what I believe to be one of the best working 
committees to address the issue that affects us at the local 
level. One of the areas that really concerns me, Ms. Alvarez is 
the Welfare to Work, and you had a request in 2000 of $761,000, 
and you are requesting a lesser amount than last year, a 
decrease of $193,000. With the enactment of the Personal 
Responsibility and Work Opportunity Reconciliation Act in 1996, 
along with the President's Welfare to Work Initiative, it 
effectively ended the current welfare system as we all knew and 
loved it.
    The SBA is participating in this initiative by providing 
training to individuals leaving public assistance, providing 
technical assistance to welfare recipients who have potential 
to become entrepreneurs, and we have discussed this at length, 
and educating small business owners on the Welfare to Work 
Program in order to obtain hiring pledges from them, which is 
in my area the Private Industry Council that has been doing 
that for a long time, and now we are asking them to do other 
things, including, of course, look at the Welfare to Work 
Program.
    You state in your budget you have exceeded your three-year 
goal for the business commitments to hire individuals 
participating in this initiative. What kind of follow-up is 
conducted with the small business community to determine if 
those commitments are honored and to determine if there are 
ways to improve the SBA's efforts, realizing that specifically 
in California it really hasn't begun to hit the cap? In other 
words, there was a limit. That limit is just barely becoming a 
reality. How do we know that we won't be able to need more 
assistance to help small business be able to take in those 
Welfare to Work recipients and the training that goes along 
with it?
    Ms. Alvarez. The Welfare to Work Initiative is a very 
important one that took very seriously. And I am happy to 
report that we really accomplished quite a bit, which is why, 
at this point, we don't think we need additional funding.
    For example, we set three-year concrete numerical goals 
which we actually exceeded. We had wanted to achieve at least 
200,000 commitments which meant--commitments that small 
businesses would either step up to the plate and commit to 
hiring someone from the public assistance rolls or we could 
assist an individual in becoming an entrepreneur. We actually 
exceeded that goal.
    Sixty-seven percent was business commitments to hire, and 
33 percent was providing entrepreneurial training. We are 
pleased to say that we reached 210,029 total commitments.
    We produced and distributed a Welfare to Work tool kit for 
small business owners. Small businesses told us that they had a 
shortage of workers, and we said here is an opportunity for us 
to connect the small businesses with the potential workers. 
That is why the Welfare to Work tool kit was important, because 
we needed to educate them.
    We launched a public service campaign which got out the 
word. We entered into formal partnerships with government 
agencies, trade associations, not-for-profit organizations so 
that we could expand the scope of what we were doing. And we 
certainly worked with the private industry councils. Every 
single district office entered into a different kind of 
relationship with the PICs.
    We also built a world-class Welfare to Work web site that 
contained the tool kit, the pledge cards, the success stories, 
and our award winners. That site averages 8,000 hits a week.
    We feel we did what we set out to do, and we are continuing 
to leverage our resources. We feltat this point in time we were 
not looking for programmatic increases, and we were just looking to 
keep pace with what we have done.
    But it is an important challenge, and we don't want to be 
asleep at the switch. I don't think we are, because I think we 
have at the field level internalized these objectives. They are 
holding events, outreach and acting on Welfare to Work goals 
really as part of their day-to-day business, which is what we 
wanted.
    Ms. Napolitano. Okay. So, you don't think there is going to 
be a demand or as high a demand possibly due to the economic 
viability.
    Ms. Alvarez. I think that the economy is so strong and 
people are so eager to find workers and, that is what the New 
Markets Initiative is all about. It is about finding another 
way to give people employment and entrepreneurial 
opportunities, because we don't want people overlooked because 
structurally things haven't been set up to address those areas. 
The New Markets Initiative will help a lot of folks who still 
fall within the Welfare to Work category.
    Ms. Napolitano. Now, you do work with Labor on that issue?
    Ms. Alvarez. Yes, absolutely. I have had many conversations 
with Secretary Herman, and we have formal relations with them 
about this topic.
    Ms. Napolitano. Thank you.
    The other question, of course, has to do with the Drug-Free 
Workplace grants, and unfortunately we don't hear the issue of 
drug in the business being lessened. We seem to have a 
tremendous problem in the United States. What can you tell us 
about how the program has worked? What success have you had 
with it, and also what performance measures have been used to 
evaluate the success of your Drug-Free Workplace Program?
    Ms. Alvarez. First of all, we think it is a good objective, 
and we are very supportive of it. It is really too soon for us 
to evaluate the outcome of the program, because, as I had 
mentioned earlier, anytime you start up a new program, there is 
a process of working across agencies that is more time 
consuming than I would like. Setting up processes and 
procedures, took us awhile, so that we didn't get those grants 
out the door until the end of the fiscal year last year. The 
reports that we are getting right now are still preliminary. We 
would like to see what the result is of the 30 grants that we 
awarded. We awarded them to not-for-profits and to Small 
Business Development Centers in September of last year. So, it 
is soon. I don't want to be premature in telling you how they 
have worked. For that reason, we didn't pursue more funding, 
because we didn't know what the $4 million investment was 
yielding us, but we do think it is a very good idea, and there 
is a need for it.
    Ms. Napolitano. Great. Well, that answers part of my 
question anyway.
    Another area is the National Women's Business Council, and 
while I read in here that you are requesting an increase, which 
may be something that they are well deserving of, I am 
wondering whether they are working with your Welfare to Work, 
because a large segment of the Welfare to Work are women. To be 
able to help them become the new entrepreneurs and being able 
to assist the Women's Business Council do that outreach, what 
is SBA recommending or what is being done in that area to bring 
them together to be able to promote new entrepreneurships?
    Ms. Alvarez. I may ask Sherrye Henry. I don't think Amy is 
here. I didn't see Amy, but if Sherrye is here, you may want to 
comment on this issue, Sherrye. Sherrye runs our Office of 
Women's Business Programs. And we have really tried to work 
across departments and across agencies on this issue of Welfare 
to Work.
    The National Women's Business Council really is positioned 
to play a very important role. We are seeing an explosion of 
women-owned businesses, which is why we are asking for an 
increase. Not enough research is being done. There are topics 
that we are not able to research, because we don't have the 
funding; that is part of what this will cover. We are getting 
requests at the State level for us to be involved. We can't do 
it without more resources. Because the States now want to set 
up their own councils.
    There is an interest in bringing together local 
policymakers with woman business owners to conduct summits, to 
help them really develop legislation and regulations and other 
programs to support women's entrepreneurship. All of that 
requires support.
    Sherrye, would you like to comment?
    Ms. Henry. Yes, I am Sherrye Henry, and I run the Women's 
Program.
    I think it is important to know that our Women's Centers--
and we have a network of about 80 around the country--work very 
hard to move women off welfare. We have been very successful at 
it. In fact, about 20 percent of all of our clients are welfare 
women, and the number of low-income women is up in the 40 
percentile. We are very concerned already with this population.
    Ms. Alvarez. Through the Microloan Program, for example, 
more than half of our microloans are going to women, and these 
are, again, low-income women, which is why we would like to 
double that program. It makes a huge difference if they can 
access a small amount of money accompanied by technical 
assistance. Many of our Women's Business Centers are actually 
microlenders as well. So, it really is an integrated strategy.
    Ms. Napolitano. Good. May I suggest that for any of the 
research that you may be wanting to ducktail with, a lot of the 
educational institutions--the universities and junior 
colleges--have done a lot of research on the population and the 
business and the impact on the economy. So, may I suggest that 
you bring them as partners, because they have already done part 
of it if not most of the research that might be able to help 
you, and you may be entering into some kind of agreement with 
them to be able to add another segment to be able to provide 
what you need.
    Ms. Alvarez. I think that is good advice. In some cases, we 
may be doing that already, but I think we need to expand it. 
Thank you.
    Ms. Napolitano. Thank you.
    Ms. Jones. Don't go away Sherrye. Before you leave, I want 
to ask you a quick question.
    Before I ask the question of you, thank you, Madam 
Chairman.
    Chairman Talent. The gentlelady from Ohio is recognized.
    Ms. Jones. Oh, you are back. See, you leave for a few 
minutes.
    Mr. Chairman, ranking member, Director, on behalf of the 
11th Congressional District of Ohio, thank you for the support 
that you have given me in the many--in the couple programs that 
we tried to do with regard to small business in the district, 
and I continue to look forward to working with you.
    The question I wanted to ask of you, Ms. Henry, was in Ohio 
the Women's Business Centers are in Columbus and where else?
    Ms. Henry. Well, we have a network of about seven operating 
centers. They are all graduated centers, Congresswoman.
    Ms. Jones. Okay.
    Ms. Henry. They have not been funded by the SBA for a 
number of years now.
    Ms. Jones. Okay.
    Ms. Henry. They are all eligible because of the 
sustainability legislation that was enacted in the last 
session.
    Ms. Jones. Make it plain to me, what are you telling me? 
You are saying they are graduated but----
    Ms. Henry. The program was set up by the Congress to 
sunset. All of the grants were at first only for 3 years, and 
it was extended to 5 years, and then last session the Congress 
passed sustainability legislation, which now allows SBA to 
recompete and refund a limited number of the network of 
graduated centers. We don't have enough money to refund all of 
them, but we expect to have about 12 graduated centers refunded 
by the 1st of June.
    Ms. Jones. So, in this budget the process is done. Okay. 
Thank you very much, Sherrye.
    My question goes to the issue of other agencies 
administering some of the loan programs and other type of 
programs that provide capital for small businesses. My question 
is have you assessed their success as compared to the success 
of SBA when SBA administered those programs? And if you have, 
could you provide, at least I am interested for my district, 
are they doing better, are they doing worse, what could happen 
to improve it? Because very often, we do something to improve 
or cut down on the administration process, but its result is to 
have it not be advantageous to the small businesses themselves. 
I have no knowledge one way or the other, but I think it might 
be a useful evaluation for SBA as well as the Committee.
    Ms. Alvarez. First, let me say that SBA is the premiere 
lender to small businesses in the United States.
    Ms. Jones. Yes.
    Ms. Alvarez. We believe just by virtue of our experience, 
and as I think you saw with our presentation, as we modernize 
that we are on the cutting edge. And our numbers, the fact that 
we are projecting $20 billion in overall activity, including 
leveraging of private capital in the year 2000, is a success 
story that I think can't be told with respect to small business 
anywhere else.
    Charles, you may want to comment. Obviously, the Department 
of Agriculture has a program that addresses small business 
needs in the agricultural area; HUD has its version of our 
program.
    Ms. Jones. Maybe my question wasn't clear. The question I 
am raising is that at some point SBA decided to allow other 
people to certify a business for a loan, like banking 
institutions and the like. And I am asking have you assessed 
whether or not, now that that certification happens in an 
institution other than SBA, whether or not there is an increase 
in funding for small businesses or a decrease based on the move 
to another agency? I didn't mean--I think you are doing a 
premiere lending operation as well, but I am just trying----
    Ms. Alvarez. You are speaking about the contracting. That 
is not you, Charles; that is James.
    Ms. Jones. I thought maybe I wasn't clear in my question. I 
apologize for that.
