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


                                                        S. Hrg. 108-238

 
             SBA REAUTHORIZATION: CREDIT PROGRAMS (PART II)

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

                               ROUNDTABLE

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 1, 2003

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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                                 senate

                                 ______

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            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

                            Committee Staff

Warren, Mark, Staff Director and Chief Counsel, Majority Staff...     *
Forbes, Patty, Staff Director and Chief Counsel, Minority Staff..     *

                              Participants

Bew, Ron, Associate Administrator, Office of Capital Access, U.S. 
  Small Business Administration, Washington, D.C.................     *
Brown, Blake, Chief Financial Officer, Coastal Enterprises, Inc., 
  Wiscasset, Maine...............................................     *
Casey, Peter, Vice President, Colson Services, New York, New York     *
Crawford, Christopher, Executive Director, National Association 
  of Development Companies, McLean, Virginia.....................     *
Cripe, Julie, President and Chief Operation Officer, Omnibank, 
  Houston, Texas.................................................     *
D'Agostino, Davi, Director, Financial Markets and Community 
  Investments, U.S. General Accounting Office, Washington, D.C...     *
Foren, Wayne, Managing General Partner, DCC Growth Fund, LP, 
  Alexandria, Virginia...........................................     *
Mercer, Lee, President, National Association of Small Business 
  Investment Companies, Washington, D.C..........................     *
Mitchell, Herb, Associate Administrator, Office of Disaster 
  Assistance, U.S. Small Business Administration, Washington, 
  D.C............................................................     *
Robertson, Sally, Executive Director, Virginia Asset Financing 
  Corporation, Fairfax, Virginia.................................     *
Tesdell, Kerwin, President, CDVCA, New York, New York............     *
Wieworka, Ardith, Commissioner, Massachusetts Office of Child 
  Care Services, Boston, Massachusetts...........................     *

          Alphabetical Listing and Appendix Material Submitted

Bew, Ron
    Prepared statement...........................................    96
Brown, Blake
    Prepared statement...........................................    99
Casey, Peter
    Letter.......................................................   102
Crawford, Christopher
    Prepared statement...........................................     4
    Post-roundtable questions posted to Mr. Crawford.............   118
Cripe, Julie
    Letter.......................................................   106
D'Agostino, Davi
    Prepared statement...........................................    37
    Additional information for the record........................   108
Mercer, Lee
    Prepared statement...........................................    64
Robertson, Sally
    Prepared statement...........................................   112
    Post-roundtable questions posted to Ms. Robertson............   123
Tesdell, Kerwin
    Prepared statement...........................................    79
Wieworka, Ardith
    Prepared statement...........................................    26
    Letter.......................................................   110

                        Comments for the Record

Danton, Heather, Vice President, SEED Corporation, Taunton, 
  Massachusetts, letter..........................................   128
Dorgan, The Honorable Byron L., a United States Senator from 
  North Dakota, letter and prepared statement....................   129
Easley, The Honorable Michael F., Governor of North Carolina, 
  letters........................................................   134
Eurkus, Erika, Greater Boston Program Director, ACCION, Boston, 
  Massachusetts, letter..........................................   135
Guinn, The Honorable Kenny C., Governor of Nevada, letter........   136
Hodges, The Honorable Jim, Governor of South Carolina, letter....   138
Kerry, The Honorable John F., Ranking Member, Senate Committee on 
  Small Business and Entrepreneurship and a United States Senator 
  from Massachusetts, prepared statement.........................   140
Korsh, Eric, Director of Loan Funds, Neighborhood Business 
  Builders, Boston, Massachusetts, letter........................   143
Madaus, Edward P., Executive Director, Guild of St. Agnes, 
  Worcester, Massachusetts, letter...............................   144
Patton, The Honorable Paul E., Governor of Kentucky, letter......   145
Sikes, Christopher, Executive Director, Western Massachusetts 
  Enterprise Fund, Inc., Greenfield, Massachusetts, letter.......   147
Southern Governors' Association, letter..........................   148
  
  
*Comments (if any) between pages 2 and 93.



