[Senate Hearing 107-412]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-412
 
                    THE 7(a) LOAN GUARANTY PROGRAM:
        A LOOK AT SBA'S FLAGSHIP PROGRAM'S FEES AND SUBSIDY RATE
=======================================================================


                               ROUNDTABLE

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION
                               __________

                           SEPTEMBER 5, 2001
                               __________

    Printed for the Committee on Small Business and Entrepreneurship





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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                      ONE HUNDRED SEVENTH CONGRESS

                              ----------                              
                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa                     CONRAD BURNS, Montana
JOSEPH I. LIEBERMAN, Connecticut     ROBERT F. BENNETT, Utah
PAUL D. WELLSTONE, Minnesota         OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia                 MICHAEL ENZI, Wyoming
MARY LANDRIEU, Louisiana             PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         MIKE CRAPO, Idaho
MARIA CANTWELL, Washington           GEORGE ALLEN, Virginia
JEAN CARNAHAN, Missouri              JOHN ENSIGN, Nevada
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel
               Emilia DiSanto, Republican Staff Director
               Paul H. Cooksey, Republican Chief Counsel







                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachusetts..................................................     1
Wellstone, The Honorable Paul D., a United States Senator from 
  Minnesota......................................................    25
Bond, The Honorable Christopher S., Ranking Member, Committee on 
  Small Business and Entrepreneurship, and a United States 
  Senator from Missouri..........................................     2
Bennett, The Honorable Robert F., a United States Senator from 
  Utah...........................................................    19

                            Committee Staff

Forbes, Patricia R., Majority Staff Director and Chief Counsel, 
  Committee on Small Business and Entrepreneurship...............     *
Cooksey, Paul, Chief Council, Committee on Small Business, 
  Minority Staff.................................................     *

                           Panelist Testimony

Ballentine, James C., Director, Community Development, American 
  Bankers Association, Washington, D.C...........................     *
Bartram, David, President, SBA Division, U.S. Bank, San Diego, CA     *
Blair, Daniel, Assistant Director, Financial Management and 
  Assurance, U.S. General Accounting Office, Washington, D.C.....     *
Blanchard, Dr. Lloyd, Associate Director, General Government 
  Programs, Office of Management and Budget, Washington, D.C.....    15
Brocato, John, President & CEO, Biz Capital, New Orleans, LA.....     *
Calbom, Linda, Director, Financial Management and Assurance, 
  General Accounting Office, Washington, D.C.....................    15
McCracken, Todd, President, National Small Business United, 
  Washington, D.C................................................    32
McLaughlin, Keith, Senior Vice President, Union Planters Bank, 
  Columbia, MO...................................................     *
Merski, Paul, Chief Economist & Director of Federal Tax Policy, 
  Independent Community Bankers of America, Washington, D.C......     *
Phillips, Bruce, Senior Fellow in Regulatory Studies, National 
  Federation of Independent Business Education Foundation........     4
Raffaele, Stephen, Senior Vice President & Treasurer, Sterling 
  Bancshares, Inc., Houston, TX..................................     *
Schuster, Deryl, President, Mid-America Division, Business Loan 
  Center, Wichita, KS............................................     *
Stultz, Steven, Stultz Financial, Newport Beach, CA..............     *
Whitmore, John, Chief of Staff, U.S. Small Business 
  Administration, Washington, D.C................................    16
Wilkinson, Tony, President, NAGGL, Stillwater, OK................     5
Wise, Richard, President & CEO, American National Bank, Parma, OH     *

         Alphabetical Listing of Additional Material Submitted

Kerry, The Honorable John F.
  Opening Statement..............................................     1
  H.R. 2590......................................................    51
  Letter to The Honorable David Walker, U.S. General Accounting 
    Office.......................................................    54
  Letter from Linda Calbom, U.S. General Accounting Office.......    56
  Information regarding the 7(a) Loan Program from the website of 
    the U.S. Small Business Administration.......................    94
McCracken, Todd
  Testimony......................................................    32
  Prepared Testimony.............................................    34
Wilkinson, Tony
  Testimony......................................................     5
  Prepared Testimony.............................................     8
  Information regarding the 7(a) Loan Program from NAGGL.........   101
Whitmore, John
  Letter to the Honorable Donald Manzullo........................   104

*Comments, if any, are located between pages 26 and 49.












THE 7(a) LOAN GUARANTY PROGRAM: A LOOK AT SBA'S FLAGSHIP PROGRAM'S FEES 
                            AND SUBSIDY RATE

                              ----------                              


                      WEDNESDAY, SEPTEMBER 5, 2001

                              United States Senate,
          Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:45 a.m., in 
room SR-428A, Russell Senate Office Building, the Honorable 
John Kerry (Chairman of the Committee) presiding.
    Present: Senators Kerry, Wellstone, Bond, and Bennett.
    Chairman Kerry. Good morning, everybody. Thank you very, 
very much for being here and joining us today. Good morning and 
welcome back to my colleague.
    Senator Bond. Welcome back to you, Mr. Chairman.
    Chairman Kerry. I think these roundtables have proven to be 
a really helpful way for us to do some business. I am not sure, 
but I think you began them, didn't you, Senator Bond?
    Senator Bond. With your active concurrence and support.
    Chairman Kerry. With my very positive input. It is a really 
productive way to have more of a dialog and to be able to 
exchange thoughts and get a roundtable going rather than just 
the formality and strict confines of the normal hearing 
process. So we are particularly appreciative for all of you 
participating today. A number of you have been very much part 
of 7(a) lending for some period of time.
    We are glad to welcome John Whitmore here, who survived the 
task of running the agency for awhile, and takes over as the 
principal assistant to the Administrator now. We are glad for 
that experience also. GAO, thank you for being here with us 
with your team of experts, both at the table and in the 
audience. I know you have spent several months in trying to 
analyze this issue and, hopefully, we can really make some 
progress here today.
    Obviously, the crux of what we want to get at today is this 
estimated default rate issue since 1992, and why it has 
differed so drastically from the actual performance and, 
needless to say, what the impact of that is on the clients, on 
the participants in the process. Let me just lay out very 
quickly the parameters of that problem, as I see them.
    Since 1992, SBA and OMB have overestimated the original 
cost of the 7(a) program by more than $1 billion. From 1992 to 
1998 alone, the 7(a) program, with interest included, returned 
about $1.3 billion to the Treasury. Congress, on the other 
hand, appropriated about $1.4 billion to run the program in 
those years. So GAO's study, as we will hear a little later on, 
attributes most of that overestimate to overly pessimistic 
estimates of the default rates that were plugged into the 
subsidy rate formula. I think, specifically, SBA originally 
overestimated defaults from 1992 to 2000 by about 87 percent, 
when compared to the actual loan performance.
    If the subsidy rate reflected the actual performance of the 
7(a) program, and current fees continue to be charged to 
borrowers and lenders, then the program would run at a negative 
subsidy rate, in effect, making money for the Federal 
Government. That means that Congress has needlessly 
appropriated too much to fund its share of the program, small 
business owners have paid too much in fees to access the loans 
and lenders have paid too much in fees to make the loans. So we 
need to examine this question and really look at the bottom-
line issue, which is that even though the 7(a) program 
effectively has been running at a profit to the Federal 
Government, it has been doing so at the expense of small 
business borrowers and lenders, and the Administration's 2002 
budget proposal, which eliminated funding for 7(a) loans and 
increased fees to cover the cost, represents something of a 
contradiction, if not a question mark, under those 
circumstances.
    So, today we want to dig into this and get a sense of how 
we might, together with experts, practitioners and others, be 
able to rectify this situation. What is the appropriate 
response to it? There's a question as to what the Government is 
``subsidizing,'' when the program itself has returned more than 
$1 billion to the Treasury since 1992? Senator Bond and I, as 
you know, put an amendment in the final budget resolution that 
restored funding for the program and opposed the fee increases, 
based on our sense of how this balance ought to exist. I would 
like to see today if we can come to an agreement and an 
assessment of how we ought to approach this. Senator Bond, do 
you want to add anything to that?
    Senator Bond. Certainly. First, sincere thanks to you, Mr. 
Chairman, for convening this roundtable. As we explained to Dr. 
Blanchard when we welcomed him, this is a way to give the 
maximum participation for the leaders in this field. It is a 
little different format, but I very much appreciate your having 
this one, because I think it is important that we get right 
through to the heart of this matter. I know this is a busy 
time. I appreciate you scheduling it. I apologize, but I am on 
the Defense Appropriations Subcommittee and Secretary Rumsfeld 
is going to be there at 10 a.m., and I think there is a little 
controversy swirling around that we are going to have to be 
involved in there. So I am going to have to leave. My staff is 
going to be here.
    I want to join with you in commending John Whitmore. I tell 
you what, John did a fabulous job and we appreciate your 
stepping in and helping. It has been great to work with you. 
You may have heard--some of you have been here at earlier 
hearings when I have been extremely critical of the 
Administration's fiscal year 2002 budget request for the SBA, 
and I said some very strong comments about OMB. I wanted the 
record to note that Dr. Blanchard was not there. He comes in 
without having responsibility for some of the things that I 
think resulted from this significant misunderstanding, and I 
hope that, working together, we can get back on the same page. 
I think this will give him an opportunity to interact, perhaps, 
even ask some questions of people here, so we can all be 
working together.
    If the legislative branch and the executive branch and the 
private sector work together, there is no telling what we could 
do, and frankly, when it comes to small business, that is the 
only way we get things done. There are lots of big, big issues 
that are floating around that command the headline coverage, 
the top of the nightly news. Small business is vitally 
important, but it usually does not make it as a high-profile 
issue, so if we get everybody working together, and this 
Committee has worked on a bipartisan basis as well or better 
than any committee I know, and when we speak, we speak as 
Republicans and Democrats. That is the way we get things done.
    The Chairman has already talked about the problem. 
According to the GAO, defaults were overestimated by nearly $2 
billion and that means that under the credit subsidy scoring, 
the Federal Government collected significantly more than it 
needed to fund its loan loss reserves. I think they said, 
specifically, the Federal Government collected over $950 
million in excess fees paid by borrowers and lenders. My shade 
tree analysis leads me to believe that small business 
borrowers, banks and taxpayers have been and continue to be 
overcharged for the 7(a) program. It is clear they are paying 
too much each year, because the SBA and OMB overestimate the 
default rate.
    Second, if a more accurate default rate were adopted, the 
credit subsidy could be reduced. Third, a lower credit subsidy 
rate would mean lower fees paid by small business borrowers. 
Fourth, the 7(a) loan program could expand to meet the demands 
of small business without requiring the larger appropriations. 
I do not need to tell anybody in this room that this is the 
time in our economy and in our history when we need small 
business to be in a position to expand. Brother, do we need it 
now. All those $300 and $600 rebate checks got to go somewhere, 
and we might as well expand small business to take advantage of 
them.
    There are a number of other questions that we have. I will 
have a fuller statement for the record, but I appreciate very 
much, Mr. Chairman, your holding this hearing, and I apologize 
to you and to the participants, but I am going to have to go 
find out what is going on in the defense budget.
    Chairman Kerry. Senator, I thank you very much. I 
understand that completely. I just came from a joint leadership 
meeting, which we had actually both this morning, and we sort 
of acknowledged that we have about 12 legislative days this 
month, given both the Jewish holidays falling for the first 
time in a long time within the week. So that, plus the 
demonstration that is planned in Washington around the IMF, 
probably making work hard in the city and so forth, really 
reduces the time we have available. Like you, I am going to 
have to dart in and out. I will be here for part of this 
discussion, but we have not gotten any conference report yet 
passed on any appropriations bill. We almost certainly are 
looking at a short-term CR, but there is a lot of work to be 
done so we are going to be pressing it as hard as we can.
    What I would like to do is invite, in our absence, our able 
staff. Patty Forbes and Paul Cooksey will conduct the meeting. 
Then I will return. I have to go over to a couple of other 
committees. We have five presentations. I would like to ask 
each of them to be kept to the 2-minute range, if possible. 
That will be as an opener to the discussion, at which point 
each participant would seek recognition from Patty simply by 
either raising your hand or just holding your nameplate up, and 
she will duly record it and put you in line to speak. I do not 
want anybody to feel constrained. If there is an immediate 
rejoinder to something, let's have a good discussion and get at 
it that way.
    If I could invite the economist from NFIB, Bruce Phillips, 
why don't you lead off and then we will just go down the line. 
Tony Wilkinson, Linda Calbom, Lloyd Blanchard, and John 
Whitmore; and then we can engage in the discussion from there.
    Thank you, Bruce.

