[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]





       U.S. SMALL BUSINESS ADMINISTRATION BUDGET REQUEST FY 2002

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                      WASHINGTON, DC, MAY 16, 2001

                               __________

                            Serial No. 107-7

                               __________

         Printed for the use of the Committee on Small Business


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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               WILLIAM PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               DONNA M. CHRISTIAN-CHRISTENSEN, 
PHIL ENGLISH, Pennsylvania               Virgin Islands
PATRICK J. TOOMEY, Pennsylvania      ROBERT A. BRADY, Pennsylvania
JIM DeMINT, South Carolina           TOM UDALL, New Mexico
JOHN THUNE, South Dakota             STEPHANIE TUBBS JONES, Ohio
MIKE PENCE, Indiana                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            DAVID D. PHELPS, Illinois
DARRELL E. ISSA, California          GRACE F. NAPOLITANO, California
SAM GRAVES, Missouri                 BRIAN BAIRD, Washington
EDWARD L. SCHROCK, Virginia          MARK UDALL, Colorado
FELIX J. GRUCCI, Jr., New York       JAMES R. LANGEVIN, Rhode Island
TODD W. AKIN, Missouri               MIKE ROSS, Arkansas
SHELLEY MOORE CAPITO, West Virginia  BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 16, 2001.....................................     1

                               Witnesses

Whitmore, John, Acting Administrator, U.S. Small Business 
  Administration.................................................     4
Wolverton, Diane, State Director, Wyoming Small Business 
  Development Center.............................................    29
Wilkinson, Anthony, President & CEO, The National Association of 
  Government Guaranteed Lenders, Inc.............................    31
Mercer, Lee, President, National Association of Small Business 
  Investment Companies...........................................    32
Finch, Zola, Vice President, The National Association of 
  Development Companies..........................................    34
Means, David, Executive Director, Greater Newark Business 
  Development Consortium.........................................    35

                                Appendix

Opening statements:
    Manzullo, Hon. Donald........................................    42
    Velazquez, Hon. Nydia........................................    44
Prepared statements:
    Whitmore, John...............................................    46
    Wolverton, Diane.............................................    84
    Wilkinson, Anthony...........................................    95
    Mercer, Lee..................................................   106
    Finch, Zola..................................................   116
    Means, David.................................................   126
Additional information:
    Letter from SBA to House Small Business Committee............   129
    Additional submission from SBA Chief Financial Officer.......   131

 
       U.S. SMALL BUSINESS ADMINISTRATION BUDGET REQUEST FY 2002

                              ----------                              


                        WEDNESDAY, MAY 16, 2001

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:10 a.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
(chairman of the Committee) presiding.
    Chairman Manzullo. The committee will be called to order, 
if the panel would be seated. I am going to go ahead and read 
my opening statement.
    Good morning and welcome to this hearing of the Committee 
on Small Business. A special welcome to those who have come 
some distance to participate and to attend this hearing. I 
applaud those parts of the president's budget which will fund 
America's important priorities, that reduce the federal debt, 
and that provide for tax relief for the American people, 
including a decrease in the marginal rates which will greatly 
help out a lot of small business people throughout the nation.
    However, I disagree with a number of items contained in the 
president's budget request for the Small Business 
Administration and I am particularly disappointed that the 
budget was made up without any input from the chairmen of the 
respective committees, including this chairman.
    Specifically, I disagree with the increases in the fees for 
the 7(a) loan program when the budget submission shows a 
substantial surplus. In fact, these fees should be decreased.
    Last year, $171 million extra came in over and above what 
was necessary for the 7(a) program. The subsidy rate has been 
unfairly set so the borrowers are paying more for the user fee. 
They are effectively paying an additional tax.
    I disagree with the increase in the interest rate for loans 
for the businesses without credit under the disaster loan 
program. I do not know how anyone could suggest increasing fees 
for persons who have just lost their businesses as a result of 
a flood or earthquake. This proposal is a double disaster to 
them. In fact, it is apparent by looking at these fee increases 
that the budget is attempting to tax small business people as a 
revenue raiser to fund other programs.
    I disagree with the proposal to charge fees for persons 
seeking business advice from the local Small Business 
Development Centers. Is the administration going to charge 
farmers for assistance from the Department of Agriculture or 
the taxpayer who calls the IRS 800 number?
    I also disagree with the failure to request funding for 
three technical assistance programs. There may be some 
redundancy, but a case has not been made as to how the SBA 
intends to make up for the services small businesses would lose 
if the programs were terminated.
    As you can see, I am concerned about the specifics of the 
president's budget as it impacts the SBA. You may be assured 
that I will remain concerned until the issues are resolved.
    I would ask as the witnesses testify, especially with 
regard to the 7(a) loan programs, how they can justify an 
increase in fees in light of the fact that based upon the 
exhibit that we have over there in the lower left-hand corner, 
it demonstrates the tremendous amount of surplus, in fact, 
almost $600 million in surplus fees have been generated by fees 
taxed to the small business people while at the same time the 
administration budget attempts to increase those fees.
    Again, I appreciate your attending this hearing. I look 
forward to the testimony of our witnesses and I yield for an 
opening statement from my good friend, Mrs. Velazquez, the 
ranking minority member from New York.
    [Chairman Manzullo's statement may be found in appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman.
    Earlier this year when we met to consider the Small 
Business Administration budget request, I said at the time that 
this budget was without a doubt the worst I have seen in my 
three years as ranking member and my nine years of service on 
this committee.
    Mr. Chairman, I have seen nothing in this budget that 
changes that opinion, nor am I likely to. One of the critical 
roles that SBA plays in helping small businesses is providing 
for those who cannot, for whatever reason, receive access to 
the capital necessary to either start or grow their business. 
That is why this proposal to replace the current SBA loan 
appropriations with a fee system is so dangerous and, indeed, 
reckless. For example, the average small business borrower in 
the 7(a) program will under this proposed structure pay 
thousands of dollars in up front and ongoing costs.
    And with these costs attached to both borrowers and 
lenders, we will create a situation where fewer and fewer banks 
offer these loans and therefore close off a vital source of 
capital to small business owners.
    Is that what we should be doing in an economy that has more 
questions than answers? Should we not be making it easier to 
access these programs so that small businesses, the real 
economic foundation of this country, can help lead us back to 
prosperity as they have done in the past?
    This budget is a formula for disaster. By cutting off 
access to capital, you are cutting off access to opportunity. 
It is just that simple.
    To add insult to serious injury, the president's budget 
proposes to impose fees on the critical disaster loan program. 
As a result, many entrepreneurs will never be able to rebuild 
their businesses without being saddled with a literal mountain 
of debt, so the business and the jobs it provides are gone 
forever. And I wonder, is this what President Bush meant when 
he campaigned as a compassionate conservative?
    What is even more alarming is that under this budget small 
business will be forced to pay for the counseling and technical 
assistance provided through the Small Business Development 
Center program. And those of you who have owned a small 
business know that businesses receiving critical technical 
assistance are more likely to succeed than those that do not.
    These new fees will force many businesses, many of whom can 
hardly afford added expenses, to go without technical 
assistance. The result, the business community will be 
subjected to increased business failure and bankruptcies. 
Somehow, I do not think that that is something we need in this 
economy.
    What concerns me is that the vast majority of SBDCs are 
located in minority communities that are trying to build a new 
life in areas that economic prosperity has somehow forgotten. 
And now we tell them just wait a little longer because we have 
to get the economy back on track.
    Well, I am here to tell you that these communities cannot 
wait any longer. These entrepreneurs as well as others around 
the country need help now, not when this cut finally trickles 
down to them. That is why it makes absolutely no sense to me 
that this budget chooses to eliminate programs like PRIME, 
BusinessLINC and the New Market Venture Capital Program.
    Not coincidentally, these were programs aimed at building 
new economic anchors who have yet to benefit from the boom of 
the last decade. Let me say for the record that this budget has 
failed in both houses of Congress and in a very bipartisan 
fashion.
    My colleagues, everyone on this committee knows the 
important role that small business has played in our nation's 
economy. That is why this budget represents such a disconnect 
between the White House and the reality of this economy.
    In closing, let me say simply that this is a bad budget and 
it will be bad for small business. This budget fails us in so 
many ways, particularly given the fact that this proposal does 
not take into account that the economy is no longer operating 
at peak efficiency. We must have a budget that recognizes these 
changes and puts us back on the road toward economic growth. 
Without a reasonable budget plan, we are placing America's 
economic foundation and the key to future prosperity at risk of 
failure. It is something that none of us can afford.
    And, as my father always told me, ``If you fail to plan, 
plan to fail.'' Small business owners and future entrepreneurs 
are counting on us to do the right thing by them. Let us not 
let them down by passing an irresponsible budget.
    Thank you, Mr. Chairman.
    [Ms. Velazquez's statement may be found in appendix.]
    Chairman Manzullo. There is a vote. What I am going to do 
is I am going to adjourn here.
    Congressman Issa went over to vote early. As soon as he 
comes back, he will start in with the testimony, as long as 
there is a member from the minority present.
    [Recess.]
    Mr. Issa [presiding]. Thank you all for your patience. We 
will now begin with our panel of witnesses, beginning with Mr. 
John Whitmore, Jr., Acting Administrator of the Small Business 
Administration, and then we will introduce the rest of the 
panel later.
    Mr. Whitmore.

