[Senate Hearing 108-238]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-238
 
                 SBA REAUTHORIZATION: CREDIT PROGRAMS 
                          (PART I) ROUNDTABLE
=======================================================================

                               ROUNDTABLE

                               before the

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 30, 2003

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                                  _______


                        U.S. GOVERNMENT PRINTING OFFICE

91-190                            WASHINGTON : 2004
_____________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800
Fax: (202) 512-2250  Mail: Stop SSOP, Washington, DC  20402-0001















            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                      ONE HUNDRED EIGHTH CONGRESS

                              ----------                              

                     OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri        JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana                CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah              TOM HARKIN, Iowa
MICHAEL ENZI, Wyoming                JOSEPH I. LIEBERMAN, Connecticut
PETER G. FITZGERALD, Illinois        MARY LANDRIEU, Louisiana
MIKE CRAPO, Idaho                    JOHN EDWARDS, North Carolina
GEORGE ALLEN, Virginia               MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada                  EVAN BAYH, Indiana
NORMAN COLEMAN, Minnesota            MARK PRYOR, Arkansas
            Mark E. Warren, Staff Director and Chief Counsel
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel

















                            C O N T E N T S

                              ----------                              

                           Opening Statements

Snowe, The Honorable Olympia J., Chair, Committee on Small 
  Business and Entrepreneurship and a United States Senator from 
  Maine..........................................................     1
Coleman, The Honorable Norm, a United States Senator from 
  Minnesota......................................................    91

                            Committee Staff

Warren, Mark, Staff Director and Chief Counsel, Majority Staff...     *
Forbes, Patty, Staff Director and Chief Counsel, Minority Staff..     *
Freedman, Marc, Regulatory Counsel, Majority Staff...............     *
Wach, Greg, Banking Counsel, Majority Staff......................     *

                              Participants

Bartram, David, President, SBA Division, US Bank, San Diego, 
  California.....................................................     *
Ballentine, James, Director, Community Development, Office of 
  Federal Operations, American Bankers Association, Washington, 
  DC.............................................................     *
Bew, Ron, Associate Deputy Administrator, Office of Capital 
  Access, U.S. Small Business Administration, Washington, DC.....     *
Brown, Blake, Chief Financial Officer, Coastal Enterprises, Inc., 
  Wiscasset, Maine...............................................     *
Byrnes, Steven, Senior Vice President, Fleet Boston Financial, 
  Portland, Maine................................................     *
Corbet, Alan, Executive Director, Go Connection, Kansas City, 
  Missouri.......................................................     *
Criscitello, Douglas, Vice President, JP Morgan Chase (Colson 
  Services), Washington, DC......................................     *
D'Agostino, Davi, Director, Financial Markets and Community 
  Investments, U.S. General Accounting Office, Washington, DC....     *
Feldmann, Greg, Partner, Gryphon Capital Advisiors, Roanoke, 
  Virginia.......................................................     *
Gast, Zach, Policy and Research Manager, Association for 
  Enterprise Opportunity, Arlington, Virginia....................     *
Hearne, Michael, Director of Member Business Lending Program, 
  Credit Union National Association, Washington, DC..............     *
Matthews, Mary, President, Northeast Entrepreneur Fund, Inc., 
  Virginia, Minnesota............................................     *
Merski, Paul, Chief Economist and Director or Federal Tax Policy, 
  Independent Community Bankers of America, Washington, DC.......     *
Schuster, Deryl, President of Mid-American Division, Business 
  Loan Center, Wichita, Kansas...................................     *
Wilkinson, Anthony, President and Chief Executive Officer, 
  National Association of Government Guaranteed Lenders, Inc., 
  Stillwater, Oklahoma...........................................     *

          Alphabetical Listing and Appendix Material Submitted

Bew, Ron
    Prepared statement...........................................   108
Brown, Blake
    Prepared statement...........................................   111
Corbet, Alan
    Prepared statement...........................................   120
Criscitello, Douglas
    Letter.......................................................   123

* Comments, if any, between pages 3 and 105.
D'Agostino, Davi
    Prepared statement...........................................   127
    Post-roundtable questions posted to Ms. D'Agostino...........   181
Gast, Zach
    Prepared statement...........................................   147
Kerry, The Honorable John F.
    Prepared statement...........................................   149
Merski, Paul
    Prepared statement...........................................   151
Landrieu, The Honorable Mary
    Prepared statement...........................................   154
Levin, The Honorable Carl
    Prepared statement...........................................   155
Matthews, Mary
    Post-roundtable questions posted to Ms. Matthews.............   182
Mica, Daniel
    Letter.......................................................   157
Schuster, Deryl
    Letter.......................................................   161

                        Comments for the Record

Gryphon Capital Advisors, Inc.
    Submissions for the record...................................   171
Hummel, Alan Eugene, SRA, President, Appraisal Institute, Chief 
  Executive
  Officer, Iowa Residential Appraisal Company, Des Moines, Iowa
    Prepared statement...........................................   166
















                 SBA REAUTHORIZATION: CREDIT PROGRAMS 
                          (PART I) ROUNDTABLE

                              ----------                              


                       WEDNESDAY, APRIL 30, 2003

                              United States Senate,
          Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:42 a.m., in 
Room SR-428A, Russell Senate Office Building, the Honorable 
Olympia Snowe, Chair of the Committee, presiding.
    Present: Senators Snowe and Coleman.

OPENING STATEMENT OF OLYMPIA SNOWE, CHAIR, SENATE COMMITTEE ON 
   SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED STATES 
                       SENATOR FROM MAINE

    Chair Snowe. We welcome all of you here today. We will 
begin quickly. I will only be able to stay until about quarter 
of 11:00, so I want to be able to hear most of what you have to 
say on some of these issues and obviously the staff will be 
here, both my staff and Mark Warren, Marc Freedman, Greg Wach, 
and Patty on behalf of Senator Kerry.
    We are going to be sure that we include all of your 
comments here this morning, because as we prepare for the 
reauthorization of the SBA programs we want to ensure that we 
have considerable input as we develop our recommendations for 
how we should proceed on the SBA reauthorization--all the more 
so, given the fact that it is the 50th anniversary of the SBA. 
I think there could be no better way to celebrate these 
programs, and the value that they represent to this country in 
developing America's economy, than ensuring the vitality of 
these programs and improving the well being of small businesses 
throughout the country.
    I know that you represent a broad section of organizations 
and institutions that enable small businesses to thrive in 
America. We want to do everything that we can to ensure that 
these programs are working well and efficiently. If we have to 
redirect our efforts from ineffective programs to more 
effective programs then we certainly want to do that. Anyway we 
can improve the delivery of these services to small businesses, 
and through your institutions, we want to do that as well.
    The program that we are talking about today is the SBA's 
7(a) Loan Guarantee Program, which is the essence, the core, of 
the SBA programs. I know you have been on the front lines in 
delivering these loans to small businesses. They put a face on 
America. Whether it is on Main Street or in manufacturing 
facilities, we are able to develop small businesses in a way 
that would not be possible without the assistance and support 
of these types of programs.
    The 7(a) program has had a profound effect on America. 
During the last 3 years, the SBA 7(a) loan programs have 
provided financing to more than 40,000 startup small businesses 
and to more than 99,000 existing small businesses that received 
financing for operating and expansion purposes, totaling more 
than $28 billion in the same 3-year period.
    More significantly, perhaps, is the fact that it has 
resulted in the creation of more than 1 million new jobs.
    As we consider ways in which to improve the SBA guaranteed 
loan processes, we also should keep in mind that it is vital to 
provide support not only for startups but also for existing 
small businesses, so that we can protect the millions of jobs 
that have already been created.
    Obviously the expansion of the 7(a) Loan Program has 
already made a difference, and I want to get your input today 
on the administration's proposal. We know that there are ways 
in which the 7(a) loan program can be improved and that is 
obviously what we want to hear from you today.
    We have tried in the past, and I know the leadership here 
in the Committee and at the SBA, have tried, to improve upon 
the delivery of these services by reducing the burden of 
paperwork, obviously reducing the fees, and trying to deliver 
speedy services through the lending process.
    We know the 7(a) program got a jump start with the Low Doc 
Program several years ago, and more recently the Express Loan 
Program that has proven that we can improve the 7(a) loan 
program. Hopefully that has worked well. It has done a lot, I 
think, in reducing the paperwork burden and the time it takes 
for a small business to obtain a 7(a) loan, and eliminating the 
SBA's internal loan processing, saving time for businesses and 
processing costs for the SBA.
    I hope that your comments here today can help, I think, 
elaborate on these issues and whether or not they have worked 
well and identifying other facets of the program that we ought 
to be working on, where we have succeeded, and what we should 
emulate, and those areas that we should address.
    We will also address the Microloan Program. We know that 
microloan lenders, including many of you represented here 
today, made over 8,000 loans to existing and startup small 
businesses during the past 4 years, creating more than 34,000 
jobs. This is another area where we must build upon the 
program. I know the SBA has expressed a desire to continue to 
improve all of its loan programs, and that is based on the 
fiscal request for this next year. I hope that we can look at 
some of those issues.
    I tried to redirect the 7(a) loan program by reducing the 
cost by more than 72 percent by using an econometric model. I 
am disappointed that it was not fully implemented by the SBA 
and I hope we have an opportunity to discuss that here today 
and what the obstacles are so that we could have the full 
benefits of using that model that ultimately could result in 
thousands of more jobs, because if realized--at least with the 
STAR Program, where it has not been used--we could achieve a 
savings of more than $13 million that could be turned around 
into millions of dollars of loans.
    As we address these and other issues, I hope you will feel 
free to comment and to submit further comments during the 
course of the reauthorization process, because we want to do 
all that we can to elicit your views on what is working, what 
is not working, and what can we do better.
    Why don't we begin? I would like to begin with the 7(a) 
loan program. I think many of you are familiar with the format 
that has been utilized here in the past, but you can put your 
card up to signify the fact that you want to make a comment. I 
will keep a list of speakers in the order that you put your 
nameplates up.
    I hope that you feel free to comment, and frankly we can 
start with the 7(a) loan program, but if you want to move in--
let us do that first, and then we can move onto microloans and 
so on. I want to focus on those areas where it matters most.
    Before I depart in the next hour, please feel free to 
comment on those or any other programs that you want to get my 
attention on.
    Who would like to begin? Tony? Please identify yourself. 
You all know each other.
    Mr. Wilkinson. I am Tony Wilkinson. I am the President and 
CEO of the National Association of Government Guaranteed 
Lenders, Inc. Our members account for approximately 80 percent 
of the 7(a) loans that are made annually.
    First of all, we want to thank you for your efforts on 
Senate bill 141, the econometric bill. As you know, Senators 
Kerry and Bond worked on that bill for a long time and tried to 
get that situation rectified. You came in and made that your 
first legislative priority, and we certainly appreciate that.
    I also want to thank you for your efforts, with Senator 
Kerry, to get the leftover STAR money reprogrammed. That is 
going to be very critical to help meet demand for this fiscal 
year.
    I would like to comment on the Administration's 2004 budget 
request. Basically it is inadequate for the 7(a) program. Last 
year we did $12.2 billion gross, $11.1 billion net. They have a 
budget request for next year of $9.3 billion and that is just 
not going to work.
    We did $5 billion the first 6 months of this fiscal year, 
even though there was a $500,000 loan cap in place. 
Historically the second 6 months of the fiscal year has 
substantially higher volume than the first. We are clearly 
going to be well ahead of a $9.3 billion pace this year, so the 
budget request for next year is going to be insufficient.
    We fully believe that if we start the next fiscal year with 
a $9.3 billion program level, that the Administration will have 
to take steps to limit loan volume in the 7(a) program, and 
that is something that we hope we can avoid.
    We agree with you that the agency has not fully implemented 
the STAR rescoring. We hope that is another issue that we can 
get resolved. We believe we will need some of those monies to 
get through this fiscal year. Even if we are wrong and we do 
not need it this fiscal year, we obviously need it the next 
fiscal year. We need to see if we can get that situation 
rectified.
    That action would cost no money. The money is sitting out 
there. It has already been appropriated. It is a no cost 
solution to our funding shortfall this year and next. So we 
hope that the Agency will take a look at that quickly.
    Lastly, we know that the Federal Credit Reform Act is going 
to be reauthorized this year. As a member of the Budget 
Committee, we would ask that you would take a hard look at what 
is going on in there. As you know, in our words, the 7(a) 
subsidy rate was gamed for several years, and I do not know 
what the Administration has planned in the reauthorization 
process. We do know that they are looking at putting what we 
call the master reserve fund in our secondary market, under the 
Credit Reform Act, which we do not believe they have the 
legislative authority to do. So that is another issue that we 
would hope that you would take a close look at.
    Our association has a legislative package proposal that we 
will submit for the record today. With that I am finished.
    [The information follows:]