   STATEMENT OF BRUCE PHILLIPS, SENIOR FELLOW IN REGULATORY 
STUDIES, NATIONAL FEDERATION OF INDEPENDENT BUSINESS EDUCATION 
                           FOUNDATION

    Mr. Phillips. Thank you. Good morning, Senator Kerry and 
members of the roundtable. I appreciate being asked to say a 
few words about the importance of small firms, having worked in 
this area for almost 30 years, as well as the availability of 
debt capital for new and growing small businesses. These 
remarks are mine only and do not represent either NFIB, with 
whom I am now affiliated, or the SBA, with whom I spent over 20 
years.
    Why are small firms important? Market flexibility and 
opportunity for about 16 percent of all small firms are new 
each year and about 14 percent leave the market, approximately 
at a 30 percent turnover rate, generally for voluntary reasons. 
That is an average 2 percent growth rate annually in the number 
of new-
employer firms. The high business startup in business formation 
rates of the small business sector are among the highest in the 
world and are envied by just about every developed Nation in 
the world. They help keep our unemployment rate lower than it 
otherwise would be, and this is as true today as it ever was 
and is a major strength of our economy.
    Many small firms, about 40 percent according to some of the 
latest NFIB figures, are adding jobs today while large 
companies are eliminating them. New business formation requires 
capital, especially debt capital during the early startup 
phases. After credit card loans of around $50,000 to $75,000, 
where do new firms go? To family, friends, and the SBA. Why the 
SBA? Because unlike most banks, the SBA does startup loans more 
and more--about a quarter of the 60,000 7(a) loans made 
annually go into startups. Many more than that go into the 
mini- or the micro-loan programs. Both have excellent repayment 
records. SBA has the only program with a 7-9-year repayment 
period and is a major source of funds for lending to minorities 
and women, especially in inner-
cities and rural areas.
    What have the bank lending markets been like? SBA advocacy 
research has shown that large, local consolidations make the 
national effective mergers difficult to judge, but we do know 
consolidations have significantly reduced the number of banks, 
especially in rural areas. Some local areas may be negatively 
impacted, but offer difficult measurement problems, despite the 
excellent research of the Federal Reserve. Credit scorings 
probably helped some borrowers with good credit, but hurt 
others that need credit the most and have more marginal 
personal credit records. SBA bank lending studies show large 
increases in micro-loans under $100,000, about 20 percent in 
the last available year, but not a large increase in dollars, 
less than 7 percent--I think it was from 1999 to 2000.
    By contrast, there have been double-digit percentage 
increases in loans over $1 million, which generally go to 
larger firms. It is still very difficult for new small firms to 
borrow large amounts of money. To make large loans, many banks 
require a new firm to bring equity to the table. Quite frankly, 
they do not have it. Our banks want rapid repayment, within 1 
to 2 years. New firms often cannot make these kinds of 
repayment schedules either. A critical issue, especially during 
these uncertain times, is the importance of a mechanism which 
allows very small employers and self-employed individuals to 
grow and hire their first employee. Often this has been 
difficult for very small minority firms, the vast majority of 
which represent self-employed individuals.
    It is not quite as well known, but only about 15 percent of 
minority firms have employees. The rest represent self-employed 
people. The SBA has been and should continue to be a major 
player in making early debt capital available to all firms that 
need it at an affordable price. The loan prices will allow very 
young and startup small firms to continue to grow and create 
jobs and pay taxes, and hopefully, qualify for larger firms in 
the future in the private market.
    I would be happy to answer any questions later that the 
roundtable might have.
    Chairman Kerry. Thank you very much.
    Tony.

STATEMENT OF TONY WILKINSON, PRESIDENT, NATIONAL ASSOCIATION OF 
      GOVERNMENT GUARANTEED LENDERS, INC., STILLWATER, OK

    Mr. Wilkinson. Mr. Chairman, first of all, I want to thank 
you and Senator Bond and your staff for holding today's 
roundtable hearing. This is a day we have been looking forward 
to for quite some time. Again, a big thanks, because there is a 
lot of work that goes on behind the scenes before we ever get 
to this point. Thank you very much for having today's hearing.
    Chairman Kerry. Well, you have been here a lot and have 
been part of this for a long time, so, thank you for your help.
    Mr. Wilkinson. I had the opportunity to attend a conference 
a few weeks ago, the American Society of Association 
Executives, and Bernard Shaw was a keynote speaker. He thanked 
the associations for being the early warning system for our 
elected officials in Washington. That is part of the message I 
wanted to deliver today--our warning sirens are going on. At a 
time when loan volumes should be going up, it is going down. At 
a time when we need lender participation to increase, lenders 
are getting out of the program. It is something that needs to 
be addressed.
    The main problem, as we see it, has been an inaccurate 
subsidy rate calculation. We have been before this Committee 
and the House Small Business Committee for years testifying 
that the default rate in the model is simply unreasonable, way 
too high, and now we see in the downward reestimates in the 
budget that that is the case, that we are sending many of our 
dollars straight to the Treasury. Mr. Chairman, you alluded to 
the fact that we sent $1.3 billion to the Treasury while $1.4 
billion has been appropriated. If we just stop today and quit, 
there is going to be more money that flows to Treasury. By the 
time we get through, there is going to be more money going to 
Treasury than was originally appropriated. From our 
perspective, that is a tax on small business. I do not know 
where authorization came to tax small businesses that use this 
program and we hope that that gets addressed and discussed 
today.
    Next, I want to thank Dr. Blanchard for engaging in our 
issue. I know he is new to this, and I had a chance to briefly 
visit with him beforehand. I do appreciate all his efforts and 
the efforts of his staff to get involved. At the same time, I 
want him to understand why we are frustrated and concerned 
about what has happened in the past. Again, since 1995, we have 
repeatedly pointed out that the SBA's model is inaccurate.
    Second, we have been supported in that argument by both the 
Senate and House Small Business Committees. Last year, in one 
of the hearings, the Administrator of the SBA testified that 
the program was being run at a profit to the government.
    Third, according to GAO, SBA has repeatedly suggested 
methodology to correct the inaccurate calculation of the 
subsidy rate, yet OMB has rejected every one of those even 
knowing that the program was running at a profit.
    Fourth, we met with OMB last year and we were told that 
they would take a look at the problem, but only when language 
appears in the House Treasury-Postal Appropriations bill does 
action begin to be taken.
    Fifth, OMB has never supported SBA's request for $4 million 
to develop an econometric model. Now it does?
    Sixth, Mr. Whitmore has done a great job and I appreciate 
his efforts, but I do not think John is an expert on 
econometrics or the subsidy rate calculation--and I wonder why 
the SBA left all their CFO representatives at home today. 
Nobody is here from their shop to discuss the issue.
    Seventh, SBA has repeatedly told its lending partners that 
it is not ready to develop an econometric model, and out of 
discussions last week, we understand that may be the option for 
fiscal year 2003. We wonder how, out of the blue, all of a 
sudden we can have a new econometric model. We are obviously 
concerned that we have now cracked the old black box, are we 
simply going to get into a new black box?
    We are not going to get hung up at NAGGL on what 
methodology we use--3-year look back, 5-year look back, post-
1991 guaranties. That to us is not the answer, although it is a 
healthy discussion, and I think these folks, even before the 
meeting started, they were engaging in that. What we hope comes 
about is a fair, accurate calculation, that when we come to the 
end of the day or over a period of time, that the reestimates 
approximate zero. The Credit Reform Act says that SBA and OMB 
should give Congress the cost of the program, not give Congress 
the cost of the program plus a huge, great, big cushion to fall 
back on. Over time, we should get to a subsidy reestimate that 
approximates zero. Some years were too high, some years were 
too low, but off we go.
    Last, we think there needs to be some measure of 
accountability for the decisions that SBA and OMB make. Where 
are they held accountable when they err? Thus far, it is the 
language in the Treasury-Postal Appropriations bill, and rest 
assured, we are going to continue to push that angle. But, 
hopefully, today we can have some good discussions and come to 
some conclusions.
    Thank you.
    [The prepared statement of Mr. Wilkinson follows:]
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    Ms. Forbes. Ms. Calbom.

 STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND 
     ASSURANCE, GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C.

    Ms. Calbom. My name is Linda Calbom from the General 
Accounting Office. I also want to introduce Dan Blair. He is 
the assistant director that has been in charge of our work that 
we have been doing for both the Senate and House Small Business 
Committees to take a look at SBA's process for estimating the 
subsidy cost of the 7(a) program.
    Basically, I just want to quickly summarize the results of 
our work that we issued recently to the Committee. As both the 
Chairman and Senator Bond said, we found that on a cumulative 
basis since 1992, defaults have been overestimated by about $2 
billion. Recoveries have been overestimated by about $450 
million. During the same time the subsidy cost of the program 
was overestimated by about $958 million, and as the Chairman 
was mentioning, that primarily relates to the impact of the net 
overestimate of the defaults.
    As far as the recoveries go, we found that most of the 
overestimate of the recovery simply related to the fact that 
recoveries are based on a percentage of defaults. So they kind 
of go hand-in-hand. As far as why defaults were overestimated 
so much, we really could not tell from 1992 to 1997, because 
the basis for the subsidy estimates in those years was not very 
well documented. But for loans that were approved after 1997, 
SBA has been using a pool of historical data, which goes back 
to 1986, that they basically average and use as a basis to 
estimate their defaults.
    As everyone has been discussing, loan performance over the 
last several years has been better than that pool of data back 
to 1986 would indicate as far as defaults go. This is primarily 
because the default rates for 1986 through 1990 were 
extraordinarily high, so that has pushed up the average. We, 
and others, have been looking at the impact of various 
alternatives to the subsidy calculation, which would result in 
a lower default rate than is currently used by SBA. We think 
that using a lower default rate does makes sense based on the 
performance over the last several years. However, we do caution 
somewhat that current economic trends may be less favorable 
than what we have seen in the last few years. So we just need 
to be cognizant of that as we make any adjustments to the 
current approach. Those are pretty much the points I wanted to 
make and I very much look forward to the discussion.
    Chairman Kerry. Thank you, Linda. We will come back to you. 
I want to pick up on some of the points you made.
    Dr. Blanchard.

STATEMENT OF LLOYD BLANCHARD, Ph.D. ASSOCIATE DIRECTOR, GENERAL 
     GOVERNMENT PROGRAMS, OFFICE OF MANAGEMENT AND BUDGET, 
                        WASHINGTON, D.C.

    Dr. Blanchard. I am Lloyd Blanchard, Associate Director of 
OMB. This is my assistant, Jim Boden, who is the branch chief 
working on small business issues. I want to wish you good 
morning, Mr. Chairman, Senator Bond and others here at the 
table. I want to thank you for inviting OMB to share the 
Administration's views on small business loans.
    This Administration believes that the Nation's 25 million 
small businesses are critical to our success and, therefore, is 
eager to assist in accessing private sector capital, which they 
might not otherwise obtain. With a total appropriation of 
nearly $900 million in fiscal year 2001, the SBA has shown that 
it can leverage nearly $18 billion in private sector financing 
through its primary lending and venture capital programs. Under 
the direction of its new leader, Hector Barreto, the SBA is 
poised to reach new heights in serving the ever-expanding small 
business community.
    As a new member of this Administration, I look forward to 
working with Mr. Barreto, Mr. Whitmore--John, excuse me--and 
his very talented team. I believe that my background as an 
academic gives me a fresh perspective from which to evaluate 
these government programs, particularly those that have 
resource allocation implications. I am charged with and I am 
excited about taking a leadership role within OMB to assess the 
accuracy of these credit subsidy models. My experience as a 
quantitative methodologist and in teaching economics and 
statistics in graduate schools of public affairs should serve 
me well in this important task.
    I look forward to working with SBA, with the Committee, and 
with other members within the industry and other interested 
parties, particularly with GAO, to meet the needs of small 
businesses. I want you to know that the Administration is 
sympathetic to your concerns with regard to the accuracy of the 
subsidy credit model. With that, I will conclude my opening 
remarks, and I look forward to participating in this roundtable 
dialog.
    Chairman Kerry. Thank you, Dr. Blanchard. I appreciate it.
    John.

STATEMENT OF JOHN WHITMORE, U.S. SMALL BUSINESS ADMINISTRATION, 
                        WASHINGTON, D.C.