    Ms. Alvarez. We have always been the agency to certify to 
8(a) eligibility, for example, and so we have tremendous 
experience in that area. We still are the agency who will 
certify you for small, disadvantaged business status. But in 
addition--oh, okay, now, Greg hands me this note. He says, 
``No, she really means the banks.''
    Ms. Jones. Yes, exactly.
    Ms. Alvarez. So, we are not talking about small, 
disadvantaged business. We are talking about PLP, preferred 
lenders.
    Ms. Jones. Exactly. Maybe I should have used your term.
    Ms. Alvarez. All right. We are just into this jargon here. 
Okay, I am going to turn this over to Charles to talk about how 
the Preferred Lender Program is operating. We obviously create 
the standards, and we review them for compliance to ensure that 
they are meeting our missionobjectives as well as our policy 
objectives.
    Charles?
    Mr. Tansey. Yes. It is a tremendously successful program. I 
think about 60 percent of our total loan volume is done right 
now under the PLP, the Preferred Lending Program. We do approve 
eligibility at this particular point, but, essentially, they 
are approving the credits under their own credit criteria in 
light of guidance.
    Ms. Jones. I understand that, and what I am asking----
    Ms. Alvarez. Your question is are they really reaching the 
people who need the help.
    Ms. Jones. I am just asking have you used an evaluation to 
determine that it is working as well as we conceptually think 
that it is? And I am suggesting that maybe what we need to do 
is take a look at that, and then maybe go to some of the 
institutions and say, ``Well, why is the rate in 1999 less than 
it was in 1998 when we have an increase in businesses 
happening? What are you doing to keep people from being 
involved in the process.'' I hope I am making sense.
    Ms. Alvarez. Yes, it makes total sense.
    Ms. Jones. Okay.
    Ms. Alvarez. Yes. Do you want to comment?
    Mr. Tansey. We are in fact doing that. Some of the 
recommendations that we are putting forward right now, for 
example, the 90 percent guarantee, comes directly out of our 
discussions with banks as to what they need to do in order to 
pursue the kinds of goals that we are looking for.
    Ms. Jones. I am raising the question, because in my 
district--I am on Banking and I also am on Small Business, 
because I would like to know what the banks in my area are 
doing, and if they are not doing what they ought to be doing, 
then I want to have an opportunity to sit down and have that 
discussion.
    Ms. Alvarez. Well, they are here today. I hope you are 
going to stay and ask them these questions.
    Ms. Jones. I wish I were. They are not here from my 
district.
    Ms. Alvarez. They are hearing it. Well, we have national 
representatives, and I am sure that Tony and others will be 
happy to respond.
    I think you are right. We are working to increase the 
guarantee, because we have heard from them that that would make 
a difference. We have set up SBAExpress, because we heard that 
if they could only use their own applications, they would be 
willing to accept a 50 percent guarantee, because it would make 
it so much faster. That is for smaller loans, because we are 
focused on smaller loans. We have the Community Express pilot 
in which these same category of lenders are not only making 
loans but they are providing technical assistance at their own 
expense. We have had an ongoing discussion with them about what 
they need to do to meet the mission objectives of the SBA. And 
I am glad you are saying this with them present, because we say 
it all the time.
    Ms. Jones. I appreciate your responses.
    Chairman Talent. If the gentlelady will suspend just a 
second. Mr. Wilkinson----
    Ms. Jones. I am sorry.
    Chairman Talent. Oh, no, not at all. Mr. Wilkinson is here, 
and unless there is an objection, I don't mind him answering a 
question or two. Ms. Tubbs Jones, you are going to have to 
leave, right, so you can't stay for the second panel?
    Ms. Jones. Yes, sir, unfortunately.
    Chairman Talent. We won't open this up to a huge--because 
other members--but I am sure you don't mind, do you, Mr. 
Wilkinson, going a little ahead of time and answering a 
question or two?
    Mr. Wilkinson. No, I would be happy to.
    One of the issues that I raised in my testimony, and it has 
been discussed here today somewhat, and that is the subsidy 
rate estimate. And it has been our position that the 
overestimate of the defaults in the model has been one of the 
reasons contributing to some of the changes we have had to make 
in the program.
    If we go back to 1995 when Low Doc Program was rolled out 
and the 90 percent guarantee, everything was rolling along 
fine. We had to make some program changes to bring the subsidy 
cost of the program down, and we moved from a 90 percent 
guarantee to an 80 percent guarantee, and the loan volume since 
then has gradually fallen off.
    That is one of the issues we need to look at: How can we 
get the subsidy rate cost down in line with the appropriations 
that we receive? And appropriations have been dwindling. The 
subsidy rate has not fallen, so the ability for lenders to 
propose and implement small loan incentives has been very 
difficult. And I think that is one of the reasons why we need 
to keep focusing on the default estimate in the subsidy model, 
and we need to have a discussion, as I pointed out in my 
testimony, about a subsidy rate floor. What is the role of the 
Federal Government going to be in the loan programs? What level 
of Federal funding will we get? Because as funding goes down 
and the subsidy rate doesn't move down, that means we have got 
a smaller program or we have to raise fees or take away program 
incentives.
    Ms. Jones. And I thank you, Mr. Wilkinson for that 
response, but that is the point I am trying to make: It might 
not be a bad idea to take a look at that and say, ``Hey, how do 
we adjust--not hey--how do we adjust that to the point that we 
can''--that is not in the record, right? Strike that. Lawyers 
can do that. [Laughter.]
    Anyway, such that we are really moving down the path of 
helping small business. And that is my point.
    And, Mr. Chairman, Mr. Wilkinson, I thank you. My 
questioning is done.
    Chairman Talent. The gentlelady raises a very good point. 
One of the problems is that, and in fairness to Mr. Wilkinson 
who did step up unexpectedly there, we do send a mixed message, 
and Congress does it, and the executive branch does it. We say 
we want you to get more money to small businesses, more money 
to low-income neighborhoods, more money that is a riskier loan. 
At the same time, we want the subsidy rate to go down, and we 
want the default rate to go down, and we want you to square the 
circle, and it does put them in a little bit of light, but if 
we don't put them under some pressure, we don't again make the 
point that we would like to have this done.
    The gentlelady from New York had another question or two, I 
think.
    Ms. Velazquez. Yes. Ms. Alvarez, when the HUBZone Program 
was designed, you, Former Ranking Member LaFalce, and I, we 
worked very hard on ensuring that this program did not 
interfere with the 8(a) Program. So, I would like for you to 
clarify for the record what the order of procurement preference 
is for the HUBZone.
    Ms. Alvarez. Fine, and I will also ask James to join me 
here.
    It has now been almost 2 years since we were engaged in 
discussion about creating a new program called the HUBZone 
Program, Historically Underutilized Business Zones. And at the 
time, one of the concerns that was foremost for the 
Administration as well as for Members of Congress was what 
effect this would have on the 8(a) Program. Would it have a 
damaging effect on the 8(a) Program? That really dominated the 
discussion apart from the discussion about the virtues of the 
HUBZone Program, which are many.
    We got--we had some very serious discussions, and there are 
letters on the record attesting to those concerns, and one 
letter in particular, which I wrote to, at the time, 
Congressman LaFalce, stressing that we would protect the 8(a) 
Program. We then put forth, as I said, almost 2 years ago 
proposed regulations. In those regulations we presented an 
order of preference, and the order of preference had 8(a) at 
the top of the list, because we wanted to ensure that 8(a) 
would have the first priority in terms of receiving contracts 
even within the context of the HUBZone Program.
    We put it out for comment. We followed the appropriate 
process, and, frankly, didn't get much in the way of comment 
that challenged the order of preference we proposed. We went 
ahead and we implemented it. And, to date, we have seen that 
there have been HUBZone opportunities for 8(a) and non-8(a) 
firms. We think that the order of preference protects the 
interests of the 8(a) Program, of the 8(a) companies, but at 
the same time it makes it possible for non-8(a) businesses to 
obtain HUBZone contracts. We have seen it already; it is 
happening. And that is really the status right now. The current 
order of preference does protect 8(a), but I don't think it 
creates any obstacles for non-8(a) businesses.
    Ms. Velazquez. Yes, so that means it will not change.
    Ms. Alvarez. We are not changing it. Someone else might 
decide to change it, but we are not changing it.
    Ms. Velazquez. I want to send a clear message that we 
worked out a compromise, and I think it is 2 years too late for 
other parties now to be challenging the order of preference, 
and I just want to make it very clear that it was a compromise 
that was worked out between this Committee and the Senate side.
    Ms. Alvarez. Yes. I agree.
    Chairman Talent. I recognize the gentleman from Illinois.
    Mr. Davis. Thank you, Mr. Chairman. I just have one other 
question I would like to ask the Director.
    Ms. Alvarez. Yes, sir.
    Mr. Davis. In terms of technical assistance, especially to 
small, emerging business enterprises, how valuable does the 
Department view that?
    Ms. Alvarez. The smaller the business, the greater the need 
for technical assistance. It is the reason why technical 
assistance is a significant component in the Microloan Program. 
It is the reason why we are so enthusiastic about PRIME, which 
is totally focused on technical assistance. It is the reason 
why technical assistance is a significant component of the New 
Markets Venture Capital Program.
    We just think that particularly with newer, smaller 
businesses and in underserved communities, that it is not just 
about the money. It is about helping people who have energy, 
ideas, willingness, giving them tools to succeed. And, so we 
can't stress enough how important the technical assistance is. 
We have seen the success of technical assistance nationwide 
with the Small Business Development Centers, with the SCORE 
volunteers, with the Women's Business Centers, with the 
Business Information Centers, with One Stop Capital Shops--in 
each case it is really a different kind of support for a 
different set of needs. There may be times when it appears they 
are overlapping, but, overall, each one of these programs 
really targets the needs appropriateto different businesses at 
the stage of their development.
    Mr. Davis. Thank you very much. I understand that you have 
taken the position that I like, that if you give a person a 
fish, they might eat for a day----
    Ms. Alvarez. That is right.
    Mr. Davis [continuing]. But if you teach them how to fish, 
then they can have a business for a lifetime. So, I thank you 
very much.
    Ms. Alvarez. Thank you.
    Chairman Talent. Okay. I have a few more questions, and 
then we can go with the next panel.
    Perhaps you want to have Mr. Walter address this; I don't 
know.
    Ms. Alvarez. All right. Greg, come on up here.
    Chairman Talent. But the question that was raised initially 
about the subsidy rate and how far back we go in looking at 
experience on defaults.
    Ms. Alvarez. Fourteen years.
    Chairman Talent. Yes. Which I understand is the average 
maturity of the loans.
    Ms. Alvarez. Correct.
    Chairman Talent. So, the idea there is that we want to go 
back at least as far as it takes, on average, to dispose of 
loans. Is that the theory behind it?
    Ms. Alvarez. Yes, yes, so that we can watch the performance 
throughout the life of the loan.
    Chairman Talent. And I am getting at the difference between 
the agency's views and OMB, because I think OMB is a looming 
presence behind a lot of this, and I don't like the idea of the 
programs this Committee oversees, which we all agree are 
terribly important, being used as billpayers for other parts of 
the Treasury, and I will just lay it--I think that is what 
happens, and I think OMB structures it that way.