    
    
    
    Chair Snowe. Thank you very much, Tony.
    At some point, Ron, I would like to have you comment on 
some of these issues because it is important, I think, to talk 
about the Administration's proposal.
    Mr. Bew. Do you want me to comment now?
    Chair Snowe. Yes, why don't you and then we will go on to 
hear your view on both of the issues he raised. That would be 
helpful.
    Mr. Bew. The Administration feels that the 2004 budget is 
adequate at $9.3 billion. It is basically in line with historic 
numbers. We went back over the last 4 years and it has always 
been $9 billion. You have to accept the fact that $11.1 billion 
includes the STAR appropriation which was a supplemental 
appropriation, and just a one time event.
    We are running about $37 million on a daily basis now, and 
that is in line, if you multiply it times 251 days, we are at 
$9.3 billion.
    Mr. Wilkinson. Is that a year-to-date daily average?
    Mr. Bew. That is actually over the last 3 years. I think 
2000, 2001, 2002. It was running about $37 million a day.
    Mr. Wilkinson. What we typically see happen is--let us just 
take last year. We did $5.1 billion the first 6 months. The 
last 6 months was $7.2 billion. The last half of the fiscal 
year, there usually is at least $1 billion growth. Last year it 
was a $2 billion growth.
    I want to be cautious about whether they are using a 
historic loan volume for 3 years, because that does not match 
what happened the last 6 months of last year and is probably 
not going to match what will happen this year.
    Chair Snowe. Would most of you agree on that point?
    Mr. Bew. The $37 million is the average for the whole year. 
Sometimes we hit under $20 million in the early months.
    Mr. Wilkinson. There is a definite cycle to the 7(a) 
program. The second half is much larger than the first.
    Chair Snowe. Is that most of the experience here, would you 
say?
    Mr. Bartram. Yes.
    Chair Snowe. Steve.
    Mr. Byrnes. Good morning, Senator Snowe. My name is Steven 
Byrnes. I manage small business lending for a lender in Maine.
    In order to maintain our position in the State of Maine as 
the number one SBA lender, there are two programs I would like 
to advocate for continuing and expanding. One is the Preferred 
Lender Program, which Fleet participates in. Since 1998, that 
has been expanded from 1 lender in the State to 11, and I 
think, is largely attributable to the increase in the SBA 
volume throughout Region I.
    Secondly, I would also like to advocate for the continued 
expansion and support of the SBA Express Program. That has 
really been the key to our success as far as driving more 
capital into the hands of small business. Prior to 1998 and 
that program roll-out we made 10 SBA loans in the entire State 
of Maine. Two years after SBA Express and PLP status was 
established, we made 137 SBA loans. So more than a ten-fold 
increase in our activity in SBA Express.
    Chair Snowe. What precisely made the difference in this 
Express Loan Program?
    Mr. Byrnes. Ninety percent of our SBA Express Loan 
approvals were scored less than $100,000. We were able to allow 
our clients, with a 1-page application, to score their 
approvals, a credit score. Based on that we were able to 
approve the loan, document it, close it, and hopefully not 
liquidate it but we can liquidate it. It gave the bank a lot of 
the authority to manage the process on behalf of the client 
with the authority from the SBA, and we have been very 
successful managing that.
    I think, to your point, there are three key benefits to the 
SBA Express. It reduces the paperwork, it streamlines the 
process, and significantly reduces the closing costs because 
the bank does not have to hire legal counsel to prepare the 
documents which under traditional 7(a) can be fairly 
complicated and have a lot of regulations and requirements. Our 
own in-house documents and our centralized SBA underwriting 
group allows us to be very efficient. We approve those loans in 
less than 48 hours because we credit score them.
    It really is a very efficient process and I would like to 
continue to advocate for that.
    Chair Snowe. It is good to know that it is working well. 
That makes a difference, when you make those changes, that you 
see the end result and it is positive.
    Mr. Bew. May I make a comment on that?
    We are very proud of the changes we made to Express. When I 
got here, I guess a little over 12 or 13 months ago, the 
Administrator asked me to dramatically expand the number of 
loans that we make and really to touch more businesses. Which 
in essence, even though we focus on number of loans, (7a) is 
really a job creation program. He wanted me to drive down that 
average loan size and Express was a way to do it.
    So we made a couple of changes. One, we increased it from 
$150,000 to $250,000, and then we opened it up to 2,400 banks 
that could qualify for it. I think we have about 500 new banks 
that joined the program.
    It is an important point to realize, these banks are taking 
a 50 percent guarantee and not the normal 75, 85 percent. That 
is how positive they felt about the program and the cost of 
delivering the normal 7(a) programs.
    We have doubled our volume and we have also, by driving 
down the average loan size primarily with Express, really 
increased our minority lending. We have a chart here to get a 
little plug in for Express, since you brought it up.
    This is one I used in the House and updated it. Minority 
lending year-to-date, almost 7 months into the year, is up 43 
percent overall. And in the categories, African-American is 
really up at 68 percent, and women are up 37 percent. We think 
there is a correlation between the average size of the loan, 
the smaller loan, and startups and minority lending. It was 
always thought to be that way and I think the numbers are 
starting to prove it to be. So it is part of our philosophy to 
drive down the average loan size.
    Chair Snowe. I think that is obviously a very positive 
development. Is there outreach in this process, too? Is that 
what also happens? What accounts for the increase? Do people 
come through the door and then they realize this is going to be 
a much easier process? How do they learn about the Express Loan 
Program? Or is it just when they come through the door that 
they find out it is not going to be as difficult as they might 
have thought?
    Mr. Bew. We market directly to the banks on the Express 
Program. You can maybe address that, Steve.
    Mr. Byrnes. We market the Preferred Lender Program status. 
We actually put the preferred lender status on the front of all 
of our doors of all of our branches. When we sit down with a 
client and they may have been talking with two or three banks, 
the fact that we are a preferred lender allows us to put it 
through in a much faster streamlined process. So the clients 
tend to gravitate towards our institution.
    Outside of the normal day-to-day sales activities that 
usually comes in the door, we do not specifically market 
against it except for the PLP program.
    Chair Snowe. The point is that a lot of people came through 
the door that otherwise would have been denied, or they did not 
want to be hassled with the process.
    Mr. Byrnes. Correct.
    Chair Snowe. But once they were familiar with this process, 
it made it much easier because you could process it without 
having to use the SBA, and had greater authority to exercise 
the ability to process this loan.
    Mr. Byrnes. The key is the underwriting side. We were able 
to expand the credit score to capture a larger audience of 
clients that may have been declined without the guarantee. That 
was the key.
    Chair Snowe. That is the key.
    Ms. Forbes. I wanted to follow up. Ron, I noticed your 
chart combines 7(a) and 504. Is it possible for you to submit 
for the record breakdown of 7(a) and 504?
    Mr. Bew. Sure.
    Ms. Forbes. I think we would all be interested in that.
    Chair Snowe. Dave.
    Mr. Bartram. Senator Snowe, thank you very much for having 
me here today. I certainly appreciate the opportunity.
    I am Dave Bartram, President of the SBA Division, U.S. 
Bank.
    I will give you a little bit of background on our bank. We 
currently have an outstanding SBA loan portfolio of $1.6 
billion and almost 6,000 loan customers in the SBA program. I 
personally have been active in the SBA program for over 20 
years.
    I am here today also as the Vice Chairman of the National 
Association of Government Guaranteed Lenders.
    I want to certainly echo what our President has stated, 
that the Administration's request for the 2004 program level is 
short, and we believe short around 25 percent, and do we 
believe that with a $9.3 billion program level that the SBA 
will be forced to do some sort of rationing, which basically is 
a loan cap.
    I believe that most lenders are expecting to lend more, not 
less. That, in my mind, supports the fact that we need more 
funding not less. Our bank is expecting a 20 percent loan 
increase, which is in line with what the trade association is 
also stating.
    I would like to, if I could, put into the record my 
testimony in the House. It basically outlines 10 points of the 
legislative proposal that the trade association has.
    Chair Snowe. Absolutely. It will be included in its 
entirety in the record.
    [The prepared statement of Mr. Bartram follows:]


    
    