    Mr. Whitmore. Good morning, Mr. Chairman and Members of the 
Committee. My name is John Whitmore with the Small Business 
Administration. I am pleased to participate with you today in 
the roundtable discussion on the Small Business 
Administration's 7(a) subsidy rate. With me today is Susan 
Wiles, counselor to Administrator Barreto. There is a new 
President in the White House and there is a new Administration 
at SBA. OMB and SBA are highly sensitive to the 7(a) subsidy 
rate issues that we know have been raised repeatedly over the 
years by this Committee.
    I can assure you there is a new era of cooperation with 
this Administration that wants to work collaboratively with the 
Congress and our industry partners to ensure that all small 
businesses have access to our loan programs. The current 7(a) 
loan subsidy rate model was developed several years ago with 
the intent of making it both predictive of future loan 
performance and stable, so there would be no major swings in 
the cost of small businesses and the appropriators from year to 
year. However, there are issues regarding its accuracy.
    GAO recently reviewed the 7(a) model, but did not provide 
specific recommendations to address the issues. However, as we 
promised in our fiscal year 2002 budget hearing last spring, 
SBA and OMB have been working closely together to thoroughly 
review the current model. Several alternative methods of 
calculating defaults, recoveries and prepayments are being 
explored, all having pros and cons. Our goal is to develop a 
new model that will be reflective of actual performance to 
date, more predictive of future loan performance and 
repayment--a degree of stability.
    Thank you.
    Chairman Kerry. We appreciate it. Those are good 
encapsulations, and we essentially have, running across the 
table, as Bruce Phillips has underscored, the importance of 
small business, the importance of fairness, and the importance 
of access to credit at fair rates that is going to encourage 
the growth of small business. Tony Wilkinson has appropriately 
expressed frustration with the current system, where 
essentially small business is paying what can properly be 
deemed a tax, if a fee can be deemed a tax. It is sometimes. We 
hear that argument around here all the time, well in excess of 
cost, and therefore is, in effect, subsidizing when it is 
supposed to be subsidized. Ms. Calbom has documented the 
situation.
    Dr. Blanchard, you articulated sort of the willingness for 
OMB to think about this, and SBA has been represented in its 
notion that we need to find a new way to approach this, and 
that work is ongoing. So the question is--how can we contribute 
to this dialog, here in this roundtable, in a way that perhaps 
reaches consensus about the best way to do this, or vets a 
little bit some of the difficulties with the approaches on the 
table and the ways to be fair about it.
    It seems to me, if you look back in GAO's report, Dr. 
Blanchard, it says, quote,

    Section 503 of the Federal Credit Reform Act of 1990 states 
that OMB is responsible for, among other things, reviewing 
historical data and developing the best possible credit subsidy 
estimates.