 STATEMENT OF JOHN WHITMORE, JR., ACTING ADMINISTRATOR, UNITED 
             STATES SMALL BUSINESS ADMINISTRATION 

    Mr. Whitmore. Thank you, Mr. Chairman, Madam Ranking 
Member, and members of the committee. Thank you for inviting me 
here today. I am pleased to present the Small Business 
Administration's budget request for fiscal year 2002. I ask 
that my full written statement be submitted for the record.
    Mr. Issa. Without objection, so ordered.
    Mr. Whitmore. With me today is Greg Walter, the Deputy 
Chief Financial Officer at SBA.
    The budget request of $539 million represents a renewed 
focus on SBA's core programs. It will provide credit, capital 
and technical assistance to America's small businesses at a 
substantially reduced cost to the taxpayer. It includes $5 
million for SBA's portion of the president's new Freedom 
Initiative to help small businesses comply with the Americans 
with Disabilities Act and $5 million as part of the Paul G. 
Coverdale Drug Free Workplace program. The budget also seeks to 
streamline the agency.
    The budget proposes funding SBA technical assistance 
programs at last year's level with three exceptions. We are 
proposing to increase the funding for the SCORE program by 
$250,000 to $4 million. SCORE is one of SBA's most cost-
efficient programs and will soon implement an electronic 
delivery system to broaden its reach.
    The Veterans' Business Development Program was not funded 
in 2001 but will receive $750,000 in 2002.
    The budget proposes a funding level of $88 million for the 
Small Business Development Center Program, $75.8 million coming 
from appropriations and $12 million in fees.
    Some SBDCs already impose a variation on the counseling fee 
by requiring new start-up businesses to take the training 
course at a cost between $35 and $45 before receiving 
counseling. This is also in line with other SBA technical 
assistance programs. Charging a modest fee of under $11 an hour 
will maintain the current service level, while reducing the 
expense to the taxpayer.
    The budget proposes funding the Government Contract 
Assistance programs at the 2001 level. However, it does include 
$500,000 for a women's contract initiative study and a contract 
bundling study.
    The budget fairly demands that those who benefit most from 
SBA programs share in its costs. In the exact language of the 
president's budget, these programs will become self-financing 
by increasing fees. The budget acknowledges that some small 
businesses may have trouble accessing private capital in the 
absence of a government guarantee, but does not require the 
government to subsidize the cost of borrowing. The budget 
increases fees sufficiently to make these programs self-
financing and would save $141 million. This will reduce the 
burden on appropriation, will allow for expanded program levels 
and is fair to the taxpayer.
    The budget proposes increasing fees in the Small Business 
Loan program and in the Small Business Investment Company 
program. In the Small Business Loan Program, the budget raises 
fees for small business loans above $150,000. There is no fee 
increase for loans made under the $150,000 benchmark and 
continues the rebate to the lender.
    We hope this will encourage small loans to those that are 
in the start-up phase of business. This will also serve to 
provide capital to those most in need and will support a zero 
subsidy rate.
    The new administrator faces many challenges once confirmed. 
Two principal challenges include antiquated programs and 
delivery systems that are out of touch with today's dynamic 
small business environment and resource and personnel 
questions. SBA needs to transform itself into an entity that is 
governed by efficiency, flexibility and the empowerment of 
small business through knowledge.
    More specifically, within the SBA Business Loan Program, 
the number of loans has decreased 21 percent in the last five 
years, while the dollar volume of the loans have increased 26 
percent. While the dollar volume has increased, the Small 
Business Loan Program suffers from a lack of reach. Larger 
loans have gone to fewer companies. This is where SBA faces the 
biggest challenge, cultivating small businesses in their 
initial stage of growth is crucial in advancing America's small 
business community. This is where SBA should focus its 
attention. This is true gap lending.
    The fastest growing groups in America's small business 
community are Hispanic and women-owned businesses. These 
groups, along with African-American, Native American and 
veterans, are also the most underrepresented in SBA's Small 
Business Loan Program.
    Another challenge facing us is the need to focus on the 
current organizational and functional structure of SBA. This 
challenge has been exacerbated in recent months by the hiring 
of 70 people in the November-January time period without regard 
to the agency's top priorities of loan monitoring and lender 
oversight.
    We also recognize the need to emphasize performance 
measures. We have addressed internally the measures we need to 
focus on and are working to implement a reliable system to 
increase accountability.
    I would also like to address SBA's loan monitoring project 
which was authorized in December 1997. After determining that 
the project had run off course, I directed the program to 
refocus on that which Congress authorized and appropriated. 
With this in mind, we have signed a contract with KPMG to 
provide us with expert assistance in assessing the available 
options. Other elements of our modernization effort will wait 
until the loan monitoring system is fully operational.
    Thank you. I will be pleased to answer questions.
    [Mr. Whitmore's statement may be found in appendix.]
    Chairman Manzullo [presiding]. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Whitmore, welcome and thank you for your testimony. I 
know, sir, that this is not your budget, so you are today in 
the hot seat and that you get hazard pay for today.
    Mr. Whitmore, you stated in your testimony that from fiscal 
year 1995 through fiscal year 2000, 7(a) loan levels have 
declined. I would like you to look at the following charts, 
sir.
    Looking at loan levels back to fiscal year 1992, you get a 
far different picture. In fact, 7(a) lending overall and 
lending to both Hispanics an African-Americans has steadily 
increased.
    This being the case, why do you choose to go back to fiscal 
year 1995 in your testimony?
    Mr. Whitmore. Well, I picked 1995 because it was really the 
highest year of our production and we moved from that year on.
    Ms. Velazquez. Mr. Whitmore, is it not true that 1995 was 
the year SBA announced the LowDoc program which at first 
attracted a high industry interest but nine months later when 
SBA published the regulations and they were not what SBA led 
lenders to believe, many dropped out from the program?
    Mr. Whitmore. I know that was the year that we initiated 
the LowDoc. I do not know what the dropout rate was.
    Ms. Velazquez. So you did not make a connection between the 
new regs and the fact that many lenders decided to drop out?
    Mr. Whitmore. No, we just picked the year that--we looked 
at the highest production year we had.
    Ms. Velazquez. Sir, is this trend not more reflective of 
SBA mishandling of a program than lack of lender interest?
    Chairman Manzullo. Excuse me a second. Could you pull the 
mike closer? Thank you.
    Mr. Whitmore. The downward trend, ma'am?
    Ms. Velazquez. Yes.
    Mr. Whitmore. I think it is a lack of focus in management 
on the areas in which we really want to participate. What we 
are seeing is the two fastest growing communities, women-owned 
businesses and Hispanic-owned businesses, where we should see a 
trend upward in the last few years without even having a 
specific focus and we are not seeing that.
    Ms. Velazquez. Do you have more information?
    Mr. Walter. My name is Greg Walter, the SBA Deputy CFO.
    Ms. Velazquez. Yes?
    Mr. Walter. During that same time period, the guaranteed 
percentage on the loan was lowered and the fees were also 
raised; We think those are also contributing factors to some of 
the downturn in the volume in the 7(a) program.
    Ms. Velazquez. Mr. Whitmore, according to SBA's statistics, 
7(a) loan volume declined by 18 percent from 1995 to 1996. Is 
that correct?
    Mr. Whitmore. Ma'am----
    Ms. Velazquez. Yes or no?
    Mr. Whitmore. I do not know.
    Ms. Velazquez. You do not know?
    Mr. Whitmore. We do not have the exact numbers for 1995 to 
1996.
    Ms. Velazquez. Can you get an answer, a written answer to 
that question?
    Mr. Whitmore. Can you hold one second on total loans?
    Ms. Velazquez. Can you look at the chart?
    Mr. Whitmore. I have a chart. What years again, ma'am?
    Ms. Velazquez. From 1995 to 1996. The 7(a) loan volume 
declined by 18 percent.
    Mr. Whitmore. It declined from $8.2 billion to $7.7 
billion.
    Ms. Velazquez. Can you look at the chart? What 7(a) fee 
changes were implemented in 1995 to respond to what was 
determined by CBO to be a regularly miscalculated 7(a) subsidy 
rate?
    Mr. Whitmore. I cannot answer the subsidy rate question.
    Ms. Velazquez. Well, I have an answer for you. The 
guaranteed percentage was dropped from 90 percent to 80 percent 
and a 50 basis point fee was imposed on the outstanding balance 
of every 7(a) loan.
    Mr. Whitmore. I was not sure what year that was. I take it 
that is accurate.
    Ms. Velazquez. You do not know? And the gentleman?
    Mr. Walter. It did happen during that period. That is 
correct.
    Ms. Velazquez. Thank you. So in 1995, in response to 
continued miscalculation of the 7(a) subsidy rate, the cost for 
the 7(a) lenders and borrowers was increased, right?
    Mr. Walter. As a result of the subsidy rate calculation, 
the fees were changed.
    Ms. Velazquez. Yes or no?
    Mr. Walter. That is correct.
    Ms. Velazquez. Yes.
    Mr. Walter. That is correct.
    Ms. Velazquez. And, as a result, the market responded by 
having 18 percent fewer loans made. Is that correct?
    Mr. Walter. Yes, ma'am.
    Ms. Velazquez. Do not small businesses that need more than 
$150,000 loan deserve access to the 7(a) program?
    Mr. Whitmore. Yes, we believe they do deserve access.
    Ms. Velazquez. So how are businesses going to get access 
when history has proven that increasing lender and borrower 
costs just causes the program to shrink? How are they going to 
get it when the federal regulators prompt banks to tighten loan 
underwriting criteria and conventional small loans of any kind 
become scarce like they have in the past?
    Mr. Whitmore. Well, we believe on loans of a million 
dollars or any over the $150,000 level that the increase is not 
that large and would not affect demand at this particular 
point.
    Ms. Velazquez. Sir, history is there to tell us that when 
you increase the cost for lenders and borrowers we are going to 
have less volume of loans. I am not coming up with that, that 
is what history is telling us.
    Mr. Whitmore. I see that, but there are also other----
    Ms. Velazquez. My next question, sir. In light of the fact 
that over the last ten years the SBA has returned over $1 
billion in fee overpayments from the 7(a) program to the 
Treasury Department, what steps has the CFO's office taken to 
correct what CBO, the President's budget and this committee 
have found to be continued errors in calculating the 7(a) 
subsidy rate?
    Mr. Walter. Congresswoman, we have been looking at the 
model continually for the last few years, as I am sure you are 
aware; We have recognized the trends that you have identified 
in that the default rates, the actual default rates of the 
portfolio, have been much less than what were modeled in the 
subsidy rate models.
    Ms. Velazquez. Sir, every year that you have come before 
this committee it is the same answer. So if year after year, 
year in, year out, the 7(a) subsidy calculation has been so 
wrong and the margin of error fails to improve, so tell me, has 
not the credit subsidy calculation just become an increase to 
increase borrower and lender fees in order to shrink the 7(a) 
program size? Yes? No?
    Mr. Walter. I believe the model as developed and used 
serves a useful purpose for looking at a long-term cost of the 
programs. Because of what the results are and have been in the 
recent years, it probably deserves to be revisited again this 
year. You are correct.
    Chairman Manzullo. Thank you, Ms. Velazquez.
    I have just a couple----
    Ms. Velazquez. Well, I will continue to--when we finish 
here, Mr. Chairman, I did not finish and I need to ask some 
more questions.
    Chairman Manzullo. I have a couple of questions.
    If somebody could remove those first two charts on the 
board closest to me--there we are. Thank you.
    Mr. Whitmore, the lower left-hand corner of that is a page 
out of the budget. That is page 1092 out of the budget, 
starting at functions 2330, 7(a) downward re-estimate. Do you 
see those figures there?
    Mr. Whitmore. Yes, we have them.
    Chairman Manzullo. Where does it start? Actually, starting 
at 2330, General Business 7(a), do you see that up on the chart 
there?
    Mr. Whitmore. Yes, sir.
    Chairman Manzullo. Could you explain what that means?
    Mr. Whitmore. Greg Walter will explain the subsidy area.
    Chairman Manzullo. Okay. Could you pull the mike closer to 
your mouth and spell your last name for the record, please?
    Mr. Walter. The name is Greg Walter. The last name is W-a-
l-t-e-r.
    Chairman Manzullo. Okay. Go ahead.
    Mr. Walter. Mr. Chairman, what these reflect are that the 
subsidy rate process that the agency undergoes. Federal credit 
reform requires us to do two things each year. It requires us 
to calculate the estimated cost of the loan program for the 
budget year into the future, so we develop a subsidy rate 
estimate for the future year. It also requires us to look 
backwards at the subsidy rates that have been provided for the 
past year since credit reform was passed in 1992 and to 
recalculate those subsidy rates based on the most current 
knowledge we have about the performance of the portfolio.
    What you are seeing in these charts is what we call the re-
estimated calculations of the subsidy rates for the loans that 
were made prior to 2001. These are funds that in fact are being 
returned to the Treasury as a result of the actual costs of the 
program being less than what we had estimated them to be when 
the subsidy was first developed.
    Chairman Manzullo. So it is overpayment of fees.
    Mr. Walter. It is a reflection of excess costs of the 
program which translated to fees to borrowers and lenders. You 
are correct.
    Chairman Manzullo. So it is a tax. It is more money that 
has to be paid.
    Mr. Walter. It is funds that were appropriated or paid by 
borrowers and lenders that were not needed to cover the costs 
of the program.
    Chairman Manzullo. Okay. So we agree on that, so my 
question is if there has been an excess of $525 million in 
fees, then why does the budget want to increase the cost of 
loans including disaster loans and charge a fee for giving 
advice at the SBDC? I know this is not your budget. If you say 
you do not know, I could accept that.
    Mr. Walter. I can give you an answer to that.
    Chairman Manzullo. Go ahead.
    Mr. Walter. The funds that you see being returned to the 
Treasury cannot be used to offset the current year's 
appropriation, so we cannot use one to offset the other. They 
are considered to be independent decisions and independent 
analysis.
    Chairman Manzullo. Well, that is a budgeteer's answer. How 
about a businessman's answer? This is the Small Business 
Administration.
    Mr. Walter. What you all are all saying, I think we 
believe, is that the modeling process that had been used 
previously while it was a valid and a sound process to look at 
the long-term costs of loans should be revisited because of 
what we are seeing as actual results today. That information 
says that the estimations done in the past have been overly 
conservative.
    Chairman Manzullo. Okay. I can understand that and I 
appreciate that----
    Mr. Whitmore. Mr. Chairman, if I could add----
    Chairman Manzullo. Yes?
    Mr. Whitmore. We have spoken to OMB a number of times on 
this and we have agreement from them to revisit this area and--
--
    Chairman Manzullo. Maybe we should bring somebody from OMB 
here. I mean, I do not like the word ``revisit'' or ``take a 
look at.'' You know, you have one shot in this world to make a 
sale. If you do not sell a hamburger the first time, that is a 
lost sale. That is the way businesses work and we would 
anticipate that at least it could work the same way.
    And, John, I know your frustration with the OMB, but if we 
have another hearing on this, we can bring them in here and let 
them do their loop de loop as to why $525 million of small 
businessmen's money is going into the general pot and why the 
small businessperson has overpaid and now he is being asked to 
pay again. I think it is grossly unfair. I think it is totally 
incompetent.
    I look at it--here is $150,000 to $700,000 one-time fee 
goes from 3 percent to 3.5 percent, that is a half percent 
increase and on a $200,000 loan, the fee goes from $6,000 to 
$7,000, but the ongoing fee increases from .5 percent to .8875 
percent. That means a present balance on a $200,000 loan goes 
from $1,000 a year to $1,775 a year.
    I mean, I am scratching my head trying to figure out what 
we are doing here, when these small businesspeople who have 
gotten these loans have paid in excess in the last two years 
alone of $525 million and now they are facing increases.
    Do you have a response to that?
    Mr. Whitmore. Well, I think the response is as Greg just 
said, that the cycle of evaluation of the subsidy rate is a 
long-term evaluation to try to take in a full economic cycle. A 
lot of people believe that is pretty conservative and it should 
be re-looked at. We have talked to OMB about it. I know 
revisiting is not the word you want to hear, but----
    Chairman Manzullo. Would you give me your answer on it? 
Give me your gut instincts. You are a businessperson.
    Mr. Whitmore. It seems that we have collected more fees in 
the past than need be.
    Chairman Manzullo. Okay. I appreciate that.
    Ms. Velazquez. Mr. Chairman?
    Chairman Manzullo. Do you want to----
    Ms. Velazquez. Yes. Would you please yield?
    Chairman Manzullo. Of course.
    Ms. Velazquez. When are you going to do it? You said that 
you are going to revisit it. Last year, the administration was 
here testifying on the budget, the same issue was raised, so 
you tell me when are you going to deal with this issue once and 
for all?
    Mr. Whitmore. Madam Ranking Member, we have a new 