    Mr. Bartram. I would like to highlight, if I could quickly, 
just 3 of the 10 points.
    We would like to see the SBA directed to establish a simple 
alternative size standard, as now exists with the 504 program, 
rather than the very complex and exclusive size standard that 
is now being used for 7(a) loans.
    Presently, a client could receive a 504 loan for fixed 
asset purchases, but may not qualify for a 7(a) working capital 
loan, which just does not seem right. There are two SBA 
programs and the size should be the same.
    Secondly, I would like to see the current fee structure 
that will sunset 10/1/04 made permanent. Clients would pay the 
SBA a one-time fee of between 1 and 3.5 percent, based on the 
loan size. Lenders would pay an ongoing fee of .25 percent to 
the SBA on the outstanding loan balance.
    Lastly, instruct the SBA to limit the lien on secondary 
collateral to a more reasonable equity amount. Presently, we 
have to file a lien on secondary collateral, which typically is 
the client's home, and we have to file that for the amount of 
the loan amount. The problem with that is it increases costs to 
our clients. In some states, they are taxed on the size of the 
lien, which is far in excess of the amount of equity that they 
have in their home.
    Again, I appreciate the opportunity to be here and I would 
like to participate.
    Chair Snowe. Thank you. Do you have any comments?
    Mr. Bew. David, you will be happy to know that we have a 
study underway now to look at size standards. It is not in my 
area but it is ongoing on the collateral issue. The study is 
making its way through the bureaucracy of the SBA.
    The other one, the 2004, that would be under review.
    Mr. Bartram. Ron, thank you.
    Mr. Schuster. Madame Chair, I am Deryl Schuster with 
Business Loan Express, the Nation's largest 7(a) lender. Thank 
you for this roundtable.
    We are a preferred lender in 68 SBA offices, including 
Maine and Massachusetts. We are proud to be involved in those 
states.
    During the Nixon/Ford days, I spent 8 years as District 
Director and Regional Director of SBA. I am a past Chairman of 
NAGGL and a past Chairman of the ABA Small Business Committee. 
I can boast of receiving the SBA's District Office of the Year 
Award and, on the other side of the desk, the National Small 
Business Banker of the Year recognition at one time.
    With these experiences, I was given the responsibility of 
obtaining and retaining PLP authority for our company. I have 
got to tell you, if Senator Proxmire was still alive today, one 
of his infamous awards would go to the SBA for the manner in 
which the PLP program renewal and expansion is administered. It 
has got to be one of the most wasteful and unnecessary and 
frustrating experiences in all of Government.
    Let me just cite a few negatives of the current procedures. 
It has driven several good lenders from the SBA loan 
participation. It makes a mockery of SBA's lender examination 
results. It discourages lenders from committing resources to 
the loan programs. It has opened the door for some SBA 
officials to blackmail lenders based upon national performance 
data. A lender can be the most outstanding lender and still not 
be approved as a preferred lender. In fact, a lender has to 
prove and reprove themselves as many as 80 times every 2 years. 
It makes it very difficult for a lender to market the SBA's 
loan programs.
    Just one of NAGGL's 10 legislative issues is a national PLP 
program. It is sorely needed in the industry and would 
favorably impact most all aspects of the 7(a) program.
    Chair Snowe. What would you recommend? Certain standards 
and criteria?
    Mr. Schuster. Some very stringent standards.
    Chair Snowe. A lengthier process for approval, that you 
would not have to go through a review process?
    Mr. Schuster. NAGGL's legislative package does include a 
detail of what we would propose, and it would include a very 
stringent set of criteria that a lender would have to meet as 
it relates to operational criteria on a national basis. We 
think those criteria should be very stringent. It includes--I 
do not have that right now, but you would have to have done so 
many loans in at least five states. Performance criteria--Tony 
you might--
    Mr. Wilkinson. It is in our legislative package, but we 
believe the Administrator should come up with a stringent set 
of standards that a preferred lender would have to meet. But it 
would be administered at a national level rather than having to 
go to each individual district office and meet each individual 
district office's requirements, as opposed to here is a 
national level and if you are performing at the levels set out 
by the Administrator, then you should be PLP, wherever you 
choose to lend.
    Mr. Ballentine. Good morning, Madame Chair, James 
Ballentine with the American Bankers Association.
    I wanted to echo the comments of both Tony and David 
regarding the appropriations for the 7(a) program. We are 
particularly concerned about the appropriation process in light 
of the fact that SBA has proposed to expand the number of 
lenders within the 7(a) program. In the usual case, more 
lenders means more loans, which means you need more dollars. In 
this case, it seems the pot is shrinking while the number of 
lenders is increasing.
    We would ask SBA, as it operates this unique 7(a) program 
that has a private sector/public sector/lender/partner 
relationship, that a much more open dialogue be set up amongst 
the lenders, amongst their partners as they call them, to not 
only set the appropriations process but also work to see how we 
can work to make the program work better.
    We are concerned that the SBA is becoming not the Small 
Business Administration but the very small business 
administration, and that they are attempting to, as Ron says, 
drive down the size of the loans and at the same time serve all 
markets.
    I think Chairman Manzullo said it best when he said there 
is a certain sector of the small business community that needs 
not a very small business loan, but rather, a larger small 
business loan. That type of capitalization is needed for those 
businesses that are expanding and that are in their fifth, 
sixth, seventh, and eighth year. We would really ask that the 
SBA become a little more open in its process and working with 
its lending partners to really see what the adequate funding 
level is for this program going forward, particularly as they 
expand the number of lenders.
    Chair Snowe. Is there a possibility of doing something like 
that, Ron? I do not know historically what has been the case, 
working with----
    Mr. Bew. As far as the dialog?
    Chair Snowe. Yes.
    Mr. Bew. I think the very first couple of months when I 
arrived we had a bankers roundtable. We have probably done five 
or six. That very first one was really the genesis of expanding 
the SBA Express Program, so we normally keep those groups to 
around 10 or 12 bankers at a time. We can continue to do that. 
The Administrator asked me to continue to do that.
    Chair Snowe. I think that would be worthwhile and I 
encourage that, because it is helpful and obviously you get 
some good ideas from the process in trying to improve upon it.
    But also in the case here about the budget and the amount 
of 7(a) loans and the fact that you are going to have more 
lenders participating, smaller loans, and so on, about the 
need. Our inability to meet the need or to fulfill the ability 
for the number of loans that could be processed if we had more 
authority to do so. Can you address the number?
    Mr. Bew. Yes, the numbers are going on. A lot of those 500 
that have joined, mainly under the Express, are really doing 
the smaller loans so it does not eat up that much volume. We 
still anticipate we can serve the larger banks and lenders, the 
larger loans as well as the smaller ones.
    Chair Snowe. Why was there not a greater request made for 
the 7(a) loan program? Obviously, there is a need. It would be 
utilized. It would make sense, given the fact that--especially 
in this sluggish economy. Would it not make sense?
    Mr. Bew. Again, I think it is adequate that what we 
requested is in historic lines. We have also found, through a 
Department of Labor study that looked at our portfolio, that 
the smaller loans generate more jobs. So as far as the economy, 
it meshes. They broke down our portfolio a couple of years ago 
and it showed in loans from 0 to $50,000 it takes $14,000-plus 
of a loan to create one job. In the loans over $1 million it 
takes $140,000. So, it is more effective on the smaller loans 
for the job creation. That has been our track so far.
    Mr. Ballentine. I think one of the important parts, and I 
have heard that cited a couple of times, is that there is job 
creation and there is also job retention, as it relates to 
making the loans that are needed for small businesses. So every 
loan is not for a startup small business, but there are loans 
made for job retention as well.
    Mr. Hearne. Good morning. Thank you for having me.
    I am here with the Credit Union National Association, and I 
want to thank you for inviting us and giving me the opportunity 
to not only speak but to see so many of my old colleagues from 
the SBA days.
    I used to work at SBA back until 1997, in the Office of the 
Chief Financial Officer, back when my good friend Mr. 
Criscitello was Chief Financial Officer.
    I am also the Treasurer of Lafayette Federal Credit Union, 
which among its field of memberships, the SBA is one. Finally, 
I am also a small businessman and a small business borrower, 
and I have been through the SBA 7(a) borrowing process from 
that end, also.
    I would like to piggy-back on what some of my colleagues 
here have said. As you know, the SBA recently adopted a rule 
that allows credit unions more full participation in the 
process. We believe that that is going to go a long ways 
towards not only increasing access to capital but the credit 
unions themselves have an average loan size of under $100,000. 
I think it allows more participants.
    In addition to that, on the funding side of things, like 
everyone, more money is better just like I think more lending 
participants is better. But an important thing, I think, 
sometimes gets overlooked is just the act of applying for an 
SBA loan does a lot of what some of the Microloan Program is 
aimed towards, which is counsel the borrowers. Going through 
the process of doing your business plan, your cash flow 
projections, and so forth, I think, is a weed out process for 
some of the smaller borrowers.
    It also, I think, reduces your default rate and ultimate 
liquidations because those borrowers who do not have access to 
a 7(a) program or a structured business loan will go and 
finance their programs with credit card debt or home equities 
and vehicle loans and so forth. They do not really have the 
opportunity to really take a step back and, with the guidance 
of a seasoned loan professional, take a look at what their 
business prospects are.
    I also think that SBA and the borrowing community would be 
well served with a more centralized process, not only for the 
PLP lenders but also for those lenders, particularly the credit 
unions, who are applying to become 7(a) lenders. Again, I 
understand where SBA is coming from on this, but it is 
difficult to have to deal with every district office and their 
varying requirements for becoming an SBA certified lender. I 
would love to see SBA work towards a more centralized role for 
both PLP and that.
    Finally, I would just like to commend Mr. Bew and his 
staff, who have really been very helpful with us in helping to 
put our program together. I know exactly what you guys are up 
against, but we do appreciate all the efforts that you have had 
to date and we look forward to working with you in the future.
    Chair Snowe. Thank you very much.
    Mr. Merski. Thank you, Madame Chair, Paul Merski with the 
Independent Community Bankers of America. We represent over 
5,000 community-based banks around the Nation in all 50 states. 
A number of our community banks are the No. 1 SBA lenders in 
their state.
    First of all, we would like to see at least a $12 to $13 
billion program funding level. Based on our projections for the 
next 12 months, we are looking at $12 to $13 billion in SBA 
7(a) loan volume demand. The $9.3 billion earmarked in the 
budget is very inadequate for the demand that our bankers are 
seeing for the loan program.
    In surveying our community bankers on some of the problems 
they had with SBA loan programs last year, when the budget 
funding was in jeopardy and the SBA quickly put in a loan cap 
amount, decreasing to $500,000 the loan limit amount, we heard 
from a number of our bankers that a number of their loans that 
were in process had fallen through. That is unfortunate because 
that was jobs that were not created and business that was not 
created. It was unfortunate that the SBA had so quickly put in 
that loan cap without fair warning to the bankers who were in 
the process of processing SBA loans over $500,000, and were 
unable to complete those loans.
    So we are hoping that the budget funding would be adequate 
enough so that rationing of loans would not be put in place.
    Also, the fee structure. The most sensitive thing for the 
community banker to do SBA lending is the fees that are 
associated with that. We would like to see the current fee 
structure, that was reduced a couple of years back now, kept in 
place. Any slight increase in fees, you are going to see a 
quick drop off in the amount of SBA lending that our bankers 
will do. It is a very marginally profitable activity for them 
now and if the fees go up even slightly, I think they will be 
dropping off their SBA business.
    Another concern that our bankers have expressed and that we 
hope can be addressed is the fact that the SBA guarantee is 
often not a guarantee. We have had a number of our bankers 
complain that when a loan went bad for various reasons and they 
went to the SBA and said, ``Well, we would like to see our 
guarantee in effect now'', and the SBA came back and said, ``It 
is not really appropriate that we give you the full guarantee 
or any of the guarantee.''
    That has, frankly, caused a large number of our community 
bankers to completely drop out of the program because they 
cannot take the risk with the low margins they make on these 
loans that the guarantee will not be there from the SBA.
    They were also disappointed in the treatment that they 
received from the SBA on these debates over what the guarantee 
should be on particular loans.
    Finally, we are also concerned with the quick action the 
SBA had taken on allowing the tax-exempt credit unions into the 
program. There was no proper administrative procedures action 
taken for a radical change in that program. We are somewhat 
concerned that the default rate on these loans might be 
impacted as the credit unions, who have little or no experience 
in commercial lending, and in fact are limited by the banking 
laws from expanding into commercial lending, enter these 
programs.
    We would request that a separate database, or at least 
separate information, is kept on the default rate for credit 
union lending activities versus the participants in the program 
as of now.
    Finally, one of the other complaints we have heard from our 
bankers when we surveyed them is what has been mentioned here 
several times already as the access to the Preferred Lender 
Program and the complications of being determined as a 
preferred lender. Many of our bankers have been in the lending 
business for over 100 years and still have a difficult time of 
convincing the SBA to get them up and running in the Preferred 
Lender Program. A lot of work needs to be done there to make 
that easier and quicker.
    If you are not in the Preferred Lending Program, it is 
almost impossible to compete with other lenders who can offer a 
loan in 48 hours when it would take weeks for you to get your 
SBA loan if you are not in the Preferred Lender Program. Those 
are some of the suggested changes we would like the Committee 
to look at.
    Thank you.
    Chair Snowe. Thank you very much, Paul.
    Mr. Feldmann. Thank you, Senator.
    I am Greg Feldmann. I am with Gryphon Capital Advisors 
based in Roanoke, Virginia. We are in the business of advising 
and helping small- and medium-sized businesses access capital, 
both equity and debt.
    We just wanted to share our experience today over the last 
6- or 8-year period. The problems that small businesses have, 
in terms of accessing capital through the banking system 
generally, and some of the constraints that we are seeing, as 
well as comment on--this would probably fall under the 
innovations or other recommendations category--to encourage the 
Committee to perhaps authorize the SBA to provide a limited 
form of credit enhancement, so that business loans could be 
securitized and create a capital markets solution for having 
capital flow into small businesses.
    The 7(a) program is a good program. We think that there 
have been improvements made over time. What we are seeing 
structurally, within the banking community with consolidation, 
is we have fewer outlets for our type of businesses to go and 
seek capital. The community banks that we interface with, and 
we have polled over 60 of them in the western Virginia and 
North Carolina area principally, are actually fighting a 
funding problem. Attracting core deposits has become a problem 
and they are hitting against walls, in terms of being actually 
able to fund loans.
    They are also obviously facing a lot of increased 
competition from larger banks, securities firms, et cetera. The 
deposit-to-loan ratio--and we have prepared a little piece for 
the record here--most of these banks are at 40-year highs.
    [The information follows:]