    Historical data shows that $100 million was returned to 
Treasury in 1996, $277 million in 1997, $647 million returned 
in 1998, $176 million returned in 1999, and $513 million 
returned to Treasury in 2000. It seems on its face that, based 
on actual performance, those results could not characterize the 
current model as producing, ``the best possible credit subsidy 
rates.'' I would assume you would agree with that.
    Dr. Blanchard. Not necessarily.
    Chairman Kerry. OK. Tell us why.
    Dr. Blanchard. Mr. Chairman, we recognize that the present 
method that is being used to estimate the credit subsidy rate 
is limited in its ability to be accurate, to accurately predict 
the default rates, and therefore credit subsidy rates. We are 
working to improve that model. We have inherited a model from a 
previous Administration--not to use that as an excuse--but we 
are eager to work on this particular model and see if we can 
improve it.
    Chairman Kerry. I agree, but by saying that, aren't you 
implicitly or explicitly acknowledging that the current model 
does not reflect an historical review that properly mitigates 
the cost?
    Dr. Blanchard. It depends on how you look at the historical 
views, sir. If you look at as much history as at data allows, 
then it does. If you look at the history that some in this room 
I believe think is most relevant, it does not truncate that 
history in that regard.
    Chairman Kerry. When you say history, as far as ability, 
you are talking about going back to when?
    Dr. Blanchard. As much data as we have. I believe the data 
that we have goes back to 1986.
    Chairman Kerry. Do you know that? Is that accurate?
    Ms. Calbom. Yes, the data they have goes back to 1986; and 
just maybe to clarify, we believe the model itself is a pretty 
good model, but it is the data you put in it that drives the 
results, and that is the question, is do you--I think that is 
what Dr. Blanchard is getting at--how far back do you go in the 
data you use? As I was saying, the 1986, particularly to 1990 
timeframe, and getting a little bit into 1991, are real high 
default rates that kind of skew the averages.
    Chairman Kerry. Are not--as you make a model and you take 
into account sort of best practices--the practices in the 
1980's different from the practices today? So to factor in 
whatever lack of experience, judgment and other safeguards that 
may have existed in the 1980's into the current model, it seems 
to me unrealistic. At some point, your model changes based on 
the degree to which you have become more sophisticated in your 
implementation of the program. So isn't it more appropriate to 
measure it against current standards, current practices, et 
cetera, and current results, simultaneously, which 
automatically then would suggest measuring all the back data is 
not a fair way to do it?
    Dr. Blanchard. I think you make a fair point, Mr. Chairman, 
and I believe we can make two distinctions. We can use all of 
the historical data and use the model to represent the 
different practices and different time periods differently, or 
we can use some of the data that some believe is more 
representative of the current practice and use a model that 
simply treats that data basically the same. I guess what we are 
here to argue, sir, is that the most appropriate use of this 
particular model is to use all of the data that is available 
and weigh it appropriately, given the different best practices 
across time. We know that there was a major programmatic change 
in 1992, the preferred lending program, among others, but this 
is one program that improved the underwriting criteria, which 
therefore improved the default rate.
    Well, as opposed to taking a limited set of data, really on 
an arbitrary or ad hoc basis, we believe that it is much more 
appropriate to weigh pre-1992 data differently than post-1992 
data, based on some programmatic characteristic that creates 
the different default rates.
    Chairman Kerry. So when do you make the cut? What are you 
waiting for that is going to be the magic determinative that 
you talk about?
    Dr. Blanchard. That is not the only factor. The best 
practice today in credit subsidy models is, as mentioned by 
Tony, I believe, is the use of econometric models. Econometric 
models basically take programmatic factors and economic factors 
that determine the degree to which those factors contribute to 
the default rate, and therefore the credit subsidy rate.
    Chairman Kerry. Is there any reason, Tony--let me ask you 
this, building on that. Obviously, the 1990's were different 
years economically for the country, and when you look at what 
happened to the market during those years, and the blip for 
productivity in the country, you might anticipate that, in 
fact, your returns, defaults, are going to be less than they 
might be now, let's say, given the current downturn in the 
economy and what we may see over the next year or two. So 
should we be making a judgment based on--obviously, those 
factors have to also come into the best practices applied here; 
don't they?
    Ms. Calbom. Sure. With the softening of the economy, there 
is the risk that we could see slightly higher defaults going 
forward. But to go back into the 1980's--I mean, there have 
been a lot of changes since then. We have gone from 90-percent 
guarantees down to 75. We have increased the borrower guaranty 
fees. We have increased the fees paid by lenders, so not only 
did they have to take a bigger share of the loan, they also now 
pay a 50-basis-point ongoing fee. So the financial 
responsibility of a lender in each of these loans is 
significantly more today than it used to be.
    Chairman Kerry. I want to hear, incidentally, from some of 
the lenders here about those costs, because that is an 
important part of this discussion.
    Mr. Wilkinson. So the program in the 1980's, it is gone. 
Today is totally different. Sure, there is something we can 
learn from history, but last year the agency testified that we 
were managing this program between an 8- to a 10-percent 
default rate, and that is exactly where it is. It is in the 
eights. We might see it move up closer to 9, 9\1/2\, but it is 
not going to be 14, like it is in the 2002 budget request, or 
13.87, to be exact.
    Chairman Kerry. I am going to yield to Senator Bennett, and 
I will come back before long and Patty will continue the 
discussion, if she will.
    Senator Bennett, thank you for joining us here.
    Senator Bennett. Thank you, Mr. Chairman. Thank you for 
doing this. The only other place I have seen this kind of 
roundtable approach followed was when Senator Gramm did it in 
the Banking Committee when we were discussing the issue of 
pooling versus purchase, and frankly it was much more 
productive than the traditional hearing method, because you had 
the kind of exchange that I am seeing here. So I congratulate 
you on doing this and appreciate the opportunity to 
participate.
    I have a little sense of an analogy between what we are 
talking about here and what happened in the SEC with SEC fees. 
SEC fees were put in place for the purpose of funding the SEC, 
and we found that they not only funded the SEC's budget, but 
they made a fairly significant contribution to the General 
Treasury, and when those of us on the Banking Committee said it 
is time to cut the SEC fees back to the level of being 
sufficient to fund the SEC budget, we found, predictably, from 
OMB--it was a different OMB--but there is an institutional 
inertia that gets set in here. We found, predictably, from OMB 
a resistance to that, because this was a source of funds that 
they liked.
    Dr. Blanchard, I do not want to put you on the spot, but if 
the surpluses that Chairman Kerry has been talking about 
continue, would OMB come in and say, ``OK, this has turned into 
a source of funds, this has turned into a tax, and we, in the 
spirit of the Bush administration that like cutting taxes, say 
let's go back to the point where we want no more revenue from 
this source?'' Or are we going to see the same kind of thing we 
saw with the SEC?
    Mr. Wilkinson, isn't that the basic issue here?
    Mr. Wilkinson. Yes, sir, that is exactly it. In fact, the 
money sent to Treasury this year exceeded our appropriation. I 
have had some folks draw the conclusion that there may be even 
an ulterior motive of trying to get the government out of this 
program. So we appropriate and OMB taketh away in the 
reestimate process. The number has clearly gotten out of hand, 
and I am hopeful we can get some movement.
    Senator Bennett. Rather than deal with history, I want to 
look ahead prospectively. Would the Bush administration say, 
``We do not want this money to be, in fact, a source of tax 
revenue. We want it just to cover the default rate and that is 
it?'' If the history continues to demonstrate that the fees are 
too high, we would support cutting them, just like we did 
support cutting the death tax, support cutting the income tax 
rates and the other things that my friend, Mr. Kerry opposed, 
but I am glad to see him on the same side as the tax cutters in 
this regard.
    Dr. Blanchard. Well, Mr. Bennett, the Administration is not 
prepared at this time to make a policy statement about cutting 
the subsidy rate. However, we are fully prepared to evaluate 
the method by which we evaluate and assess these rates. Let me 
say that we do not believe we use this model as a tax on small 
business in any sort. Collecting additional revenues through 
the assessment of fees is not the purpose of the calculation. 
The purpose of the calculation is to predict the credit subsidy 
rate that not only shares the risk among the government and the 
borrowers and lenders, but also creates a self-financing 
program.
    I think the problem that we have run into, sir, is that we 
have gone through an extraordinary economic time in this 
country, one of the best economic times we have had in this 
country in terms of the 8- or 7-year stretch or so. The credit 
subsidy model will be sensitive, any credit subsidy model or 
any econometric model that is similar to that will be sensitive 
to changes in economic conditions. Our ability or anyone's 
ability to estimate a credit subsidy rate will be improved by 
the constancy of the economy, and hurt by the movements in the 
economy. The economy has been constant of late, but at high 
level, which has completely, sort of, confounded, I think, past 
efforts, which is what created the reestimates and 
extraordinarily high subsidy rates.
    However--if I may?
    Senator Bennett. Sure.
    Dr. Blanchard. Through time, that subsidy rate has been 
decreased to correct for those overestimates. But apparently, 
according to history, OMB and others and SBA continue to be 
confounded by the extraordinary performance in the economy. 
What we want to do is use a model that represents not only the 
best of times, but also the worst of times. If we do not have a 
model that controls for both good and bad times, we will always 
find ourselves reestimating subsidy rates. So, the corollary to 
this is, if we use the same model or if we use a model that 
looks at a limited period of time, which is what I believe that 
most of the proposals do, then if we move into an economic 
downturn, we will find ourselves reestimating that subsidy rate 
upward, just as we had to reestimate these subsidy rates 
downward in the good times.
    Senator Bennett. Ideologically, I hear agreement and I like 
that, because I did not hear it when I first came in, the idea 
being, we do not want this to be a cash cow for the General 
Treasury. As a matter of principle, we want to be sure that 
over time in the swings, the number is always zero.
    Mr. Wilkinson, do you agree with that, too? Is that where 
we are? Let me restate it for you. I think I hear now some 
agreement that says over time we do not want this program to be 
a cash cow for the Treasury. We want it to be, over time, zero, 
that it funds the default rate and nothing more. Dr. Blanchard 
says yes. Do you say yes to that as the ideological goal here?
    Mr. Wilkinson. I have not heard him say yes.
    Senator Bennett. He said yes.
    Dr. Blanchard. We want the reestimates to be zero. We do 
not want to have to reestimate the subsidy rate.
    Senator Bennett. So that--and I cannot speak for Chairman 
Kerry, but that is certainly where I would like it to be. So, 
now we come to this problem. This is not a business where you 
can set aside money in an accounting category, a reserve for 
depreciation. This is the Federal Government that operates on a 
unified budget. In good years it does go into the General 
Treasury, no matter how obnoxious that may seem, and in bad 
years it does come out of the General Treasury.
    Has anybody done any estimates for the business cycle on 
the models we are talking about? Because we have not repealed 
the business cycle. We have discovered that. The present time 
downturn demonstrates that. No matter how euphoric we got in 
the 1990's, the business cycle was always there. I tell my 
constituents when they say, ``When are we going to come out of 
this current mess,'' I say you can be sure you will come out of 
this current mess when you have a 100 percent consensus that we 
are never going to come out. That will be the signal from the 
economists, the pundits, the New York Times--all say that Bush 
has pushed us so completely into the ditch that we will never, 
ever come out. That is the signal that the recovery is underway 
and vice versa. As the economists were saying in 2000, that we 
are in a new era and we are never, ever, ever going to see a 
downturn, that was the signal that the downturn was underway.
    So we are not going to repeal the business cycle. It is 
going to take place. Is there anything on the table from any 
source, and I am sorry to just be talking to these two, but 
from anybody else, about a formula that says over time, as it 
goes up and down and in and out of the business cycle--the net, 
as agreed by Mr. Wilkinson and Dr. Blanchard, is going to be 
zero over time? Does anybody know of a model that predicts that 
kind of result?
    Linda, do you want to go ahead?
    Ms. Calbom. I do not know of a model that predicts that, 
but just to reiterate your point, that I think what you expect 
to see is things to go up and down. One year you might be 
above, 1 year below, that over time, like you say, you are 
trying to get it to smooth out. I think what Dr. Blanchard is 
saying makes some sense to us, as well. You do not want to just 
use data that is reflective of the last few years that were 
really strong years. You want to have some data in there that 
is going to give you a bit of a cushion, and the chart that is 
up in various places in the room is actually--it is only 
showing what various models--how well they would have predicted 
1999, which happened to be a very good year.
    As you can see, the black line is actually 1999 actuals, 
which was a very good year. There are various approaches that 
either give you some cushion or that predict very closely with 
what happened in a very good year, 1999. In our view, you do 
not want to be predicting right along on a very good year. You 
want to allow some cushion, but not as much as we have had on a 
cumulative basis at this stage.
    Mr. Wilkinson. Well, let me just say every time I hear the 
word cushion, it is a tax, do not forget it.
    Ms. Calbom. But when we say cushion, that is not a 
cumulative cushion. What we are talking about, when you are 
looking at a year like 1999, which is a very strong year, then 
that is a year that some of these models that we have thrown 
out there, some are above--and that is about as good a year as 
we have had, and others are just right at it. You want to be 
somewhere in between is what I am saying. So you are going to 
have your ups and downs. Does that makes sense?
    Senator Bennett. Yes, but I come back to the ideological 
point I was making in the beginning, that you want to come as 
close to zero over time as you possibly can, and everybody 
agrees to that.
    Mr. Wilkinson. If we miss 5 or 10, 15, 20 percent a year, 
that is one thing. We are missing over 100 percent a year. Use 
of all this historical data sounds really good, but it has 
worked horrible in practice. We have very large downward 
reestimates. We know that we have used default rates in 1999, 
2000 and 2001 that are going to be 80 to 90 percent higher than 
actual performance. So we have got big downward reestimates yet 
coming in the future. There is something going on here that we 
just have not got figured out. The bottom line is, 7(a) is not 
the only credit program in the Federal Government, but it is 
the only Federal credit program that has got the size of 
reestimates that we have. What is going on?
    Dr. Blanchard. Forgive me, Tony. Senator Bennett, I want to 
address your previous question, with regard to do we know of 
any models that can achieve the zero reestimate. But before I 
do that, I want to dispute two claims. No. 1, I think what 
Linda was referring to with regard to the cushion had more to 
do with a variance in estimation rather than a cushion with 
regard to extra money coming into the Treasury. We do not want 
to use this particular program as a cash cow. We want to use 
this program for the purposes for which it was designed, which 
is to help small businesses. So the key is really just to hit 
the point.
    I want to also dispute Tony's claim that the cushion has 
been over 100 percent. We recognize that over the past 10 or 12 
years there is a cumulative $2 billion that has gone back to 
the Treasury. That total cumulative amount as a percentage of 