administration and a new administrator coming and we have every 
reason to believe this will be revisited in late summer and we 
will see some changes.
    Chairman Manzullo. Good. What we will do is we will have a 
hearing on it then and then perhaps Ms. Velazquez and I can sit 
down with the new SBA administrator and give him our input on 
it and we could take it from there.
    I have one question that is unrelated. Mr. Whitmore, it is 
totally unrelated, but, as you know, I am interested in 
improving and enhancing the Office of Advocacy and one 
provision in my draft bill would fold the Office of the 
Ombudsman into the Office of Advocacy. I would like to have 
your opinion of this idea.
    Mr. Whitmore. I really cannot give you an opinion at this 
particular point. We are discussing it with OMB, again, and 
also it will be discussed with the new administrator once 
confirmed.
    Chairman Manzullo. That is fair.
    Mr. Whitmore. I think the ombudsman office is a very 
valuable office and I think it does an awful lot of good, but 
whether it should move or not, I would ask that you wait until 
a new administrator is confirmed.
    Chairman Manzullo. Okay. I appreciate that.
    Mr. Pascrell.
    Mr. Pascrell. Mr. Chairman, on the way over to vote, you 
may say get a life, I read your opening statement, Mr. 
Chairman. I found it very, very interesting because the things 
that you disagree with I think most of us disagree with, but 
there is a basic problem here. Both sides should understand 
what the basic problem is and if I repeat myself, I apologize. 
We are trying to squeeze a gallon and a half out of milk into a 
pint bottle. It is not going to work.
    We are talking here with the messengers. And all due 
respect, these are two good people who have good public service 
behind them and they have been asked to come before us to sort 
of justify what is happening here.
    And most of the people on the other side of the aisle--
look. All my legislation I have introduced is bipartisan. I 
take a back seat to no one. But you all voted for a budget that 
puts every issue on the line, including small business. You 
cannot do it. You cannot have it both ways.
    You cannot say you are out to help the small business folks 
and then accept a budget that cuts what we are able to do by 43 
percent. You put the public officials on the line, on the spot, 
and it is an unfair group of questions. It is like me asking, 
Mr. Whitmore, can you live within this budget, that is like 
asking the question when did you stop beating your wife. It is 
an unfair question and I am not going to do that.
    I have looked at the budget very, very carefully and this 
is going to be repeated throughout the Hill over the next few 
weeks, not just in small business. Well, you will have to learn 
to live with it. Well, I guess we will. Whatever the numbers 
are, the numbers are. Unless they are changed in 
appropriations. We have not seen that scene yet, that drama 
yet.
    Even though this administration acknowledges that small 
businesses will have trouble accessing private capital in the 
absence of a government guarantee, it still does not want to 
subsidize the cost of borrowing. That is the bottom line. The 
Bush administration wants the tax cut, yet the change to the 
7(a) loan program effectively levies a tax.
    You can call it a fee, I am going to call it a tax.
    It levies a tax on small businesses that use the program 
and it demonstrates specifically what the numbers are. And this 
tax will cost the average small business an additional $1,400 
in up front fees, just what they need at this point in the 
history of mankind in the United States. Just what the doctor 
ordered. And this will be justified.
    Recent changes contained in the budget and the 
reauthorization bills that were adopted on the closing day of 
the 106th Congress provide an interesting comparison. One of 
the changes included a simplified loan guarantee fee structure 
which replaced the complicated tiered structure which was in 
place since 1995. Guarantee fees are paid by the SBA by 
lenders, but the cost is commonly passed on to the borrowers. 
Remember, this was done in the closing days of the 106th 
Congress. The guarantee fee structure was amended in January of 
2001. So you heard the chairman talk about loans of $150,000 or 
less, the guarantee fee is 2 percent of the guaranteed portion, 
for loans greater than $150,000, up to and including $700,000, 
the guarantee fee is 3 percent of the guaranteed portion and 
for loans greater than $700,000, which there are some of, the 
guarantee fee is 3.5.
    Now, what is being proposed in the new budget? What are the 
changes that we are saying we need now even though we just did 
what went into effect in January of this year?
    Let us go back to those loans of $150,000 or less, there 
will be no change in the guarantee fee as I understand what is 
proposed.
    On loans of $150,000 to $700,000, the guarantee fee will go 
up 16.6 percent.
    The wrong people are in jail. What are we doing here?
    And loans of $700,000 to $2 million, the fee will increase 
by 14.3 percent.
    The annual loan servicing fee that lenders pay to the SBA 
would rise 50 base points. This is a 66 percent increase.
    The Small Business Development Centers which provide 
management and technical assistance services to small business 
clients are going to receive far less money than they received 
last year and this year.
    After the first initial hour, the estimated costs will be 
$10.75 an hour. Right now, that is not even charged. Now, that 
may not seem like a lot of money. To people who are sustaining 
themselves and to people who are trying to make ends meet in a 
tough economy where new forces are impacting upon our daily 
lives like energy, that is a minor issue cost-wise, cost 
increases, and on top of that, we are going to tax small 
businesses, this business friendly administration.
    Now, you tell me, Mr. Whitmore, what I am missing unless I 
have described accurately what is at hand.
    Mr. Whitmore. I think certainly your depiction of the fees 
and what the changes are is accurate. I would say with respect 
to the Small Business Development Centers, they are currently 
charging very similar fees right now on all training that is 
being done. In fact, a number of them they charge a fee on 
training new businesses before they start counseling. So it is 
not something new to the Small Business Development Centers. It 
is certainly a proposal that has been put in the budget for 
many years. I think it is very modest this year, compared to 
previous years.
    Right now, in some Small Business Development Centers a new 
client coming in, a start-up business client coming in, would 
be charged the equivalent of what we are proposing to take a 
training course even prior to starting counseling. So this is 
not a brand new thing for either the SBDCs or for SBA to do.
    Ms. Velazquez. Would you yield on that answer, please?
    Mr. Pascrell. Go ahead.
    Ms. Velazquez. Mr. Whitmore, can you please tell the 
committee which SBDC is currently doing this and the total 
number of SBDCs that are charging fees?
    Mr. Whitmore. There are four that required charge----
    Ms. Velazquez. On the start-ups.
    Mr. Whitmore. Yes.
    Ms. Velazquez. On the start-ups.
    Mr. Whitmore. Right. Fee-based training required for pre-
counseling. There are four that require it and I would say 
there are eight to twelve, that encourage fees to be charged.
    Ms. Velazquez. Twelve?
    Mr. Whitmore. Well, I can count them, if you would like.
    Ms. Velazquez. Twelve? So----
    Mr. Whitmore. It is not all, but some do it already.
    Ms. Velazquez. Sir, out of a thousand?
    Mr. Whitmore. No, out of the lead centers.
    Mr. Pascrell. Mr. Chairman, if I may conclude?
    This dilemma mirrors the president's proposals. It is a 
dilemma which will be heard in many rooms similar to this 
throughout the Hill. You cannot have it both ways.
    So therefore I have come to this conclusion, Mr. Chairman, 
we should accept and support the 43 percent cut in small 
business and let the cards fall where they may. Would you agree 
with that? What other choice do we have?
    Mr. Bartlett [presiding]. I think it is the purpose of the 
hearing to determine the facts and then when we have all the 
facts on the table we will deal with it.
    Mr. Pascrell. No, I am sorry, Mr. Chairman, that is not 
acceptable to me because you cannot have it both ways. You vote 
for a budget that puts us in a shoe box. With all due respect, 
you put us in a shoe box and then you are telling us to ask 
questions to these panelists who are simply here to carry the 
message. It does not work that way. We are being made fools of, 
to think that we could change what is already out there, unless 
we are going to make the pint bottle larger through the 
appropriations. That is not necessarily unheard of either, is 
it?
    Mr. Chairman, this is a fraud. Thank you.
    Mr. Bartlett. Mr. DeMint would like to make a very brief 
comment and then we will go to Mr. Issa.
    Mr. DeMint. Thank you, Mr. Chairman.
    Mr. Whitmore, appreciate you appearing here and taking the 
heat. You mentioned in your testimony, and I do apologize for 
being late, that you need to look at streamlining the agency, 
with changes in budget, changes with situations in the market, 
perhaps allowing private sector administration, more oversight.
    Is there work going on within the agency to effectively 
restructure long-term strategic plans that look at how you are 
operating? Is this something that is going on now that we can 
look forward to a different way to deliver services and even 
upgrade services?
    Mr. Whitmore. Yes, sir. We are looking at virtually all our 
programs in all areas to make sure that they meet the needs of 
small business in the 21st century. Certainly electronic 
commerce has changed everything and how fast we can deliver 
information is very important. We are making detailed 
recommendations in each of the program areas that we intend to 
give to the new administrator once confirmed and I assume that 
some decisions to change program areas and restructure and 
streamline the agency will take place.
    Mr. DeMint. Thank you.
    Thank you, Mr. Chairman. I will yield back.
    Mr. Bartlett. Thank you.
    Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    I will be brief, but I am going to follow a pattern that 
you might find, Mr. Whitmore, very reminiscent of your 
previous--I will say inquisitors because I think that is why we 
are here today. We do realize that you are in an interim 
position and I appreciate your understanding that you are 
getting combat pay, we are going to make sure that happens.
    The first point, would you put back up Ms. Velazquez's 
poster that was taken down?
    And I am new to Congress, I have been here 140 days, but I 
spent 20 years as a small----
    Pardon me? Just put that one back up.
    I was in business for a long time and in 20 years, in every 
one of those years I would have shot a messenger that tried to 
tell me that there was a steep decline or there was less need 
and chose a peak year that looks like that. So if there is one 
message you take back from both sides of the aisle, it is do 
not try to use a convenient statistic on this body. We get 
enough of them and when we find them coming from the other side 
of the aisle or from this side of the aisle we do not like 
them, but we cannot tolerate them coming from an 
administration.
    We need the facts in as an honest a way as you can so that 
we can make appropriate decisions on budgets and on other 
areas. No question there.
    I do have one question and that is that if this body were 
to work with the body of the whole and create the ability for 
funds to not go back into the general fund, as is so often our 
tradition, but to remain within your organization, would you 
consider that, based on your tenure, to be something that you 
would look forward to?
    Mr. Whitmore. I think that would be very viable.
    Mr. Issa. Okay. The next question, I will put you back on 
the hot seat. You mentioned somewhat in passing that in the 
latter days of the last administration, November and December, 
70 to 80 slots were filled. Can you tell us a little bit more 
about that?
    Mr. Whitmore. Well, there was hiring right at the end of 
the last administration. I am not sure that most of those were 
not going to the areas that we thought were most in need and 
that is portfolio oversight, especially in the changing times, 
we are very concerned with that.
    Seventy additional hires at SBA is very difficult to deal 
with. We are a very small agency. The turnover rate is roughly 
maybe 150 positions a year. We have been going down in terms of 
size over the years and so that really handicaps the next 
administrator.
    Mr. Issa. Would it be fair to say that this administration 
was set up somewhat deliberately by the outgoing 
administration?
    Mr. Whitmore. I think the new administrator is going to 
have difficulty as a result of those recent hires at the end of 
the year.
    Mr. Issa. I appreciate that. The one thing that I would 
also pass on, again, not as a congressman as much as somebody 
who spent a long time in business, this subject of the fees 
perhaps being raised when they should be lowered, being poorly 
calculated based on historic events. I will remind you of the 
story of the outgoing CEO and the incoming CEO and when the 
outgoing CEO hands the incoming CEO envelopes and he says, 
``Any time you get in trouble open one of these envelopes.''
    And the first one, the very first one, when the CEO gets in 
trouble, he opens it and it says ``Blame your predecessor.''
    You only have one chance to do that, you only have one 
chance to say that work done in the previous administration 
might have been in light of new facts misguided. I suggest 
strongly that your administration prepare the way for the new 
administrator to open that envelope and reconsider the historic 
way that these were calculated to get to this body a more 
accurate calculation based on your own reports.
    Just for everyone else, of course, the next two are 
``Reorganize.'' I would suggest that the new administrator, if 
he is going to do, open both at the same time.
    And the last one, if you do not do those two well and you 
come back to this body again year after year with the same 
problems, the last of the three envelopes says ``Write three 
letters and put them in envelopes.''
    So let us recognize that you really only get this one 
chance for change.
    The last point I have, and it is one of deep concern, I 
believe the microloans which have worked so well around the 
world and they are targeted and they are intended to be 
expendable if they need to be, but they have proven to be paid 
back in huge amounts, area an area that I would like to see 
year after year your proposals come back with more funding for 
that, more availability and more emphasis and your own 
statements that the quantity is going down, albeit a little 
debatable based on base year, but the dollar figure is going 
up, to me as somebody who spent my entire business career as a 
small business man is a bad sign.
    When I got to $100 million, yes, I could have gotten a 
small business loan, but, no, I no longer needed one. But when 
I had $7,000 and a 1967 Carmen Ghia, that is when I had a dream 
and should have gotten the kind of attention that I hope you 
will be giving.
    I yield back the balance of my time.
    Mr. Whitmore. Mr. Chairman, if I may respond, the 1995 year 
I selected. It was not done by the administration and we 
selected it solely as the high year when we walked through 
this. It was not to pick off any other thing.
    What we were trying to highlight here is not so much that 
we were going from the high year down, but for certain segments 
of the community that want loans we are seeing a flat trend 
more than anything else. It was definitely high in 1995, but we 
are saying in certain areas, the percent of dollars and the 
percent of loans going to African-Americans or Hispanic-
Americans, should be on the up rise and we are not seeing that 
trend. And that is the reason we picked 1995. I made the 
selection of 1995, it was Administration.
    Mr. Issa. Well, I appreciate that. And, of course, year 
after year, if we continue to use five years, we would accept 
that the anomaly would be reasonable, if that is always the 
case.
    Mr. Whitmore. We just picked a year that went back and 
certainly that was a high year.
    Mr. Issa. Thank you.
    Ms. Velazquez. Would you yield on that?
    Mr. Issa. Yes, I would yield.
    Ms. Velazquez. Did you check on 1992 and see the number of 
loans for Hispanics?
    Mr. Whitmore. We did look at the loans all the way back and 
we just picked a year and I made the selection on that.
    Mr. Bartlett. Thank you very much.
    Now we will turn to Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    I want to cover policy and then its application and I am 
looking at your statement on page 1, ``The proliferation of new 
programs at the SBA has come at a cost of diluted focus and 
lack of attention to our bread and butter programs. * * * We 
are concerned that neither our programs nor our delivery 
structure are ready to serve small business needs in 2002 and 
beyond.''
    My understanding of your strategy and that of the 
administration is to try to have some of these programs where 
you already have fees to increase fees, where you do not have 
fees, create fees and they become self-sustaining and non-
subsidized. I think that is the basic approach.
    Did you all consider, and I know we have covered it more or 
less, but I want to know in process, did you all consider how 
that would impact the utilization of any of these programs?
    In other words, reduced opportunity for individuals to take 
advantage of the programs and, of course, then the result of 
that in your projections in what fees you think they would be 
generating. And then I will have a follow-up question and apply 
it to a local entity.
    Mr. Whitmore. A demand study was not done in the 7(a) loan 
program, but we did look at it from the sense that we wanted to 
ensure that the majority of loans be $150,000 or less. I 
believe it is 60-some-odd percent. And they would not be 
impacted by fees at all.
    On a large loan, a $1 million loan, for instance, it would 
amount to $42 a month additional cost to the borrower. It is 
still an additional cost, but we did not think that that would 
really slow down demand for the program in the larger loan 
areas.
    Mr. Gonzalez. And on fees for counseling, did you think 
that might impact the availability to individuals seeking the 
services of the Small Business Development Centers?
    Mr. Whitmore. As I said earlier, some already charge 