             SBA REAUTHORIZATION: CREDIT PROGRAMS (PART II)

                              ----------                              


                         THURSDAY, MAY 1, 2003

                              United States Senate,
          Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:38 a.m., in 
room SR-428A, Russell Senate Office Building, Hon. Olympia 
Snowe (Chair of the Committee) presiding.
    Present: Senator Snowe.

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

    Chair Snowe. Since time is of limited duration here--I have 
a vote at 10:15 and conflicting markups--we will begin and I 
will dispense with much of my opening comments. Suffice it to 
say that I truly appreciate the fact that you are all here this 
morning to continue this dialogue regarding the upcoming 
reauthorization of the Small Business Administration (SBA). 
This has been very helpful to me as new Chair of the Committee 
on Small Business and Entrepreneurship. Senator Kerry and I 
will be working on some of these issues together.
    This has been very instructive for me in this process, so I 
really appreciate your helping to continue this discussion. 
Today, obviously we will be concentrating on the 504 program, 
the disaster loan program, the venture capital programs that 
include small business investment companies, and the New Market 
Venture Capital program, all of which have been extremely 
effective and successful programs that have played a pivotal 
role in the growth of our economy and the growth of small 
business.
    Just looking at the numbers in the 504 loan program, in the 
past 3 years, the SBA has provided guarantees for more than 
15,000 new loans through the 504 loan program, almost 3,000 for 
new business startups and more than 12,000 for existing small 
businesses. The total number of jobs created and retained as a 
result was 325,471 jobs during the 3-year period, which I think 
underscores the value of this program to small businesses and 
to our overall economy.
    Obviously, the SBA's venture capital programs have also 
been extremely effective, particularly at a time as you well 
know, that lending institutions have had to ratchet back 
availability to small businesses in particular because of the 
stock market bubble burst. As a result, it has been much harder 
for small businesses to access venture capital. That is where 
these programs have really come in to play. In fact at a time 
in which venture capital firms have decreased their 
investments, the number of SBICs have increased. There are now 
443 licensed SBICs and they have made more than 16,000 
investments in small businesses since the start of fiscal year 
1999 with a total of more than $17 billion in value. Clearly 
they have played a critical role in the creation and retention 
of almost a half-million jobs during this period of time.
    SBA's disaster assistance program, obviously, is their 
foremost direct lending program. In the wake of the terrorist 
attacks on September 11th, the SBA approved more than 11,700 
business disaster loans to businesses across the country with a 
total volume of more than $1.1 billion.
    We understand that the SBA has improved its efficiency in 
approving and processing these applications, and in fact 
increased the percentage of applications processed within 21 
days during each of the last 4 years. I would like to commend 
the SBA for really upgrading the process and making it more 
efficient and effective. We want to thank the SBA for that as 
well.
    Again, I appreciate your presence here today and your 
thoughtfulness that you give to the recommendations that you 
will be advancing. Obviously, your full statements and comments 