the total loans or even the total appropriations, does not 
amount nearly to even 10 percent. Last year's reestimate was 
only $2.6 million. The year before that was $26 million. Yes, 
going back into time, it goes up, but that sort of scaling down 
of the reestimate reflects improvement in the quality of the 
model, but it is not quite there.
    The model that will achieve, or at least, that will get 
closer to achieving what I think we are all interested in is a 
model that is similar to models that FHA uses, models that are 
similar to the models that USDA uses and other programs that 
run major subsidy credit programs, that is econometric models. 
Econometric models represent the economy in its good and bad 
times by representing different factors of the economy that 
tend to drive default behavior. The econometric model 
represents, and fully represents, in the model, different 
programmatic changes across time, so that if there is an 
underwriting change, say in 1992, the data pre-1992 is used 
just as the data post-1992 is used, but they are weighted 
differently to reflect different impacts across time on the 
credit subsidy rate.
    That is where we are moving to. So, in theory and in 
practice, but we are not practicing it yet, the econometric 
model will achieve that goal. What we are trying to do is move 
to that point, and it is not an easy task, because it requires 
very detailed data to represent the different factors in the 
economy that have that influence on the default rate.
    Senator Bennett. Nobody knows better than I the perils of 
forecasting. Nobody has a worse track record of forecasting 
than the U.S. Congress. I am going to be giving a speech on the 
floor within the next week or two in which I will quote the 
Congress and President Clinton with respect to the balanced 
budget agreement entered into in 1997, when we promised proudly 
and hopefully and with great enthusiasm that the unified budget 
would come down to zero, therefore balanced, in the year 2002, 
and that after that period we might even hope for a surplus. Of 
course, we hit the surplus in 1999, and now this year we are 
being accused of being in a fiscal ditch when we have the 
second largest surplus in our history.
    So, that shows the perils of economic forecasting with the 
greatest of enthusiasm and consensus. So I am very sympathetic 
to the idea that you are constantly looking at the model and 
you are looking at the factors that are going into it. But the 
point I want to make, and then I will get out of this, that I 
want to be sure we leave here, is that everybody agrees that 
the purpose of the model, whatever it is, is to get the income 
to the government down to a net zero, in terms of the impact on 
this program, and that if, indeed, there are flaws in the 
model, as Mr. Wilkinson would insist, that are causing this to 
be a cash cow for the General Treasury, those are the first 
flaws we look at to try to squeeze out as rapidly as possible.
    Let the record show everybody is nodding at that, and if I 
have achieved that kind of agreement, than I better shut up, 
because that is as much as I am going to accomplish here today.
    Did you want to carry forward now for Senator Kerry?
    Ms. Forbes. Yes.
    Mr. Wilkinson. Can I just make one comment? Not to get hung 
up on math and numbers, but as Senator Kerry said in his 
opening statement, since the start of credit reform, we have 
appropriated about $1.4 billion, already almost $1.3 billion 
has been returned to Treasury, and we know that 1999, 2000 and 
2001 cohorts are going to have big downward reestimates. So by 
the time we get through, we will have exceeded the 
appropriation, and that is a 100 percent cushion.
    Senator Bennett. That is a strong indication that some kind 
of modification is necessary. Just, again, ideologically, as a 
committed tax cutter--and I think the Bush administration has 
demonstrated its commitment to tax cutting--that we do want 
this to turn into a tax, and I do not know anybody around the 
table who thinks it should be. So let's just leave it at that 
point.
    Mr. Wilkinson. Just so we know, 2002 has got the same big 
default. It is getting ready to happen again.
    Ms. Forbes. I think one of the problems is that the model 
that they are using--until they change the econometric model, 
there are going to continue to be these big reestimates. That 
is what we are trying to get at and trying to see----
    Senator Bennett. That is the reason for the roundtable and 
amazing bipartisan consensus here in the Committee, that we 
have got to move to that kind of change as quickly as we can.
    Dr. Blanchard. Actually, if I may, Ms. Forbes, as each year 
of data becomes available with the model that we are using, and 
the GAO can correct me if I am wrong, it improves the quality 
of the estimate simply because----
    Ms. Forbes. But not by enough--the problem is it has been 
year after year after year that it has been millions of dollars 
over. That is why we are concerned about it. I agree with you 
that you cannot predict absolutely to zero, but, on the other 
hand, the reason this roundtable is happening is there is a big 
concern that the borrowers and the lenders are paying too much, 
and; therefore, the credit will not be available to small 
businesses in a weakening economy. That is why we are having 
this. So, we understand----
    Dr. Blanchard. We feel your sense of urgency, yes.
    Ms. Forbes. It is great if we can figure out here at this 
table what a good model would be, but to say we are going to 
use it eventually is not----
    Dr. Blanchard. Thank you. We do recognize the sense of 
urgency in coming up with that model, and we believe--well, 
what we have done is try to--before we can get to the full-
blown econometric model, which I think everyone around the 
table will agree is the best approach, that requires a 
significant amount of data, more data than we have available. 
Until we can get there, what we want to do is use a reasonable 
middle ground that gets us most of the way or the part of the 
way there, but we still recognize its limitations.
    Ms. Forbes. So what you are saying is that you will 
probably amend the current model in anticipation of eventually 
moving to an econometric model?
    Dr. Blanchard. We are studying various models that will 
accomplish that goal. We are doing the same thing, essentially, 
that GAO is doing, which is looking at different models, 
whether it is a 10-year look-back period or a 5-year look-back 
period. I have already explained our concerns about truncating 
the data, because the data represents different time periods 
which may be extraordinary and not representative of the 
business cycle in its entirety.
    Ms. Forbes. I am going to ask if Senator Wellstone wants to 
speak now, then we will probably come back to this.
    Senator Wellstone. I did not say I wanted to speak. I just 
came in. We had a hearing on stem cell research that I was at 
and I apologize for being late.
    Senator Bennett. I have got to leave and go to the floor.
    Senator Wellstone. The only thing I would say, Dr. 
Blanchard, I am sure you have--and everybody here--I am sure 
you heard it before, is that the big concern that we have, 
which I think is what Patty is trying to get at--I just came 
right in here, but I think I understand the context is--for 
example, in Minnesota, I would say in the last 5 or 6 years, 
7(a)--I think we have leveraged close to $1 billion. This is 
access to capital for small business. Second of all, we are 
technically not in recession, but we are near recession. The 
last thing you want to do is make it more difficult for the 
small businesses to have access to capital.
    I think there are--what I am hearing--I had two SBA 
hearings back in Minnesota, where the attendance was just 
astounding. I should have known it would be, but it was much 
larger than I had anticipated. I am not just trying to spin 
this. It really was. Clearly, one of the things you are hearing 
from the lenders, and I think they are saying it in good faith, 
is we are not the ones who are supposed to be subsidizing this, 
and between the way in which the subsidy rate has been figured 
out and the fees that were in the Administration's proposal--I 
mean, if you want to talk about consensus, there is just a huge 
consensus that this is not going to work well and could 
severely undercut small business access to capital. You cannot 
do anything that you do not think is intellectually honest.
    Dr. Blanchard. I understand that, but I think there are 
plenty of questions that we are raising, both about the 
definition of subsidy based upon default and based upon what 
has happened with these loans, and the fee part--I just do not 
understand it for the life of me. I do not understand it. I 
think it is a big mistake. Didn't we have to go through this 
with the Clinton administration, too, on the fee part, to be 
honest about it?
    Ms. Forbes. Yes.
    Senator Wellstone. We did. We had to go through this. So, 
nobody should take this as a big partisan point here. It is 
more just advocacy. It is a huge--I think probably this is--I 
jumped over here from that other meeting, because I would say 
from Minnesota, I would put this as one of the very top issues 
right now for our State. I do not need to tell anyone here how 
important small businesses are, but we are really worried 
about--unless we get it right with you guys, we are really 
worried that this flagship program, which has been so important 
for access to capital, is going to be really greatly weakened.
    Dr. Blanchard. Sir, if I may respond to at least a portion 
of your comments--yes, we want to have a model that is 
consistent in estimating credit subsidy rates, and by 
consistent, I mean consistent across the government, because we 
have to evaluate models for various programs, in addition to 
the 7(a) program. Academic honesty is not the primary goal 
here. I think we are willing to listen to the concerns of 
industry, as well as the concerns of the Committee to--and 
working with GAO and SBA to try to determine what method best 
serves the needs of small businesses. This Administration does 
care about small businesses and surely does not put methodology 
or academic honesty above the needs of small businesses.
    Senator Wellstone. Real quickly, there is a semantics 
problem here. I am in academics, so I quickly get defensive 
about this. What I meant by that, by intellectual honesty is, 
of course, you are going to be rigorous in your analysis and we 
want you to be. But we think that some of the projections and 
some of the methodology is off. We think there should be 
improvement on the subsidy, and we think the combination of the 
subsidy and the fees poses a real danger to what has been an 
incredibly successful program. I cannot imagine the 
Administration would want to move away from a program that 
provides small businesses with access to capital. That is what 
we are saying.
    Dr. Blanchard. Understood.
    Ms. Forbes. I think we should allow some of the other 
participants here to actually participate.
    Senator Wellstone. Sorry.
    Ms. Forbes. We will get back to the actual model and the 
timing of when we can hope to have a new model and all the rest 
of it, but I think most of you have an agenda, I believe, in 
front of you. If we could hear from some of the other 
participants about what the effects of these program fees have 
been on the small businesses that they have been trying to help 
through loans, and also on their banks' or lenders' willingness 
to participate in this program, because obviously you cannot 
have a lending program without lenders. So if you want to 
speak, just put your card up like this, and I will recognize 
you.
    Yes, David.
    Mr. Bartram. Thank you very much. Senator, thank you very 
much for having us here, and I appreciate the opportunity to 
talk about SBA lending. I am with U.S. Bank. I am an executive 
vice president for U.S. Bank, and I head up the SBA function 
for U.S. Bank. We lend in 24 States and we have a $1.5 billion 
portfolio of SBA loans. So we have been a very active 
participant in the program. Through the last 5 years, our loans 
have helped companies with more than 27,000 jobs. So we really 
believe that we are doing very good work in this area.
    However, concurrent with that 5-year period, profits for 
our company in this program have decreased--37 percent. That is 
significant because it means the amount of resources that we 
can use for this loan program--if I could explain, we basically 
target on a conventional basis perhaps a client base this wide. 
We use the SBA program now to expand that more to offer terms 
to clients that might still obtain conventional financing, but 
with extended terms have more chance to succeed, to employ more 
people. Then there is still a group further out that could not 
get conventional financing at all.
    What is at risk here with the subsidy rate, for us, and the 
increased fees that we have seen, both to our clients and to us 
as a lender, is that risk to help that client base that is out 
here on the right side.
    Dr. Blanchard, you had mentioned that the subsidy rate has 
come down. The subsidy rate has come down because clients and 
lenders have paid more fees. That has been what has been 
driving that down. So we do feel as though we are now providing 
subsidies for this loan program to go on, and I would certainly 
urge you to get this fixed as quickly as possible.
    Thank you very much.
    Ms. Forbes. Mr. McLaughlin.
    Mr. McLaughlin. Thank you for inviting me today, and I 
appreciate the opportunity to express my opinions on the 
subject. One of the things that I have not heard this morning 
about this econometric model is fairness. What is a fair price 
for a borrower to pay for an SBA loan? To give an example, this 
year we got a loan for a black family to build a funeral home 
in a black community, in an area where it is, quite frankly, 
hard to borrow money. We did the loan. If I may use $250,000--
it wound up a little higher than that, as they often do--but 
there is a reference point. The loan cost for this family to 
build this funeral home, the SBA costs in themselves, was 
$6,750. I am not counting identical fees that would apply to 
both the SBA and conventional loans. This is because they went 
SBA, their cost was $6,750. The lender's cost on that loan was 
$3,400.
    When you add the total cost of that loan up, it runs about 
$7,800, almost $7,900 for them to go SBA. This is twice as 
much--twice the cost as if they could have gone with a regular 
conventional loan. Now, you say there was obviously not the 
benefit of the value in a conventional loan that you find in an 
SBA loan, and one would agree with that, but is the value twice 
as much?
    Say what you want, but the conventional loan market is a 
reference point that people look at in determining whether they 
use SBA or whether they do not make the loan, if you will. When 
you have a disparity, when it gets that wide, it becomes very 
hard for a lender, No. 1, to justify to the borrower that this 
is the way you ought to go, and No. 2, when the lender looks at 
their cost, because recovery on an SBA loan takes about 3 years 
before we start seeing a profit in it, the lender has to decide 
whether that is the type of loan product they want to offer.
    So I say that in hoping that when you build your 
econometric model, that the model looks at fairness in the 
marketplace.
    Senator Wellstone. I would argue, if I could just real 
quickly--is it Keith?
    Mr. McLaughlin. Yes.
    Senator Wellstone. But I would argue that, also built into 
whether it is an econometric model or whether it is just built 
into the overall policy question, you get back to the issue of 
access to capital. That is what this is about. That is what you 
are talking about. That is what we should be about. One thing, 
Patty--I was remiss. Perry whispered in my ear--he said you did 
not mention 504 on the fee part, and I do not know whether or 
not some of you have experience just on the 504. I would love 
to hear a little bit about that, as well. I did not mean to 
slight the 504 program. Anybody on fees and 504?
    Mr. Whitmore. Well, the fee has been at zero for quite 
awhile now, or the subsidy rate has been zero for quite awhile 
now, and the actual fees passed on to both borrowers and 
lenders has dropped over the last couple of years.
    Senator Wellstone. I am sorry. Could you get over to the 
mike?
    Mr. Whitmore. The 504 program has had a zero subsidy rate 
for a number of years now, and the fees were high and have been 
coming down over the past few years, as a result of 
improvements in the calculations. So there has been improvement 
in the program. As we are seeing in the 7(a) program, as well, 
over time, that we have seen some improvement in the subsidy 
rates, some, as the gentleman had said, had been attributed to 
increased cost, but also some had been attributed to 
improvements in the data and the cycle as each year passes.
    Mr. Wilkinson. Could I just add--I am not an expert in the 
504 program, but I do understand that they are having the same 
kind of problems that we are with the default estimates and 
that they are also having big downward reestimates, as well.
    Ms. Forbes. Thank you.
    Mr. Stultz.
    Mr. Stultz. Thank you for the opportunity to speak. Just by 
way of reference, I am not a lender. I make my living helping 
borrowers get SBA loans and helping lenders get into the SBA 
loan business and learn the business. Just by way of example, 
in the 25 years I have been doing this, borrowers were paying a 
1-percent guaranty fee when I started. Now it is as high as 3.5 