training fees in that same range and it does not seem to----
    Ms. Velazquez. Just ten.
    Mr. Whitmore. No, they all charge training fees.
    Mr. Gonzalez. Training fees in other programs, but 
counseling which you are proposing after the first free hour 
would be about $10.75 per hour?
    Mr. Whitmore. We thought that over the course of a year 
that $44 would not affect demand.
    Mr. Gonzalez. Did you consult the Small Business 
Development Centers on that policy?
    Mr. Whitmore. We did not consult them until after the 
budget was developed.
    Mr. Gonzalez. Because it would seem to me that maybe before 
you propose that, that maybe you would go straight to the 
individuals on the ground and say: ``Hey, do you think this 
would have any kind of negative consequence?''
    Mr. Whitmore. We have proposed fees for probably 10 to 15 
years and we have gone through this same situation. The fee 
proposals in the past were considerably higher. We thought this 
was pretty reasonable at $44. A recent study that was done by 
the SBDCs indicated the businesses they counseled, I guess at 
55 of the centers, had over $5.3 billion in revenues. That was 
based on, I think, a 1999 study that SBDCs had commissioned. So 
we thought that some of the businesses and the SBDCs themselves 
say quite a few of their businesses are more seasoned 
businesses and we did not think that a $44 cost over the course 
of a year would impact demand.
    Mr. Gonzalez. Okay. But we are talking about the first hour 
being free and thereafter--regardless, I mean, we are not 
saying big, small, medium size, we are talking everybody, 
right?
    Mr. Whitmore. Right. We are.
    Mr. Gonzalez. And I think that is a real important 
distinction. And then so I bring it down to my Small Business 
Development Center in San Antonio which is something that is 
truly treasured, and that is the University of Texas at San 
Antonio, Small Business Development Center, it covers 79 
counties, 108,000 square miles, a population of nearly 6 
million people and about 108,000 businesses and they do a 
tremendous, tremendous job. And the director received a letter 
from the SBA and in it it states ``Please ensure that your 
budget proposal has an additional column for the proposed fees 
for the counseling portion of the funding'' and in the request 
for their budget, it indicates that a federal dollar amount not 
to exceed x amount and it says and a program income amount of 
$246,135.
    My question to you is I guess you are asking these 
directors to incorporate what they perceive or anticipate that 
they would be collecting under this fee structure. Is that 
correct?
    Mr. Whitmore. Yes. That letter has caused some confusion. I 
was made aware of it yesterday. I think it tried to indicate 
that this is what the budget proposal is. We have also 
indicated in there that it is subject to the final 
appropriation as well. But we will send a letter out today to 
every SBDC to clarify that.
    Mr. Gonzalez. But they still will be required basically to 
indicate their anticipated fee structure and what they would be 
bringing in if there was a $10.75 per hour counseling fee after 
the first free hour.
    Mr. Whitmore. When we send this particular letter out, we 
do not know what the final numbers are, so it is usually 
estimated. When we know what the budget number actually is, the 
SBDCs would come with adjustments. But we will send a letter 
out this afternoon that will clarify that.
    Mr. Gonzalez. And, Mr. Chairman, I seek your indulgence, 
one last part----
    Mr. Whitmore. May I mention one last thing, Mr. 
Congressman?
    Mr. Gonzalez. Sure. Yes, sir.
    Mr. Whitmore. In San Antonio, that is one of the SBDCs that 
does encourage fees on new businesses before they start 
counseling. It is encouraged, it is not required.
    Mr. Gonzalez. And have you talked to the director regarding 
your proposed fee on counseling after the first free hour? 
Because I do not think you will have--let us just move beyond 
that.
    Let us say they do not meet--they have the projection, they 
provide it in the budget, you adopt it and they are going to 
come up with x amount of dollars in fees.
    Now, contrary to what you all thought, it does impact the 
number people utilizing the program and they come up short on 
the fees that they are collecting. What is the consequence to 
the center?
    Mr. Whitmore. If they do not raise the fees?
    Mr. Gonzalez. I am just saying as you all go through with 
this, they are going to have projections on what they 
anticipate, because I am sure you are not asking that for no 
reason. But they do not meet those because you all were wrong. 
You all were wrong because it did impact the number of people, 
especially in south Texas, $10.75 on counseling is--I will tell 
you, that will impact the program. So let us just say you have 
fewer numbers of people utilizing the program, therefore you do 
not have the fees that you anticipated collecting on this 
counseling fee arrangement, so they are not meeting that 
particular projected budget amount. What is the impact to the 
center?
    Mr. Whitmore. I assume the impact would be very similar to 
when they establish their own budget, they include fees when 
they are doing their own budget projection. They include fees 
from what they anticipate they would take in from training, so 
I assume they would view it the same way.
    If they do not make their fees, they probably would have to 
limit the amount of time they are open or the amount of 
services given. But in their own budget projections, I assume 
they include fees that they raise themselves through training 
as well as what they anticipate getting from the matching funds 
required for our program, either through state or private 
entities.
    Mr. Gonzalez. All right. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Bartlett. Thank you.
    Mr. Grucci.
    Mr. Grucci. I have some questions but will you pass me for 
a moment.
    Mr. Bartlett. Yes, sir. I would be happy to.
    Ms. Millender-McDonald.
    Ms. Millender-McDonald. Thank you, Mr. Chairman. And may I 
first ask unanimous consent to submit my statement for the 
record?
    Mr. Bartlett. Without objection.
    Ms. Millender-McDonald. Thank you so much.
    I am really distressed, Mr. Whitmore. I suppose the person 
who spoke a couple of speakers before stated that you are the 
messenger, you are not the one really we should be driving this 
wedge to or through, but I am really concerned about the 
seriousness of this budget. This is an assault on the Small 
Business Administration. It certainly does not do well for 
those who are trying to increase economic viability in low 
income areas, urban areas, rural areas, for those who small 
businesses have created the jobs for and especially women-owned 
business.
    As I look at your 7(a) program, there are decreases for 
veterans as well as for women. This does not fit well in 
communities which I serve, Watts and Compton, some of the most 
impoverished areas, because they are looking to small business 
to help them in microloan programs, as Mr. Issa said, that you 
really need to revisit that microloan program and do open the 
envelope or put something in the envelope yourself to revisit 
these programs that are just so important to urban and rural 
areas.
    I could shout at you, but you are just the messenger, but 
please report back to the person down on 1600 Pennsylvania 
Avenue that we do want to see not increase in fees, decreases 
in programs that help those who are distressed and in 
distressed areas, but let us revisit this budget and look at 
where we can improve the funding base and try to minimize the 
fees because it is critical for those who are trying to create 
jobs, especially in my district and I suppose for all of us who 
represent urban and rural districts.
    And that is it, Mr. Chairman. Thank you so much.
    Mr. Bartlett. Thank you very much.
    Now Mr. Grucci.
    Mr. Grucci. Thank you, Mr. Chairman.
    I have a couple of concerns and they are on both sides of 
the issues that we are dealing with today, certainly on the 
SBDC and the 7(a) program. I have an SBDC shop in my district, 
it is at the University of Stoneybrook and it does wonderful 
work and it has done a lot of good to help a lot of small 
businesses get underway. And they are very fearful of the fee 
schedule that is now being imposed.
    And I just want to ask you a question on that. You have 
indicated a fee of about $44 a year. I would have to assume 
that that means the first hour being free that you are thinking 
about four hours worth of counseling at the rate that I am 
looking at, you get about four hours worth of counseling at $44 
and that is enough for a small business entrepreneur with no 
experience in the business community, no experience with 
running a business, four hours of counseling will be enough to 
satisfy their knowledge of running a business.
    I would have to see that statistic to really appreciate it 
being accurate. I mean, I know that--we have a small business 
and it requires a great deal more counseling by our 
professionals than four hours a year. I would welcome just four 
hours of counseling to help us through some of the mazes of 
getting through the bureaucracy that exists for small 
businesses. And so I question that fee.
    And the fear that our SBDCs have is that since this is both 
a state and a federal program you are now going to have the 
state jumping on board with their opportunity to create the 
fees because now it is going to be new monies for them as well, 
so now you do not have a $10 an hour or $10.75 an hour fee, you 
have something closer to $22 an hour that is being placed on 
the small business entrepreneur and my guess it would be far 
more than four hours worth of counseling necessary and, you 
know, we discourage them from coming into the business world 
rather than getting involved in the business world.
    I really think as some of my colleagues said here today 
that we do need to revisit this issue. I do not think there is 
going to be a great deal of support for the fee structure on 
the SBDC programs and I know that I am speaking to the ones in 
my district, they are very fearful of it, they are concerned 
about it, and they do not think it is going to be helpful, they 
think it is going to be injurious, is their words.
    Let me just move on to the 7(a) program for a moment. We 
were a recipient of the 7(a) program. My family's business 
suffered a very significant issue in 1983, we had a fire. I am 
in the firework business. It led to a series of explosions, 
completely wiped out the operation of the business and without 
the 7(a) program to be able to go to to borrow from, we would 
not have been able to stay in business and we needed to borrow 
a half a million for capital and a half a million for working 
line and obviously under this structure we would have been then 
subject to the fee schedule.
    And I do not see the formula for the fee schedule anywhere, 
I do not know how that fee would be created, what it is based 
against. Is it based against the volume of dollars that you 
borrow? Is it based against some other formula?
    All of that does not help to sustain business or to grow 
business. And I know when I say this I am preaching to the 
choir because you probably know far better than I do that the 
engine that drove this economy is not the Fortune 500s but the 
mom and pop operations that dot the Main Streets of America for 
Montauk Point to Monterey Bay and to that end we have to do all 
that we can to make it easier for them to come into these 
businesses, provide those jobs, provide those opportunities and 
what I am seeing here is not going to do that.
    I think we need the funding in place, we need to reinstate 
the $12 million for the SBDC and we need to fund the 7(a) 
program while we can be assured that it can ultimately get to a 
zero subsidy and that it can operate independently of the 
subsidy.
    Until that point, I am not convinced and I would certainly 
like to see you pay closer attention to the needs of the 
districts like mine and others that you heard from here today 
because we speak for the American small business people.
    I do not know if there was a question in there or not, if 
you would like to respond to that, you certainly can. I feel 
very passionate about these two programs because I have dealt 
with them firsthand and I think that they are in jeopardy and 
being in jeopardy hurts the American business person.
    Mr. Whitmore. I would like to say a couple of things on 
fees on both 7(a) and on SBDC. Generally on business loans or 
any kind of loans, there are points charged to make the loan. 
So there are some points, whether it is an SBA loan or whether 
it is a commercial loan.
    There is an increase in fees on the very large loans. We 
are concerned that the smaller loans are the most difficult for 
SBA to get made and not increasing fees on loans under $150,000 
we think would be helpful to the program.
    In terms of SBDCs, there is no fear in charging training 
fees, so I am a little confused myself on why there is a great 
fear in charging counseling fees. The SBDCs across the country 
charge fees today as we speak, they just do not charge them on 
counseling.
    And to address the hours, I agree with you, it may very 
well be more. What we took was an average number of counseling 
hours based on the number of clients they counseled and we came 
up with five, the average. But if that is the average, there 
are some at three and there are some at 15 also.
    Mr. Bartlett. Thank you very much.
    Ms. Tubbs Jones.
    Ms. Tubbs Jones. Good morning, Mr. Chairman.
    Mr. Whitmore, I apologize, I missed the beginning of your 
presentation. Will you give me very quickly your background 
with SBA, please?
    Mr. Whitmore. I have been with SBA since 1977. I worked 
primarily in the procurement and 8(a) programs. I also was the 
CFO of the agency at one point. It does not sound like I can 
keep a job very long as I am telling you this. I was the head 
of Management and Administration, and I worked in the 
Entrepreneurial Development Program as well.
    Ms. Tubbs Jones. And what is the Entrepreneurial 
Development Program?
    Mr. Whitmore. SBA's technical assistance programs. It is 
the Women's Business Centers, it is the Small Business 
Development Centers, it is Business Information Centers, 
Veterans' Business Assistance Centers and SCORE. And I probably 
missed one.
    Ms. Tubbs Jones. Thank you. In your statement, Mr. 
Whitmore, you began to outline what programs would no longer be 
funded in 2002 and as I read through each of them, it said that 
they are being defunded because they are duplicative or they 
are redundant programs.
    Can you specifically tell me what program will handle the 
programs that BusinessLINC was put in place to provide?
    Mr. Whitmore. BusinessLINC had been in operation for two 
years without any funding. It is designed to foster mentor-
protege relationships. SBA has 11,000 senior executive 
volunteers that certainly would be able to work in that area.
    Ms. Tubbs Jones. That is the SCORE program?
    Mr. Whitmore. The SCORE program.
    Ms. Tubbs Jones. Before----
    Mr. Whitmore. In addition, there are other----
    Ms. Tubbs Jones. Hold on a second. Hold on. I only get five 
minutes and I know I walk on treacherous grounds when I start 
doing this, but I only get five minutes, so I do not want long 
answers. I want you to specifically address my question so I 
can take you to the next question, okay?
    Now, particularly because you brought up SCORE, now, the 
people who work in SCORE are retired executives who no longer 
have businesses, correct?
    Mr. Whitmore. That is correct.
    Ms. Tubbs Jones. Now, the purpose of BusinessLINC, however, 
was to take existing strong businesses, make relationships with 
small businesses to kind of create an old boy network, right?
    Mr. Whitmore. Yes.
    Ms. Tubbs Jones. And clearly if you have BusinessLINC and 
an old boy network, it is much better than having somebody who 
is retired who has no existing business to maybe provide you 
the opportunity to do business, correct?
    Mr. Whitmore. I do not want to talk about the old boy 
network there because----
    Ms. Tubbs Jones. Well, it is true. I mean, you are not 
offended because I am talking about old boy, but everybody--it 
is a concept.
    Mr. Whitmore. SCORE, I may be going there myself soon. But 
there are other programs. SBA has had a mentor-protege program 
for quite a while. The Department of Defense has a mentor-
protege. I believe NASA has a mentor-protege program.
    Ms. Tubbs Jones. Well, were you around when they talked 
about creating BusinessLINC? You have been with SBA a long 
time, right?
    Mr. Whitmore. I was not involved in the creation.
    Ms. Tubbs Jones. You were not in that. But you have been 
involved in SBA and the various technical assistance programs 
and clearly having a mentor is a great technical assistance for 
any small business, correct?
    Mr. Whitmore. I certainly think it is.
    Ms. Tubbs Jones. Okay. Now, I am particularly concerned 
about the defunding of BusinessLINC because as a result of the 
defunding of affirmative action programs and the lack of 
opportunity for minority businesses to access people who they 
traditionally might not get involved with, BusinessLINC was 
going to provide them that opportunity, to meet and greet 
people, because we know that much business is done on the golf 
course, much business is done where people have an opportunity 
to meet people that they traditionally would not meet under 
normal circumstances, correct?
    Mr. Whitmore. Correct.
    Ms. Tubbs Jones. Okay. And so I am asking that you take 
back to the powers that be, whoever that ultimately ends up 
being, I want to buy into all the other statements that my 
colleagues have made, but to say that here we have a program, 
BusinessLINC is funded for this year, right?
    Mr. Whitmore. It is funded in the 2001 cycle. The 
performance of BusinessLINC will actually take place really in 
the 2002 year.
    Ms. Tubbs Jones. Say that again?
    Mr. Whitmore. The awards for the BusinessLINC awards will 
take place later this summer.
    Ms. Tubbs Jones. Okay.
    Mr. Whitmore. The performance of the BusinessLINC awards 
will be during the course of fiscal year 2002, starting 
probably in October of next year.
    Ms. Tubbs Jones. And before you have had a chance to really 
evaluate the value of such a program, you are defunding it? Is 
that correct?
    Mr. Whitmore. Well, it is not funded in 2002.
    Ms. Tubbs Jones. Right.
    Mr. Whitmore. It will be operational----
    Ms. Tubbs Jones. So then my question is that before----
    Mr. Whitmore. It will be operational in 2002.
    Ms. Tubbs Jones [continuing]. You have had a chance to 
evaluate the success of the program, you have decided--maybe 