    Now, a lot of these loans are prepaid, aren't they?
    Mr. Walter. That is correct, Mr. Chairman.
    Chairman Talent. Which means that, yes, maybe the average 
maturity is 14 years, but that really isn't the average in 
terms of disposing the loans, because if you included the 
prepay, the average life of the loans is less than 14 years.
    Mr. Walter. Many of the loans we do make have maturities up 
to 25 years, especially in the larger real estate-backed loans. 
So, the 14 years is the average length of time a loan is 
outstanding.
    Chairman Talent. So, in this case, average maturity is the 
same thing as average life of the loans?
    Mr. Walter. Not necessarily. It is just a mathematical 
average, so it isn't necessarily the same thing.
    Chairman Talent. Because my understanding is that the 
average life of the loans is less than 14 years. And if it is--
in other words, if we went to figuring it based on how far back 
we went based on average life rather than on average maturity, 
it wouldn't be 14 years. And we are all in agreement that if we 
don't have to go back that far, then the subsidy rate doesn't 
have to be this high, and that frees up dollars for other 
things. I mean, what is your opinion on that, either the 
Administrator----
    Mr. Walter. I think we would be happy to look at that and 
see if there is a significant difference between the two and 
enter into discussions with OMB and see whether there is any 
ability to look at that.
    Chairman Talent. Now, if there were a difference who would 
have--would you have the authority to change to average life as 
opposed to average maturity on your own or would you have to 
get OMB's approval for that?
    Ms. Alvarez. OMB.
    Mr. Walter. We would have to get OMB concurrence on that.
    Chairman Talent. I want to ask, could we change that here 
or would that generate a jurisdictional problem with the Budget 
Committee? Yes, we have a looming presence here too, so I 
understand your problem.
    Ms. Alvarez. So, you can relate.
    Chairman Talent. I mean, let us be clear. It would be one 
thing if because we were so conservative in figuring this 
subsidy rate we had an extra pool of money which we put back 
into our programs; that would be one thing. But it goes to the 
Treasury and is then spread out all over the budget, and if you 
can figure out a way to get that changed, I would be very 
interested in hearing, I can assure you of that.
    Ms. Alvarez. As Greg says, it would require changing the 
Credit Reform Act.
    Chairman Talent. Yes, that is unfortunately what we have 
been told, although the other way to do it is just informally, 
between the two of us institutionally, put OMB on the spot with 
the small business communities to get them to change. I mean, 
for example, the 90 percent default rate and I support--excuse 
me, the 90 percent subsidy for certain kinds of loans, which I 
support, that isn't in strict keeping with their standards. In 
other words, they can deviate when there is enough pressure on 
them to deviate, and that is true, isn't it?
    Ms. Alvarez. Well, I think that from the standpoint of 
judging the safety and soundness, they judge that it will have 
practically an insignificant effect raising the guarantee to 90 
percent on the cost of the program. And, so the judgment is 
based on the fact that it really doesn't have a noticeable 
effect on the program.
    Chairman Talent. Which I think if they would let us make 
that argument, we can make that argument, I think, for a number 
of these other programs. And this gets to something Ms. Tubbs 
Jones was getting at. I think the experience of the agency and 
this Committee in overseeing these kinds of programs is greater 
than the experience at OMB or Treasury or any other. I just 
think we do it better. You have been living with it from the 
beginning. This Committee has been living with it from the 
beginning, and I don't think we are irresponsible. I would not 
support a lowering of the subsidy rate--excuse me, a--yes, a 
lowering of the subsidy rate to a point where it would be 
risky. I don't want to impair all the credibility of these 
programs. I think they are the ones, the ones outside this 
Committee and this agency, who are adjusting these rates for 
their own purposes, either to make money or for whatever other 
reasons are at stake.
    And, so one of the reasons I was grateful to the ranking 
member for making sure that we still had oversight over PRIME, 
because it isn't--to me, I don't hesitate--I have waived 
jurisdiction over stuff that we had jurisdiction. I want to get 
things done. So, where I felt it was appropriate to do, I have 
done that. This is not a turf battle. We just do this better 
than they do it. And I have pretty much pursued that course 
pretty consistently, I think.
    Would you explain to me more specifically than I now 
understand it what the BusinessLINC Program is?
    Ms. Alvarez. BusinessLINC--and that is not Greg's area----
    Chairman Talent. No. If it is all right with you, you are 
excused, Mr. Walter.
    Ms. Alvarez. BusinessLINC actually falls within our New 
Markets Initiative. It started out, in fact it is underway 
right now, as a collaboration between big business and small 
businesses. We have been working with the Chamber of Commerce 
nationally. They have set up branch offices in different parts 
of the country to create a mentoring networking and in some 
cases a business relationship with smaller businesses. We think 
that it is proceeding in a really promising way, but we 
recognize that we are going to need some resources if we want 
this to take off, because at some point we need to provide 
support.
    The formula is big business, small business, and not-for-
profit community development organizations that help make this 
marriage occur. These not-for-profit organizations, these 
economic development organizations, can't just sort of drop 
everything else they are doing to continue to do this kind of 
mentoring without some support, and we also need to develop 
some kind of an infrastructure to institutionalize it. That is 
why we need the funding for BusinessLINC. There is a lot of 
support from the big business community, but we need to help it 
happen.
    Chairman Talent. Right. I am all for mentoring. I think, 
actually, mentoring is a very promising way of getting small 
businesses to the point where they can participate on their 
own. But as you know, this program is not authorized, and we 
are not even sure exactly what it is and how it operates. And I 
am always a little concerned when the agency requests a 
substantial appropriation. The staff tells me $6.6 million on a 
program that isn't authorized. So, this is an area that we are 
going to want to go into more with you and with staff to make 
certain that this--particularly, does the money go to the 
larger businesses?
    Ms. Alvarez. No, it doesn't. And we didn't seek 
authorization, because we are not providing grants where we 
would certainly come before the Committee for authorization. We 
are really going to be allowing these organizations to compete 
for contracts to help create the--mediate and create the 
relationship between the big and small businesses.
    Chairman Talent. When you say these organizations----
    Ms. Alvarez. In other words, not-for-profit organizations 
who would have expertise in the business development world so 
to put together the big and the small businesses and monitor 
and move along these relationships.
    Chairman Talent. But they will be applying for grants, 
won't they? How else are you going to----
    Ms. Alvarez. No, we won't do it through grants. It will be 
a competitive contracting situation, which is what we do now. 
We have the authority to do that now in most areas. That is why 
we didn't----
    Chairman Talent. So, this will be--can you give me an 
example of maybe the kind of organization that would apply for 
this contract?
    Ms. Alvarez. James, do you want to share some examples 
here?
    Mr. Ballentine. Mr. Chairman, one of the good examples that 
we often use is related to an organization that is affiliated 
with the Washington Board of Trade here in D.C. It is called 
the Community Business Partnership Project. They launched such 
an initiative that we are dealing with now with BusinessLINC 2 
or 3 years ago. Today the project really works with 45 local 
businesses, and they, as the Administrator said, attempt to 
match those businesses that they work with, the small 
businesses, with their already established large businesses in 
the community.
    As a result of these relationships that they have 
established in working with both sides, the large and the small 
businesses, they have created 60 jobs by just bringing these 
small businessestogether with the large businesses for 
technical assistance and for sub and prime contracting opportunities.
    While SBA has many outlet points, we don't have this type 
of expertise, but these economic development type 
organizations, such as the Community Business Partnership 
Project, have this expertise. What they really need is seed 
money to get this started to do this.
    Chairman Talent. I get handed a lot of notes too. So, would 
this be like a community development organization might do this 
or a local chamber or any of the above?
    Mr. Ballentine. Exactly.
    Chairman Talent. And, so it sounds kind of like a grant to 
me. I mean, what do you put out specs for a contract in a 
particular area? You want to up this mentoring in a city or 
something, so you put out specs for that city?
    Mr. Ballentine. Exactly, under a contract.
    Chairman Talent. And then they bid for the contract.
    Mr. Ballentine. Yes.
    Chairman Talent. So, this would be local, like in regions 
you would do it. You identify regions that need----
    Mr. Ballentine. We would identify regions, particularly 
those in low- and moderate-income areas that, again, 
traditionally do not have this type of investment opportunity 
and do not have many large businesses working in those 
communities. So, we would identify areas.
    Chairman Talent. Have you got regulations about how this 
operates or something in writing for us to look at?
    Mr. Ballentine. We would be happy to meet with you and your 
staff as well as the staff of Ms. Velazquez to go over how we 
would lay out the project.
    Chairman Talent. How much has been appropriated for this in 
the past?
    Mr. Ballentine. This is a new program.
    Ms. Alvarez. This is brand new. This has been operating as 
a voluntary initiative.
    Chairman Talent. Okay. So, you have done it out of existing 
funds without making it----
    Ms. Alvarez. Yes.
    Chairman Talent. Is this a separate line item this year? Is 
this the reason this has come to my attention for the first 
time?
    Ms. Alvarez. Yes, this is the first time. We think that 
there has been enough demonstrated potential here that if we 
were to get some funding, we might really have it take off.
    Chairman Talent. All right. Staff tells me you got $1.5 
million last year. Is that a separate item or was that----
    Mr. Ballentine. We received $1.5 million, but the 
BusinessLINC Initiative was linked to the New Market Venture 
Capital Initiative which did need authorization. In Fiscal Year 
2001, we are not seeking authorization, because we are simply 
not going through the grant process.
    Ms. Alvarez. It was a different proposal, Mr. Chairman. 
When we first started this as a voluntary effort, it was 
conceived by James' predecessor, Richard Hayes, as a grant-
making program, so we sought authorization as part of the New 
Markets Initiative. But when we revisited that issue, it didn't 
appear to me that this needed to be a grant program, that this 
could be a competitive contracting situation, and so we 
delinked it, and now we are requesting $6.6 million.
    Chairman Talent. You delinked it from NMI.
    Ms. Alvarez. Yes.
    Chairman Talent. Okay. Well, I just want to, just to let 
you know up front, I believe in mentoring. I certainly don't 
want to inhibit the agency from taking these kinds of 
initiatives. But, for example, I am just sitting here thinking 
we don't have any standards for measuring results or 
accountability or anything like that. If the program is 
unauthorized and we don't have from the agency some set of 
standards that you are going to follow----
    Ms. Alvarez. We will be happy to sit down with you and any 
members of the Committee and share with you our approach, our 
standards, the plan, and get your input on what makes sense.
    Chairman Talent. All right. Well, I am going to direct the 
staff to do that on a quick basis, because I don't want to hold 
up this authorization bill. But I may--and I haven't talked 
with the ranking member about this, but we may want to do 
something in this bill on this, because you are going now to a 
pretty significant amount of money. I mean, $6.6 million. We 
talked about some of the needs that haven't been met, and I 
want to make certain that we know how this ducktails with other 
programs, what areas of the country you are picking to go for, 
what the standards are for the specs, all that sort of stuff, 
and we don't really have that yet. So, I think we are going to 
have to look into that.