percent. That is a 350-percent increase over what it was, and 
the demand for loans has not dropped off. The reason is that we 
are making loans to borrowers who cannot get a loan otherwise. 
So you can keep raising the fees and they will keep paying 
them, because they do not have another place to go to get that 
loan. If they are going to get it, this is the only place to 
go.
    But what has been happening is the profitability to the 
banks has decreased because of their fees and because of 
additional burdens put on by the SBA. The program is more 
sophisticated than it was and it is more involved, and new, 
young community banks who want to get into the SBA program, 
frankly, are deciding not to do it now, because it is more 
complicated and it takes a more sophisticated, expensive staff, 
and it is a big up-front cost to get into that business.
    I am, frankly, seeing banks disappear through acquisitions, 
but the bank that acquired them deciding not to continue in the 
SBA business, and the new bank that is thinking about getting 
into the business looks at what it takes to get into it and 
opts to do other things instead.
    Senator Wellstone. You talked about banks. How does that 
affect the smaller banks versus the larger banks?
    Mr. Stultz. Well, a larger bank has a higher level of 
bureaucracy to process these things. A small community bank 
does not have somebody that they can go out and dedicate to 
doing this full-time instead of----
    Senator Wellstone. So it makes it harder?
    Mr. Stultz. So it makes it harder for the smaller banks to 
get into this business and participate. The bottom line is it 
is harder for the borrower to go out and find a lender who is 
going to participate in this program and help him get that loan 
he cannot get otherwise.
    Ms. Forbes. Thank you.
    Mr. Raffaele.
    Mr. Raffaele. Yes, thank you. My name is Steve Raffaele, 
and I am senior vice president and treasurer for Sterling Bank 
in Houston, Texas, and I very much appreciate the invitation 
this morning. Sterling is a $2.5 billion publicly-traded bank 
in Houston, and our culture and our mandate revolves almost 
exclusively around our commitment to small business. That is 
what we do and that is everything that we do, down to the 
lowest levels of our organization. Almost 35 percent of 
Sterling assets are in small business loans of less than $1 
million. You can imagine how many small business loans we have, 
thousands and thousands.
    Virtually our entire commercial loan portfolio is loans 
less than $2 million, so again evidences our commitment. One of 
the things that make Sterling unique is that we are involved in 
the 7(a) program on both the origination and secondary market 
sides of the fence. So my contribution today would be to add 
the perspective of treasury and executive management in 
allocating bank capital to the needs of small business and how 
SBA and the topics at hand play a mission-critical role in our 
thinking process.
    Investors vote every day on our decisions on how we 
allocate capital, and the way that they do that is they either 
buy, sell or hold our stock. So in a very real sense this is 
what we face when we choose among various opportunities to 
deploy our resources, opportunities that have now been expanded 
even further by banking legislation. Fees that we pay related 
to our 7(a) lending activities have a very visible impact on 
the returns that we, and ultimately the market, perceive on 
capital committed, and thus fees have a direct impact on the 
extent to which we are able to invest in 7(a) lending 
activities.
    In addition, though, to any direct or indirect costs that 
we might bear as disincentives, there are other critical 
components, as well, the most critical of which for us is 
funding, and fundings costs play a role of--it is really the 
central topic du jour in banking today, and I have not heard 
much talk about that today. But larger banks--and I want to get 
back to something that Mr. Stultz said, larger banks have 
easier access to capital, and I think this answers the question 
about why smaller banks would have trouble being involved and 
having an interest in small business lending. Larger banks can 
get funding for these activities.
    So the secondary market for loans and SBA pooling is a 
critical funding mechanism. However, it does not operate at the 
same level of efficiency that we see for other classes of 
lending, for example, consumer loans, mortgages, commercial 
real estate, bonds, leases; all of these we have a lot of 
funding opportunities, but for small business we do not. So my 
encouragement, my hope, is that this Committee, in working with 
SBA and others, can be a critical instigator of new, higher 
levels of efficiency in the secondary market by working with 
the existing resources, technology, willing market participants 
that might even be willing to bear more of the risk, and 
potentially even reduce the subsidy rate further than any of us 
have even anticipated, because they are willing to take that 
risk if they can get involved in helping us with our funding 
and ultimately getting more capital to small business.
    Ms. Forbes. Thank you. Anything further?
    Senator Wellstone. No. Thank you everybody. Thank you so 
much.
    Ms. Forbes. Thanks for coming.
    Mr. Wise.
    Mr. Wise. Thank you for putting this roundtable together 
and permitting me to be here. My name is Richard Wise. I am 
president and CEO of American National Bank in Parma, Ohio. It 
is about a $30 million community bank. I am also chairman of 
NAGGL, and we have about 700 members nationwide that account 
for about 80 percent of all the 7(a) loans that are made. There 
has been some discussion about taking this program to a zero 
subsidy rate, and we do not believe that is a good idea; that 
we need to keep some appropriations for this program. It is 
good public policy, No. 1, and when we do have a downturn in 
the economy, if the losses do skyrocket, we are going to need 
some appropriations in order to keep the fees where they are, 
acceptable.
    It is kind of interesting that the Fed has dropped interest 
rates seven times this year, trying to encourage borrowers to 
expand their businesses, and there was talk earlier this year 
about raising the fees on SBA loans. So it is a little bit 
counterproductive when we have those two features working 
against each other. My bank is strictly a business bank, has 
been since 1989. Again, we are a $30 million bank, so we know 
about all the problems of funding and help and so forth, and we 
were pretty much an SBA bank up until about 3 years ago.
    Our profitability started to just plummet mainly due to the 
secondary market, the prepays were very high, so the premiums 
came down, so we started looking for other sources of 
businesses to do, other than SBA loans. We are doing BNI loans. 
We did have an offsite meeting in July, and my Board of 
Directors happened to be 10 entrepreneurs that bought the bank 
in 1987, I guess. So they are all small business people. At 
this offsite meeting, it became very evident that the SBA 
program was not going to be any longer the flagship of our 
bank, strictly because the profits were not there.
    So, again, we are out looking for new products, new sources 
of revenue from businesspeople that we can do to get our 
profitability back where we think it ought to be. I do not know 
how quickly you can repair the subsidy rate to get us down 
where small businesses again can afford to borrow money using 
SBA, and that we banks can afford to make those loans without 
paying a lot of our profits back to the Treasury. I guess we 
are being taxed as a small business owner at this point in 
time.
    OMB has looked back to 1986 looking for losses. The bank 
regulators make us go back 3 years to do a 3-year average, and 
that is how you establish your loss reserve going forward. 
Hopefully, there is a happy medium there somewhere that--Dr. 
Blanchard, you can come up with and we will all be happy again. 
Thank you very much.
    Ms. Forbes. Mr. Merski.
    Mr. Merski. Hi, my name is Paul Merski. I am the chief 
economist for the Independent Community Bankers of America. We 
represent about 5,500 banks located around our Nation. As a 
chief economist for the banking industry, it is very disturbing 
to see our bankers declining in their use of the 7(a) loan 
program because of the costly fees, while at the same time the 
estimates show that the program has paid in over $1 billion 
into the Treasury. The reason why that is disturbing is I get 
an opportunity to travel around the country and visit our 
different small community banks, and get to see the work that 
they are doing in the 7(a) and 504 lending programs, and 
actually see the small businesses that are thriving, that they 
created in the community and created a small economy in their 
community, that is thriving and paying taxes and doing well. It 
is unfortunate that they are cutting back on the 7(a) lending 
because of the high costs to the banks. These banks were 
operating on very thin margins, as we have heard from some of 
our other lenders, one to 3 percent profit margin, and a 50 
basis point cost on the 7(a) loans makes a big difference to 
their bottom line and their ability to afford to provide these 
loans.
    As an economist, it is also disturbing to see that when you 
do econometric modeling, one of the key checks and balances as 
to whether your model is accurate or not is you plug in the 
historic numbers and see how accurate they are. If you go back 
2 years, 3 years, 5 years, and see that the model is 
consistently overestimating and providing a subsidy to the 
Federal Government, instead of to the small business community, 
that is a failed econometric model.
    I just urge that there could be a sensible solution to this 
constant overestimation, and that these programs, which are so 
beneficial to the small communities around our country--Senator 
Wellstone from Minnesota was here, and we have over 300 bank 
lenders in Minnesota alone that this program could be fixed for 
and made workable and usable.
    One final point is that on several occasions, Chairman 
Greenspan has addressed our bankers and has encouraged them to 
increase their lending, and increase their credit to small 
business, particularly now when interest rates have been cut 
and the economy is in a slowdown. So, it is ironic that 
Chairman Greenspan is urging us to increase our lending, yet 
the costs of these lending programs have been going up while 
there is a subsidy to the Federal Government. I think there 
needs to be a solution for this and it is very critical for our 
small communities around the country.
    Ms. Forbes. Thank you.
    Mr. Schuster.
    Mr. Schuster. Thank you, Ms. Forbes, Mr. Cooksey and your 
staffs and your members. Thank you very much for the effort 
that went into this session. I am Deryl Schuster with 
Businessloan Express, one of the few non-bank lenders still in 
the program. Several of our peers have departed the program in 
the last couple of years due to the lack of profitability or 
the excessive costs in delivering the program, costs of both 
borrowers and lenders alike. In fact, recently, when one non-
bank lender exited the program, they put out a news release 
telling the world, the stock market, that they were getting off 
the SBA program and their stock went up.
    That is unfortunate and the ramifications truly could be 
widespread, and I think we need to be concerned about it. But 
it explains why this meeting is so important, and fixes are 
even more important. As has been eloquently stated by many 
small businesses and lenders alike who administer this 7(a) 
program, they have been unfairly taxed ever since credit 
reform. The residual benefits of small business and small 
business loans are well-known; jobs created, tax revenue 
generated at every level of government. We get no credit for 
those residual effects. All we get is more and more taxes. It 
is unfair and it is a tax when we pay more than what the 
program costs.
    If OMB was funding a loan-loss reserve to handle possible 
increased defaults in future economic shortfalls, that would be 
different and that would be justified and understandable. But, 
regrettably, that is not the case. Overpayments just go to 
Treasury, excess revenue. I can guarantee you if defaults do go 
up in the future, we will not get one penny's benefit, 
borrowers and lenders will not get one penny's benefit for the 
excess revenue or taxes we have paid in the past. It is just 
truly terribly unfair.
    I am reminded that my Administration, just a few months 
ago, proposed increasing the fees even more, to even exacerbate 
and magnify the unfairness of the current situation. 
Fortunately, thank goodness, Congress cooperated by helping to 
beat that effort down. Something is wrong with this picture.
    Let me just conclude by telling you I was asked to bring 
some examples of the type of gap financing, the type of 
financing that would not be made were it not for the SBA 
program and the lenders who pay it. I could have brought 
hundreds out of our $800 million program, hundreds of appealing 
examples, but let me just tell you, of the 25 loans we have 
made to naturalized citizens from Vietnam, people who gave 
great risk and sacrifice to get themselves and their families 
to our country, who are now, because of this program, able to 
participate in the American dream. Every one of those loans 
exceeded $750,000 as they acquired boats to participate in the 
shrimping industry, and I might tell you, the loans have 
performed extremely well. It should go without anybody 
questioning, without this 7(a) program, these loans, these 
opportunities to participate in the American dream, would not 
have happened. Thank you.
    Ms. Forbes. Thank you.
    Mr. McCracken.
    Mr. McCracken. I am Todd McCracken. I am the president of 
National Small Business United. I just want to make a couple of 
very quick points. One is that we have to remember, I think, 
that the banking community is a very different one than the 
last time we had an economic downturn in the late 1980's. The 
number of community banks have traditionally been the primary 
source of credit and capital for the small business community. 
So the 7(a) program is far more important as a key lending 
source for the small business community than it was at that 
time. It is much larger now than it was at that time. As Tony 
mentioned before, associations can often play a role of being 
an early indicator of things that are going on, and we are very 
clearly hearing, anecdotally, from members some of the very 
same kinds of signs we saw during the credit crunch period 
1989, 1990, 1991.
    We think it is crucial that the 7(a) program be in a 
position to respond to some of those problems, should they 
really get ramped up. Obviously, there is a confluence of 
issues here. One is the whole issue of the subsidy rate and the 
other issue is whatever the subsidy rate is, how much should 
the government be funding the program versus the fees? Our 
view, obviously, is that we need to have a realistic subsidy 
rate. We have to make sure that businesses and lenders are not 
overpaying to use this program, especially at a time of 
economic uncertainty that we have right now. But we also have 
to make sure that the government is playing a role that is 
appropriate.
    If we are entering a time of economic slowdown, it probably 
is appropriate for there to be some additional funding from the 
Federal Government, rather than simply fees to pay for some of 
those increased costs in the 7(a) program. I am not sure if 
that is on the agenda today, but I think it is an important 
thing to mention. I feel like the elephant in the room, but 
those are the gist of my comments. We just cannot forget how 
different the credit system for small businesses is now than it 
was the last time we experienced these kinds of difficulties, 
and 7(a) really has moved to the center as the lender of last 
resort, that it was not 15 years ago. Thanks.
    Ms. Forbes. Thank you.
    [The prepared statement of McCracken follows.]
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    Mr. Ballantine.
    Mr. Ballantine. Thank you, Patty. This is probably the 
worst kept secret in Washington as to whether the subsidy rate 
was off between SBA and OMB, and, from the American Bankers 
Association, we are simply trying to determine what is the cost 
and what is the difficulty in getting to this exact subsidy 
rate, and whether it is lack of information coming from the 
Small Business Administration or whether there is some 
misinformation coming from OMB in trying to determine how these 
two issues merge and how these two parties get together to 
determine what the correct model should be.
    You have mentioned a couple of models; the FHA model and 
the Agriculture Department has a model, and the loan guaranty 
program that has been very successful. If those programs, which 
has been around for years, just as the 7(a) program has been 
around--has either the GAO or OMB determined that perhaps the 
Department of Agriculture's subsidy rate calculation model is 
one that could be used, is best to be used and why, over the 
years, it has not been used, and whether SBA is lacking funding 
in putting this model together or not? What is exactly the 
hold-up here?
    Dr. Blanchard. Let me just say, Mr. Ballantine, I 
appreciate your question and it is precisely the question we 
need to answer. First of all, let me say that I do not think 
there are differences in what SBA and OMB estimates. I think 
SBA had a proposal that it was considering at one point as a 