will be put in the record in their totality. So let us begin 
with the 504 program, and anything else, particularly since I 
am not going to be here for the entire duration, so please feel 
free to give me your comments on those issues that you consider 
to be a priority.
    Mr. Crawford. Good morning, Senator. I am Chris Crawford. I 
am Executive Director of NADCO, the 504 Trade Association. I 
would like to make just a couple of points, if I might, about 
the program.
    First of all, we do appreciate your support through the 
years and the Committee's support. Secondly, the most important 
thing to us is that our program must be reauthorized by 
September 30th. We are unlike other SBA programs in that we 
receive no appropriations. So if we are not part of an 
appropriations bill, on September 30th we are dead ducks if we 
are not reauthorized. So that is crucial to us. I would also 
say that our core mission, as you probably know, is job 
creation. You cited the numbers over the past 3 years. I 
believe SBA's numbers over the life of the program are in 
excess of 1 million jobs created, which is a pretty impressive 
record. Our loan volume for this year is up 22 percent, year-
to-date, over last year. Last year we were up 15 percent, and 
we continue to grow. As the banks contract and pull in their 
credit horns, there is a further demand for this program and it 
is crucial.
    I would say that we have traditionally been part of the 3-
year reauthorization. I believe the Administration is proposing 
a 6-year reauthorization. We are opposed to that. We believe 
that is too long of a time to go between Committees looking at 
the program. Business lending is a dynamic process, a dynamic 
program. However, business needs change. The only way we can 
change the program year to year is through the reauthorization 
process.
    We have provided the Committee with a substantial 
legislative package. We are working with your staff and Senator 
Kerry's staff on that package. We hope you will seriously 
entertain it and work with us on that. We have also talked to 
the Administration about it. I think we have had very 
productive discussions with the Administration.
    OMB, I cannot help but bring up the subsidy model. Once 
again, we are concerned about the fees of the program. We have 
talked for the last 6 years now about the inaccuracies of the 
subsidy model. We continue to be concerned about that. We would 
like to see it continue to be looked at. We would like to 
continue to work with the Administration on the subsidy model 
to see that it is revised and made more accurate. We have 
concerns about, frankly, the recovery rate on the program. The 
subsidy forecast for this coming year is a 17-percent recovery 
rate. That is extremely low. We believe that there are better 
ways to work with recoveries on our defaulted loans and, again, 
we would like to work with the Administration on that.
    Finally, I would comment on, and you touched on it, the 
centralization pilot, the processing pilot. This pilot has been 
in effect, I believe, for only 2 months. At this point its 
track record, in my view, is nothing short of phenomenal. They 
have reduced the processing time for 504 loans for small 
businesses from anywhere from 2 weeks to 30 days to 40 days 
down to 2 to 3 days, which is amazing. Frankly, we predicted 
it. So it is coming true. We want to encourage the 
Administration to continue to move more district offices into 
this pilot as its success continues, and we are very supportive 
of it.
    Finally, I believe that Sally will talk about some things 
such as streamlining and centralization.
    [The prepared statement of Mr. Crawford follows:]