not you personally, but a decision has been made to defund the 
program.
    Mr. Whitmore. Yes, ma'am.
    Ms. Tubbs Jones. And it appears to me that throughout all 
of the defunding--this is my last question, Mr. Chairman--that 
everything that has been called redundant are programs that the 
last administration trying to reach new markets, as they called 
them, are not being funded. Is that correct?
    Mr. Whitmore. There are two programs that were not funded, 
the PRIME program and BusinessLINC. The New Markets Venture 
Capital Program was funded according to the authorization, it 
was a one-time funding, it was not defunded, the authorization 
was for a one-time funding.
    Ms. Tubbs Jones. Well, if I am a program, whether I am 
defunded or not reauthorized, it is the same effect, though, 
right?
    Mr. Whitmore. The effect is the New Market Program is going 
to last for five or six years. It is intended to fund up to 
$150 million in venture capital and it was funded for the term 
of its authorization.
    Ms. Tubbs Jones. I do not know if you answered my question, 
but I am not going to belabor the point.
    Mr. Chairman, are we going to get another chance to make 
inquiry?
    Mr. Bartlett. We can have a second round if the members 
wish. We will have another panel and opportunity to question 
them.
    Ms. Tubbs Jones. Thank you.
    Chairman Manzullo. Thank you very much.
    Mr. Udall.
    Mr. Udall. Thank you, Mr. Chairman.
    I come from a district, Mr. Whitmore, that has a number of 
small businesses and small businesses accounted for nearly 90 
percent of all new net jobs in my state last year--80 to 85 
percent of those jobs were created by businesses with ten or 
fewer employees. I also have a large Native American population 
and New Mexico is one of the states that has a very high 
utilization of SBDCs.
    I have heard you talk here and heard you try to explain 
this, but I am really not happy with this proposal to charge 
fees for SBDCs and I wanted to ask a couple of questions in 
that area and also possibly follow up on what Ms. Tubbs Jones 
talked about in terms of the mentoring program.
    For 2001, SBA requested $4.5 million for the Native 
American outreach program. Of that, $1.5 million was to fund 18 
existing Tribal Business Information Centers, upgrade the 
technology infrastructure and to provide additional business 
development training and technical assistance to Native 
American customers.
    The remaining $3 million was to establish reservation-based 
Native American Small Business Development Centers to provide 
business development assistance, counseling, training and other 
services to Native Americans who want to start, maintain and 
grow businesses.
    My question is being that the SBA never received the 
funding for Native American outreach or the TBICs, how has SBA 
been able to assure the proper operation and success of the 
program?
    Mr. Whitmore. With regard to the Tribal Business 
Information Centers, we have been funding them out of the SBA's 
operating budget. I will tell you the funding is roughly around 
maybe $30,000-$33,000 per TBIC. That is basically to fund 
somebody, usually from the tribal community college, to work 
there. We are looking at that area very seriously. It did not 
get funded, as you know, last year. We do not anticipate taking 
funding away from it at this point. However, we do think that 
we are not seeing the productivity out of the Tribal Business 
Information Centers that we would like to see. We are not 
seeing economic development out of there.
    With respect to the SBDCs, there is no prohibition by the 
SBDCs right now under the current statute and their current 
funding to opening subcenters on Native American reservations. 
Certainly it would always be nice to get additional funding, 
but we would question why they are not open on reservations 
today with the current funding. There are 900 centers, we have 
very few, if any, on reservations.
    Mr. Udall. In your experience with the SBA, do you see a 
need out there in terms of the Native American community?
    Mr. Whitmore. I think that that is probably the most under 
served community in the United States, especially reservation-
based Native Americans.
    Mr. Udall. And you realize, I think, in saying that, from 
your experience, that some of the reservations have 
unemployment of 50 and 60 and sometimes 75 percent and so this 
kind of a program obviously is very, very important to Native 
American communities and when you say we are not seeing the 
economic developing out there, I would hope that your agency 
would try to look at creative ways and come back and talk to us 
about how we can see small business growth out on the 
reservation because this is a dire need and I would hope that 
you would try to focus on that. If something you have in place 
now is not working, then come back and give us some suggestions 
on that.
    Mr. Whitmore. Mr. Congressman, we talk about funding our 
core programs. We think our core programs should meet the needs 
of all small business and all Americans. Certainly the 7(a) 
program and the SBDC program should be able to deal with Native 
American problems and economic development and we have not seen 
that and we think we need to focus and manage in those two 
areas. I am sure the new administrator is going to take a look 
at this area and if we have ideas that are a little different, 
we certainly would come up here and propose them.
    Mr. Udall. Thank you very much, Mr. Whitmore.
    And thank you, Mr. Chairman.
    Mr. Bartlett. Thank you very much.
    Dr. Christian-Christensen.
    Mrs. Christian-Christensen. Thank you, Mr. Chairman. I 
apologize for being here late but I am glad I had a chance to 
get here before Mr. Whitmore has left.
    And I am sure you have heard a lot from this committee and 
the dissatisfaction with the proposed budget for SBA. I want to 
focus, though, on the disaster loan area because over the past 
two years SBA has begun to conduct asset sales and some of 
those sales have included disaster loans.
    Can you tell the committee if SBA has conducted a study or 
done any research on the impact of those asset sales on small 
businesses, the small businesses that receive loans through the 
disaster loan program?
    Mr. Whitmore. I am not aware that we have conducted any 
study.
    Mrs. Christian-Christensen. We are having problems in my 
district with some of those loans. I would imagine that we are 
not the only jurisdiction that is experiencing those problems. 
Has there been any follow-up at all on what has happened since 
those sales?
    Mr. Whitmore. I cannot answer that. I would be happy to 
submit an answer for the record on that. I am not sure.
    Mrs. Christian-Christensen. Okay. Then, Mr. Chairman, I 
would ask that we have that submitted in writing to us. Thank 
you.
    Let me just go a little further into this. When the sales 
first began to take place and we started to receive complaints 
from my community, we called officials from SBA who oversee the 
disaster loans and we were really assured that the terms of the 
loans would not change and even the administration of those 
loans would not change.
    Now, in my district, we have had several major hurricanes 
and businesses have secured loans to rebuild their business in 
one season and then been faced in another subsequent season 
with a similar disaster and had to take out another loan, and 
this despite a lot of work being done on really mitigating for 
these kind of disasters. We are getting better, but still some 
have had two subsequent loans. And now they are being asked by 
the banks to repay their outstanding balance.
    Have you heard any----
    Mr. Whitmore. The asset sale program is required of SBA. I 
have only been there since February in an acting capacity and 
have not received any feedback on the subject. I am unaware of 
any reason that any of the terms and conditions of those loans 
should change unless it would affect their ability for future 
borrowing. They should not change the terms and conditions just 
because the loan is sold.
    It may affect someone's ability, ma'am, to get an 
additional loan if they have outstanding balances.
    Mrs. Christian-Christensen. Yes.
    Mr. Whitmore. Where we may have some issues there, but it 
should not come from the purchaser of the asset sales, it would 
be coming from the SBA disaster assistance office, if they had 
questions regarding the cash flow of the business or the 
homeowner.
    Mrs. Christian-Christensen. Well, we would like to follow 
up on this issue with the administration because it may not be 
specifically so much the terms of the loan, but there were 
certain things in the operation of that program that borrowers 
traditionally could expect when dealing with SBA that does not 
occur now with the banks having bought those loans and it is 
creating a hardship in my district.
    Mr. Whitmore. Those that have purchased the loans have been 
fairly cooperative in working with borrowers when they have run 
into financial difficulty, but I really am not versed in this 
area and I would be happy to get any response to you.
    Mrs. Christian-Christensen. We may have to ask you to help 
us get some response and cooperation from at least one of the 
banks that holds most of the home loans and most of the 
disaster loans in my district.
    Thank you, Mr. Chairman.
    Mr. Bartlett. Thank you very much.
    I want to thank the witness and the members of the 
committee. When I chair a hearing I usually reserve my 
questions until the last and I will recognize our ranking 
member in just a moment.
    With the anticipation that most of the questions that I 
would have asked will be asked by someone else and that has 
certainly been true today, everything has been said pretty 
much, I think, and I do not need to repeat it.
    I would just ask Mr. Whitmore if he has gotten the message 
that this is a truly bipartisan committee that is concerned 
with the small business community.
    Mr. Whitmore. Without a doubt.
    Mr. Bartlett. That message is loud and clear. Okay. We 
speak, I think, with a unified voice on this committee. We are 
concerned for the small business community.
    I am one of probably 35 more or less people who came to 
this Congress from an FIB. I was in small business before I 
came here. Too few of us have been there. And so I am very 
appreciative of the really good attendance at this hearing 
today by our subcommittee members and thank you for your 
testimony.
    Let me turn now before we convene the next panel to our 
ranking member.
    Ms. Velazquez. I really appreciate it, Mr. Chairman.
    Mr. Whitmore, in your testimony you state that the 
objectives of the New Market Venture Capital Program can be 
achieved more efficiently and at a lower cost to other means. 
You also state that the programs that provide direct investment 
into economically distressed areas already exist. What other 
program is there provides a combination of equity investment 
and technical assistance?
    Mr. Whitmore. Well, the Small Business Investment Company 
Program invests a substantial number in low and moderate income 
areas----
    Ms. Velazquez. Sir, I am asking you a combination of equity 
investment and technical assistance.
    Mr. Whitmore. Certainly those receiving the SBIC investment 
would be eligible to get SBDC assistance or SCORE assistance, 
but we do not have a program that has those in combination.
    Ms. Velazquez. So then how could you come before our 
committee and state that equity investment can be achieved 
through other programs that already exist?
    Mr. Whitmore. We think the New Market Venture program will 
be run over the next five or six years. We are not saying that 
it is being eliminated, there was just not additional funding. 
The program was authorized for a one-time funding and received 
that one-time funding.
    Ms. Velazquez. Targeting low and moderate income 
communities.
    Mr. Whitmore. Absolutely. Yes. And we expect the final rule 
for that program to be published probably tomorrow or the next 
day.
    Ms. Velazquez. I said in my opening statement that it seems 
to be a disconnect between the White House and what is going on 
in terms of our economy and the small business community. Does 
the administration understand the importance of technical 
assistance when it comes to investing in low income areas?
    Mr. Whitmore. I think they do. They support the New Market 
Venture program this year----
    Ms. Velazquez. You are telling me that, yes, they do, but 
the administration insists on eliminating the new market's and 
PRIME technical assistance components while at the same time 
funding for the microloan technical assistance program has been 
done just at one-third of its authorized amount. Is that not 
correct?
    Mr. Whitmore. That is correct. At $20 million.
    Ms. Velazquez. So can you tell me where will the technical 
assistance come from that the new markets is supposedly 
duplicating?
    Mr. Whitmore. I think it should come from our existing 
programs. I think our focus on our existing programs should 
ensure that we serve all Americans. SCORE, SBDC, 7(a), the 
Women's Business Centers, we need to broaden the reach and 
manage our current programs to ensure that this kind of service 
gets to all Americans.
    Ms. Velazquez. You state earlier that the funding for the 
new markets program was intended to be a one-time 
appropriation. I was the author of that bill and I can tell you 
that that was not my intent. There have been different 
interpretations of the language including from the speaker's 
office. Can you explain that?
    Mr. Whitmore. The report language, talks about a one-time 
funding. And also in a press release that you issued last May 
indicating, Madam Ranking Member, that it was a one-time 
appropriation of $45 million.
    Ms. Velazquez. Not for the technical assistance component 
of that.
    Mr. Whitmore. It was a combination of both technical 
assistance and investment. Both the technical assistance 
program and new markets is a five-year funded program.
    Ms. Velazquez. That is a five-year program? GAPP?
    So let me just say this to you, Mr. Whitmore, I am not 
satisfied with that answer. The new market was a commitment 
that we got from the White House, from Speaker Hastert, from 
Jim Talent, J.C. Watts, and you are going to tell me that now 
that the face of small business in America is changing where we 
have more women and more Latinos and more blacks and it is 
proven that technical assistance is an important component to 
help those who want to start up a business, you are going to 
come here and tell me that the New Market Venture Capital 
Program is not important because some of that technical 
assistance is being provided through other programs that you 
recognize have been either zeroed out or their funding has been 
decreased?
    Mr. Whitmore. Madam Ranking Member, specifically with the 
New Market Venture Capital, it is a five-year program and it is 
not zeroed out, it was a one-time funding of $45 million to 
encompass $150 million in debenture or an investment in the 
rest. So we are not saying it is not being emphasized. It is 
going to be run over a five-year period, longer on the 
investment side, and certainly we will have ample time to 
evaluate that as we go.
    Ms. Velazquez. So then explain to me what about the 
expenses to administer the program? If SBA does not request 
funds to administer the program, how will those expenses be 
covered?
    Mr. Whitmore. We have hired four people so far in the New 
Markets Venture Capital area to work on that specific area. We 
have a division within that area that will do the oversight and 
examinations already existing, but we have added four people to 
the New Market Venture Capital.
    Ms. Velazquez. I just want to ask you how do you think any 
company will want to make investment in any low or moderate 
income communities when the same administration is telling us 
that you wish to eliminate the program?
    Mr. Whitmore. In our SBIC, they are investing in low and 
moderate income areas now and we are not eliminating that 
program. And we did not say we were eliminating----
    Ms. Velazquez. Have you seen the numbers?
    Mr. Whitmore. Yes, I have. I believe it was $700 million 
last year. The New Market Venture program, is just starting. 
The first year will be in 2002, the debentures, I believe, will 
go over a seven-year period and the technical assistance is 
over a five-year period. So I think we will have ample 
opportunity to assess whether that program is operational and 
whether it actually is meeting the needs.
    The most recent change we made in that program is on the 
regulations themselves. When the original proposal came out, I 
believe January 19th, it came out as an interim final rule and 
we redid that proposal just recently and changed a couple of 
the things that we felt would not be beneficial to low income 
areas. There was an eight-to-two investment ratio, for every 
eight investments you could have two investments that were not 
in low income areas.
    We thought that would be a loophole, so what we changed 
that to include the money aspect, as well 80 percent of the 
dollars have to be invested, not just 80 percent of the loans.
    Ms. Velazquez. Do you think it will be a multi-year 
funding?
    Mr. Whitmore. It is multi-year funded with the one-time 
appropriation.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo [presiding]. Thank you very much.
    John, you set a record. We appreciate your stopping by. I 
hope you will come back again. I trust you will.
    Ms. Velazquez. Well, Mr. Chairman, I have not finished with 
him. I will be submitting some questions, especially on the 
HubZone program and the 8(a).
    Chairman Manzullo. That is okay. You will have an 
opportunity also, Ms. Velazquez.
    And we appreciate your graciousness. Thank you for the 
terrific job you are doing in a very difficult position, having 
to defend the budget when you are the acting administrator. I 
appreciate your candor and coming here. Thank you very much.
    The first panel is discharged. Let us have the second 
panel. I do not think it will take this much time.
    Mr. Issa. And, John, you look good with arrows all over 
yourself.
    Chairman Manzullo. Okay. If we could have Ms. Wolverton, 
Mr. Wilkinson, Mr. Mercer, Ms. Finch and Mr. Means. We are 
going to start with Ms. Wolverton.
    The light in front of you is five minutes. You probably 
want to finish as quickly as you can. When the yellow light 
comes on, that means that you have one minute. When the red 
light comes on, that means that your five minutes are up. Some 
members have subcommittee meetings that start at 1:00, so I 
want to get this finished as soon as possible and appreciate 
your stopping by.
    Ms. Wolverton.