    I am told that the other services line item in your budget 
increases from $44 million to $85 million. Can you give us a 
summary of the items that were covered under that and why you 
need an additional $40 million for that?
    Ms. Alvarez. Greg is telling me that these are the non-
credit programs.
    Mr. Walter. Mr. Chairman, a number of the non-credit 
programs are not executed through grants, but we use contracts 
and other vehicles to do that. If that is the case, then they 
would be shown in the other services line instead of the grant 
line. So, a lot of the increases you see there is for those 
non-credit programs that you have heard us talk about today.
    Chairman Talent. Okay. Give me some examples now of what 
you are talking about, so when you say non-credit----
    Mr. Walter. For instance, HUBZones is an example. We have a 
specific line item for HUBZones, and to the extent funds for 
the HUBZone Program are spent as a contract or things under 
object class 25, as defined by OMB, they would be shown under 
the other services line. So, a significant portion of the 
HUBZone money would be going out in contracts to do outreach 
and other types of things, so those funds would be shown under 
the other services line.
    Chairman Talent. All right. Do you have a breakdown of 
which programs this extra $41 million is associated with so you 
can tell us it is the contracts for HUBZones, it is the 
contracts for PRIME or whatever it is?
    Mr. Walter. Certainly, we can provide that to you.
    Chairman Talent. Yes, I would be very interested, because, 
again, we are talking about a significant amount of dollars, 
$41 million.
    So, you are saying reason having to do with how you submit 
your budget, you don't include that in the line item of the 
program with which it is associated.
    Mr. Walter. There is a separate object class breakdown that 
is required in the budget where you take the entire request for 
the agency and break it by sub-object class. So, depending on 
how the funds are spent, whether they are on compensation and 
benefits or grants or other services or travel, we have to 
allocate them into those various buckets. So, what you are 
seeing is the allocation of the agency's budget into that 
category called ``Other Services.''
    Chairman Talent. Why the reason for the big jump this year?
    Mr. Walter. Because of the increases that we are asking for 
in the various programs, such as HUBZones going from $2 million 
to $5 million. If the majority of that increase is in that one 
object class area, you would see an increase in that category.
    Chairman Talent. Okay, I am informed that there is a $41 
million increase in other services. That is what I am talking 
about. But, in addition, a $40 million increase in grant 
subsidies and contributions. It sounds like two kinds of catch-
all categories. What is the difference between the two of them?
    Mr. Walter. That is correct. It depends on how the funds 
are actually spent by the agency. If we put them out in the 
form of a grant, then they would be shown in the grant line. If 
we put them out in the form of a contract, then they would be 
shown in the other services line. So, what you are seeing in 
the two categories is generally the total increase that we have 
shown in the budget for the non-credit programs. For instance, 
the PRIME Program, the $15 million, or the E-commerce Program. 
Those types of programs would be distributed between the two 
object-class categories depending on how we spend the funds.
    Chairman Talent. Okay. Well, I would like that breakdown, 
and we would like that expeditiously.
    Mr. Walter. Absolutely.
    Chairman Talent. And, also, I am told by staff, Ms. 
Alvarez, that sometimes we have made requests subsequent to 
these hearings for information, and it has taken some time to 
get them to the Committee. Now, I was not given specific 
instances, but figures like three months were given to me. It 
took that much time to get requests answered from the agency. 
That strikes me as too long. I am sure it strikes you the same 
way.
    Ms. Alvarez. Yes.
    Chairman Talent. So, let us expedite information requests.
    Ms. Alvarez. Yes, I agree, I agree.
    Chairman Talent. I don't want to get anybody in trouble, 
maybe I do. It just depends on----
    Ms. Alvarez. We will talk later.
    Chairman Talent. Okay.
    We have this markup coming up very quickly, according to 
the plan, and the ranking member and I would like to bring this 
up next week. So, we are going to have to move pretty quickly. 
We don't want to have to keep postponing this. But those are 
some issues I think we need to address, because there is a lot 
of money in those two areas I just covered.
    Ms. Alvarez. Mr. Chairman, the overall increase in this 
budget is $185 million over last year. And 1 percent of that 
increase goes to the disaster funding, which we are fully 
funding; 6 percent of the increase goes to new programs; 14 
percent of the increase is to the existing traditional core SBA 
programs. So, the majority--the largest part of the increase is 
to our standard SBA programs and then to disaster, and really a 
smaller fraction goes to the new programs.
    Chairman Talent. I made one note to myself, which I can't 
find because of all these other notes people have given me. 
Where is the note about the NMI stuff I want to bring up? Don't 
take my note until I am done with it. [Laughter.]
    Let me go a little bit into your presentation on NMI just 
to make some points. And we, as you know, are working up that 
bill with you on this.
    Ms. Alvarez. I appreciate that.
    Chairman Talent. You made a point measuring--or it may have 
been Mr. Ballentine who made this point, I don't know--about 
the number of jobs that were associated with NMI.
    Ms. Alvarez. Yes, that is right. That was a point I made.
    Chairman Talent. Now, is it your anticipation that we would 
measure performance from these NMI investments by jobs created? 
And let me tell you why I would have some concern about that. 
We all expect and hope and would be very pleased with job 
creation from these investments in these low-income areas, and 
there will undoubtedly be some.
    Ms. Alvarez. Yes.
    Chairman Talent. I think it is a mistake to overemphasize 
that going in because of all the collateral benefits that we 
get from small business creation in these neighborhoods, even 
if there isn't an immediate or a very substantial impact on 
jobs in the neighborhoods right away. In part, just renewing, 
if you will, the infrastructure of those neighborhoods and 
having the functioning small contractor with his headquarters 
in that neighborhood is a tremendous plus even if you don't go 
out and hire right away a bunch of folks from the 
neighborhoods. Obviously, we hope that happens, but it means 
that when the child walks to school in the morning and is going 
by the drug store, says hello to the guy--you see what I am 
getting at? And, so give me your thinking on that. You are not 
tying this directly to job creation.
    Ms. Alvarez. When I made the presentation and talked about 
the job creation, I used the word ``long-term,'' because in the 
New Markets Venture Capital Program, you are talking about 
investments in growth companies but companies that will need 
significant involvement, hence the TA component on the part of 
the investor. These are companies that are already a going 
concern, that are promising, but they really need expertise, 
hands-on management to really make them take off. And about 
patient capital for these New Markets ventures, we are talking 
about not paying interest for a period of 5 years. We want to 
allow these companies an opportunity to produce a return, and 
it is not going to happen immediately. So, it would not be wise 
to judge the success in terms of immediate job creation.
    In studying the results produced by the community 
development venture capital companies, they look at job 
creation ultimately as one of the outcomes of telling the 
success story, and we should look that way too.
    Chairman Talent. Yes, no question. I think--tell me if you 
think we are in disagreement here. I don't think we are.
    Ms. Alvarez. No, I don't think so. I totally agree with 
you. I made the point, though, because if you look long-term 
and you look at the investment, it really is a very modest cost 
to create those jobs.
    Chairman Talent. I think that is true in the longer-term. 
One of the gripes I have about the current enterprise-owned 
system is that the only tax relief in there is for hiring folks 
from the neighborhood, which is a very good thing to do, but 
people don't open businesses to hire employees. They open 
businesses to eventually make money to support themselves, and 
if we lose that focus, if we go wrong--one of the tricky things 
about this is if you go wrong with the focus at any point, the 
program can end up being ineffective.
    So, as long as we are in agreement that, yes, this is a 
benefit we expect to enjoy in the longer-term but it is not a 
criteria for performance measurement necessarily in the short-
term, then we are in agreement. I do agree totally with you 
that not only will it create jobs, maybe even more important, 
be a model for entrepreneurship for young people in that 
neighborhood. So, even if it doesn't create a job, they go 
start their own business then, which----
    Ms. Alvarez. That is right, that is right.
    Chairman Talent. Now, another point you mentioned about NMI 
investments and you said, okay, one of the reasons the program 
is expensive is that we do expect losses. I think you said 
that, didn't you?
    Ms. Alvarez. We are using the most conservative estimates. 
The analogy would be the kind of subsidy rates that we 
estimated for the SBIC Program not too long ago and in the 
Microloan Program where we started off using very conservative 
estimates, and over the course, really, of a relatively short 
amount of time, we saw in actual experience that we were too 
conservative. In fact we didn't require as much. And we expect 
that those experiences will be not unlike what we will 
experience with the New Market Program.
    Chairman Talent. You said there is going to be--I think you 
said it is going to be mission-driven rather than profit-
driven.
    Ms. Alvarez. Obviously, the investors will want a return on 
investment. This is not throwing away money, but to the extent 
that they won't expect the same kind of return that the SBIC 
investor would expect, it is mission-driven. To the extent that 
we are talking about patient capital so that you don't expect 
an immediate return but you expect it down the road, and to the 
extent that these New Markets Venture Capital Companies will be 
located in those communities, they will know those communities 
and will be investing in the well-being of the community not 
simply their own profit motive. That is the distinguishing 
characteristic.
    Chairman Talent. No question about it. Would you agree with 
me-- I hope you do--that it is a very fine line we have to walk 
here, because one of the--where something is investment-driven 
in the sense that people expect to go in business from which 
the investors get a rate of return, you have a hedge against a 
lot of things that you don't want entering into that program.
    Ms. Alvarez. Correct.
    Chairman Talent. Because once decisions are made other than 
on those criteria, unless you are very careful, you start 
having to declare what is the mission? Who gets the investment? 
And I am not going to be here after this year, and--well, I 
don't know whether you will still be in control of the agency 
or not--but we don't know what will happen a year, 2 years, how 
decisions will be made if they are not made based on we expect 
to have a working, functioning business there that is 
eventually producing for the investors. Do you see what I am 
saying?
    Ms. Alvarez. Absolutely.
    Chairman Talent. It isn't so much that profit is the key. 
It is that profit is a way of not letting other considerations 
enter into it--who knows somebody and therefore gets the 
investment.
    Ms. Alvarez. There is a profit motive, and, I don't know if 
you want to comment, Don Christensen.
    Chairman Talent. Yes, I know--this is worth a little extra 
time, and I know the members have been patient, but this is an 
important program, and if he would like to comment, I would 
like to have him comment.
    Ms. Alvarez. These programs are meant to produce a return 
on investment, and they are meant to be investments in growth 
companies.
    Don.
    Mr. Christensen. Yes. I am Don Christensen, the Associate 
Administrator for Investment.
    Yes, a fundamental concept of the New Markets Venture 
Capital Program is that it is sustainable. If you have an 
investment program, to be sustainable, you have got to have a 
profit. Now, the difference that the Administrator is referring 
to is our SBICs target profitability of between 20 to 30 
percent per year. Those profits will not be available in the 
LMI areas that we are trying to address. So, for those funds to 
be redirected toward LMI areas, there has to be a mission 
component. It is what we speak of as a double bottom line, that 
you make a profit, but you also look at some of what you have 
contributed to the community. And the contribution is, as you 
pointed out, more than just employment.
    One of the things we speak of is that we are trying to 
build wealth in the community. The wealth is both economic, 
being able to stand up and be proud of your community, to feel 
it is safe. These are the things that small business can make a 
very significant contribution to.