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    Chair Snowe. It appears with that pile that we need to.
    Ms. Robertson. Good morning, Chair Snowe. I am Sally 
Robertson with Virginia Asset Financing. We are the state-wide 
Certified Development Company in Virginia that delivers the 504 
program. Our CDC has done over 1,000 loans for small businesses 
resulting in $1 billion dollars in projects, and our borrowers 
have created over 12,000 jobs as a result of those financings. 
Nationwide, I think through a variety of programs, CDCs have 
seen over 1 million jobs created through their efforts.
    We think it is extremely important that the 504 program get 
reauthorized given the sluggish condition of the economy, the 
rising unemployment rates, and the ability of 504 to help the 
small business sector grow and create more jobs. Again, since 
it is at no cost to the taxpayer it would seem to be a fairly 
simple decision to reauthorize the program.
    I would also like to mention that our small business owners 
who have benefited from the 504 program would tell you, if they 
were here today, that the things that make this program so 
important to them are the low down payment, the fixed rate, and 
the long term. They would not have been able to make the next 
step in their growth process if they had not had the 504 
program to do that with.
    I will also tell you that they will consistently say that 
the paperwork is extraordinarily burdensome in a 504 loan. I 
have brought with me an application package and a closing 
package. If you had to produce all that paper to do this loan, 
it is extraordinarily burdensome and there has to be a way to 
streamline this.
    Chair Snowe. That is one loan?
    Ms. Robertson. One loan. One application package, one 
closing package.
    Chair Snowe. That is really unbelievable.
    Ms. Robertson. We need to find a way to reduce the 
paperwork.
    This is not only from the small business owner's 
perspective, but as we get into the centralized process it is 
extraordinarily difficult for SBA personnel to properly do 
their job when they have this pile of paperwork that they have 
to look at in order to properly approve or look at a loan that 
is being closed. We think there are a lot of ways in which this 
can be reduced.
    The CDCs, I think, are overall very much in favor of 
centralized processing. As you know, in this day and age, small 
business owners are used to instant communication and instant 
information. Sellers of property are also used to that. If a 
small business owner cannot get a loan approval in a reasonable 
time he is likely to lose that property and the opportunity to 
grow and expand his business and create more jobs. We need to 
be able to give them a quick turnaround time on loan 
processing. Thirty days is just too long. Centralized 
processing, given the reduced staffing at the SBA, is critical 
to that. In order to make centralized processing work we have 
got to reduce the paperwork.
    Chair Snowe. Without question. You would think that even 
one pile would be too much, let alone two for one application.
    Ms. Robertson. I would agree. You have to admit too that 
this adds to the cost of the program for the small business 
owner.
    Chair Snowe. No question about that.
    Mr. Brown. I just wanted to make a comment that in 
Wisconsin we do not have enough filing space. We are also a 
CDC, doing the 504 program. I think we currently have about 110 
loans outstanding. I would agree with Sally that the 
administrative part of it gets quite burdensome, so any effort 
to make that more streamlined would be helpful.
    Chair Snowe. Ron, do you think that is possible?
    Mr. Bew. Absolutely. When I came on board a year ago, I 
looked at the 7(a) programs and made changes to 7(a), and now 
the focus is on the 504 program. Somebody deemed that, even 
though I am credited with it, I am not sure I did, this is the 
year of the 504, just to show our emphasis and focus on this 
program. When I was a lending officer, I did a loan, a huge 
loan with VEPCO which is Dominion Resources, and the 
documentation was that much more for a multi-million dollar 
loan.
    Ms. Robertson. This one was $300,000.
    Mr. Bew. So it is a great visual of the problems in the 
program. We definitely will streamline this program.
    Chair Snowe. We appreciate that.
    Julie.
    Ms. Cripe. I would like to make two comments. One, I concur 
with the reduction of the paperwork. As a lender of a $300 
million community bank, of which I am the President, we do 
many, many 504 loans. We find it is a great program. That is my 
day job, and by night I was the President of a state-wide CDC 
in Texas, and I am now the Vice President. I stepped back after 
8 years.
    It is a great program but the paperwork is very burdensome 
to small businesses. The small businesses I deal with are very 
busy. They walk into the closing room and they really have a 
reflex that is unbelievable when they see the paperwork. It 