    
    
    Mr. Feldmann. So it is not just a matter of having the 
dollars appropriated, but it is actually having the monies 
available in the banks, from a liquidity standpoint, to be able 
to fund the loans.
    We think there is a role that the SBA could play in 
providing, as a complement to the 7(a) program, a limited form 
of guarantee to allow poolers and aggregators of small business 
loans to purchase those loans from the community banking 
system, sell those into the capital markets, and over a period 
of time have business loan category become much like the asset-
backed categories of mortgages and automobile loans, et cetera, 
that are prevalent in today's market.
    We wanted to simply come on record today and encourage, in 
this reauthorization process, that the Committee look at this 
as a means for the SBA to help facilitate funding for small 
business in a different sort of way than just the 7(a) program.
    Chair Snowe. Have you ever considered that, Ron?
    Mr. Bew. Yes. I am from Virginia and people will think I 
put Greg up to this. I do not know Greg.
    But that is what we mentioned in the budget about what we 
are calling pooling. We have explored it. We do not have 
anything definite, but the concept was obviously to provide 
more capital for small business outside of the 7(a) program. If 
the SBA could use its guarantee for a pool of loans, it would 
free up the banks to liquefy their assets and then reload, so 
to speak, and make more business loans.
    So yes, we are looking at it because it would be good for 
small business.
    Ms. Forbes. When you were looking at it, were you 
considering this in addition to fully finding the 7(a) program?
    Mr. Bew. It would be additional, yes. Definitely 
additional, not to supplant or replace the 7(a).
    Chair Snowe. Doug.
    Mr. Criscitello. That is a good segue into my comments.
    I am Doug Criscitello from J.P. Morgan Chase. We are the 
parent company of Colson Services Corp., which is the fiscal 
and transfer agent for SBA for loans that are sold on the 
secondary market.
    I think it is important to point out the importance of the 
secondary market here. As Mr. Bew just referred, a secondary 
market allows a lender to take a loan that has been made, sell 
it, generate additional liquidity, and make additional loans. 
That cycle goes on and on. The existence of a very fluid 
secondary market is critical to that equation.
    Go back in time 20 years to when there was no formal 
structure in place for a secondary market for 7(a) loans. It 
was a very inefficient and cumbersome process to get rid of 
loans that were on your books. The Congress stepped in in 1984 
and passed the Secondary Market Improvement Act. SBA quickly 
implemented that Act, hired Colson Services Corp. to serve as 
the fiscal and transfer agent. Over time, the process has 
become more and more efficient. I would really point to it as a 
model public/private partnership in that it is important to 
know that we have a very active fluid secondary market and the 
cost to taxpayers over the last 17 years has been zero. It is a 
partnership that has worked extremely well.
    I would like to commend the SBA for a fine job it has done 
over the years.
    Chair Snowe. We appreciate, as I am sure they do, your 
comments.
    We want to move on to the Microloan Program. Next will be 
Tony, David, and Michael. You can make three quick comments and 
then we will move on to the Microloan Program. Then you can 
come back to anything else after I leave, however, I want to 
get your comments in.
    Mr. Wilkinson. I just want to touch on a couple of items 
that Ron and some of the others have talked about.
    We went through a period in the 1990s of a very good 
economy where lenders were making loans, we call it fringe 
loans, without an SBA guarantee.
    History changed on 9/11. Lenders pulled in their credit 
horns. Borrowers who were on the fringe now found themselves 
being put into the 7(a) program. We think that the history that 
is relevant is what has happened since 9/11 and that we are 
going to continue to see the kinds of loan volume that we saw 
last year.
    Yes, we did $9.3 billion, $9.4 billion in the 1990s, but 
this is a new day. We are going to continue to see the higher 
loan volumes and hope we can find a way to fund those loans.
    Second, Mr. Bew made a comment that this was really a job 
creation program. There is nothing in the Small Business Act 
that says this is a job creation program. This is a long-term 
credit program for small business. There are businesses out 
there, in particular manufacturers, who use the 7(a) program to 
buy specialty equipment that makes them much more efficient, 
and is critical to their operations. It is not only job 
creation, it is really a long-term capital program for small 
business.
    I wanted to echo the comment that Mr. Byrnes made about the 
Express Program. That really is one of the highlights of the 
Agency. They have found a new way to get the large banks back 
in the program by SBA Express, and they have really done a 
masterful job refining that program and getting it where it 
works.
    The one issue we have is that it appeared, going through 
the last fiscal year, that they were trying to use the Express 
Program to replace the existing 7(a) program. That is where we 
would be at great odds, doing only Express loans at the expense 
of putting other loans aside.
    We fully support keeping the fees the same. If you go back 
a few years, and it is part of the subsidy issue that we 
touched on just briefly. The fees that were required to be 
charged to borrowers and lenders were excessive. It was done 
through the subsidy calculation, and well over $1 billion has 
been sent to Treasury, taken out of the pockets of borrowers 
and lenders, that could have been used in their business 
operations or for other loan incentives.
    Some lenders finally figured out what was happening to 
them, and that they really were not making a profit in this 
program and they left the program, including a lender who was 
the largest volume lender in the country, and got out of the 
program.
    At that point in time, we started working with Senator Bond 
and Senator Kerry saying fees have got to come down. If they do 
not fix the subsidy rate, that is one issue. We have got to get 
the fees down so we will keep lenders in the program to deliver 
it. The fees came down, lenders are coming back to the program.
    So it will be very important that we keep those fees and do 
not allow that change to sunset. Thank you.
    Chair Snowe. Tony, in talking about the explosive growth in 
the 7(a) loans, and what you are recommending, do you see that 
as a trend or an aberration? In this last year, because you 
took a 3-year average; is that correct?
    Mr. Wilkinson. He used a 3-year average in his daily loan 
volume. What we are seeing is a spike post-9/11.
    Chair Snowe. Do you see that as a trend? Do you think that 
is sustainable?
    Mr. Wilkinson. I think that the days of $9 billion in 7(a) 
lending are over. We are going to see higher levels, especially 
if--again, you look at the volume in the Express Program, the 
big banks are finding that a great program, they are coming on 
board. The loan cap is now gone.
    We would have had higher volume in the first 6 months of 
this fiscal year were there not a $500,000 loan cap. Where the 
next cycle is, where the times are good and the lenders are 
making more loans absent the guarantee, I do not know when that 
period is.
    However, in the near future, we are going to see higher 
loan volumes.
    Chair Snowe. Thank you. I would like to call on Davi 
D'Agostino from GAO.
    Ms. D'Agostino. Thank you. I am very pleased to be here 
this morning to discuss GAO's work on SBA's 7(a) preferred 
lender oversight.
    Why is it so important for SBA to have a credible preferred 
lender oversight program? First of all, preferred lenders 
approved nearly $7 billion in Government guaranteed 7(a) loans 
in fiscal year 2002 alone with full approval authorities 
delegated by SBA. This amounts to significant exposure for the 
taxpayer.
    The preferred lenders that are banks are overseen by bank 
regulators whose main focus is not on the quality of Government 
guaranteed 7(a) loans or their appropriateness for the 7(a) 
program mission goals.
    The other preferred lenders, the SBLCs who we have heard 
from today, are not otherwise regulated or examined. The SBA 
did contract with Farm Credit Administration to examine the 
SBLCs in response to our 1998 recommendation.
    Strong oversight is needed to maintain the integrity of the 
7(a) program in meeting its mission to provide credit to those 
who cannot get it elsewhere.
    What do we find in our work? SBA certainly has made a 
tremendous amount of progress since our 1998 report when there 
was virtually no lender oversight. Still, we identified several 
aspects of the program that do need some improvement.
    The program does not adequately focus on the 7(a) portfolio 
risk at both bank lenders and the SBLCs. For example, it was 
optional to evaluate financial risk in preferred lender 
oversight reviews at the time of our work.
    Preferred lender reviews have also been cursory checklist 
file reviews and do not qualitatively evaluate or test lender 
decisions on eligibility, for example, how they use the credit 
elsewhere test and apply it, and the credit worthiness.
    Also, SBA standards for the credit elsewhere test are very 
broad and variable, making it difficult to assess lender 
decisions about eligibility as they are currently written.
    The SBA has also been slow to respond to important Farm 
Credit Administration recommendations in their examinations 
about the program and even specific SBLCs.
    For example, Farm Credit has recommended that the SBA 
better define for SBLCs what constitutes a delinquent loan, and 
also what constitutes adequate capital for capital requirements 
purposes. That is how much capital an SBLC should hold against 
the risk on its books. This would obviously greatly affect the 
amount of taxpayer exposure to higher SBA 7(a) costs in the 
long run.
    SBA also had not developed enforcement policies and 
procedures to No. 1, deal with the safety and soundness 
problems at SBLCs and in bank lenders' 7(a) portfolios; or to 
No. 2, describe the grounds for suspending or revoking 
preferred lender status.
    Finally, we found that the SBA's Office of Lender Oversight 
is within the Office of Capital Access, which is a program 
promotion function, which also recruits lenders to participate 
in the 7(a) program. This raises potential conflicts of 
interest and independence concerns when you are doing oversight 
and evaluation. They should be separated. The promotion and 
oversight should be separated.
    What did we recommend and what was SBA's position? We 
recommended improvements to the preferred lender oversight 
program in all of the areas I mentioned, including the need to 
separate lender oversight functions and responsibilities from 
the Office of Capital Access. It is not clear in all cases that 
the SBA fully responded to all of our recommendations, but the 
SBA seemed to agree with part or all of the recommendations to 
improve its assessments of the lenders and to separate lender 
oversight from OCA. But the SBA said it was working to expand 
its enforcement policies and procedures.
    I also wanted to mention we have related ongoing work, 
looking at the new 7(a) credit subsidy model that the 
Administration and the SBA came up with at the request of 
Senator Kerry and the House Committee on Small Business.
    We are also looking at SBA's transformation initiatives.
    [The prepared statement of Ms. D'Agostino follows:]