substitute for the method that is currently being used that OMB 
sanctions. But we are now in agreement in our efforts to find 
the best model, to accomplish this goal.
    Why can't we get to this, sort of, best practice that USDA 
and the Department of Education, and their student loan 
programs, and FHA uses? That best practice is an econometric 
model that requires a significant amount of data. I do not know 
why we have not gotten there in the past, but without that data 
and without that data collection, we cannot represent the 
factors that drive the default rate. I invite the industry to 
help us, both OMB and SBA, in putting the data together. The 
data that is specific for this is the data that drives the 
default rate, both economic data, as well as programmatic data. 
With that information, we can be a lot more accurate, and I 
think GAO will agree with me. We can be a lot more accurate in 
our ability to estimate the credit subsidy rate.
    Short of having that data, we have to use what we have and 
the best model that we have now. What we are looking at as a 
substitute for what we have been using, is a model that, 
although it cannot represent the economic conditions in a 
rigorous fashion, we do have information on programmatic 
differences as they have changed across time. We are engaging 
in an effort to determine the degree to which any programmatic 
changes, like the preferred lending program that was 
instituted, I believe, in 1992 or so--the degree to which that 
programmatic change affected the default rate, and to the 
degree that it has affected the default rate, it will be 
represented as such in the revised model.
    Let me say that we are continuing to work toward the goal 
of the econometric model, but it requires data, and we need 
your help to gather that data and to use it for the purposes of 
determining an accurate credit subsidy rate. Linda, please help 
me.
    Ms. Calbom. I cannot make my namecard stand up, so I am 
having a little technical difficulty. I just wanted to make one 
quick comment on that as well. Some of the other agencies, they 
are using pieces of an econometric model, but nobody's really 
there all the way. In fact, Dan was just pointing out to me, it 
is kind of interesting, the USDA model, which was just new in 
the last year, it actually uses some of SBA's data as a proxy 
for information it does not have, because of this very reason, 
that they did not have a very good system for accumulating 
data. So it is a difficult----
    Ms. Forbes. Excuse me. Just to clarify, the FHA model only 
uses it for a small part or two of the elements of who knows 
how many.
    Dr. Blanchard. FHA or USDA?
    Ms. Calbom. Both.
    Ms. Forbes. I am just trying to show that nobody is using 
what we are trying to get to eventually, which is fine. It is 
just that what we are trying to do is find some sort of short-
term solution. We are not saying you should not use an 
econometric model. From what everyone says, it sounds like a 
good thing. It also sounds like it is going to take quite a 
while to get there.
    So do you have a proposal for the interim? I know GAO has 
done some studies and has looked at some alternatives. I do not 
know maybe if Ms. Calbom, if you want to talk to that, or Dr. 
Blanchard?
    Dr. Blanchard. Let me just say that OMB is working very 
closely with SBA to develop a proposal for fiscal year 2003. 
Right now we are looking at this, sort of, substitute approach, 
which tries to represent the effect of the programmatic changes 
that occur across time using all the data. We are beta-testing 
that model, because we want to run it. As Mr. Merski suggested, 
we need to test that model by lopping off some data and then 
seeing the degree to which the model is able to predict the 
data that we left out. I do not want to get into the weeds on 
this, but you do that in a systematic way to determine the 
accuracy of the model. That is what I mean by beta-testing and 
that beta-testing should be complete by the time we begin to 
consider the 2003 budget, and I fully expect that we will have 
something that will be much more accurate than what we have 
been using before.
    Ms. Forbes. I think Mr. Cooksey would like to speak.
    Mr. Cooksey. Just to go back and reflect some on your 
discussion about your work toward the 2003 budget, to come from 
my perspective--I work for a Senator from Missouri, the Show Me 
State, and usually I have to be pretty specific in what I am 
discussing with him. He usually gets directly to the issue very 
quickly, and if he were here, he would get very much into the 
issue. The issue right now to him is 2002, not 2003. I think 
everyone of us in this room knows that the default rate that is 
in the 2002 estimate is not going to be hit. We know that 13.87 
percent is not reflective of what is going to be the 
performance of the upcoming model--of the upcoming year.
    We know that hours after the close of fiscal year 2002, 
excessive fees and appropriations that have gone into the 
financing account will be returned to the Treasury. So for one 
more year, small business borrowers and banks are going to be 
taken to the cleaners. From an academic standpoint, I know, 
looking toward the econometric model is the way to go. As you 
said to me earlier, we should have already been there, but to 
delay providing the kind of relief that we know is available, 
and we know that can be delivered to small business borrowers 
and lenders, is a crime.
    You said earlier, I think in response to something that Mr. 
Wilkinson said, Dr. Blanchard, that when, I think, Mr. 
Wilkinson said that more in fees goes back to the Treasury each 
year than is appropriated and you responded that that is not 
necessarily accurate, that while last year--I think you meant 
for fiscal year 2000--$2.6 million was returned to the 
Treasury, something like that, which I find just astounding. In 
a fiscal year which has only been over for a couple hours or 
days, you are already returning money to the Treasury. It leads 
me to believe these are excessive fees which you are already 
returning, and over the course or over the life of that 
portfolio, that amount, the total amount that is projected to 
go back to the Treasury will exceed the amount of money that 
has been appropriated for that cohort.
    What I cannot understand is that you say everybody in this 
room help us, OMB and SBA, improve on the default information. 
GAO has spent hours, and days and weeks and months working on 
this. They have delivered to us numerous roadmaps on which to 
get us out of the fiscal year 2002 problem that is going to 
start in less than 30 days, ways to use this information that 
is responsible, ways in which produce the best result that the 
Federal Credit Reform Act seeks and ways in which none of us 
could be accused of acting irresponsibly.
    Back in 1995, when Senator Bond first became Chairman of 
this Committee, the first law that came out of this Committee 
was to increase fees. Tony was here. Deryl was here. All of 
these other people were here and we made this huge increase in 
fees, cut the subsidy rate by probably 50 percent, added the 50 
basis point fee on all lender loans, put on significant 
borrowers fees. We did that to increase the size of the 
program, drive down the subsidy rate and lessen the demand on 
appropriation.
    Do you think all these people in this room who were here 
then that worked with us in developing these fees that could 
work would have sat tight if they knew most of this money was 
going to be going back to the Treasury in excessive fees? No, 
they would not have gone through that. So we are sitting here 
and I really cannot understand why an interim program--and I 
know Senator Bond would be asking you the same question--why an 
interim reestimate of this plan, when the flaws in the current 
estimate are so obvious, why a new estimate for fiscal year 
2002 cannot be undertaken?
    Dr. Blanchard. Well, thanks, Mr. Cooksey. I appreciate your 
comments on that. Let me help you understand that while GAO may 
have some solutions that can be addressed in the short-term, no 
solution is going to precisely estimate the credit subsidy 
rate. Now, we do not know if the default rate will be 13 
percent or whatever you said it might be at the end of 2002, 
but we do not know what it might be. No model, however 
sophisticated, can be 100 percent accurate. So the question is, 
what short-term solution gets us where we want to go that is 
going to be sustainable across time, meaning do we want to have 
a solution for 2002 and a different one for 2003, and maybe 
even a different one yet for 2004 and beyond? I do not think 
that is what we want to do.
    That will cause more problems in terms of reestimation and 
in terms of inconsistency in expectations in the small business 
community than, I think, the more careful route that we are 
taking. The more careful route that we are taking is to 
carefully examine the options that GAO has provided, as well as 
the options that we prefer. I am not as thoroughly familiar 
with all of your options and I would be willing to work with 
you and understand them, but our option is similar to a sort of 
modified econometric model, which represents those factors that 
have a direct influence on the default rate, so that we can use 
the most determinate factors in predicting that which we cannot 
predict with 100 percent accuracy.
    Let me say in closing here that the key principle that 
underlies the President's approach to financing small business 
loans for fiscal year 2002, is that the key principle is 
sharing of risk. Not only does the government share in that 
risk for guaranteeing the loan up to a certain percent, lenders 
take on a part of that risk through their commitment in 
offering the loan, but the borrowers also have to share in that 
risk. If the borrowers do not share in that risk, they are more 
likely, or let me say, if the borrowers do not share, 
financially, in the risk of this program, the default rate is 
more likely to be higher than if they did have a financial 
stake in the program.
    That being said, the budget did not expect an economic 
slowdown that recent evidence is now beginning to confirm. We 
understand that the Senate and the House mark, Mr. Schuster, 
has recognized the slowdown and has dealt with what many 
perceive to be our deficiency in addressing your concerns. We 
are not adverse, given our ongoing study of this program, given 
the changing economic nature of what we are facing here in the 
economy, and given the degree to which that change nature 
impacts small businesses, we are not adverse to deferring to 
the Senate and House mark on fiscal year 2002.
    We are continuing to work on this problem and we will 
continue to work, both with GAO and SBA, to come up with the 
best model, the best practice that can be sustainable from 2003 
and beyond.
    Ms. Forbes. Mr. Brocato.
    Mr. Brocato. Yes, what I would like to talk about is 
solutions. At this point you have brought up a number of 
factors that would increase, decrease this on a yearly basis. I 
think what we really need to focus on is solutions. How are we 
going to come up with something that can move into effect in 
the next year, the 12 months? For example, I represent the 
State of Louisiana, which we had 105 lenders last year. Today, 
as of last month, we now have 20 lenders in the State that want 
to lend SBA money. Maybe next year it might just be 10 to 5 
lenders. Whatever happens, we have to decide, I would think, in 
the next 6 to 12 months on what is going to happen, so we do 
not have a problem 2 years from now when we look around this 
table and maybe we only have 10 to 15 lenders in each State. At 
this point would need a major decision, not 6 months or 12 
months from now, but something that we can focus on and to try 
to deliver in the next fiscal year.
    Ms. Forbes. Thank you. I do not think there is going to be 
a lot of sympathy for waiting for the perfect model. I think, 
as you can see from Senator Kerry's and Senator Bond's 
amendment to the budget, from the Appropriations Committee 
finding the money when there was no money in that budget for 
this program--that was a lot of money for them to find--their 
strong support for this program in Congress. It is great to get 
to a better model, a really good model down the road, but let's 
get to something that works in the interim. We would like to 
have a commitment, and I am sure Senator Kerry will mention 
this when he comes back, for all of us to try to work together 
in the next couple of weeks and try to get something that we 
can use in the interim. I know people have had there cards up 
that I saw.
    Yes, Tony.
    Mr. Wilkinson. Patty, if I could just take charge for just 
a second, I just want to disagree with Dr. Blanchard on his 
statement that we probably should not have one model for 2002 
and a different one for 2003 and another one for 2004. We have 
got small business and lenders that are going to be paying more 
in fees than they have to, starting in about 30 days, and that 
is what is unfair. Linda said in her opening statement that the 
model we currently have got is not all that bad. It is the data 
we are using.
    It is clear that a lot of things have happened in this 
program since the 1980's, a lot of program changes have 
happened. Yet in our discussions with OMB, they just keep 
hanging their hat on ``we have got to have this business cycle, 
we have got to have this business cycle,'' and they forget that 
we have had improvement in underwriting standards. We now have 
an Office of Lender Oversight, where lenders are held 
accountable for their portfolios, and things happen when they 
make bad decisions, something that we would like to see happen 
with OMB, too, when they make bad decisions, that they are held 
accountable for those. But that is another discussion for 
another day.
    But we need something for 2002. It is unfair for the 
borrowers to be paying more fees than they have do. I do not 
care if we have got to come up with a new model for 2003. That 
is great, but it is time to change what we are doing. They can 
make some very simple default assumptions. What we have is a 
net present value analysis today. It is not that bad, yet the 
data that they are putting in there for defaults they know is 
wrong, we know is wrong. This program is being managed at a 
default rate in the 8 to 10 percent range. When we have a 
downturn in the economy, and I will bet you--check me in 5 
years--but I bet you it will not go over 10 percent. We know 
that sitting here today, based on the way the program is being 
managed, this is not going to go over a 10 percent default 
rate. It is time to change now.
    Ms. Forbes. Ms. Calbom.
    Ms. Calbom. One thing I just wanted to mention--and I do 
agree that it is more of a data issue. The model itself perhaps 
is not the big issue, although I also agree eventually we want 
to get to an econometric model. But Technical Release 3, which 
is guidance for preparing credit subsidy estimates--it was put 
out by the Accounting and Auditing Policy Committee--it says 
very clearly that you use historical data adjusted for changes 
in economic or programmatic conditions, and I think that is 
what we are facing here, and we need to be flexible in doing 
that, and we need to be able to do that quickly, because 
programmatic and economic conditions change quickly.
    An econometric model does that for you. But in the interim, 
we need to be willing to do that, and that is why we have kind 
of looked at some different proposals where we have said let's 
adjust for the fact that lending practices have changed, let's 
adjust for the fact that the economy has changed. Let's also 
not forget that the economy may be changing again soon. So you 
need to take those factors into consideration, but the point is 
you need to be flexible and adjust as changes occur.
    Dr. Blanchard. Mr. Chairman, I do not disagree with what 
Linda just said, except that the data is not necessarily the 
problem. I believe the comment was it is not the model that is 
the problem, it is the data. But we are forced to work with the 
data. We are forced to work with historical representations of 
default rates and economic conditions. We will work to improve 
that data, but the data must be used.
    Chairman Kerry. When will you work to improve this?
    Dr. Blanchard. We are now.
    Chairman Kerry. Yes, but you see--I know Mr. Cooksey raised 
this issue, and I was going to raise this toward the end, 
anyway. I think the timing here is really critical. There is a 
sense among the community that there has been a kind of stiff 
arm for awhile. This has been a delay process--we will put it 
out there, let it hang out there, but we get through this 
budget and we get through the next budget cycle. Meanwhile, 
over $100 million is inappropriately sucked out of the small 
business community, annualized, or $250 million or $600 million 
in a particular year.
    I do not think you are going to see the $600 million this 
next year, but you certainly are likely to see a continuation 
of these significant amounts. It is beyond my comprehension, 
frankly, Doctor, why it is not possible for OMB to sit there 
and say, ``You are correct, this is inappropriate; this is not 
stimulative.'' It is, in fact, not even good counter-cyclical 
policy for the moment you find yourselves in. The engine that 
you are looking for to move the economy is not going to be 
helped by keeping these stiff fees where people like Mr. Wise 
and others make the comment that the Fed is coming down, down, 
down, and here you guys are going up. It does not make sense.
    I fail to understand why it is not possible to make 