  STATEMENT OF DIANE WOLVERTON, STATE DIRECTOR, WYOMING SMALL 
                  BUSINESS DEVELOPMENT CENTERS

    Ms. Wolverton. Thank you, Chairman Manzullo, Ranking Member 
Velazquez. I am Diane Wolverton. I am the State Director of the 
Wyoming Small Business Development Center. I am here today on 
behalf of the Association of Small Business Development 
Centers. I want to thank you today for extending the invitation 
to the Association of Small Business Development Centers to 
testify and for the support that you have given to the program 
and that I have heard even this morning.
    I have given you my written testimony and I would like to 
offer some highlights this morning, as well as some insights 
into my personal experience with the Small Business Development 
Center.
    I am a passionate advocate of the program because I am a 
product of it. Since the time I graduated and finished my 
studies in journalism, I had the dream of owning a small 
newspaper and that dream was realized 14 years ago when I 
signed the papers to buy the Bridger Valley Pioneer Newspaper 
in Lyman, Wyoming. And that was the beginning of an 
entrepreneurial adventure that was at some times exciting and 
sometimes perilous. I worked hard as editor and janitor of the 
newspaper and the business grew.
    We increased circulation by more than four, we increased 
revenues by five times and we put people to work at a time in 
Wyoming when we were experiencing the oil bust and the 
unemployment in my county was higher than 15 percent.
    Then I was an ambitious entrepreneur, as we see many of 
those at the SBDC, and I set my sights on purchasing the other 
publishing company in my town, which was the community shopper. 
Soon I was able to complete that deal and was busy working on 
my new publishing family. That is when I started to run into 
some trouble.
    I found that I was having difficulty paying my bills on 
time, I found that I was struggling to make payroll and I found 
that very often when I was able to make payroll for my 
employees I was not able to take a paycheck for myself. And 
that is when I called the Small Business Development Center in 
Rock Springs, Wyoming and the counselor there helped me see 
that my problem was cash flow.
    He gave me a visual example that was very powerful. He told 
me that a business is like a fish bowl. There is water coming 
in the top and there is water going out the bottom. My business 
is the fish in the middle and my job was to make sure that it 
does not get empty and the fish would die.
    And the big aha experience was I saw that I had my sights 
on all the new revenues that would be coming in with my new 
expanded business, but I had not focused carefully enough on 
the new expenses that I had taken on. The Small Business 
Development Center helped me develop strategies that enabled me 
to make it through a very difficult time. They helped me solve 
problems to get my business back on track and eventually 
allowed me to sell that business for a substantial profit and 
it is still publishing in Lyman, Wyoming and doing very well.
    Mr. Chairman, as I am before you today, it is a little 
embarrassing to tell you the mistakes I have made in my 
business, but I do it to point out the power of the Small 
Business Development Center and how it helps to fill in the 
knowledge gaps of talented entrepreneurs.
    The Small Business Development Center counsellors see more 
than 600,000 businesses every year who are entrepreneurs like I 
was, that understand the basic profession or trade but the 
facts of business such as finance and marketing and how to deal 
with government regulations, they may not have total 
understanding of those. The SBDC plays a powerful role in 
filling in those gaps.
    And as a woman business owner, I am also keenly aware of 
the need to have these services available to populations that 
have been disadvantaged. The SBDCs work very hard across the 
country to meet the needs of women and minority business 
owners. Last year, 43 percent, I believe, of our clients were 
women business owners and 31 percent minorities.
    And when I started my business, I will tell you that I was 
recently divorced and I was reeling from the financial and 
emotional setback that that had brought to me and I needed that 
business to work, not only for the financial standing, but also 
to bring my confidence back, and SBDC helped me do that. And 
that is the power of the SBDC, it forges not only economies, 
but it helps to build community leaders.
    We are a country that embraces the free enterprise system 
and it is one of the tenets upon which our country is built and 
I think that many people are like me that want to participate 
in the free enterprise system, understand parts of it, but not 
the whole picture, and that is what the SBDC program does 
effectively and it is the only national comprehensive non-
academic government-sponsored program that helps our citizens 
participate in the free enterprise system by giving them 
knowledge they need.
    And it is important that this program continues to be 
available. It is critical that it remains free. As I testified 
earlier, at the time I went to the SBDC, I was not even sure I 
could keep my lights turned on, let alone pay fees.
    Chairman Manzullo. Diane, we are at five minutes. You very 
emphatically and persuasively have made your point as to the 
value of the SBDCs. Thank you.
    Ms. Wolverton. Okay. Thank you.
    [Ms. Wolverton's statement may be found in appendix.]
    Chairman Manzullo. Our next witness is Anthony Wilkinson, 
the President and CEO of the National Association of Government 
Guaranteed Lenders.
    Mr. Wilkinson.