    
    
    Chair Snowe. Thank you very much. I am going to look at 
some of the issues that you have raised. Any response, Ron, at 
this point to any of those issues?
    Mr. Bew. Yes, I am aware of the report and actually one of 
the four goals that the Administrator set for me was to 
increase the effectiveness or role of lender oversight when I 
came here, and we have increased staff there. We have, this 
month, just awarded a contract through Fed Sim for the loan 
monitoring system. That should be up and running in about 6 
months. That will help us address these problems on lenders, 
loan programs, products, regions, whatever. It will really help 
us take an off-the-shelf product from Dunn and Bradstreet and 
have a more effective oversight policy.
    I think we have some items in the leg package for the 
enforcement policy. We have taken some of those 
recommendations, most of them, and are addressing them.
    Chair Snowe. Thank you, and we will follow up as well.
    Can you tell me, on some of the recommendations here of 
NAGGL, about centralizing the certification process. Would that 
complicate oversight at all?
    Ms. D'Agostino. Actually, I do not think so. It was also 
part of our report. We discussed the same issues that NAGGL and 
some of the banks have brought up about the unevenness that we 
heard from the lenders across district offices and how it would 
help them if there was more consistency across.
    Chair Snowe. Thank you.
    Let us move on to the Microloan Program. Who would like to 
begin on that score? Anything? All satisfied?
    Go right ahead, Alan.
    Mr. Corbet. Thank you, Madame Chair. My name is Alan Corbet 
and I am the Executive Director of Go Connection, which is a 
small non-profit in Kansas City, Missouri. We service a 
geographic area in Kansas and Missouri for the SBA's Microloan 
Program as well as the SBA's Women's Business Center.
    Today I am here to add support to the funding needs of the 
SBA Microloan Program specifically. We must receive the funding 
levels necessary to support this program.
    We are requesting $25 million in technical assistance 
grants and a program level of $25 million in loan funds for 
this program for fiscal year 2004, which supports AEO's 
recommendations to the Committee. The President's budget has 
only suggested $15 million for the technical assistance side of 
that program. I want to speak directly to you about the 
technical assistance grants today.
    For the past 2 years, the approved budgets have reduced the 
technical assistance grants. If this continues, the SBA 
Microloan intermediaries will suffer and may eventually go out 
of business. This is not just about a non-profit going away.
    We, as a group across the nation, owe the Federal 
Government approximately $96 million today on the money that we 
have borrowed for the benefit of our microborrowers. If we are 
not in existence, this amount represents a potential loss to 
the Government. The only way to protect that from happening is 
to continue to provide technical assistance, as we do, to the 
small business owners. These are the ones that we have helped 
out to get in business to begin with.
    We would not be making these loans without that assistance 
in place. These are high risk businesses. In fact, these are 
non-bankable businesses. The banks will not touch these, and I 
do not blame them. They do not have the systems in place and 
they are put together to be profit making and they have returns 
to their shareholders that they are responsible for.
    This program was created specifically to help these high 
risk businesses to get off the ground. Without the one-on-one 
business counseling that we provide, they will not exist and 
they will go out of business.
    The SBA guidelines provide that grants will be made to 
intermediaries of up to 25 percent of the borrowings that we 
receive from the SBA. This year, fiscal year 2003, we are only 
receiving 15 percent of that grant. Last year it was 15 
percent, and prior to that was 25 percent.
    To give you an example, my organization roughly owes the 
SBA about $1 million and we received $250,000 2 years ago in 
technical assistance matching grants. This year our grant of 
$150,000 is a huge reduction to us. To continue the growth that 
we need to continue, it makes it very difficult for us to 
manage those accounts that we have on the books.
    Based on the suggested technical assistance grants and this 
year's President's budget for the fiscal year 2004 
recommendation, our grant would next year go from 15 down to 11 
percent. This is an extremely critical reduction in the funds 
that we need to monitor and assist these high risk businesses 
that SBA has encouraged us to help.
    If the funding levels in the President's budget is enacted, 
the future of the Microloan Program is in jeopardy.
    As you indicated in your comments earlier, we have over the 
last 4 years, helped create 34,000 jobs. We handle a market 
that no other SBA program will handle. There has been some 
suggestion, and I guess my comments or questions today to you, 
Mr. Bew, are that there have been some suggestions to us that 
there is a possibility that the Community Express Program, 
which is a new program for the SBA, may be an alternative that 
is cheaper to the taxpayers in order to provide that same 
dollar amount of loans. That may be true, but it is completely 
a different borrower. Even the Community Express Program does 
not go to the borrowers that we assist.
    I also understand that there is a need to consolidate 
technical assistance or grant programs within the SBA and try 
to get those two--there are several different organizations 
from the Women's Business Center, Small Business Development 
Centers, et cetera, SCORE, as well as the Microloan Program, 
that provides technical assistance. I want to stress the point 
that, in consolidating these dollars with others of those 
resource programs, the concern about that is those programs do 
not have the $100 million at risk that we do to the SBA. When 
you do not owe the money, you will not help the borrower as 
heavily as we will.
    Those are just a couple of my comments that, if you could 
respond too, I would appreciate it.
    Mr. Bew. As far as the Microloan Program, yes, it appears 
that TA is down to $17.5 million, I believe, last year, to $15 
million. We are doing a couple of things to make that whole 
program work more efficiently. One is to give you--it is in our 
leg package--the flexibility on how you allocate the 25 percent 
TA, between the old and the new borrowers coming online.
    During the course of the year we instituted a performance 
standard for microlenders. You had to produce four loans per 
year. Some of the microlenders in the program were not 
producing as many as four loans, and I think they will not draw 
the TA which will let us reload that and just use the amounts 
of money in the Administration's budget more effectively.
    Those two items will help us on the microloan. That is our 
position.
    Chair Snowe. Blake.
    Mr. Brown. Madame Chair, thank you for inviting us today.
    Chair Snowe. The Maine contingency here.
    Mr. Brown. Yes, the Maine contingency. We travel together.
    Again, I appreciate your inviting us today.
    I am Blake Brown, Chief Financial Officer at Coastal 
Enterprises. We are a community development corporation located 
in the great State of Maine.
    I wanted to personally thank you for all that you have done 
for our organization, with all of the SBA programs that we use. 
That goes from the Microloan Program to the SBA 504 Program 
through the SBDC and the Women's Business Ownership Technical 
Assistance Program.
    I guess my comments will be very brief. I wanted to play 
off of what Michael had said earlier about banks having to turn 
clients down because of various reasons, and they end up going 
to credit cards and they do not get the counseling that they 
need. The whole focus of the Microloan Program is to provide 
that technical assistance to budding entrepreneurs. That is a 
key link. The financing and TA are a critical piece.
    I really think the SBA has a jewel in the Microloan 
Program. I think the major issue to us is continuing funding 
for the program.
    Over the past 8 years, we have borrowed about $2.8 million 
from the SBA and have done about $3.6 million of loans, with an 
average size loan of about $13,000, well below what a bank 
would typically be looking for. So I think it is really a 
critical program.
    I think Steve would probably concur that a number of our 
customers have eventually graduated to the bank and we have 
actually done joint deals. The banks view this program as very 
beneficial.
    A couple of comments. Again, the funding is an issue. CEI, 
over the last 3 years, have actually had a decline in volume 
because of lack of funding. Although recently we just received 
an allocation, which we thank the SBA for gratefully. But 
basically we pretty much had to slow things down for a good 9 
months, and actually elected to borrow money without TA, which 
we think is not a good thing for us or any of the microloan 
providers. The TA component is extremely important to the 
field.
    Again, funding level is key. Just a couple of minor points, 
we would like to see more uniformity in terms of interest rate. 
That is driven by a number of factors. No. 1, the cost of funds 
to the microlenders. It would be a much simpler process if we 
could come up with a mechanism that blended loans. For 
instance, we have a series of five loans that range from 
interest rates of 1.25 points to 6.25 points, a fairly broad 
range. We are capped in terms of what money we can put out to 
borrowers.
    In the marketplace, we are showing a pretty broad range of 
rate. We would like to see a consistency in rate. We think that 
it makes more of a uniform program to the customer.
    In terms of eligibility for the Microloan Program, I think 
we would like to see flexibility in terms of eligibility of 
organizations apply for funding, and really looking to staff 
experience and not necessarily organizational-wide experience. 
Although, again, I think there should be flexibility there.
    Again, I think Alan touched on the flexibility of TA and 
how that gets spent, and I think the SBA concurs with that.
    I think those are my key points. Actually, the last one 
would be eliminating State funding restrictions, although I 
think the SBA has shown some flexibility there, the way the 
funds get allocated among States. I think they have been 
flexible with us in terms of receiving money. But I think I 
would like to see that incorporated in the laws.
    I think that is all that I have. I have written testimony 
for you.
    Chair Snowe. Thank you Blake, and you can submit the 
entirety of your testimony. I appreciate those comments.
    [The prepared statement of Mr. Brown follows:]



    
    
    Mr. Brown. If we have time, I would like to explore the 
possibility of creating another lending program within the SBA. 
We think there is a gap in funding from $35,000 to $200,000 
direct lending, that we think could be a beneficial program for 
the SBA. I really do not want to take up more time with this, 
but we would love to explore that with you and the SBA.
    Chair Snowe. Great. We will follow up on that, as well.
    I am delighted to welcome here today my colleague, Senator 
Coleman from Minnesota, who is not only a new member of the 
United States Senate, but also a new member of this Committee. 
We certainly want to welcome you. We know that he is going to 
provide invaluable insight and perspective on this Committee. 
He is also here to welcome one of his constituents, who is Mary 
Matthews from Virginia, Minnesota.
    Senator Coleman.