    Chairman Talent. Now, the contribution to the community, 
isn't the establishment by somebody of a functioning small 
business in a community that doesn't have a good skeleton of 
that, that is the contribution. We are not going to ask them, 
Okay, in addition to this, you have to attend every board of 
alderman meeting and fight for community policing in your area 
and this sort of thing. We assume they will do that, because we 
want their businesses to be successful, right?
    Mr. Christensen. Yes, sir.
    Chairman Talent. Okay. That is fine. I mean, I hear what 
you are-- if what you are saying is we are doing what all our 
programs do at some level is skim below where the market might 
generate on its own----
    Ms. Alvarez. Exactly.
    Chairman Talent [continuing]. And get some others that are 
slightly riskier but will be sustainable, and that is the 
mission you are talking about. That is the line I think we need 
to walk.
    Ms. Alvarez. And I think that word sustainable is very 
important, because it means that you expect something.
    Mr. Christensen. We expect earnings of the order of 8 to 10 
percent per year for the new market investment.
    Chairman Talent. I want this to work. I want it to work. I 
don't want any 5 years down the road some huge--some expose on 
20/20 from the same people who are screaming now that we need 
to do this, and then a few years from now they say, ``Oh, it 
didn't work, so-and-so got this.'' So, as long as your 
conscience of that, we are all on the same page. We may 
disagree on the details, but we are going in the same 
direction.
    Ms. Alvarez. That is right.
    Chairman Talent. That is, I believe, all I have unless you 
have another note to pass to me. Do you have any more notes or 
questions? Okay.
    I thank you all. It has been a very good hearing so far, 
and we have another panel.
    Ms. Alvarez. Thank you, sir.
    Chairman Talent. Thank you, Ms. Alvarez.
    Mr. Davis. Mr. Chairman, I have a young brother traveling 
with me today. I just want him to be----
    Chairman Talent. Well, why don't you put his name on the 
record, if the gentleman wants to do that?
    Mr. Davis. His name is Greg Creole. He is part of a program 
called Talent Search, and what they are doing is growing 
cucumbers. [Laughter.]
    Chairman Talent. Well, thank the gentleman for introducing 
him.
    We will have the second--he looks sufficiently below the 
constitutional age that I don't thinkthe gentleman from 
Illinois has any concerns from him in the short-term.
    [Recess.]
    Chairman Talent. We have already had a taste from Mr. 
Wilkinson, and our appetite having been wetted now, we are 
eager to get onto the second panel, who all I think are 
veterans except Ms. Hayashi. This is your first appearance; 
welcome.
    Other than Ms. Hayashi these are the usual suspects. We 
have rounded them up and gotten them before the Committee.
    All right. Rather than introduce everybody and then 
reintroduce them, we will just start off with Mr. Tony 
Wilkinson, who is the president of the National Association of 
Government Guaranteed Lenders.

    STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT, NATIONAL 
          ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS

    Mr. Wilkinson. Mr. Chairman, Ms. Velazquez, thank you for 
inviting us here today. We appreciate the opportunity to 
testify on SBA's budget request.
    You have my written statement for the record, so in light 
of the fact that we are running a little late today I am going 
to abbreviate my testimony.
    Chairman Talent. Well, as to that, let me just say that 
this is the only hearing we are going to have specifically for 
this purpose, and I felt it important to give everybody the 
full opportunity. So, whether we are late or we just had a full 
exposition, I think it was necessary.
    But I do appreciate you all summarizing. You all have 
testified many times, so just tell us what you think is 
important.
    Mr. Wilkinson. Sure. First, I want to thank the Committee 
for your consideration and passing of H.R. 2615 last year. We 
look forward to that moving forward this year. As you know, 
that includes a prepayment provision that we think is necessary 
in our program.
    The Fiscal Year 2001 budget request confirms that we are 
incurring higher costs in this program due to prepayments. 
Specifically, the subsidy rate increase is primarily the result 
of an increase in the loss of fee income due to prepayments and 
the Treasury earnings on these fees.
    Chairman Talent. What luck have you had in convincing our 
counterparts in the Senate of the need for change in that area?
    Mr. Wilkinson. We continue to have dialogue. We are trying, 
we are trying.
    Second, I raise the issue of our funding shortfall for this 
year, and we are pleased to hear today from Administrator 
Alvarez that efforts are being made to address the 7(a) 
shortfall.
    Next is the Fiscal Year 2001 budget request, and we agree 
with SBA that we will need $11.5 billion net for the 7(a) 
Program, as we estimate that to be the demand for the program 
next year. We detail our recommendations for authorized levels 
for 2001, 2002, and 2003: $14.5 billion for 2001, $15 billion 
for 2002, $16 billion for 2003. These amounts should be 
sufficiently above the current budget levels to provide 
flexibility of the Appropriations Committee should a change in 
the economy necessitate consideration of a higher level of loan 
guarantees without the necessity of authorizations being 
changed.
    I would like to thank SBA Administrator Alvarez and her 
staff. We have had an excellent ongoing working relationship 
with her and her staff. I don't want the discussion of the 
subsidy model and the excess--the conservative estimate of 
defaults in the model to overshadow the fact that we have had 
an excellent, ongoing working relationship. We are pleased with 
the budget request; shows that the 7(a) Program continues to 
perform well. The recovery rate on defaulted loans remains 
high, but unfortunately the subsidy model does include a 
default estimate that we continue to believe is materially 
overstated.
    And, so I thought I would just spend a minute on what 
happens--or some of the discussion that occurred this morning. 
I am no expert on this entire budget package, but in looking at 
the budget for Fiscal Year 2001, there is a line item on the 
status of guaranteed loans. It shows that the outstanding 
balance of guaranteed loans at the end of the 1999 was $36 
billion. We did $9.5 billion last year and roughly $9 billion 
each the 3 years before. So, my simple math tells me that we 
have spun the entire 7(a) Program out in 4 years.
    I know that is simplistic, and that is not the right answer 
for the average life of the loan, but it is a lot less than 14. 
It is probably more than four, but there is a number of 
somewhere in between that better reflects what is actually 
happening in this program.
    So, I would hope that we could continue to have dialogue on 
the estimate of defaults in the subsidy model. Perhaps your 
staff can meet with the Budget Committee staff, a joint 
hearing, a letter down to OMB, something to have a discussion 
about what is going on with the default estimate.
    I also heard Mr. Walter say today in his comments that they 
thought the range of defaults was from 8 to 12. Yet, in the 
model, they use 14.25. Why not at least the highest level of 
the range they anticipate of 12. That was what I understand to 
be about 34 basis points per 1 percent decrease in default 
estimate. That is a lot of money to either reduce the subsidy 
rate so we need less appropriations or we now have some subsidy 
dollars to spend on small loan incentives. So, again, I hope 
that we can continue to take a look at that.
    Mr. Chairman, I raised briefly, when I was up at the table 
earlier, the concept of a subsidy rate floor, and since we have 
already gone through that once before, I won't do it again. We 
would ask that that be considered.
    And I would like to close today by saying that since this 
will probably be the last time I appear before you as chairman 
of this Committee, I want to thank you for the leadership that 
you have brought to this Committee, and I appreciate the 
bipartisan effort that you and Ms. Velazquez have brought to 
Committee affairs.
    [Mr. Wilkinson's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Wilkinson. I have a lump in 
my throat, I think.
    Mr. Lee Mercer, president of the National Association of 
Small Business Investment Companies.

  STATEMENT OF LEE MERCER, PRESIDENT, NATIONAL ASSOCIATION OF 
              SMALL BUSINESS INVESTMENT COMPANIES

    Mr. Mercer. Thank you, Mr. Chairman and Ms. Velazquez and 
members of the Committee who will be considering the testimony. 
And I would like to echo Tony's remarks regarding appearing 
before you and working with you and your staff and the 
bipartisan way in which this Committee has been run. It is 
really a model for how legislation ought to be done, and I 
think you are both to be commended.
    The SBIC Program is in the best shape of its long history 
and providing substantial money in equity investments and 
subordinated debt investments to small businesses, $4.2 billion 
in Fiscal Year 1999. If you did it on a calendar year basis, $5 
billion in calendar 1999. More important than just the gross 
number is the size of individual investments. You heard the 
testimony from SBA about the private venture capital funds 
investing at the rate of about $6 million, $7 million, and even 
up to $10 million per deal, per investment.
    For all SBIC investments, the average is about $1.4 
million, but what is more impressive is the median. The median 
is only $375,000, and for debt SBICs that are making 
subordinated debt investments, the median drops down to about 
$181,000. So, clearly, there are a substantial number of 
transactions going on at the very lowest levels of capital 
necessary.
    This is true. About 34 percent of all SBIC investments last 
year were made in companies that had been in existence for less 
than a year, and if you raise that bar to 3 years, it jumps up 
to over 50 percent. So, those are the companies that need--with 
the exception of dot.coms that burn substantial amounts of 
money, those are the companies that need these smaller levels.
    The other interesting note is in the technology area, SBICs 
probably invested about 27 percent in technology-oriented 
businesses, and in the private world it is much higher of 
course, mainly driven by Silicon Valley and other areas.
    As far as----
    Chairman Talent. Lee--and I would encourage the ranking 
member also to jump in if she wants to. Unless she has a 
problem, I will keep this informal. Is that because of 
incentives or persuasion from the Government that your 
portfolio looks different? Is that just the nature of the way 
this investment operates?
    Mr. Mercer. No, it is just the nature of the business. What 
you have, I think, in the SBIC Program more than in the 
strictly private funds is a couple of things working. One, SBIC 
managers are always looking for a niche. They are profit-
driven, so they are looking for niches. They come from probably 
more varied backgrounds than perhaps some of the managers of 
the strictly private funds. They end up looking at probably 
more Main Street businesses because of that, because of their 
backgrounds. Also, they are investing much smaller amounts, and 
that kind of drives them into more Main Street businesses also.
    When you are managing a $500 million fund or even a $1 
billion fund, like a private fund manager is, you are going to 
have to be investing $10 million, $15 million, $20 million at a 
time. So, the only way you are going to be able to put that 
kind of money to work is to look for a business, typically a 
technology business, that has a significant burn rate for 
capital in its development years. So, those are some of the 
things. It is just the market dynamics that are at work, and 
good ones for small business and the SBIC Program.
    As far as the--does that answer the question? We can pull 
more statistics if you want, but does that get at the question?
    As far as the budget is concerned, we support the budget 
with what we understand to be the amendment that is going to be 
coming from the administration. For participating securities, 
they have proposed $2 billion which would cost an appropriation 
of $26.2 million, and that level, which is a 33 percent growth 
in available leverage for only a 7.8 percent increase in 
appropriation, we think is well justified by the growth of the 
program. All participating security leverage has been used for 
the last 2 or 3 years. It is the program that has the steepest 
growth rate.