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

    Mr. Wilkinson. Good morning, Mr. Chairman, and other 
members of the committee.
    Chairman Manzullo. Is that clock not working in front of 
you?
    Mr. Wilkinson. It is on.
    Chairman Manzullo. It is on?
    Mr. Wilkinson. Yes, sir.
    Chairman Manzullo. Okay. All right.
    Mr. Wilkinson. Thank you for the opportunity to testify 
today on the fiscal year 2002 budget request for the SBA 7(a) 
program. You have my written testimony and I would ask that it 
be included in the record of today's hearing.
    In the fiscal year 2002 budget request, the Office of 
Management and Budget predicts that the subsidy budget 
authority for fiscal year 2001 for all SBA credit programs will 
be a negative $525 million, as you have up on your chart.
    This means borrowers and lenders will have paid $525 
million after recovering the initial appropriation provided in 
the various programs. The original subsidy budget authority for 
fiscal year 2001 was $163 million for all SBA credit programs. 
This will be offset by $688 million in downward program cost 
re-estimates, leaving $525 million subsidy budget authority 
profit for the Treasury.
    And this is not the first year it happened. In fiscal year 
2000, the subsidy budget authority was a negative $137 million 
and for fiscal year 1999 the subsidy budget authority was a 
negative $473 million. That totals $1.135 billion in just the 
last three years--$1.135 billion in excess fees charged users 
of SBA's credit programs in just three years.
    Please keep in mind that this amount is after covering any 
initial subsidy budget authority provided to SBA's programs 
like 7(a) and SBIC.
    Anybody who thinks that government has been subsidizing the 
SBA credit program users needs to look again because it is 
clear that it is the SBA program users who have been 
subsidizing the U.S. Treasury.
    Specifically, for the SBA 7(a) program, the Office of 
Management and Budget now re-estimates that 7(a) borrowers and 
lenders have returned $1.257 billion to the Treasury since 
credit reform began in 1992. That means on average that OMB has 
over estimated the cost of the SBA 7(a) program by $125 million 
per year for ten years.
    Compare the $125 million annual cost over estimate to the 
$118 million needed for fiscal year 2002 to fund an $11 billion 
program.
    Even knowing all of the above, the OMB budget request asks 
for higher fees on SBA program users. OMB wants to supposedly 
drive the subsidy rate to zero so that the federal government 
is not subsidizing the cost of borrowing for small business.
    As I have already stated, it is clear that it is the SBA 
program user who has been doing the subsidizing. Second, we 
believe the SBA 7(a) subsidy rate is already at or below zero, 
OMB just refuses to recognize the actual performance of the 
program.
    For instance, OMB still requires the use of an approximate 
14 percent default rate in the subsidy model. SBA officials 
just last year testified before this committee that the program 
was being managed to a loss rate of 8 to 10 percent. Using the 
highest default estimate per their testimony of 10 percent, the 
SBA 7(a) subsidy rate for fiscal year 2002 would be about a 
minus .29, as the subsidy rate would fall by 34 basis points 
for every 1 percent decrease in the default estimate. And we 
think defaults are actually closer to the lower end of SBA's 
estimates, which would drive the subsidy rate farther into 
negative territory.
    Mr. Chairman, it is clear that small businesses have been 
subsidizing the U.S. Government, not the government subsidizing 
their borrowing costs. We at NAGGL encourage an immediate 
independent review of the assumptions used in the subsidy 
model. It is clear to us that OMB has gone well beyond the 
scope of the Federal Credit Reform Act. Rather than simply 
providing you with an estimate of the program's cost, OMB has 
attached a tax on program users to their cost estimates. Make 
no mistake about it, to a small business excess program fees 
are no different than a tax.
    While we wait for the results of an independent review of 
the assumptions used by OMB, we encourage the members of this 
committee to support fiscal year 2002 appropriations of $118 
million. This would support an $11 billion program next year. 
Based on the evidence we have provided, the government will get 
all this money back in the from of downward cost re-estimates 
in the future.
    So please do not punish small business borrowers because 
the Office of Management and Budget has purposefully over 
estimated the cost of the 7(a) program.
    Mr. Chairman, with that, I will conclude my remarks and be 
happy to answer questions.
    [Mr. Wilkinson's statement may be found in appendix.]
    Chairman Manzullo. Thank you very much.
    Mr. Mercer.

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

    Mr. Mercer. Thank you, Mr. Chairman.
    Ms. Velazquez, members of the committee, thank you for the 
opportunity to appear today to discuss the president's budget 
with respect to the SBIC program. I do not know whether it is a 
just a coincidence that I am sitting in the seat that Mr. 
Whitmore sat in, but I am probably the only one who is going to 
say that we support the president's budget, with reservations.
    Chairman Manzullo. Mr. Whitmore enjoyed it so much that he 
is sticking around to listen to the rest of the testimony.
    Mr. Mercer. The SBIC program is in the strongest position 
it has ever been in right now and in great measure that is a 
compliment to Congress, which has, over the past five or six 
years, worked with the industry to completely redesign the 
program that was first started in 1958. The growth has been so 
phenomenal that the SBIC program is, I believe, the fastest 
growing program that SBA has in terms of financing, percentage 
growth, that is, and in fiscal year 2000, the program provided 
$5.5 billion in equity and loans to growing small businesses.
    The reason we support the president's budget is that the 
program needs growth and the president's budget impacts the 
participating security program, the fasted growing part, the 
equity capital program. The program needs $3.5 billion in 
participating security leverage for fiscal year 2002 and 
without an increase in fees, that would require $65.5 million 
in appropriation or a 150 percent increase over the current 
appropriation in fiscal year 2001.
    We believe that that is extremely difficult to achieve, if 
not impossible to achieve, under the current situation and even 
though this committee joined with the Senate committee in 
having money added back into the budget, it would essentially 
just flat fund the programs, if you will. And flat funding for 
the participating security program at $26.2 million in 
appropriations would produce just $1.4 billion in participating 
security leverage, far less than we need.
    Increasing the fees will produce the result that the 
industry needs and it will create tremendous new growth and 
availability of equity capital for small businesses. So, the 
only question is can that growth be achieved through these fees 
in such a way that the increase in fees paid do not do any 
damage to the SBIC program or to the small businesses that are 
receiving the financing.
    In this regard, this program is distinct from the 7(a) 
program where even though the fees increase in both programs, 
not every program is the same. The fee increases in the 
participating security program will impact only one portion of 
the annual rate, if you will, that participating security SBICs 
pay for their money.
    In February of 2000, that rate for participating security 
leverage was 9.52 percent per year. If the president's budget 
were adopted today, effective today, even with the increase in 
fees proposed for the participating securities program, the 
total rate would be 8.52 percent, 1 percent less than it was a 
year ago. That is because the biggest driver of the rates for 
participating security SBICs is not the fees that paid to the 
government. The biggest driver is the interest rate in the 
market that we have to pay for our guaranteed leverage.
    Thus, for the SBIC program, the choice is fairly simple. If 
we want to increase to the level where the demand is and where 
the small businesses can use the money, we need to impose the 
fees. We join with those who say that there has to be a 
revisiting, if you will, or a critique of the subsidy models 
and perhaps in the SBIC program we would find that they were 
too conservative as well because money has been released from 
that program as well.
    But at this time, increasing the fees would produce three 
positive results: it would reduce the cost to the government of 
the program, making more money available for other purposes; it 
would increase the equity capital available to small 
businesses; and it would continue the growth and leverage 
necessary to attract private capital to the program.
    Thank you, Mr. Chairman, and members of the committee. We 
value our working relationship with you and we look forward to 
working again with you this year.
    [Mr. Mercer's statement may be found in appendix.]
    Chairman Manzullo. Thank you.
    Ms. Finch.

   STATEMENT OF ZOLA FINCH, VICE PRESIDENT FOR CONGRESSIONAL 
  RELATIONS, THE NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES

    Ms. Finch. Good afternoon. My name is Zola Finch and I am 
the Vice President of Congressional Relations for the National 
Association of Development Companies or NADCO. I am also the 
Director of Finance Programs for Rural Missouri, Inc. and we 
are the statewide certified development company. We also 
administer four other economic development financing programs 
to small businesses and one of those is the SBA microloan 
program as well.
    I am pleased to be invited by the committee to provide 
comments on the SBA fiscal year 2002 budget and ask that my 
written statement be entered into the hearing record.
    Chairman Manzullo. All of the written statements will be 
entered into the record without objection.
    Ms. Finch. Thank you.
    We have four objectives in providing this testimony to the 
committee. First, NADCO would like to comment on the 504 
authorization level and the proposed borrower fee contained in 
the FY 2002 budget for SBA. Secondly, our statement compares 
some of the 504 performance projections by SBA and OMB with the 
actual performance to date for the 504 program. Third, we will 
comment on some of the SBA performance plan objectives 
submitted to Congress with the fiscal year 2002 SBA budget. 
And, fourth, we will provide the committee with several 504 
program proposals that could result in additional enhancements 
as we serve America's small businesses.
    First, NADCO supports the current program reauthorization 
level passed by Congress last year, rather than the 
administration proposal of $3.75 billion. With 504 having a 
zero appropriation, there is no cost to the taxpayer for the 
current ceiling of $4.5 billion.
    We believe this higher authorization level may well benefit 
small businesses if the current economic slowdown continues to 
restrict private sector lending.
    We also appreciate the continued reduction in the program 
borrower fee. Going from .472 down to .410 for fiscal year 2002 
will mean a total reduction of over 50 percent from fiscal year 
1997 fee which was imposed when the program was taken onto a 
zero subsidy.
    However, we continue to have major concerns about the 
calculation of this and the other program fees. Three of the 
primary assumptions used in calculating our fees is the default 
rate, the loan recovery rate and the debenture prepaying rate.
    The default rate calculated by SBA and OMB went down from 
11.1 percent to 8.41 percent for fiscal year 2002. We are very 
interested in how the administration computed this, since 
actual defaults have been fairly stable for a number of years 
and I would like to refer to the second chart in my written 
testimony, which was actually provided to NADCO from the Bank 
of New York, our trustee for the program. This is private 
industry information provided to us and has been provided to 
OMB and SBA over the years and has not been taken into 
consideration in the calculation of the subsidy model.
    As revealed in this chart, the rate of debenture 
prepayments has declined over 50 percent in the last three 
years. Please note that this has occurred during both times of 
increasing interest rates and decreasing interest rates. We are 
troubled by the administration's forecast of prepayments moving 
up from about 40 percent to almost 50 percent of our loan 
portfolio.
    The administration's forecast giving us the greatest 
concern is the SBA estimate of recovery rates on future loan 
defaults. This projection decreased from 31 percent to an 
unfathomable 26.93 percent. Conversely, the results of both the 
CDC liquidation pilot program and the SBA asset sales paint a 
much more favorable pictures.
    With the liquidation pilot program focusing on loans from 
47 CDCs, both SBA and CDC staff are averaging about a 60 
percent recovery on defaulted loans. The average recovery rate 
for 778 504 loans from three asset sales was reported by SBA at 
46 percent. Given our experience with the CDC liquidation pilot 
and SBA figures on the three asset sales, we can find no 
justification for another decline in this important program 
statistic.
    Thirdly, the fiscal year 2002 performance plan is of great 
interest to the CDC industry. As lenders and taxpayers, we are 
all concerned about the prevention of loan program fraud and 
abuse. However, it is simply taking too long to authorize, 
approve and close 504 loans. It is clear that the agency must 
do something to improve the procedures it has developed for all 
lenders to work with to protect against loan fraud. These 
cumbersome procedures are grinding, however, the loan process 
to a crawl by requiring weeks or even months to process and 
handle verifications that could be done in days or hours.
    Fourth, NADCO strives to meet the changing needs of 
America's small businesses. Therefore, the 504 program just 
remain dynamic and ready for change and renewal. We have 
recently completed a major strategic analysis of the program 
and we will be bringing our recommendations to this committee.
    Mr. Chairman, you and the ranking member have already shown 
support of the 504 program. We have serious questions, though, 
and doubts about the current assumptions going into the 
administration's 504 cost model. We ask for your assistance in 
getting to the bottom of the extreme and inconsistent forecasts 
so that we might see lower borrower fees which our portfolio 
performance reflects.
    Thank you for this opportunity to testify and I would be 
happy to answer any questions.
    [Ms. Finch's statement may be found in appendix.]
    Chairman Manzullo. Thank you very much. I am sorry we 
misspelled your first name. It says Lola on there, but it is 
Zola.
    Ms. Finch. That happens frequently. It is Zona.
    Chairman Manzullo. Mr. Means.