OPENING STATEMENT OF NORM COLEMAN, A UNITED STATES SENATOR FROM 
                           MINNESOTA

    Senator Coleman. Thank you, Madame Chair.
    I should note, a brief aside, I just came from the Senate 
Floor, in which I had an opportunity to display the Minnesota 
Golden Gopher tie that Senator Gregg is going to be wearing 
after Minnesota beat New Hampshire.
    I say that because I see the Maine contingent is here, and 
last year, of course, Minnesota beat Maine in the finals of the 
NCAA hockey championship. So I have the tie right here.
    Mary, being from the Iron Range, that is really kind of the 
heart of a strong Minnesota hockey country, so it all fits 
together, Madame Chair.
    I am pleased to see that Mary is here today. She is 
President of Northeast Entrepreneur Fund. It is a community 
development institution based on Iron Range.
    The Iron Range, for those not familiar with it, is up in 
northern Minnesota. It is a place where we dug out the taconite 
ore that built the battleships and produced the steel that won 
two world wars. The reality is that we face some tough times up 
on the range. Many of the largest taconite producing operations 
have closed.
    Clearly, the future of the Iron Range, the future of the 
towns, the Virginias and the Hibbings and the Chisholms, is 
tied to small business being vibrant and vital. That is why 
what we are doing here today is so important.
    I would note that I was an urban mayor for 8 years and had 
great familiarity with some of the microloan concepts and 
programs in an urban setting. It is really important to have 
Mary here today representing a more rural perspective and to 
highlight the importance of this program.
    I think it is very fair to say that the SBA Microloan 
Program is actually essential to Northeast Entrepreneur Fund's 
mission. It needs to be there. They rely on the Microloan 
Program to help those who want to learn how to start a business 
or to grow an existing business.
    I understand that through their work they have helped start 
or expand over 625 businesses and have created and retained 
over 1,400 jobs in the region. That is a big deal in a region 
that has seen significant job loss, this is really, really 
important.
    I think that sometimes the impact the microbusinesses in 
our economy is often overlooked. For instance, in Minnesota, 
companies with four or fewer employees employ over 447,000 
workers, which is over 13 percent of the total workforce in the 
state. These are the businesses that directly benefit from the 
Microloan Program.
    So, again, as a former mayor who understood the importance 
in some of my neighborhoods that we were struggling to preserve 
and revitalize, creating opportunity oftentimes for new 
Americans and new immigrants, this program is essential. But it 
is not just an urban program, it is a rural program.
    I want to thank Mary and all the other participants for 
being here, and I look forward to being very much involved in 
the work of this Subcommittee.
    Chair Snowe. Thank you very much, Senator Coleman. We 
appreciate your comments.
    Mary, with that introduction----
    Ms. Matthews. Thank you, Senator Snowe, for the invitation. 
Thank you, Senator Coleman, for the introduction. It is a 
pleasure to be here today.
    The Northeast Entrepreneur Fund is a 14-year-old 
microenterprise and small business development organization 
serving 10 counties in northeastern Minnesota and one county in 
northwestern Wisconsin. Our mission is to create a spirit of 
entrepreneurship, help people start and grow small businesses 
in a region of the country that is not known for its 
entrepreneurial spirit.
    Senator Coleman talked about the economic dislocation that 
our region has undergone, and we see a continued, growing 
interest in small business development.
    The Entrepreneur Fund, and particularly the Microloan 
Program, serves a specific niche in the marketplace, and it is 
a niche that is not met by banks. It is a niche that is not met 
by the Small Business Development Centers and other technical 
assistance providers. That provision of capital through the 
Microloan Program, as well as the technical assistance, is 
really a critical link.
    To describe that, about 6 weeks ago, our staff looked at 
our portfolio. We are probably an average size microloan 
program. We have made 145 loans since 1992 for a total of $1.2 
million. Our average loan size is about $8,200.
    We have 33 loans in our portfolio. For 85 percent of those 
loans, at the time when they were made, the business had little 
or no equity to invest in the business. Two-thirds did not meet 
bank credit criteria. We have just started collecting credit 
scores, and of the credit scores that we have been collecting, 
the highest is 601, the average is about 550. We are actually 
looking at a loan right now that is below 500. So I am anxious 
to hear all of you bankers respond to that.
    Ninety percent of these businesses were startups. These 
loans went to startups. Most of them had little or no business 
experience. Fifty-one percent had no experience in the business 
they were starting. Would any of you bankers want that 
portfolio?
    Let me tell you how it is performing. The delinquency rate 
at the end of last month, at 30 days, was 2.1 percent. Our 
charge-off rate last year was 3 percent. We have historically 
charged off about 10 percent of those loans. Early on we were 
not lenders. As we learned how to be lenders, the performance 
was not as good at the beginning. It is continuing to improve.
    So what makes the difference? The SBA's technical 
assistance grants tied to the loans invest in business success 
and it makes it possible for people in a region who have not 
been starting businesses to start and grow businesses.
    Some of them employ themselves. Some over time begin to 
employ additional employees. Some of those businesses will 
grow.
    I can think of a number of examples where initially the 
business served a local market. As they have grown confident, 
their product lines of expanded. We have one business that has 
been a service business for 12 years and is just starting a 
second business. It is a manufacturing business that has a 
regional multistate market, potentially a national market.
    This is somebody who is employing all of her neighbors, who 
works out of her garage, and maybe need to move into a new 
building.
    These businesses grow and they have great potential. 
However, it is the tie of the training and technical assistance 
funding that we get from the SBA that makes this kind of 
performance and this kind of success possible.
    So Alan provided the numbers of what the industry request 
is, and also what the impact is going to be if the 
administration's budget for $15 million is enacted next year.
    There are already organizations leaving the program because 
there are not enough funds. You cannot separate the two. There 
is no banker in this room that would delegate monitoring their 
portfolio, particularly one that I described, to another 
organization. We cannot give the monitoring and the follow-up 
to the SBDC. We need to have the funding for both sides of the 
program.
    Part of the difficulty for the SBA is the SBA is divided 
into two sections, capital access and entrepreneurial training. 
So this is housed within the capital access side of the 
program, and there is kind of a disconnect. It is sort of an 
odd, unique duck, within the SBA environment. Whatever you can 
do to support the program, its continued growth, and ongoing 
funding is critical. Thank you.
    Chair Snowe. Thank you, very much. That is very helpful.
    Zach.
    Mr. Gast. Thank you, Madame Chair.
    I think I would like to begin by thanking the SBA for 
including in their legislation package some changes that were 
actually brought forth by Senator Kerry and yourself and passed 
last year in the Senate. I think those are going to be some 
excellent changes in terms of flexibility, and we would 
wholeheartedly support those and thank you for working with 
industry to come up with those changes.
    I would then like to turn to a little bit bigger picture. 
It is easy to focus on the funding and the authorization. Ron 
Bew cited a statistic that loans of $14,000 are the best job 
creators. The average loan size in the Microloan Program last 
year was $14,000.
    Beyond that we have more statistics. We have statistics 
that estimate that the return on investment for the Federal 
Government for one dollar invested in microenterprise was $2.06 
to $2.72 in either reduced federal expenses or increased 
federal revenue only. We are just looking at federal. So while 
you can look at $15 million as quite a bit of money, that is 
hard to say in the context of the Federal budget, that actually 
is quite little. When it potentially is returning over two 
dollars for every dollar that you put in, I would say it is a 
very worthwhile investment.
    Now I would like to focus on the Microloan Program. I think 
it is a program that is going places and we need to make sure 
that happens. Nearly one-sixth of all the loans that were made 
in the program's history were made in fiscal year 2002--and 
this is a 12-year-old program. It is certainly going places. 
The quantity of the organizations participating is always 
improving, and I think we can continue that.
    But I think it is been highlighted that the technical 
assistance is key. These are businesses that need a little bit 
of help but they can go a lot of places. We just asked for 
success. We wanted to hear from microloan intermediaries and 
others. We heard stories of business that started with $10,000 
loans in the Microloan Program and now have $13 million in 
revenue. We heard from a defense manufacturing company that 
started with a $25,000 microloan and is now doing more than $3 
million in business for defense manufacturing.
    I would like to point to those and just thank you for the 
opportunity to be here today and to present the information.
    Chair Snowe. Thank you. Alan, and then Steve.
    Mr. Corbet. I would just like to say that my position has 
been that I am a real champion of small business and of small 
business. My background is 22 years in banking, but I spent a 
lot of that time as a supervisory investigator for the 
Resolution Trust Corporation and that disaster that we had to 
deal with several years ago.
    Getting back to helping the very small businesses has been 
real exciting for me. I have been doing this for 6 years, but 
no one ever listens to us. I have my own funding problems in my 
own community because venture capital is sexy. So people want 
to talk about that. They do not want to talk about the little 
$10,000 loan where we help someone get a small cafe started.
    I continually struggle to have the people with the money 
hear about us. The same thing goes to the Federal Government.
    So I guess my statement is that I ask you to help send our 
message to the right Budget Committees and Appropriation 
Committees, that the funding is provided as we have requested. 
As Zach indicated, $15 million is pocket change in the Federal 
budget. So when we only ask for a $10 million increase to 
restore the previous years' cuts, when it gets to the Committee 
process and trying to allocate those monies, it becomes very 
difficult to get those earmarked to our program.
    I implore you to help the very, very small business owner 
of America to get the funding that we need to help them out.
    Chair Snowe. I know exactly what you are saying. You can 
certainly have a greater bang for your buck with these types of 
programs, especially at a time in which we have a declining 
economy. Small business is the engine that drives the economy, 
without question.
    It seems counterproductive not to be investing more in 
these programs, because it really does maximize the effect. The 
only job creation that is occurring is from small business. It 
really does not make sense to be ratcheting back these programs 
at a time in which we need job creation.
    To me it really is staggering, when I look at these 
numbers, the respective programs within SBA and to see the 
thousands of jobs that it ultimately generates.
    Essentially, I think those of us serving on the Committee 
and maybe some others, and obviously all of you, understand. 
However, I do not think people can fully appreciate, and even I 
did not until I was looking at these numbers, the extent to 
which these programs become a great catalyst for job creation 
in our society. They really do produce.
    I think we really have to do more to advance these 
programs. You are right, for a small amount of money we can get 
so much from them. So I would like to do more in that regard, 
without question.
    Steve, and then I have to go. I do not know if I will leave 
it with Norm or just leave it with the staff to continue the 
discussion for the rest, because I want to make sure you all 
have the opportunity to fully participate in any other aspect. 
I am sorry that I have to depart.
    Senator Coleman. I can stay for a little bit.
    Chair Snowe. Great, that would be terrific.
    Mr. Byrnes. I would just like to throw my support behind 
the Microloan Program. It is administered through CEI in the 
State of Maine.
    Over the last 6 months we have had two specific 
transactions. Both were women-owned businesses that were 
acquiring a retail shoe outlet and a restaurant. In both of 
those transactions, there were not sufficient proceeds after 
the bank loan and the equity contribution from the women-owned 
business owner. We had to turn to CEI as gap financing to 
provide a microloan.
    I can say with complete honesty that if the microloan was 
not there to provide that gap financing, both of those 
transactions would not have happened. Many times at the 12th 
hour, those microlenders can turn these transactions around in 
a very short period of time. Because you have situations that 
no one can anticipate, such as a light evaluation on the assets 
or an appraisal that comes in light, and you have a gap that is 
created in the 12th hour.
    The CDCs and the CDFIs do a great job of providing that gap 
financing in critical situations like that. It helps move that 
30 percent number for women-owned businesses up to an even 
higher level.
    Chair Snowe. Thank you.
    I just want to express my appreciation to all of you for 
the thoughtfulness that you have brought to the table with 
respect to your recommendations, and I can assure you we are 
going to follow up on each and every recommendation that has 
been presented here today, and to vet them further as we 
proceed to reauthorization, working with Senator Kerry. We have 
a great working relationship, and I know we will continue to do 
that. With members like Senator Coleman on the Committee we 
hope to have a very good reauthorization process that I think 
everybody can be proud of.
    I just want to thank each and every one of you. All of your 
testimonies will be submitted for the record in their entirety.
    Thank you, Senator Coleman.
    Senator Coleman. Thanks and I will take it from here, if 
there are others that still wanted to speak.
    Ms. Matthews. Thank you, Senator Snowe, again for the 
opportunity. Thank you, Senator Coleman.
    In fiscal year 2003, that is our current budget, right? The 
$15 million that has been appropriated for the SBA Microloan 
Program means that there are limited technical assistance 
grants for new loan capital. Blake referenced the fact that CEI 
has just taken on a loan with limited technical assistance to 
support preparing borrowers to access financing. So that is 
going to limit the ability to grow the program.
    We created some projections about what the technical 
assistance grants need to be between now and 2000 and fiscal 
year 2007. In order to continue to grow the program and 
continue to serve new loans, the amount of appropriation for 
the technical assistance grants needs to increase because we 
are bringing on new loans. We are also supporting and providing 
ongoing assistance to past loans.
    [The information follows:]