    With regard to the Debenture Program, although the budget 
submission calls out for a positive subsidy rate of 0.78 
percent, which would require a $3.9 million appropriation to 
support $500 million in debentures, SBA and OMB have now 
admitted that a simple mathematical error was done. I don't 
want to get into an argument about what should be the subsidy 
rate formula. We arenot--we just said to them, even using your 
formula, it doesn't make sense. And they went back and checked their 
math, and in fact there is no positive subsidy rate. In fact, the 
subsidy rate fell by over a point, so it is a negative subsidy rate, 
and we understand the OMB and the Administration will be proposing to 
change the law that imposes the mandatory 1 percent interest that was 
imposed in 1996 to reduce that for the Debenture Program this year to 
0.88 percent for the leverage that will apply in Fiscal Year 2001. And 
we would support that, obviously.
    So, the availability of debenture leverage next year will 
literally be driven by whatever the authorization levels are 
that the Committee decides to insert in the language of the 
reauthorization bill.
    As far as suggested levels for reauthorization, in my 
testimony I have said for debentures $1 billion in 2001, $1.5 
billion in 2002, and $2.0 billion in 2003. For participating 
securities, it would be $2.5 billion in 2001, $3.25 billion in 
2002, and $4.0 billion in 2003. For participating securities, 
clearly, the growth curve supports those numbers. On the 
debenture side, although the utilization is nowhere near those 
numbers, we feel that there will be--there are things in play 
right now that may increase the likelihood that a greater 
number of debenture--more debenture leverage will be used, 
namely the zero coupon debentures that are not yet available 
that will be available to SBICs for making investments in LMI 
areas, and also the fact that last year Congress, with your 
leadership, passed a bill which would make the use of royalty 
agreements much more attractive to SBICs. Actually, they 
weren't attractive at all, but under the new legislation they 
will be. SBA has yet to issue their implementing regulations, 
but when they do, we believe we will see more debenture use 
there as well.
    Importantly, I would like to draw your attention to the 
four proposed changes to the Small Business Investment Act that 
we have proposed. We have dealt with both your staffs on these, 
so I don't want to spend a lot of time on them unless you have 
questions of me, but one of the changes has to do with the 
subsidy rate and allowing the administration to have continuing 
authority, like in the 504 Program, to adjust the subsidy rate 
when the model shows that it goes below zero.
    The other three amendments pertain to the operations of 
SBICs and, more importantly, to the resources that SBA has to 
expend in regulating SBICs. In the first case, we propose that 
SBA's definition of long-term, which they say is a 5-year 
period, be reduced to be 1 year, and this would put, for all 
SBICs, a definition that they have already made for companies 
in LMI areas and that they proposed for their New Markets 
Venture Capital Program. It is really just a recognition of the 
fact that in this environment, as in tax law and accounting 
law, the term ``long-term'' is denoted by a period greater than 
1 year. SBA has recognized that for LMI investments, and they 
should recognize it for the entire program.
    The second is with respect to control of a small business 
that has been invested in. SBA has a imposes a blanket 
prohibition on an SBIC controlling a small company, having a 
controlling interest in a small company that it invests in. It 
then sets out four broad exceptions. You can take control for 
up to 5 years where reasonably necessary for the protection of 
your investment, if there has been a material breach of the 
financing agreement, if there has been a substantial change in 
the small businesses operations or such a change as intended by 
the financing, and the SBIC and the investor group is providing 
a major source of the capital, or in the case of a start-up. 
So, you can see that what they have done is given four 
exceptions that cover almost every conceivable thing you can 
think of in providing financing to a growing small business.
    So, what happens? SBICs are forced to jump through hurdles 
to try to comply with the exception rules, and then SBA spends 
an inordinate amount of time and resources when they go out to 
examine an SBIC to make sure that all the exceptions have been 
complied with, and the exceptions pretty much take up the 
universe.
    In the Gramm, Leach, Bliley Act, that bill recognizes it, 
and for the first time, under that act, banks will be able to 
have venture capital funds without regard to having an SBIC 
license. This will be the first time in history that has been 
allowed. In that act, the way they deal with the control is 
they specifically say in the Gramm, Leach, Bliley Act that the 
venture capital firm, the bank venture capital firm, can take 
control of the small business during the investment period. 
Well, SBA's exceptions permit it for up to 5 years which is 
typically an investment period. So, we say that should be 
changed.
    And the final one is another one which is just technical in 
nature which would permit SBICs to make tax distributions once 
during any calendar quarter. The law right now says they can 
only make it at the end of the calendar quarter. What happens 
is that SBICs like to make distributions as quickly as they can 
in order to make higher internal rates or returns for their 
investors. So, they make a distribution as soon as they can in 
the quarter, and then they make another tax distribution at the 
end of the quarter. Well, each time they make a distribution, 
they have to fill out sets of forms, and SBA has to review 
them. So, we think that if you change the rule--and I think SBA 
would be supportive of this--it would just, again, reduce time 
and effort by SBA.
    Chairman Talent. Lee, I am going to have to ask you to 
suspend or we are going to miss the vote.
    We will be right back.
    I understand Mr. Wilkinson has to leave to catch a flight, 
and neither Ms. Velazquez nor I have further questions, 
although we may submit some to you in writing. So, thank you 
for coming, Tony.
    And we will be back in a few minutes.
    [Recess.]
    Chairman Talent. Okay. Mr. Mercer, by our timing you have 
been on for 30 minutes, but do you have any closing comments? I 
have to say the Committee wasn't actually in session during 
that entire period of time.
    Mr. Mercer. But I want you to know that I thought about it 
for 30 minutes, and the only thing I would close by saying is 
the four suggestions we have made, at least three of them would 
simplify the regulations. This guide to the SBIC Regulations is 
what we publish each year for SBICs. Over 600 pages. It is the 
regulations, the forms, the policies, the procedures. It is 
everything an SBIC needs to know, and it is obviously a complex 
program. So, we think that the changes we have suggested will 
take some of the complexity out.
    So, I am going to stop now with just two more comments: 
One, although SBA has left, I would like to commend SBA for the 
work they have done in supporting the SBIC Program, sometimes 
without enough assets, and in terms of personnel we have been 
told that Administrator Alvarez has allocated another 15 people 
to the SBIC program.
    Chairman Talent. I was going to ask you about that. So, you 
think that will clear up the backlog in applications?
    Mr. Mercer. Well, there is obviously going to be a learning 
curve and a hiring curve. Of that, Mr. Christensen has the 
ability to hire 5 from outside the agency, we have been told, 
and 10 from inside the agency. So, there will be some lag, but 
for a program that has grown over 280 percent over the last 4 
or 5 years they obviously need some new help, and I think at 
least we have been told that help is on its way.
    I would just like to close, in a sense, where I began and 
thank you both and your staffs for taking the time to really 
try to understand what is an exceedingly effective but 
exceedingly complex program. It really is performing up to the 
expectations of Congress. We think it can do more, but it is a 
pleasure to work with you, and we look forward to continuing 
that work.
    Thank you.
    [Mr. Mercer's statement may be found in the appendix.]
    Chairman Talent. Appreciate your comments very much, Lee.
    Next witness is John Giegel who is the vice president for 
Congressional Relations at the National Association of 
Development Companies.
    Mr. Giegel.

  STATEMENT OF JOHN GIEGEL, VICE PRESIDENT FOR CONGRESSIONAL 
    RELATIONS, NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES

    Mr. Giegel. Good afternoon, Mr. Chairman and Representative 
Velazquez. I also want to thank the chairman and ranking member 
for their bipartisan cooperation on this Committee. NADCO would 
like to thank the Committee for your continued support of our 
504 Program and the CDC industry, including the passage of H.R. 
2614. It was another step towards the improvement and expansion 
of the 504 Program to the benefit of all our small business 
borrowers.
    It is our understanding that this bill is being considered 
by the Senate Committee on Small Business at this time, and we 
would strongly urge the Committee to work with the Senate to 
obtain quick passage of this bill, which is crucial for the 
improvement of the 504 Program.
    I want to take an opportunity this morning to briefly 
address certain items in the SBA Fiscal Year 2001 budget. SBA 
has proposed that the authorization level for the 504 Program 
for Fiscal Year 2000 in the amount of $3 billion to $3.75 
billion. NADCO supports this increase in the authorization 
ceiling for two reasons: First, we have seen a rise in the 
long-term interest rates, and we have also seen private sector 
lenders starting to become a little bit more conservative in 
their lending practices. And this may be very early in this 
time frame, but there are possibilities of liquidity concerns, 
credit tightening, and the increase in authorization will help 
504 meet those challenges this year and in the future.
    There is also a 3-year reauthorization of the Small 
Business Act which provides for an authorization for the 
guaranty authority for the Small Business Administration to 
provide financing under 504 or the CDC Program, but it 
restricts the maximum amount of loan guarantees it may provide 
in any given year.
    Historically, legislation has been enacted to provide this 
program authority for 3 years. The most recent law authorized 
SBA to guarantee CDC debentures in the amount of $3 billion, 
$3.5 billion, and $4.5 billion for each of the last respective 
3 years. We certainly agree that the next 3 years should be 
increased to provide debenture guaranteed levels at $3.75 
billion for 2001, $4.5 billion in Fiscal Year 2000, and $5 
billion in Fiscal Year 2003.
    These program authorization levels are not contained in 
H.R. 2614, referred to the Senate last year, and we urge that 
they be included in your bill as without program 
reauthorization, the 504 financing cannot be provided. In other 
words, we will be shut down without those numbers being 
included.
    We believe these guarantee authorities are in line with 
expected program utilization, again, particularly as commercial 
lenders may begin to tighten as the economy might slow down as 
the result of interest rate increases.
    The SBA budget also addresses the subsidy level, and I know 
the chairman is quite interested in that. SBA's proposed budget 
decreases the annual fee charged for each 504 business borrower 
from 0.6 percent to 0.472 percent. This is an actual 21 percent 
decrease for the upcoming fiscal year, and it is the fourth 
decrease in a row. Now, certainly, we in the industry have 
always felt the subsidy rate has been too high, but at least 
there has been some reflection with the OMB subsidy calculation 
that the need to continue these high rates has been reduced, 
and this lowered subsidy rate will in fact result in smaller 
costs to our small business community.
    However, the budget also talks about the industry has a 
concern about the forecasts, again, contained in the budget 
concerning the recovery of defaulted loans and also the number 
of defaulted loans. Historically, 4 years ago, the default rate 
was around 18 percent, and now it has fallen, and recoveries 
have also fallen except for the last year. It reached a low of 
25 percent, and now it has risen to 31 percent. This does, 
again, raise the question of the subsidy rate. We in the 
industry, of course, and the small business community and I 
believe the participating lending institutions would all agree 
that the fees are probably too high. And indeed the 504 Program 
is a positive contribution to the revenue, project revenue over 
and above total costs.
    Chairman Talent. Let us get into that loan liquidation 
issue a little bit, Mr. Giegel. I, too, am impatient for more 
discretion for 504 investors to be able to liquidate defaulted 
loans. Do you have any idea--we had a pilot. Any idea how well 
it has done? I know the report isn't ready yet, but do you 
know?
    Mr. Giegel. We have only a secondary evidence, but the--and 
it is a small sample--but, clearly, the pilot liquidation study 
has shown a recovery rate better than what has been projected. 