sometimes takes 4 and 5 hours to pass the documents around just 
for signature. So I concur with that.
    I would like to make one comment about recoveries, because 
I believe that everything is into interrelated, and it speaks 
to our subsidy rate and the reason that we perhaps do not get 
the subsidy rate we would like to see. I think there is a lot 
of work that can be done on recoveries that are positive for 
taxpayers and lenders and CDCs. I have seen many examples, 
which I will not go into, of SBA making a decision not to buy 
out a first lien or to rush to walk away from a 504 second lien 
position when in fact they could recover 75 to 100 percent of 
the debenture amount. As a taxpayer that is distressing to me. 
As a lender, the bank comes out whole, no question. But wearing 
my CDC hat I feel that it can be worked on in some very simple 
ways that are not going to create a burden of administrative 
costs and actually can go through the CDCs for recommendations. 
Thank you.
    Chair Snowe. Thank you.
    Chris.
    Mr. Crawford. Senator, we did a study, our Association did 
a study about 5 years ago in advance of this Committee 
authorizing a liquidation pilot, which Patty will certainly 
recall whereby about 20 CDCs actually tried to do their own 
liquidations as opposed to having the SBA doing the 
liquidations. The results were better than 50 percent average 
recovery on the outstanding loan, the guaranteed loan.
    We did this because we also talked to a number of SBA 
staff, the portfolio management staff out of the field. These 
are the people out in the field that actually do the 
recoveries. We found that some of them had loan workout, 
workloads in excess of 200 loans. We then surveyed commercial 
banks and said, how many loans do your workout people work on 
at one time. Twenty to 30 loans. It is just humanly not 
possible to work on 200 recoveries at a time, and the SBA 
simply is not staffed to do that, which is why we advocated to 
do this pilot that was, in my own view, very successful. 
Following that, this Committee actually got passed a bill which 
made that pilot permanent. We continue to await regulations on 
that pilot which would make the pilot available to many other 
qualified CDCs. We would like again to work with the SBA to get 
those regulations established so that we do that.
    Chair Snowe. When was this pilot established?
    Mr. Crawford. The bill that actually was established was 
Public Law 106-554 which made that pilot permanent; is that not 
correct, Patty?
    Chair Snowe. When was that? The last Congress? Two 
Congresses ago? So why have the regulations not been developed 
and implemented?
    Mr. Bew. I do not know. I will look into that.
    Chair Snowe. 2000, the reauthorization.
    Mr. Crawford. So we think there is a real opportunity to 
help on recoveries. There is a direct impact on our fees, and 
we think this is the opportune time. As the agency looks to 
streamline its processing, streamline its other services, deals 
with its budget problems, we can help. Every CDC in this 
country is prepared to help on this. I think we have proven 
that we can do it.
    Chair Snowe. Absolutely. Would you follow up on that?
    Mr. Bew. I will follow up on that.
    Chair Snowe. It is critical.
    Mr. Bew. Our overall theme has been to push more and more 
of the decision making, use of forms, and processing out into 
the private sector. I am sure this could be a logical extension 
of that theme.
    Chair Snowe. The liquidation issue, it is because it does 
require much staffing to do it, is that what accounts for the 
difference between the SBA and the private sector?
    Mr. Crawford. It requires a lot of work.
    Chair Snowe. It requires a lot of work to drive it and to 
recapture the greatest amount. That is a good suggestion. Any 
oversight problems with that from GAO?
    Ms. D'Agostino. Actually we have not looked recently at the 
504 program. We have not been asked to and we have not done any 
on our own initiative. We have mostly focused on 7(a) lender 
oversight and disaster lately.
    Chair Snowe. What are the most effective or ineffective 
aspects of the 504 programs? One is the issue of the subsidy 
rate and paperwork, streamlining? Anything else in the 504?
    Ms. Robertson. From a lender's perspective I would think 
that the PCL regulations which we have been hoping for for 
sometime would be issued to give qualified certified 
development companies more authority to process loans. 
Additionally, the change in the job creation ratio from 1 per 
35,000 to 1 per 50,000. Jobs have become far more expensive to 
create. It would allow us to help more businesses where the 
cost of those jobs are higher, such as manufacturers.
    Ms. Cripe. I am here really to speak about Senate bill 822 
which applies to the 504 program. It is something that actually 
came up 4 years ago in my own bank when I was approached in a 
minority neighborhood to finance a daycare center. The woman 