    
    
    Ms. Matthews. The other thing that I think is critical to 
note is that the program has been authorized for $70 million in 
technical assistance funds and $100 million a year in loan 
capital. With these requests, we are still way below what has 
been requested for the program.
    It is also not available across the country. It is 
available in about two-thirds of Minnesota, the central piece 
of Minnesota is not covered. There are a number of pockets 
throughout the country where there is not yet an SBA Microloan 
Program. So in order to have this available across the country 
to grow small businesses, we are going to need to add 
additional intermediaries and, as a result, additional funding.
    Senator Coleman. Mary, may I ask you, or perhaps someone 
from the SBA, what is the reason or the basis for, let us say 
in Minnesota, the areas in which there is not coverage? What is 
the reason for that?
    Ms. Matthews. There are actually six intermediaries in 
Minnesota, two in the metro area and four in rural Minnesota. 
There needs to be an organization that is taking on the 
program. The four outer corners of the State are covered by 
intermediaries and then there are two in the metro area.
    There have not been organizations that have requested the 
program as of yet.
    Mr. Bew. I think I can respond a little bit to that. I 
believe you are aware of the leg package where we are asking 
for flexibility and experience to encourage some other people 
to be microlenders, other entities. Hopefully that will be 
cured, particularly in the rural areas.
    Ms. Matthews. It will not be cured if there are not the 
technical assistance grants to support that.
    Mr. Bew. I hear that. I have got the message.
    Ms. Matthews. One of the difficulties that we have had, as 
a matter of fact, is that as funding has been declining, the 
SBA has been bringing in new organizations. So the pot that was 
getting smaller is spread among more people. It makes it more 
and more difficult to work.
    We all look for alternative sources of funding. We all look 
at streamlining our process and making changes that will--while 
not as efficient as the Express Program--hopefully make us more 
efficient. However, we still need more funding in order to 
provide the kind of support that business owners need.
    Senator Coleman. Thank you, Mary.
    Mr. Warren. Senator Coleman, we really appreciate you 
stopping by today.
    We obviously have more time that we can spend on 
microloans, but I think we also do, before we conclude, need to 
go back because I think there were some issues left open on the 
7(a) side of things.
    One question that I wanted to ask Ron, if you could add 
into, and then the group as well, the Administration's proposal 
includes some changes to the amount of experience that a 
microlender would have to have. I was wondering if you could 
comment on a proposal.
    Mr. Bew. I think that is what I was alluding to with Mary, 
that there is an experience requirement--I do not know exact 
details of it--that precludes other entities from joining the 
Microloan Program immediately. I think there are some years of 
experience requirements.
    We are proposing that if entities have people with 
experience that the microlenders need or have, then it would 
accelerate that entity's ability to join the microlending 
program.
    Mr. Warren. I guess the question for us would be has that 
current restriction presented a significant enough bar? Does 
that raise additional issues in terms of having an organization 
with no organizational experience, yet having somebody come 
from another organization that has the 1-year requirement? Is 
that going to create new potentials for problems?
    Mr. Bew. I am not sure about the creation of problems. I do 
not believe so, because the entities that would probably ask to 
be a microlender are already lenders. It could be a 504 lender, 
for instance, and already have experience in the field but just 
do not have that specific microlending experience.
    Mr. Gast. If I could make one comment, there is currently a 
provision in the legislation that asks the SBA to provide 
capacity building services through a grant to a non-profit 
organization that would allow the SBA to bring people up to 
speed very quickly, if people were able to go in and provide 
intensive assistance.
    Up until now, that has not occurred. Obviously, that is 
something the industry would like to see--is the opportunity to 
work with people and bring them up to speed so that we can get 
full coverage across the country.
    Ms. Forbes. That is Senator Snowe's amendment to S. 174, 
the bill that passed the Senate last Congress, right?
    Mr. Gast. Actually, that was separate. There is a provision 
currently in the legislation, and I believe Senator Snowe 
introduced a second provision that would add $1 million for 
that purpose.
    Mr. Corbet. I just had a couple of comments. I guess the 
only comment was the subsidy rate, I know what the rate is. 
What I don't know is how it was derived.
    I would ask the Committee to look into that regarding the 
Microloan Program subsidy rate. Ron, maybe you can explain it. 
It confuses me.
    But I think most specifically, we have seen the subsidy 
rate for the microloan program going up, and I know that is 
what helps decide the President's budget and what they 
allocate. We do not quite understand why it is going up, 
because as far as the loan volume that has been lent to the 
intermediaries, there has been no loss, or maybe a minimal loss 
to the Federal Government in that program, but the rate 
continues to climb each year. Whereas the Disaster Loan 
Program, which has significant defaults, has been declining in 
its subsidy rate.
    I hate to get into this too far, because I do not know 
enough about it except just what the rate says, but I would ask 
the Committee to look into that to see if there is any 
rectification.
    Mr. Warren. Ron, do you want to comment on that?
    Mr. Bew. I think I will leave that to the Chief Financial 
Officer. I am like you, Alan. I was a banker most of my life, 
and I have never heard of subsidy before I came here.
    Ms. Forbes. Can I just clarify one thing? To our knowledge, 
there have been no losses to the Government in this program 
since its inception. Is that still accurate, Ron?
    Mr. Bew. I think there has been a minimal amount of loss.
    Ms. Forbes. So an intermediary----
    Mr. Bew. An intermediary, yes, defaulted.
    Ms. Forbes. Can you submit that to this Committee, so that 
we see it? Because we are not aware of that.
    Mr. Bew. But it is very minor.
    Mr. Schuster. Thank you, Mark.
    I would like to just return to a general discussion of the 
impact of the total SBA loan programs. As we all know, OMB has 
too often taken an annual look at this program. Let me cite an 
example.
    A few years ago a Congressman in my district, on the night 
of his election, said, ``We are going to consolidate and 
eliminate some agencies''. The one he mentioned was SBA.
    I had him come into my office after obtaining from the 
local SBA district a computer printout of every single loan 
made in that district since 1953. This new Congressman spent 
2.5 hours going page by page which was--he could not believe 
all businesses that one time or another in their life had 
received assistance from the SBA.
    I think we, as an industry, the Committees, and the SBA 
need to focus more on the cumulative impact of these programs 
rather than the 1-year snapshot. There is not a story here that 
would not be dramatic 10 years from now.
    As this Congressman, who has become a great supporter of 
SBA, said once, ``If you removed all of the businesses from our 
economy that at one time or another received SBA assistance, it 
would be a major impact on this country's economy''. Somehow we 
have got to get OMB and SBA to focus on that.
    While I am on that, let me just put on the record, we need 
to also recognize that it is the large loans that ``subsidize'' 
a lender's ability to do smaller loans or the Agency's ability 
to do smaller loans. We need to come to grips with that. There 
is no question, but the income generated under the 7(a) Program 
by the borrowers that pay the 3.5\1/2\ percent guarantee fee, 
do help create an environment and a subsidy rate and affordable 
loan program for the smaller ones.
    Then, to just put another hat on, a few years ago the 
Agency had a direct loan program called HAL or Handicap 
Assistance Loan Program. It then was changed to Disabled 
Assistance Program but not funded. I think now it has been 
removed.
    But just so everybody would focus on it, back years ago, 
when there was a HAL Program, I am familiar and on the board of 
an organization that received two HAL loans. Today, they employ 
over 200 people, of which 75 percent are severely disabled 
individuals who prior to this program were wards of the state. 
Their total lifestyle was dependent upon government handouts. 
They are now contributors to society.
    As a point of interest, they were the sole source for every 
M-16 magazine used in the recent war. It is an incredible 
success story. Those are the kinds of things I think SBA and 
the Committee need to focus on, look to the future, and to sell 
people on. SBA is, in fact, the greatest bang for the buck in 
all of Government.
    While we have some minimal disagreements from time to time, 
I too take my hat off to the professionals at SBA.
    Mr. Warren. Thank you. Not seeing any other placards--I am 
sorry, David.
    Mr. Bartram. Thank you very much, Mark.
    I would like to go back to the possible, or what we believe 
to be, a real shortfall for next year. Ron Bew has basically 
stated that the Administration feels comfortable with the 
funding levels for next year. If we did see a trend where 
funding levels are significantly higher than they think for 
this current fiscal year, what would the SBA's position be 
starting next year?
    I would maybe ask it and give you an option, Ron. No. 1, 
would the SBA immediately be forced to put a cap in place as of 
10/1/03? Or, realizing that maybe they had miscalculated, would 
the SBA push or suggest that perhaps additional appropriations 
are required to find an inadequate, or what would basically be 
supported to be inadequate at that time, 2004 budget?
    Mr. Bew. Of course, we think the $9.3 billion is adequate 
and we would just review the situation at that time.
    Mr. Bartram. But what if you are wrong?
    Mr. Bew. We would just review the situation at that time.
    Ms. Forbes. Can I just comment that if it is October or 
later when the situation is determined to be a problem, SBA has 
missed the appropriations cycle. So it would be very hard, 
unless there was another supplemental appropriations request 
coming up, to secure additional appropriations and then if the 
supplemental request were limited to defense, for example, or 
homeland security, it would be very hard to get this kind of 
money onto that bill.
    Mr. Wilkinson. We should have an indication over the next 
few months if we are experiencing the cycle that we have 
experienced for the last 10 years or so, with the second half 
loan volume being bigger. They should have a pretty good 
indication over the next couple of months whether loan volume 
is going to be at a pace higher than what is in the next year's 
budget request.
    Mr. Warren. If I could, before we wrap up, I would like to 
go back to Greg. You have talked a lot about the pooling idea, 
or a few minutes on it. How would that mesh with the current 
7(a) structure?
    Mr. Feldmann. The concept that we have advanced and left 
for the record would be, again, a complement for the 7(a) 
structure as supposed to supplanting it in any way. The idea 
would be to follow the same track that the SBA does with SBICs. 
You could license some pooler/aggregators who could then 
purchase and use a limited, probably second loss position, to 
guarantee from the SBA in order to credit enhance that pool and 
sell it on into the capital markets.
    We think that there would be institutional buyers. We know, 
from talking to community banks, that they would be interested 
in using this as a potential vehicle to address liquidity 
concerns.
    Currently, if you look at the community banks say between 