 STATEMENT OF DAVID MEANS, EXECUTIVE DIRECTOR, GREATER NEWARK 
                BUSINESS DEVELOPMENT CONSORTIUM

    Mr. Means. Thank you, Mr. Chairman, and members of the 
committee, for this opportunity to testify before you today. My 
name is David Means. I am Executive Director of the Greater 
Newark Business Development Consortium (GNBDC) in Newark, New 
Jersey and a member of the Association of Enterprise 
Opportunity (AEO), the nation's only micro enterprise 
development trade organization. My testimony represents the 
views of AEO, as well as the Greater Newark Business 
Development Consortium.
    I am a retired banker with 33 years experience. I retired 
as Senior Vice President responsible for Branch Administration, 
Operations and Legislative Relations.
    My interest in community development began early in my 
banking career as project manager for the bank's Urban 
Development Housing Program. Today, I am the director of New 
Jersey's leading SBA/Microloan Program. Over the past seven 
years, GNBDC has borrowed from the SBA directly or indirectly 
$3,523,139. The GNBDC has approved and closed 207 loans for 
$3.2 million, with an average loan of $22,000. The default rate 
is a low 6 percent with 57 borrowers already fully repaid.
    My organization also has a full technical assistance 
program, training and technical assistance program of 27 hours. 
We have a component small business mentoring program also.
    The theme of our organization is make the loan, then make 
the loan work.
    A.E.O., founded in 1991, is the national association of 
organizations committed to microenterprise development. The AEO 
provides over 400 organizational members with a forum, 
information and a voice to promote enterprise opportunity for 
people and communities with limited access to economic 
resources. A good number of AEO members are SBA intermediaries 
as well as Women's Business Centers. AEO has three policy 
priorities for this fiscal year. They are to fund the SBA 
microloan technical assistance and loan capital programs at $30 
million each; to fund the Office of Women's Business 
Ownership's Women Business Center Program at $13.7 million, and 
to fund the PRIME program at $15 million for fiscal year 2002.
    Microenterprises are small businesses with five or fewer 
employees that have difficulty accessing small amounts of 
credit from conventional sources. Many microentrepreneurs, 
particularly those served by microenterprise development 
organizations, are low income, women, minorities or disabled 
individuals who may face other challenges to business success 
as well. The Aspen Institute estimates that there are at least 
2 million low income microentrepreneurs in the United States.
    As I mentioned earlier, in order to meet the demand for 
training and technical assistance and credit among 
microentrepreneurs, AEO urges Congress to support and 
acknowledge the distinct and complementary programs within SBA 
and to assist microenterprise development organizations to 
serve more entrepreneurs effectively.
    Convention sources of business credit, such as banks, are 
often beyond the reach of microentrepreneurs. These potential 
borrowers often seek very small amounts of capital, have poor 
credit histories and can offer banks little or no collateral. 
The SBA microloan program contributes to solving this problem 
by providing funding to over 160 community-based intermediaries 
to help microentrepreneurs gain access to credit. To date, 
these intermediaries have made more than 12,000 microloans 
totalling over $130 million.
    Since microloan borrowers require training and technical 
assistance to start or expand their business, the SBA microloan 
program also provides funding to intermediaries who offer these 
services. In contrast to PRIME, however, this program supports 
the training and technical assistance needs of borrowers and 
provides only minimum amounts of funds for technical assistance 
to individuals who do not borrow.
    The SBA's Office of Women's Business Ownership (OWBO) is 
the only federal office that specifically targets women 
business owners. Its Women's Business Centers provide training 
and technical assistance to women starting or expanding 
businesses. There are a total of 92 Women's Business Centers. 
Fifteen new centers were opened this past year.
    Finally, in order to succeed in our complex economy, 
microentrepreneurs need training and technical assistance in 
areas such as financial management, bookkeeping and marketing. 
Fifty percent of the PRIME Act funds are to be used to support 
training and technical assistance for low income entrepreneurs. 
PRIME funds also enable non-profit microenterprise 
organizations to build their management, outreach and program 
design capacity so that they can more effectively serve low 
income clients. PRIME funds can support the full range of non-
profit of organizations that assist microentrepreneurs, not 
only those organizations providing microloans.
    I will reserve the comments of the last part of this 
presentation of the testimony, they are comments to me from 
some of our borrowers. I think it is widespread throughout the 
organizations.
    [Mr. Means' statement may be found in appendix.]
    Chairman Manzullo. We are going to go and vote and come 
right back.
    [Recess.]
    Chairman Manzullo. I have just a couple of questions and it 
would be of Ms. Wolverton.
    Ms. Wolverton. Yes?
    Chairman Manzullo. There was a bill that has been 
introduced by Congressman John Sweeney of New York called the 
National Small Business Regulatory Assistance Act, H.R. 203, 
that would allow Small Business Development Centers to offer 
advice and refer clients to resolve various environmental and 
workplace related problems.
    What would your opinion of that be?
    Ms. Wolverton. Well, Mr. Chairman, I have not seen the 
bill, but I am familiar with the concept and also that the 
Small Business Development Centers have asked, I think, since 
1996 to assist businesses with these regulatory compliance 
issues and they are big issues for small business. We have been 
doing it on a limited basis because we have not had the 
financial resources to assist that. Some states have been able 
to find grants and have quite extensive programs, but this to 
me from first blush sounds like an opportunity to enhance that 
and to be able to offer that to the businesses when they are in 
the stage of learning how to set up their business and not to 
build a building that is not in compliance, not to set up 
procedures that are going to cause damage and fines later on 
down the road, so we think this is an excellent opportunity.
    Chairman Manzullo. What do you do now when somebody has an 
environmental question? Do you refer them to the local EPA or 
what do you do?
    Ms. Wolverton. Well, in Wyoming, I can speak that we do 
have a government office, it is the Department of Environmental 
Quality in Wyoming and they have what they call an Office of 
Business Outreach and so we do work in partnership with them, 
we have done some programs with them. And also one of the 
issues is in referring businesses to them, though, is there is 
a little fear that this is a regulatory agency and that if the 
business comes and is open about what they are doing that they 
will be shut down. And so they do have that office, there is 
some resistance to it, but we feel that with a partnership 
arrangement, and we have been working to forge those 
partnerships in different states, that this is a delivery 
system that could work very well.
    Chairman Manzullo. Well, I guess my question would be what 
level of training would the SBDC people have to have? I mean, 
as it stands now, any time somebody has a question, you have 
the authority to refer those people to the appropriate 
agencies. Is that correct?
    Ms. Wolverton. Yes. Yes. Absolutely.
    Chairman Manzullo. And my question is if somebody comes to 
the SBDC, I mean, an environmental workplace-related problem, 
these are highly technical.
    Ms. Wolverton. Exactly.
    Chairman Manzullo. Would it not be kind of dangerous going 
off into an area where you----
    Ms. Wolverton. Absolutely. And we would never intend--just 
as we do not give legal advice, we know to call in the experts 
that have the technical assistance in that area. Absolutely.
    Chairman Manzullo. Do you have brochures from these other 
agencies that you give to people that may have a question on 
workplace related problems such as wage and hour issues? Do you 
already furnish that to them?
    Ms. Wolverton. Yes, we do.
    Chairman Manzullo. Okay. Does anybody else here have any 
input on that?
    (No response.)
    Chairman Manzullo. Okay.
    You came back just in time to ask a question.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Mr. Wilkinson, why do you think the SBA subsidy estimate 
for the 7(a) program has been wrong year after year and then 
what can we do to try to fix it?
    Mr. Wilkinson. That is the same question we have been 
asking for quite some time. From our perspective, it looks like 
OMB still requires a default estimate that is well beyond what 
this program is being managed to today, yet they continue to 
want to hang their hats on the old SBA way back into the 1980s 
that had high default rates and that is just not the program we 
have today. So the OMB could quickly fix some of their problems 
by using a more realistic default estimate in the model.
    Ms. Velazquez. So, Mr. Chairman, are we going to do a 
hearing where we could bring here OMB and deal with this issue?
    Chairman Manzullo. I think they are here now in the back.
    Ms. Velazquez. But they are not testifying.
    Chairman Manzullo. No, but we can----
    Mr. Wilkinson. They were here for a while. I do not think 
they are here now.
    Chairman Manzullo. Oh, they left?
    Mr. Wilkinson. Yes, sir.
    Chairman Manzullo. Yes, we can bring them in. We will be 
glad to let you ask them some questions.
    Ms. Velazquez. Sure.
    Chairman Manzullo. I am sure you might have a few.
    Ms. Velazquez. I guess so.
    Mr. Mercer. Can I reserve a seat for that hearing? That 
will be standing room only.
    Ms. Velazquez. Mr. Wilkinson, what kind of response did you 
get from SBA when NAGGL told then you wanted to do an outreach 
program to increase credit availability among under served 
populations?
    Mr. Wilkinson. As you know, the agency and NAGGL entered 
into a cosponsorship agreement after those discussions whereby 
we provided training to intermediaries that work with minority 
and women-owned businesses and we put on training classes 
throughout the country and looking at the loan dollars and 
women and minority loans from 1998 to 2000, you will see that 
there was a good increase across the board in all categories.
    Ms. Velazquez. Would you please comment on Mr. Whitmore's 
analysis of 7(a) lending by ethnicity and gender?
    Mr. Wilkinson. Well, again, I agree that picking on 1995 
was the wrong year to choose, that was an anomaly and not a 
good choice of years to pick because there has been a good 
trend, as you can see, from the charts.
    Clearly, we can always do a better job, but when you go 
back to 1996, we had a change in fees that dramatically drove 
up the cost of the program to both borrowers and lenders and 
there was a decrease in participation. It is very clear that 
any dollars that could have been used for incentives with those 
small loans have been scraped off the table by OMB and sent to 
Treasury. And I again come right back to OMB, they have taken 
all the money away which we could use to try to provide 
incentives on small loans.
    I disagree with Mr. Whitmore that you do not stipulate the 
volume of loans $150,000 or less by doing nothing, which is in 
the administration's proposal.
    Ms. Velazquez. Thank you.
    Mr. Means, the administration's budget does not request any 
funding for PRIME. In addition, the administration has declared 
their intent to eliminate the program all together, arguing 
that it duplicates programs like the microloan program and 
CDFI.
    As a participant in the microloan program, do you believe 
that the PRIME program offers something different from the 7(m) 
program?
    Mr. Means. Yes, it does, because the PRIME program is a 
fund for giving counselling and technical assistance pre-
application, pre-loan application, which is extremely important 
when you are dealing with microloan enterprise individuals 
going into business. You need a thorough understanding of what 
going into business is all about and this comes before the 
application. Yes, it is different.
    Ms. Velazquez. Thank you.
    Ms. Wolverton, what will be the impact of fees on your 
match?
    Ms. Wolverton. That is an excellent question because the 
match providers from our various states provide the match with 
the understanding that it is for an outreach program that is 
offered free and the addition of fees would be a huge 
disincentive for them to participate in this program.
    Ms. Velazquez. So what do you think the effect on the host 
institutions will be?
    Ms. Wolverton. The host institutions will look at the 
burden of calculating the fees, they will look at the publicity 
detraction from people who were being able to receive these 
services not being able to receive them any more. The host 
institutions have used this as an outreach. For example, the 
University of Wyoming has an outreach program. It was earlier 
mentioned do we charge farmers to contact the Department of Ag? 
We have outreach with our ag extension agents and they do not 
charge. And so it would be an anomaly within what the host 
institutions do and many of them may decide to pull out of the 
program.
    Ms. Velazquez. Ms. Wolverton, there is a very hot topic in 
terms of the privacy issue.
    Ms. Wolverton. Yes.
    Ms. Velazquez. Whether it is financial, personal or medical 
records. More and more people are concerned that critical 
private information may be disclosed. How important is the 
privacy issue in terms of business information to your clients?
    Ms. Wolverton. Well, I guess the best answer I can say to 
that is how often do we walk up to someone and ask them how 
much money they make? It is an extremely private issue and we 
are discussing these things, we have these things in paper form 
and it is just absolutely unacceptable for our clients to think 
that this could be made public or made known.
    Ms. Velazquez. It concerns me because recently I was made 
aware that the Virginia SBDC was required to turn over their 
client list to the local SBA office.
    Ms. Wolverton. This is also very troubling because not only 
are the clients very protective of the information that is in 
the file, but the fact that they walk through our doors is also 
something they like to keep private. For example, some of them 
may be employed in another place and they are getting ready to 
start a business and they really do not want that known; some 
of them may be in trouble financially, they do not want that 
known, it could impact maybe a potential sale of the business 
or their customers having confidence in them. So they do not 
even want people to know who they are coming into our offices.
    Ms. Velazquez. Do you think that this could----
    Chairman Manzullo. Could you yield a second?
    Ms. Velazquez. Yes.
    Chairman Manzullo. On that issue with Virginia, I would be 
willing to sign a letter with you to the state organization 
that is in charge of the VASBDCs and find out by what authority 
they are getting these lists and for what purpose they are 
using them. Maybe we should send a letter to all 50 states to 
see if they are doing that.
    Ms. Velazquez. Yes. I would like to do that, but I would 
like to ask her if you consider that this committee should 
consider some statutory changes to ensure the confidentiality 
because, look, this is one office, but what about if it happens 
in some other regional offices?
    Ms. Wolverton. We would welcome that. Our clients do sign a 
form that says their records will be kept confidential and yet 
they are still nervous, so if they knew there was some 
statutory relief they would be--I think that would go a long 
way to ensure their confidence. Yes. Thank you very much.
    Ms. Velazquez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Manzullo. I have no further questions.
    Mr. Whitmore, did you want to respond to that last question 
on privacy that we talked about?
    Mr. Whitmore. You want me to respond.
    Chairman Manzullo. I mean, if you wanted to.
    Mr. Whitmore. Well, I would say that we don't have an 
electronic database nationwide.
    Chairman Manzullo. If you could do that, we would 
appreciate it.
    Mr. Whitmore. It would be possible to have a nationwide 
database and track clients but not by names.
    Chairman Manzullo. Okay. Just by function.
    I want to thank you all for coming. After the first panel, 
those of you who are not used to testifying figured why I am 
here, coming this long distance to do this. We really want to 
thank you for coming and testifying before us today.
    Mr. Whitmore, thank you for participating in the first 
panel and sitting through the testimony of the second panel. I 
really commend the SBA for always having somebody here; 
oftentimes, the administrator is here or acting administrator 
to gather firsthand what is going on.
    Again, thank you very much.
    This committee is adjourned.
    [Whereupon, at 12:46 p.m., the committee was adjourned.]
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