was successful and had been running a child care center. She 
needed to expand her business and wanted to buy the building 
that she had identified would add another 100 kids to the 
program. She was a nonprofit. She would fully guarantee the 
loan, getting that issue out of the way. It was not a credit 
issue as her credit was strong. She paid her bills. It was not 
any kind of corporate welfare, if you will. She fit all the 
credit criteria.
    She did not have a lot of cash because she was expanding so 
the 504 was the perfect fit for her. After much ado, we found 
out that she did not qualify because the company was nonprofit. 
We thought perhaps we could put it in her name, since she owned 
the company 100 percent, and she could create a for-profit 
company to own the real estate. That still did not fly, and in 
fact we met with SBA and it just did not fit within the 
parameters of the regulations.
    So a long story short, we were not able to do it. She had 
to maintain the nonprofit status in order to get the parents 
the subsidies for their children to be allowed to be in her 
daycare center in this enterprise zone. It was not an option 
for her to give up the nonprofit status that she had in this 
particular daycare. I think it is very important that this 
pilot program be attempted in an opportunity for us--I have 
financed many, many daycares under no program whatsoever and no 
defaults to date. I think that Sally can speak to that same 
issue. She has done even more.
    Ms. Robertson. We have done $28 million worth of daycare 
projects in Virginia for 26 small business owners. We have not 
had a single default under the 504 program in any daycare 
center transaction.
    Chair Snowe. Thank you. Ardith, do you want to speak to 
this?
    Ms. Wieworka. Yes. Good morning, Chair Snowe. My name is 
Ardith Wieworka and I am the Commissioner of the Massachusetts 
Office of Child Care Services. I just wanted to talk this 
morning about how important the Childcare Lending Pilot Act 
would be to childcare providers. Certainly in Massachusetts, 
but I am sure across the Nation. We have about 15,00, 16,000 
licensed childcare providers in Massachusetts. I know this map 
is a little hard to see, but basically all those little dots, 
those are the licensed childcare providers in Massachusetts. It 
is really a huge industry. These are businesses. These are 
businesspeople.
    At the Office of Child Care Services we regulate this 
industry, we license it, but we also administer the subsidy 
system. There are 50,000 kids, low income kids, kids from 
unstable families, and disabled kids who use our subsidies. In 
this industry, many of these programs are in church basements, 
and historically, therre are very low margins that these 
programs run on. The extension of the 504 program to nonprofits 
would really make a huge difference in their abilities to 
succeed.
    For the kids in those programs, we have basically a two-
tiered system. There is your high-end national childcare 
chains. Those chains are not beating down the door to take care 
of poor kids. But there are a lot of dedicated, passionate 
nonprofit programs that do want to take care of the kids, the 
poor kids that we serve. This program would allow them to do 
things like build new classrooms.
    We were having a debate earlier about whether playgrounds 
would qualify. I know that the playground in my elementary 
school is still there, so that is more than 10 years. But I 
think that there are a lot of adaptive measures that are needed 
for disabled kids. If you have a kid in a wheelchair, you need 
a ramp or you need certain designs of the program. The design 
of a program is so important. At OCCS we have prosecuted cases 
of child mistreatment simply because mistreatment went 
undetected because of the design and layout of the classroom.
    There is an enormous potential for positive outcome here if 
these programs had access to money. That is really what it 
comes down to. They need the access to money to improve the 
program, to improve positive outcomes for disadvantaged kids. 
That is really the win-win here. This would support the goals 
of the 504 program and it would support kids. It is a winning 
combination.
    [The prepared statement of Ms. Wieworka follows:]
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    Chair Snowe. What is the question here, Ron, about opening 
it up to nonprofits? I think that is one of the issues. I do 
not have any question about the need and availability of 
childcare facilities and supporting that. Certainly it is 
absolutely essential for so many people, in order to enable 
them to go to work, opening small businesses, as an adjunct to 
businesses. What is problematic here, if anything, with respect 
to opening the door to nonprofits?
    Mr. Bew. I think it is statutory. The statute requires a 
borrower to be a profitenity, although in the Microloan program 
there is an exception to that. It would require a statutory 