The SBA budget talks about 25 percent to 31 percent. The 
limited sample evidence that we have not probably puts that 
close to 50 percent or better, and we only have--there is, 
obviously, recently an asset sale as well. And while we do not 
have access to the final reports and the numbers, there is 
certainly some evidence out there that indicates that the 
assets sales have resulted on 504s to be considerably higher 
than the recovery rates posted by OMB.
    Chairman Talent. Is anyone from the agency prepared to 
comment? Ms. Butler, I notice you are here. Will this report be 
ready soon for our inspection? I hate to penalize people for 
sticking around, but----
    Ms. Butler. Actually, we appreciate it. We are very 
interested in the outcome of this as well. I am Jane Butler. I 
am the Associate Administrator for Financial Assistance.
    We did issue a report on September 30 that covered the 
first 2 years of the pilot. Unfortunately, because of the 
length of time that is required to complete liquidation actions 
and the pilot only included loans coming into liquidation 
within the 2-year period, so it is not a complete record of the 
total activities on all the loans in the pilot. We are 
continuing to monitor those, and we will report to you 
periodically.
    But what Mr. Giegel said is absolutely correct. We have 
seen on both the control group, that is the liquidations 
handled by SBA, as well as those liquidations handled by the 
CDCs, that our activities show higher recoveries than what have 
been proven on a long-term basis with regard to the subsidy 
model. So, we are continuing to watch that program.
    Chairman Talent. Now, if this report turns out to be 
positive, as preliminary results indicate, you have the 
authority to move it from a pilot to just a general program 
where they can liquidate their own defaults; is that correct?
    Ms. Butler. Actually, the legislation that authorized the 
program did not have a sunset date, so we are continuing the 
pilot with the group that was originally participating, and in 
the reauthorization bill passed by the House and pending at the 
Senate, you would make the program permanent.
    Chairman Talent. Okay.
    Ms. Butler. But we are continuing it without interruption.
    Mr. Giegel. And that is a key element. We are taking, I 
think, measures included in the House bill, and hopefully to be 
adopted by the Senate, will make permanent both the Premiere 
Certified Lending Program, which provides for a reserve by CDCs 
on PCLP loans, as well as provide for making permanent the 
Liquidation Pilot Program, which would include a litigation 
authority to, we think, and working with the SBA, to make 
recoveries even better. And I think it will be certainly 
positive for our consideration of the subsidy rate as soon as 
we are able to let it count.
    Chairman Talent. Okay. Thank you, Ms. Butler.
    Mr. Giegel. Well, those are the key points of my 
presentation. We certainly want to thank you, Mr. Chairman, for 
all your efforts and your past efforts, and all the Committee 
members and ranking member and the staff for working so well 
over the last several years. The bipartisan effort has made the 
504 Program a better, better program.
    CDC are major stakeholders in the 504 Program, and we want 
to do everything we can to ensure its long-term viability. We 
have considered these recovery problems, the subsidy rate 
issues to be a very serious matter, and we look forward to 
working with your Committee and the SBA in reversing that 
trend. Only with this effort can we make the 504 fees come back 
to a reasonable level for all small businesses.
    Thank you.
    [Mr. Giegel's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Giegel.
    Next, Mr. William McCutchen, the executive director of the 
Association of Small Business Development Centers. Woody, thank 
you for your patience. Proceed.

 STATEMENT OF WOODY McCUTCHEN, EXECUTIVE DIRECTOR, ASSOCIATION 
             OF SMALL BUSINESS DEVELOPMENT CENTERS

    Mr. McCutchen. Thank you, Mr. Chairman and Ms. Velazquez, 
and I, too, would like to thank you for this opportunity for 
the association to testify this morning.
    I would also like to express our gratification for your 
leadership of this Committee, leadership that continues an over 
20-year tradition of bipartisan interest and support for the 
SBDC Program, a bipartisanship that has proven very productive 
and positive for our program.
    Today's SBDC Program is truly a national delivery system. 
We have got over 1,000 locations in all of the 50 States, 
District of Columbia, Puerto Rico, the Virgin Islands, Guam, 
and just recently American Samoa. In the last 20 years, SBDCs 
have provided counseling and training for almost eight million 
existing and pre-venture clients.
    We also would like the record to reflect today our 
appreciation for the administration's and Administrator 
Alvarez' decision this year to fund the program at a level of 
$85 million. We think it demonstrates a new renewed awareness 
within the SBA of the importance of the SBDC Program and the 
clients we serve.
    We have included a chart in our written presentation that 
documents the performance of the SBDC Program, performance that 
we are tremendously proud of. If you look at the chart, in 
Fiscal Year 1999, our funding was up by less than 1 percent, 
but in Fiscal Year 1999, total clients--African-American 
clients, Hispanic clients, women clients--were all up by at 
least 9 percent, up to almost 16 percent. So, the program is 
certainly making effective use of the dollars that the Congress 
supports us with.
    This morning, Mr. Chairman, we are asking that this 
Committee approve and recommend to the full House that the SBDC 
Program be reauthorized at $100 million in Fiscal Year 2001, 
$105 million in Fiscal Year 2003, and $110 million in Fiscal 
Year 2003. We believe these levels of authorization are crucial 
if the program is to maintain a level service capacity. 
Additionally, we believe that at a minimum the SBDC Program 
will need an appropriation of $90 million net of earmark from 
section 21 funds to address the growing needs of the Nation's 
exploding entrepreneurial population.
    There is a crying need for vastly expanded and more 
comprehensive small business regulatory compliance assistance. 
The SBDC is also working with the Association of Disabled 
Veterans and other veterans' groups to provide improved and 
expanded services to the Nation's veterans. The program for 2 
decades now has utilized the dollars that Congress invested to 
create a strong and viable infrastructure that includes over 
3,400 strategic resource partners. The SBDC Program is the only 
Federal small business M&TA Program that is subject to a 
congressionally mandated certification program. The ASBDC also 
contracts with an independent consultant for a biennial 
economic assessment of the long-term effects of SBDC clients.
    In 1996, SBDC clients experienced sales growth at almost 
four times the rate of the average U.S. business, and job 
creation for SBDC clients was 1.29 compared to 0.22 jobs for 
average U.S. businesses. We have expressed our concerns this 
year regarding the need for essentially technical changes in 
our funding formula, and we have also expressed concerns 
regarding the need to maintain client confidentiality that is 
so essential to our client relationship. We are most 
appreciative that the staff of this Committee has always been 
available to us and extremely helpful.
    In summary, Mr. Chairman, the SBDC Program is the Federal 
Government's largest and most successful small business M&TA 
outreach and assistance program. The network is well positioned 
to deliver an increased level of management and technical 
assistance to a significantly expanded client base if the 
program is provided the resources to do so by Congress. And we 
ask for this Committee's support for the program's 
reauthorization at funding levels that will allow the program 
to remain innovative and meet the needs of the Nation's 23 
million small businesses.
    We want to make sure that the record reflects that the 
ASBDC and SBDC network are solidly committed to helping open 
doors of economic opportunity for individuals in communities 
and new markets. In fact, new markets are not new to the SBDCs. 
In 1999, 42 percent of our clients were women, 23 percent were 
minorities, and almost one-fourth of our service centers are 
located in targeted economic revitalization areas, such as 
HUBZones, empowerment zones, and enterprise communities. SBDCs 
are therefore well positioned to play a significant role in 
publicizing these important Federal initiatives.
    The Congress has invested significant dollars in this 
program over the last 20 years, and in return for that 
investment, what has resulted is an unprecedented network, a 
distribution network, of over 1,400 outlets to deliver small 
business services to all Americans. We think that therecould be 
no better investment for any small business services than in utilizing 
the distribution network that Congress has already generated.
    I will end my remarks with that, and I would be happy to 
answer any questions that you may have about our program.
    [Mr. McCutchen's statement may be found in the appendix.]
    Chairman Talent. Thank you, Woody, Mr. McCutchen.
    And our last witness is Caroline Hayashi, the Association 
for Enterprise Opportunity. Appreciate your patience; proceed.

   STATEMENT OF CAROLINE HAYASHI, ASSOCIATION FOR ENTERPRISE 
                          OPPORTUNITY

    Ms. Hayashi. I would like to thank the chairman of the 
members of the House Small Business Committee for providing me 
with the opportunity to testify before you today.
    My name is Caroline, and I am a member of the Association 
for Enterprise Opportunity, or AEO, and I am also the program 
director of the ECDC Enterprise Development Group in Arlington, 
Virginia. My views today represent AEO's views as well as those 
of my organization and the Association of Women's Business 
Centers.
    AEO was founded in 1991. It is a national organization of 
organizations committed to microenterprise development. They 
provide over 490 organizational members with a forum, 
information, and a voice to promote enterprise opportunity for 
people and communities with limited access to economic 
resources. AEO members represent many SBA microloan 
intermediaries as well as Women Business Centers.
    We all know that small businesses are the backbone of the 
U.S. economy. According to the Small Business Administration's 
Office of Advocacy, small business accounts for 53 percent of 
all jobs. What I am here to talk to you about today is the 
growing importance of the smallest firms within that group of 
small businesses. These are microenterprises employing less 
than five employees. Despite this critical role, many 
microentrepreneurs have trouble accessing management assistance 
and the capital they need to grow and start their businesses. 
Microenterprise development organizations are there to provide 
these resources to this growing market.
    Over the past decade, the microenterprise development 
sector has grown rapidly, reaching over 55,000 entrepreneurs in 
1997. Yet the demand for microenterprise services far exceeds 
the limited resources of the field.
    Largely through the loan and grant funds from the SBA, the 
ECDC Enterprise Development Group has provided over 150 in the 
past 4 years to small businesses, totaling over $1.6 million. 
It has created 320 jobs and provided management assistance to 
over 2,500 entrepreneurs, and I would like to add out of all 
those individuals served that over 85 percent of those 
individuals were minorities, over 95 percent were low- to 
moderate- income individuals, and over 50 percent were women. 
So, again, as Mr. McCutchen noted, when we are talking about 
new markets, in terms of microenterprise organizations and who 
we serve, we are serving the new market.
    Chairman Talent. When you talk about--excuse me----
    Ms. Hayashi. Yes.
    Chairman Talent. When you talk about the ECDC----
    Ms. Hayashi. Yes.
    Chairman Talent [continuing]. Now, help me a little bit. 
That is the Association of Micro----
    Ms. Hayashi. AEO is the Association of Enterprise 
Opportunity, which is the national association of 
Microenterprise organizations of which we are a member.
    Chairman Talent. Okay.
    Ms. Hayashi. And I am actually the director of the ECDC 
Enterprise Development Group, which is a non-profit 
organization based on Arlington, Virginia which provides direct 
microenterprise services.
    Chairman Talent. Okay. So, I am trying to get a handle on 
how significant that $150 million figure is. You are one 
microlending intermediary.
    Ms. Hayashi. We are one microlending institution that 
serves the Washington, D.C. metropolitan area.
    Chairman Talent. I want to be clear. So, when you are 
talking about an Enterprise Development Group, that is a plural 
group, but you are one micro----
    Ms. Hayashi. Yes, we are one organization, one program.