adjustments, if you put your mind to it, if you want to do it, 
you can find the people that have good common sense around this 
table and elsewhere to come up with a model that tries to 
adjust. If you miss it in the first year--we are all working 
together at this effort--so we can adjust at the end of that 
year and bring it back. But to sit there with something that 
has got 6 or 7 straight years of out-of-whack disequilibria is 
unacceptable, just unacceptable.
    Dr. Blanchard. I appreciate your concern, sir. The history 
of this program is one that has had an unfortunate one. The 
Administration is working in its first year to correct this 
problem, and it is one that we inherited that, as you all have 
mentioned, is a significant problem.
    Chairman Kerry. We have had 5\1/2\ months now, 5 months 
with the Administration aware of this, with a budget that was 
already rejected by this Committee, overwhelmingly. If there is 
not a message in that, I do not know what the message is.
    Dr. Blanchard. That message was heard loud and clear, sir.
    Chairman Kerry. But why is it that this message was not 
responded to equally? Why is it impossible to put this into the 
current budget? I do not understand that, particularly given 
the needs of small business. I would think you guys would want 
to be doing this, that this is the best way possible to help 
small businesses in this country.
    Dr. Blanchard. I mentioned earlier, before you walked in 
the room, Mr. Chairman, that given the economic downturn that 
has been confirmed by recent evidence, given the concerns that 
are raised here and that have been raised, given the fact that 
we are working on a model that will best serve our needs and 
serves as the best practice for estimating the subsidy rate, 
that we are not likely to be adverse to deferring to the 
message that was sent by this Committee loud and clearly.
    Chairman Kerry. Which one, the message about the budget or 
the message about the formula?
    Dr. Blanchard. The message about the budget.
    Chairman Kerry. What about the formula?
    Dr. Blanchard. The formula that is used to estimate the 
rate for fiscal year 2002, by law, by the Credit Reform Act, 
has to be based on the assumptions built into the fiscal year 
2002 budget. Those assumptions cannot be changed.
    Chairman Kerry. It is not possible to come up with a 
different model?
    Dr. Blanchard. We can come up with a different model, but 
the model is driven by the assumptions.
    Chairman Kerry. Which assumptions are driving the fact that 
you have to have a surplus of--what was the last one, last 
year?
    Mr. Wilkinson. One hundred and seventeen million last year.
    Dr. Blanchard. I cannot tell you the precise assumptions, 
sir. I apologize, but----
    Chairman Kerry. Why can't those assumptions be changed? 
Look, we just voted on a budget a few months ago. I voted 
against it because the assumptions were wrong, and now they 
have been proven to be wrong, and there were divergent 
assumptions between CBO and OMB. CBO had a very different set 
of assumptions, and they do again right now.
    Dr. Blanchard. We are bound by law to maintain those 
assumptions, in terms of the implementation of credit subsidy 
models. But as I said, the message that was sent by this 
Committee with regard to the funding, the appropriation for 
SBA, is one that we will surely consider, is one that we will 
likely defer to.
    Chairman Kerry. Dr. Blanchard, let me ask you something. 
Are you telling me that if there is an error in an assumption, 
you are legally bound to adhere to the error?
    Dr. Blanchard. No, I am not saying that there is an error 
in the assumption, sir.
    Chairman Kerry. I can tell you, you are not, and it seems 
to me patently clear there is an error in the assumptions.
    Dr. Blanchard. I do not believe we read it that way, sir.
    Chairman Kerry. Well, how do you justify the surplus? How 
do you justify the excess subsidy if there is not an error? 
Clearly, it is not correct because it is not balancing out or 
close to the equilibrium that it was supposed to be at. I do 
not understand that. How do you justify that?
    Dr. Blanchard. Our lack of ability to estimate economic 
conditions, and by our, I mean not only the Administration's 
ability, but any organization who makes that assumption.
    Chairman Kerry. If you have 6 or 7 years of--let me see 
now--213--excuse me. Yes, the re-estimate, 100, 277, it began 
in what? 1995, 1996, $100 million, $277 million, $647 million, 
$176 million, $100 million. So for 5 years, there has not been 
one reestimate under $100 millon. One might think it was 
reasonable to find a formula change that took $100 million off 
the cost and see where you wind up at the end of the next year, 
if there was a reasonable effort to be fair. By any reasonable 
person's standard, it is very hard to assume where the fairness 
is here, if you have had 5 straight years of over $100 million 
excess, why you do not adjust that is beyond me.
    Dr. Blanchard. We are adjusting this model consistently 
across time. I cannot explain the past errors in estimation. I 
can say that it seems, through the trends set, the sort of 
downward trending of the subsidy rate itself, it suggests that 
the improvement, at least institutionally within SBA and within 
OMB, has taken place, and we will continue that improvement.
    Chairman Kerry. What do you say to that, Ms. Calbom?
    Ms. Calbom. Our feeling is that there is some room for 
adjustment. Again, kind of going back to this graph, I think we 
want to be a little bit careful not to adjust, so that we are 
tracking the last few years, which have been very, very strong 
years. I think you can use that as a starting point, perhaps, 
but at the same time I think there is room to come down from 
where we have been.
    Chairman Kerry. I am wondering whether we should legislate 
a rebate structure so that at the end of the year, you have to 
hold whatever is in excess in escrow, and at the end of the 
year all users are prorated a rebate.
    Dr. Blanchard. That would surely make everyone in this room 
very happy.
    Chairman Kerry. Would it make you happy?
    Dr. Blanchard. I would not personally have a problem with 
it, sir. Whether or not the Administration will support that 
effort, I cannot commit to that.
    Chairman Kerry. You mean whether or not they need that to 
cover other expenses?
    Dr. Blanchard. That is nothing I will commit to right now, 
in terms of support, sir. But it is a fascinating and 
interesting proposal.
    Chairman Kerry. The question here is whether or not the 
small business lending program, which is supposed to make 
credit available at a reasonable price, has over charged fees 
to borrowers and lenders that are getting to the point where 
they say this is no longer a flagship program. It seems to me 
that if you could equalize that, rather than see that money 
used--effectively, you are asking those small businesses to 
subsidize other expenses of the Administration, including the 
tax cut, I might add. It is effectively a wealth transfer. We 
are taking from small businesses, and we are giving it to the 
folks who are getting the tax cut at the other end, because 
that is what it is used for.
    Dr. Blanchard. That is not our purpose.
    Chairman Kerry. That is the effect.
    Dr. Blanchard. That is not the purpose in the way we 
operate the SBA program.
    Chairman Kerry. If we cannot get you to change the model 
itself, we ought to at least guarantee that at the end of the 
year--it is like the FHA program. We run into this, too. The 
FHA insurance program runs a $5 billion surplus annually, at a 
time when we are cutting housing. Housing is producing a 
surplus, but does housing get the surplus? No. It goes into 
general revenue and helps cover all these other things people 
do. It is unconscionable, I have got to tell you. It is bad 
public policy. It may be good bookkeeping, but it is bad public 
policy.
    Dr. Blanchard. I tend to agree with you there, sir.
    Chairman Kerry. What do you say there, Mr. Wilkinson, as to 
where we find ourselves in this discussion? Is there a way 
through it, in your judgment?
    Mr. Wilkinson. I am hopeful that the message has been heard 
loud and clear, that there is a significant problem that has 
got to be dealt with and dealt with quickly. I am concerned 
about the response from OMB today, that they want to hesitate 
and defer and push it off into the future while we continue to 
charge borrowers who are closing loans today and tomorrow fees 
that do not need to be charged, concerned that we continue to 
hear OMB say the problem with the model is our lack of ability 
to make economic predictions, and they totally overlook how the 
program has been changed from its structure inside, with lender 
participation and fee structures and all the things that we 
have done in improving the underwriting standards over the last 
decade, totally ignored.
    Chairman Kerry. Well, I am sympathetic to that notion. 
Look, obviously, we do not want to go back to the days where it 
is running on the other side. You do not want to put the 
government excessively at risk for defaults. I would be 
disingenuous if I did not sit here and suggest that these 
numbers raise the specter of whether or not that 5-year bubble 
of overpayments does not have something to do with the 5-year 
economic bubble we have just gone through. So you want to be 
somewhat cautious and thoughtful here so that you do not set 
yourselves up for a fall. I do not think we should do that. We 
ought to be smart. So maybe the best way to do it is to at 
least hold people harmless at the back end.
    Maybe the idea of this rebate thing is not off the wall, 
which covers the potential of a downturn, a disaster. But in 
the end, the businesses are insuring themselves against that, 
and there is a rebate appropriately directed according to cost. 
It seems to me that might not be a bad way to think about it, 
at any rate, as a way out of this, so that the government is 
protected, but at the same time people are not gouged. Any 
comment, response, thoughts?
    Dr. Blanchard. I would just say that we recognize the 
limitation, and to beat a dead horse, we are continuing to work 
on this, and we believe that we have a short-term solution. 
However, the implementation of that short-term solution in 
fiscal year 2002 may be limited, and that limitation compels--
may well compel the Administration to defer to the House and 
Senate mark with regard to the SBA appropriations. But we are 
eager to continue to work with the Committee, to work with the 
industry----
    Chairman Kerry. Doctor, is there any way we can put that on 
a schedule? Could we get some timetables here, and perhaps 
accelerate the process? Is there any reason we could not 
anticipate a reconvening of this in number of weeks, to 
reevaluate where you come out in your judgments on the issue 
that we just talked about?
    Dr. Blanchard. I will have to check with my general 
counsel, sir, but my understanding of the implementation of the 
program is that it is based--it must be based on the 
assumptions built into the President's budget submission for 
that fiscal year. So any changes to the current subsidy model 
for fiscal year 2002 must require changes to the President's 
fiscal year 2002 budget submission.
    Chairman Kerry. You are saying that the model is linked 
inexorably to each of the assumptions?
    Dr. Blanchard. As per the----
    Mr. Wilkinson. Mr. Chairman, could I just add that one of 
the assumptions in the model is an estimate of interest rates. 
At the time they did their budget request, they estimated a 5.1 
percent discount rate that would be used in the model. In fact, 
come October 1, they are going to go look and see what the 
actual rates are on the day, and they are going to change that 
model. Rates have come down, our subsidy rate is going to go 
up. So they are going to change based on actual data coming up 
in about 3 weeks. It happens every year.
    Chairman Kerry. And raise the subsidy?
    Mr. Wilkinson. This will raise the subsidy rate, because 
the discount rate has fallen.
    Chairman Kerry. It seems to me if you can do that in a few 
weeks, why can't you do the other?
    Dr. Blanchard. Pardon?
    Chairman Kerry. I do not see how you can pick and choose 
which ones you do.
    Dr. Blanchard. I am not sure that I agree with Mr. 
Wilkinson's assessment of the change. There may be a review 
that looks at that discount rate, but I doubt that change can 
be applied in 2002.
    Mr. Wilkinson. Yes, it can. The subsidy rate changes, I 
would have to go look, but I will bet the final subsidy rate on 
October 1 has not been the same as the subsidy rate in the 
budget for quite some time. It is off by one or two basis 
points one way or the other.
    Ms. Calbom. Just one quick comment or, I guess, question 
that I had; the default rate, though, is not any assumption 
that is built into the President's budget; is that correct?
    Mr. Boden. It is primarily the discount rate that is used. 
That is the one that has to be used in the President's budget, 
and, as Mr. Wilkinson said, at the end of the year that 
discount rate will be adjusted for actuals that have taken 
place during the year.
    Ms. Calbom. But the default rate, I think, is more what we 
are talking about.
    Chairman Kerry. Why can't the default rate be adjusted?
    Dr. Blanchard. The default rate would be adjusted if the 
discount rate is adjusted. Am I correct, David?
    Mr. Boden. [No response.]
    Chairman Kerry. I do not want to leave this--it may well be 
that we do not have a return here. We have got a few weeks here 
left to work on this Budget. We are going to have a continuing 
resolution probably for the short-term, because we are not 
going to get all of these approps done. I would like to figure 
this out. I would like to get some timetables here. So what I 
would like to do is ask you if you would go back, and if I need 
to call Mitch Daniels, well, we will do that, and see if we 
cannot get some focus on this issue. I would like it not to be 
confrontational. This is not a Democrat-Republican issue at 
all. This is a bipartisan effort. Senator Bond, myself, and 
other members of the Committee are trying to figure out how we 
are going to make it more reasonable and fair for small 
businesses, which is in all of our interests, to have access to 
affordable credit.
    I think it is in our interest for all of us to try to work 
together to do it. If you could go back and review, Dr. 
Blanchard, what your understanding, what counsel's 
understanding is specifically, I would like a very specific 
response back to us about what, if any, limitations exist on 
our ability to change the default assumptions in the Budget. 
That is No. 1. No. 2, I would like to know specifically what 
ways you propose to solve the inaccurate subsidy rate 
estimates. I am going to ask for this also from the SBA--John, 
would you and the Administrator tackle this? Mr. Wilkinson and 
to GAO, to come up with a common understanding of what the 
possibility is. I would like to have that report back in about 
3 weeks. That is ample time, it seems to me. Then we will make 
a decision whether we reconvene the roundtable or have a 
meeting or have a hearing, to review how we might proceed to 
try to address this, if possible. Meanwhile, staff--nothing 
should restrain our staffs from kind of cranking out on this. 
If we can, see if we can come to some mutual agreement. Does 
that make sense?
    Dr. Blanchard. It makes perfect sense, sir. We believe that 
this does not have to be an adversarial process, either, and 
OMB stands ready to commit to providing you with that 
information. I cannot speak for GAO or SBA.
    Chairman Kerry. As I say to you, none of us here--we have 
worked hard over the last 15 years on this Committee to shore 
up this program. Where there were weaknesses, we tried to 
address them, and there were some. There have been some, and it 
may well be that after a decade of plenty, as the pressures 
mount, there clearly are going to be some casualties out there. 
No question about it. I think we would be responsible if we did 
not recognize that we have got to not only look at bringing new 
people in, but we have also got to nurture what we have there 
and be smart about it. So there is a balance. I just think it 
is inappropriate for those small businesses to be funding a 
whole lot of other things in government, which is effectively a 
back-door tax, and I want to find a way to free them from that 
burden. I hope we can work together to do that. Fair enough?
    Are there any other comments anybody wants to make? Yes, 
sir?
    Mr. Wise. I have a question. I heard that OTC had done a 
report on SBA loans. Do you know anything about that?
    Mr. Whitmore. I do not. I believe there was a study done, 
and I have not looked at it.
    Mr. Wise. It would be important to see that study.
    Chairman Kerry. We will get a hold of it.
    Mr. Wise. I have talked to my folks, and they know nothing 
about it.
    Chairman Kerry. We will take a look at it. We will do it.
    Mr. Wilkinson. We submitted a written statement. Could we 
include that in the record, please?
    Chairman Kerry. All written statements will be placed in 
the record in full as if read, and they will be part of the 
record. I look forward to following up on this in 3 weeks, if 
we can. Hopefully, we could even come to some agreements or 
some thoughts about it ahead of time; that would be helpful. We 
stand adjourned. Thank you all very much.
    [Whereupon, at 11:58 a.m., the Committee was adjourned.]
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