change to let nonprofits into the 504 program.
    Chair Snowe. It is statutory in the sense that it prohibits 
or it is confined to only for-profit. But whether or not, does 
that present any problems?
    Mr. Bew. Philosophically, I think the program was set up 
for for-profit entities. We would have to look into that.
    Chair Snowe. Whether it is a slippery slope?
    Mr. Bew. Whether it opens the door to other nonprofits.
    Chair Snowe. It is something to certainly explore. It is an 
interesting issue. There is no doubt about it. The need is out 
there, undeniably. Obviously, that is a dimension of small 
business and it is a major issue in the development and helping 
to create more daycare facilities. We just have to explore the 
different dimensions, if there was a rationale for nonprofits.
    Chris and Julie.
    Mr. Crawford. Senator, I have to agree with Ron. I do not 
want to characterize it as a slippery slope. Obviously our 
program was established to make loans to for-profit small 
businesses to enable them to repay their debts. Given that we 
have no subsidy, we have zero appropriation, and it is 
something that my industry is extremely sensitive to. Because 
the minute our losses start going up, our fees go up, the 
demand for our program gets less and less. So we are very 
concerned about that. We want to be very cautious in this. I 
believe that it has been proposed that it be a pilot. I think 
that it is most appropriate to try and see how it works.
    I do not want to sit here and encourage that we look at 
opening this loan program to every Tom, Dick, and Harry 
nonprofit that is in the country. I do not think that is 
appropriate. Daycare is a very special circumstance.
    Ms. Forbes. I would just like to say for the record, the 
reason that Senator Kerry was looking at opening this up to 
nonprofits is because in this industry such a high proportion 
are nonprofit, and there did not seem to be another way to get 
the money to this very needy cause.
    Ms. Cripe. My favorite way of debate, I guess, is to use 
analogies. I am in the trenches every day and my bank is 
located in a minority neighborhood, has been for 50 years in 
Houston, Texas. We have just at my small bank, 114 church 
accounts and over 100 of those have loans with me. They are not 
eligible for programs, and I am not advocating that. As Patty 
brought to everyone's attention, in the daycare industry I do 
not have a Kindercare, if you will, coming to my neighborhood 
to serve that area. They are not going to come. The real estate 
will not support what they normally want to do.
    The elementary schools are understaffed and they have 
problems. If we can get experienced people to open daycares and 
expand, then it certainly meets the spirit of the 504 program, 
which is job creation and meeting the needs of economic 
development in underdeveloped areas. I have seen repeatedly the 
daycares fix up the neighborhoods, if you will, because if they 
buy a building, if they have ownership, it creates a sense of 
spirit in the whole neighborhood that makes a pride come about.
    I understand the slippery slope that we are talking about. 
I understand that most of the churches in minority communities 
lead the charge in economic development. They form separate 
corporations which, yes, are nonprofit. That has to do with the 
fact that, and I am sure Ardith can speak to it better than I, 
they must have a nonprofit status in order to receive the 
subsidies to get the children in there.
    Chair Snowe. That is an interesting point where they 
develop a different entity for that purpose, because how then 
would you collect collateral, using collateral from a church, 
from a religious institution?
    Ms. Cripe. You do not. They create a separate nonprofit. We 
all know that nonprofit does not mean they do not make money--
as a separate business. That owns the real estate. They also 
hire the teachers and supervise. In fact my own church does 
that in Houston and we are not--all churches are nonprofit.
    Ms. Wieworka. I just wanted to point out, in Massachusetts 
the childcare providers that we contract with, 90 percent of 
them are nonprofits. They do that for a variety of reasons. It 
gives them certain access to other Federal programs that if 
they were for-profit they would not be able to access. I wanted 
to say, I think one of the reasons this for-profit versus 
nonprofit issue comes up is that nonprofits are considered--
they already get a break because they are nonprofits, so we do 
not want to give them another advantage over for-profits. But I 
think that the historically low rates of reimbursement for 
childcare providers puts them in no significant advantage over 
their for-profit counterparts.
    The childcare industry is also, I think, unique in that it 
absolutely is an industry that supports workforce development. 
The bottom line is, if you do not have a childcare provider and 
you have kids, you cannot go to work. If you do have a 