    Chairman Talent. Because I thought the $150 million, 
actually, if that had been a number of microlenders, would have 
been kind of a small figure over 4 years.
    Ms. Hayashi. Yes, it would be very small. Actually, there 
is another number there of, a national number, 55,000 
entrepreneurs being served in 1997----
    Chairman Talent. Yes, a little more like it.
    Ms. Hayashi [continuing]. Which is more like it, yes.
    Chairman Talent. Okay, thank you.
    Ms. Hayashi. Sure.
    ECDC assists businesses that don't have access to capital 
and other business resources elsewhere. Although these loans 
are very uneconomical for non-profits to provide, these 
businesses promote economic self-sufficiency through the income 
and jobs they create and promote local economic development 
through the goods and services they provide. They also help 
keep individuals off of welfare and help build the local tax 
base.
    I would like to give you an example of an entrepreneur that 
demonstrates the kind of impact that these kinds of small 
business can have on the owner as well as the community. Ms. 
Kyung Hee Park is a 40-year-old woman who 5 years ago found 
herself living in a homeless shelter with her two small 
children. She found the opportunity through an acquaintance to 
start a siding and flooring business. After the first year in 
business, when the company did not made a profit, her partner 
gave up his portion of the business. However, she decided to 
continue the business to try to make a better life for her and 
her children.
    Two years ago, Ms. Park came to ECDC to get a loan to 
expand her business. Ms. Park had approached over 20 other 
financial institutions and was turned down partially because of 
credit problems she experienced while living in the homeless 
shelter. Since that loan 2 years ago, she has experienced more 
than 500 percent. She went from hiring 5 contractual employees 
to more than 20 full-time employees. She went from doing small 
residential jobs to obtaining large-scale financial contracts 
from companies such as U-Haul and has received a sub-contract 
for a 90-unit housing complex through the U.S. Department of 
Housing and Urban Development.
    SBA has been a critical resource partner for ECDC. ECDC has 
$1.5 million in loan funds from the SBA, which constitutes 
approximately half of our capital pool.
    Chairman Talent. Ms. Hayashi, how many of--I was going to 
ask you, actually, to give us a particular example, so I am 
glad you did on your own. Is that typical? I mean, somebody--
here, she had a working business up and going.
    Ms. Hayashi. Yes.
    Chairman Talent. But because her paper, in essence, wasn't 
good because when she had that difficulty in her life her 
credit went bad, and so the bank--she didn't even get through 
the front door of the bank, right?
    Ms. Hayashi. No, she is actually a very tenacious woman, so 
she did actually approach 20 other financial institutions, 
which not a lot of people do either. But, yes, was pretty much 
immediately turned away by----
    Chairman Talent. So, of the 150 loans that your group has 
given out, how many of them are situations where the person 
can't get through the front door because of a paper problem? In 
other words, you had a credit--I assume that the bank officer 
looks at this, ``Wait a minute. You mean to tell me you have 
had a bankruptcy or this credit report is bad on you. Forget 
it. We are not even talking to you.'' Is that----
    Ms. Hayashi. Is that common?
    Chairman Talent. Yes.
    Ms. Hayashi. Very common, yes. A lot of the clients we 
serve either have had credit problems in the past because of 
this kind of life difficulty or we also have a surprising 
number of clients who do not have any credit history because we 
also serve a number of immigrants.
    Chairman Talent. Okay.
    Ms. Hayashi. And no credit, as we all know here in the 
U.S., is considered to be pretty much the same as bad credit.
    Chairman Talent. Yes, because you haven't had a history of 
credit.
    Ms. Hayashi. Exactly.
    Chairman Talent. So, the bank never even gets into 
performance of the business in the past or profit-loss 
statements or the rest of it, because they don't even get 
through the front door.
    Ms. Hayashi. Pretty much not. In some cases where they are 
able to get to a certain level, the business itself would 
probably not be able to get funded through a bank anyway 
regardless of the credit because of, for example, being a 
start-up, being too young of a business.
    For instance, in Kyung Hee Park's case, although her 
business was a going concern, it did not have sufficient good 
credit history banks look at in order to take a risk of giving 
her a loan.
    Chairman Talent. Would these folks be in a situation where 
50 years ago if they were in a small town what you do for them 
is what the local banker might have done given--it is an 
overused term--but a character loan?
    Ms. Hayashi. Exactly. In fact, I was just speaking to 
someone in my office about this who remembers being on a family 
farm and having that kind of bank there where the manager knew 
everybody in the town, and, yes, would give loans based upon 
the fact that they knew who they were, and they knew they would 
pay back.
    Chairman Talent. Yes, you mention George Bailey. Hey, I am 
the one who brings up old movies in this hearing.
    Ms. Hayashi. That is quite a good analogy, yes.
    Chairman Talent. I would say it is very applicable, isn't 
it?
    Ms. Hayashi. Yes, very good analogy.
    Chairman Talent. And often those individuals may end up 
being better credit risks, because they don't have--it is not 
like if they fail they are going to get another shot at it.
    Ms. Hayashi. That is exactly what we found is this is sort 
of we are working with individuals who had had a tough break in 
life, things have happened to them, and this is sort of like a 
second chance or in the case of immigrants sort of like of 
first chance type of loan program. And we have found in our 
program that these individuals are normally very good credit 
risks. We have----
    Chairman Talent. Let me ask--jump in, because we are going 
to have to run, unfortunately.
    Ms. Hayashi. Sure.
    Chairman Talent. So, I wrap up, because I don't think I 
will, unless the gentlelady wants me to, I don't think I will 
bring everybody back. Are you allowed to loan to ex-convicts? 
And I don't ask this to trap you. I think----
    Ms. Hayashi. I think we are allowed to.
    Chairman Talent. But do you very often?
    Ms. Hayashi. Not that I know of.
    Chairman Talent. You don't.
    Ms. Hayashi. We don't----
    Chairman Talent. That is another set of people who----
    Ms. Hayashi. We don't necessarily ask--we don't ask that 
question in our application process, but we usually get to know 
quite a bit about the person's life through the process.
    Chairman Talent. Okay. I may go into that a little bit more 
through staff.
    All right. Well, go ahead and finish up.
    Ms. Hayashi. Okay. I just wanted to quickly outline five 
recommendations that AEO has based upon the experience of its 
membership of the SBA Microloan Program.
    First, we would recommend that we give successful State 
programs a better chance to access assistance. AEO believes 
that States with successful or capable microlending 
intermediaries should not be limited by an arbitrary formula 
which regulates how much funding is available State-by-State. 
By eliminating this formula, we believe that the best programs, 
serving the most people, will be able to access assistance 
based on need and demand and not on geography.
    Second, AEO recommends reducing confusing interest rate 
regulations. It is often confusing, both to program 
participants, as well as to the SBA, to administer different 
interest rates for different loans, which are tied to the 5-
year Treasury bill interest rate. SBA should allow for a 
singular interest rate buy down for all intermediaries.
    Third, AEO recommends that you let local programs determine 
the best forms of technical assistance. We think that it is 
duplicative and unnecessary for the SBA to proscribe how much 
technical assistance is available before a loan and after one. 
This type of micromanagement restricts program flexibility.
    Chairman Talent. You know why I bet that happens, because 
we had a discussion after the first panel up here about it. 
Everybody who gets into this field understands how important 
technical assistance is.
    Ms. Hayashi. Yes.
    Chairman Talent. None of us are comfortable that we have a 
handle on what it really is, much less that we can have any 
kind of accountability for it.
    Ms. Hayashi. Sure.
    Chairman Talent. So, we are in sort of a situation where we 
appropriate more money, we know how much--but we are also in 
the back of our minds afraid that somebody will mess up 
someplace and there will be some 20/20 program, and then we 
will all be hung by our thumbs for the thing.
    Ms. Hayashi. Yes.
    Chairman Talent. So, I would love to get a working group of 
people together to try and get a better handle on what is 
working, what isn't working, how we do this. Because it would 
be great--I mean, you are absolutely correct. Really, we ought 
to be letting the microlenders have greater control of what 
kinds of technical--but, you see, the fear from this standpoint 
is what is the money being spent on, which is a legitimate 
issue.
    Ms. Hayashi. If I can just speak to that for quickly. As 
you said, technical assistance is critical, and as you can see 
from the written testimony, for instance, in ACDC's case, we 
have maintained a less than 5 percent default rate, which is 
quite incredible considering the clientele that we are dealing 
with. And the way that we do that is through what we are 
broadly calling technical assistance, which is basically 
personal one-on-one business management--anything from business 
management assistance to personal problem assistance that they 
need in order to make their businesses successful.
    Chairman Talent. All we need, though, is one intermediary 
that uses the technical assistance to fly somebody to Paris for 
some seminar. And, look, I am not saying this happens, okay? I 
am saying if you put yourself--you are volunteering for that, I 
can imagine.
    So, really, if you all would understand the perspective we 
have to come from up here and find ways of putting some kind of 
accountability measures in there that is consistent with the 
flexibility for you that you need, then we have solved the 
problem.
    If you were sitting up here, what would you put in the law 
to make sure that you have some accountability while giving the 
flexibility you want? And I am very interested. We have got an 
reauthorization bill coming up. I am very interested in this, 
so go to work and let us know.
    Ms. Hayashi. AEO is very interested in actually having 
standardized, I guess, measures for the field, and perhaps that 
could be used, worked into the process to have more 
accountability in terms of technical process.
    Chairman Talent. At least begin the process, if you would, 
and I am going to--because we are going to have to--do you have 
a question you want to submit?
    Ms. Velazquez. No. I will submit.
    Chairman Talent. All right. Can you finish up in a minute.
    Ms. Hayashi. I just want to--there are just two more 
recommendations that AEO has. One is to raise the loan cap to 
represent the increases in the cost of doing business. When the 
initial $25,000 maximum loan was set in 1991, as we all know, 
inflation has since eroded that cap, and we would like the SBA 
to look at raising that cap to reflect the cost of living 
increases.
    Chairman Talent. What should it be at?
    Ms. Hayashi. I don't know if AEO has a specific amount in 
mind right at this time.
    Chairman Talent. You give me a number, I was going to say 
okay. [Laughter.]
    Ms. Hayashi. Someone saying to say $40,000.
    All right, the last recommendation is encourage greater 
cooperation among microenterprise Programs. We would also like 
Congress to lift the maximum allowable loan in joint ventures 
so that microenterprises can pair with other organizations to 
help to expand their businesses beyond the microenterprise 
stage.
    Chairman Talent. Ms. Velazquez said 60.
    Ms. Hayashi. Okay, great. [Laughter.]
    Chairman Talent. Eighty, all right.
    Ms. Hayashi. That sounds good.
    [Ms. Hayashi's statement may be found in the appendix.]
    Chairman Talent. We have got 4 minutes, all right.
    Thank you, Ms. Hayashi. I am sorry we were getting a little 
punchy there at the end, but we will certainly take your 
recommendations under advisement.
    I appreciate everybody coming. I think I have done the 
house keeping details.
    The hearing is adjourned.
    [The statement of the Bond Market Association is located on 
page 110.]
    [Whereupon, at 2:05 p.m., the Committee was adjourned.]
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