$100 million and $1 billion in the United States, they are at a 
40-year high in terms of loans versus core deposits. They are 
struggling with funding and keeping up with funding right now, 
and I think probably some other colleagues here can address 
that even better than I could.
    But again, one piece of data that might be interesting to 
this Committee, we have made an estimate in that same segment 
of community banks that there are roughly $100 billion worth of 
real estate-backed small business loans, owner-occupied 
properties and that sort of thing. I think that type of debt 
would lend itself, as an initial block of debt, that could be 
pooled and aggregated and sold onto the market.
    However, we do feel that there is some sort of a credit 
enhancement role to jump start that process, since it is a 
fairly new asset class.
    Mr. Warren. Anyone else want to chime in on that?
    Ms. Forbes. I have a question. When you are talking about a 
credit enhancement role, do you have something in mind? Do you 
have a price that goes with that?
    Mr. Feldmann. Again, conceptually, the idea would be that 
there would be a first level loss reserve that would be created 
at the private level. Then a second level loss reserve that the 
SBA would provide, maybe in the 3 to 5 percent range of the 
pool, something like that.
    But you would go through the private first level loss 
reserve before you would ever hit the second level.
    Ms. Forbes. Would the first level be the same percentage as 
that proposed for SBA's contribution, or would it be a lower 
percentage?
    Mr. Feldmann. It could be the same, or maybe even slightly 
higher. That is something, I think, that would have to get 
structured in the details and more discussion.
    But the idea would be to get a lot more bang for your 
dollar. In the current 7(a) Program, you are providing up to a 
75 percent loan guarantee, whereas I think under this structure 
you could cap out at a much lower percentage of potential loss 
than you would in the 7(a) Program conceptually.
    If you look again on the record, we have kind of outlined a 
little plan that I think a lot of detail would have to be 
fleshed out on. But on page 12 of our presentation that is part 
of our record, we lay that out.
    Ms. Forbes. Can you estimate a cost for that? You are 
proposing some sort of cost.
    Mr. Feldmann. Yes. I think the pooler/managers would charge 
a fee necessary to meet any cost at the SBA for the credit 
enhance. So there would be a wash. There would be no cost to 
the SBA, and that would be the concept.
    Ms. Forbes. There would be no cost to run it, but there 
would be a cost of the credit enhancement; correct?
    Mr. Feldmann. That is right.
    Ms. Forbes. That is what I am trying to ask, what are you 
estimating for that?
    Mr. Feldmann. What I am trying to say is I think the 
pooler/aggregator would charge a fee as they pool those loans 
sufficient to meet any cost that the SBA would have for the 
credit enhancement. So it would wash.
    Mr. Hearne. So it would make this like a zero subsidy type 
of program?
    Ms. Forbes. Somehow you have to have something up front to 
start it, right? Do you have any estimates on that? You can 
submit it for the record.
    Mr. Feldmann. I think that is something that we may want to 
think about offline.
    Ms. Forbes. What I am trying to do is identify the amount 
relative to what is spent on 7(a).
    Mr. Wilkinson. Mark, if I could just comment briefly on the 
pooling concept.
    We have not been briefed, so we do not know the details. 
But I would say that in the past we have looked at various and 
sundry ways to supplement the 7(a) Program and really have not 
found anything that worked. We went, I do not know how many 
years back, we looked at a Government-sponsored enterprise and 
we just could not find a way to make all the pieces of the 
puzzle fit together.
    We would have some concerns as to whether this was actually 
pulling out what we would call the grade A credits out of the 
7(a) portfolio, which would then ultimately cause the subsidy 
rate in the 7(a) Program to rise. So you would start a vicious 
cycle. I am not saying that would happen because I do not 
understand the intricacies of this deal.
    One of the other items that we have picked up on as we 
looked at some of these alternatives was the reason that this 
program is doing well is that we have got a program that works 
for the borrowers, and is profitable for the lenders. It is a 
good match.
    From my understanding of a program like this, it becomes 
profitable for the pool assembler and that there would be a 
diminished demand by the lending community. That is one thing 
we would have to cross over, are you putting together a program 
for pool assemblers, as opposed to the ultimate borrower?
    Mr. Warren. Greg, did you have any other comments on that?
    Mr. Feldmann. I am not a pooler/aggregator. I am just 
simply saying that from our experience we are seeing tighter 
liquidity issues in the community banks and it is creating a 
constraint. I think this is one way we have seen other asset 
classes successfully cross this divide. I think the case can be 
made, although further study would be required, that there is a 
capital market sufficiency in terms of cost to borrower that 
would come to bear over time.
    Mr. Wilkinson. There is a very active secondary market 
that, for the 7(a) Program, provides great liquidity, that is 
working quite well. I would be a little shocked that there is a 
liquidity crisis right now. I think most banks are flush with 
deposits.
    Mr. Bartram. Only 38 percent of the SBA loans are sold. So 
that does not support that there is a liquidity issue.
    Mr. Feldmann. Again, I am not saying that you would sell 
the SBA loans. I am saying that there are other blocks of loans 
inside these institutions that could qualify. So I am not sure 
that we are at competing odds here.
    Mr. Wilkinson. As long as it is not a replacement for, and 
that is what has been said several times, that it is in 
addition to. That said, we are staring at a budget shortfall 
next year, and we are going to have to find ways to solve that 
problem.
    We have got a legislative package we are going to submit. 
You may see some additions to that as we get farther down the 
road. If it appears that the Agency is not going to come 
forward with a supplemental budget request, or if we cannot 
handle the appropriation process to come up with additional 
funds, we may have to come back and revisit some of the program 
parameters and have some new ideas at some point in time.
    Mr. Bartram. Mark, if I could just add, one way to augment 
part of this shortfall is to get the STAR money rescored, and 
that just boggles the mind.
    Mr. Wilkinson. An absolute must.
    Ms. Forbes. Ron, do you know what happened to the response 
to Senator Snowe and Senator Kerry's letter on the STAR 
rescoring? It was sent about a month ago. We had asked for a 
return within a pretty short time. I think it was a week or 
less.
    Mr. Bew. I am not sure where that is. I do know that we are 
reviewing the STAR rescore.
    Mr. Warren. If you could look into that, because I know 
Senator Snowe has asked repeatedly for it, as well as Senator 
Kerry. We would very much appreciate a reply on that.
    Ms. Forbes. The only other point that I was going to return 
to was GAO. Davi, I know that you have been working hard on our 
requests and both sides of the Congress really appreciate it. 
Everybody appreciates all the good work that you and your 
office do for us.
    But I would like you to talk a little bit about some of the 
problems that you have had in getting information to validate 
the econometric model. We are all delighted that the 
econometric model is there and that it is seeming to be a 
better model, but we want it validated. Senator Kerry is very 
interested in that.
    Ms. D'Agostino. As you know, you all and the House 
Committee requested that we very quickly look into the new 
credit subsidy model and try to explain some changes that 
occurred through different iterations, and then to also look in 
more depth and verify and validate the model.
    I think we reported fairly quickly in January to you all in 
a briefing about some of the things you asked us to do, and 
then began to undertake the more in-depth work, pulling about 
the model which is fairly complex.
    What has happened is things have somewhat changed at SBA. 
We have always had a great working relationship with basically 
all the program offices and the CFO. Our work seems to be 
taking a turn for the slower, at a minimum. The new liaison for 
GAO is the CLA and they have put in place some fairly 
cumbersome procedures for our work that has slowed our work to 
a point where what would normally take 3 to 4 months is now 
going to take 9 months or more, and it is hard for us to even 
estimate now when we could complete that work.
    Some of the examples, all communications must go through 
that office. Meetings have to be scheduled so that their staff 
have to be present, even if other times are more convenient for 
both the SBA program officials and GAO staff.
    Also, there are cases where we are not getting timely or 
complete information in response to our requests, and we do 
have to keep going back and asking for the complete information 
or documents in basically all our work, not just the work on 
the 7(a) credit subsidy model. We are also doing work for Chair 
Snowe and others on the transformation initiatives, et cetera.
    It is just becoming more and more of a challenge to meet 
the time frames that you all ask us to meet. It has become 
difficult.
    We cannot even make a commitment to the Committees about 
when we could complete the work, given the process that we are 
having to go through.
    Mr. Warren. This may be an issue that is broader, Ron, than 
your shop, but I think it is something that we need to address. 
Ron, we will be asking, possibly the Administrator, to help us 
work through that, because obviously the GAO is an incredibly 
important asset for Congress. In order for you to do your work, 
you have got to have access to the information. That is all we 
are really asking for.
    Ms. D'Agostino. I would like to add that GAO is trying to 
work with SBA and we are going through the process right now 
and probably will end up talking with the Administrator. We 
have a few more steps to go through, I think, before we get 
there. But we are trying to work out some different operating 
procedures so that we can get our work done.
    Mr. Warren. If you could keep us informed on that.
    Ms. D'Agostino. Sure.
    Mr. Wilkinson. Mark, could I just echo, we have the same 
kind of issue on the flow of information. This is nothing 
against Ron and his staff, but the flow of information has 
stopped.
    I have got a couple of e-mails that have come in and says 
we are no longer allowed to talk to industry. A memo went out 
of central office a week or two ago that said working with 
lenders was not considered mission critical. There appears to 
be, at the management level somewhere, a demand that says no 
information flows out of the Agency.
    It has stopped flowing in our direction, as well.
    Mr. Warren. We have just about wrapped up our time. I want 
to thank everybody on behalf of Senator Snowe and Senator 
Kerry, if I can, for coming to the roundtable.
    Obviously, we have heard a lot of good suggestions, 
identified a number of problems. Clearly, we have quite a bit 
of work to do.
    As Senator Snowe said at the beginning, the record will 
remain open for 2 weeks. If you have additional information, 
things you want to supplement for the record, please feel free 
to send them in. Probably the best way to do it is to either e-
mail or fax to our hearings clerk, who will get them into the 
record.
    We also may submit some written questions to you on behalf 
of the members, and we would ask for your timely responses on 
that.
    With that, we are adjourned. Thank you.
    [Whereupon, at 11:36 a.m., the roundtable was adjourned.]


                      APPENDIX MATERIAL SUBMITTED


    

                        COMMENTS FOR THE RECORD


    

                       POST ROUNDTABLE QUESTIONS


    



                                  