childcare provider, you can go to work. I think it meets the 
goals of the SBA program.
    Chair Snowe. Do any of these nonprofits, childcare 
facilities develop into schools, or become schools?
    Ms. Wieworka. Sure.
    Chair Snowe. Does that create any complications there, in 
your estimation?
    Ms. Cripe. I also have the issue of charter schools in 
Texas and we are not allowed to use the SBA program for charter 
schools. Again, I have financed 10 of them in the last year and 
I have had no collection problems whatsoever.
    One issue that I know will come up is personal guarantees. 
As I mentioned in my previous example, the businesswoman who 
was running the nonprofit daycare center was willing to step up 
to the plate and personally guarantee the loan. Her credit was 
impeccable and she was a good businessperson.
    When I loan money to churches, I typically have the Deacons 
sign on the dotted line as guarantors. So the guarantee issue, 
I believe, can be resolved.
    Chair Snowe. Maybe many of these questions could be 
addressed through a pilot project, so that is something that we 
will obviously explore.
    Mr. Brown. Just one quick comment. I think, representing 
CI, we have done about 150 childcare loans in Maine, in excess 
of about $8 million. One of the issues is quality of childcare, 
and one is the facilities in which they provide their programs. 
I would see this as a way to provide that long-term lower-cost 
financing to make that happen.
    Chair Snowe. There is no question there is a tremendous 
need out there for quality, and affordable daycare without a 
doubt.
    One other question I wanted to follow up on with the 504 
and the 7(a) program, do you think they overlap between those 
two programs? Is there a need for two separate programs?
    Mr. Foren. Absolutely. There is a definite need. I have a 
view on this that other people may not share. In a prior life I 
had something to do with the 7(a) and 504 program. 7(a), 
historically is a secured lending program and so is 504. 7(a) 
typically has been used for working capital short-term. The 504 
program is a different program in that it is strictly fixed 
asset financing for small business development, creating jobs. 
They have a distinct purpose. 7(a) is under the Small Business 
Act, 504 is under the Small Business Investment Act. The 
purpose of the Small Business Investment Act has a slightly 
different focus than the Small Business Act. I think there 
clearly is a need for the 504 program.
    But if I could just take a rabbit trail, I understand you 
are leaving in a few minutes. We have an SBIC and we have a 
small business that we financed up in upstate New York that is 
in a decommissioned Air Force Base, kind of like Loring, and in 
that business we are completing an equipment line that requires 
new equipment of $1.5 million. Ideal for 504 financing. I found 
out in the last 2 to 3 weeks that I have got a problem, and 
that problem is simply this. Since we own more than 20 percent 
of the small business, not much more but a little bit more, our 
SBIC is required to guarantee that loan, the 504 loan, which 
then uses up my liquidity that I could provide to the business 
if it needs additional liquidity in the future.
    Something needs to be done relative to giving SBICs some 
flexibility and not requiring personal guarantees so that these 
two programs can be used in concert to help small business 
development. I know that is not part of the subject area, but 
it is critical.
    Chair Snowe. It is.
    Mr. Foren. Lee has got a copy of--would you provide the 
Chair with the product? It is a small business.
    Mr. Mercer. There is no powder in this. It is safe. But 
that is an SBIC investment in an LMI company.
    Mr. Foren. It would qualify as an LMI.
    Mr. Mercer. It is a new way of applying polymers to 
ammunition which will reduce--Wayne can tell it better--reduce 
the weight of the ammunition by 25 percent.
    Chair Snowe. Is that right?
    Mr. Foren. It is cheaper and safer. You throw a handful of 
those bullets into a fire, they will not explode. The plastic 
will melt and the powder will fizzle. This is in the final 
stages of testing with the military and we hope that in the 
fall it will be ready for acquisition by the military. This is 
disruptive technology in the small arms area. To me it is a sad 
commentary that we cannot use the 504 and 7(a) program, or the 
SBIC and 504 program in concert to help complete this plant.
    Chair Snowe. Because of the high-level guarantee?
    Mr. Mercer. What the guarantee does is once Wayne has to 
guarantee the 504 loan, that counts as a financing in the SBIC 
regulations and therefore he runs the risk of violating what 
are known as the overline limits. In other words, he would be 
considered to have invested, because of the guarantee, too much 
in one company.
    Mr. Foren. I can only put $3 million into any one deal. We 
have already invested $2.5 million. The 504 portion of this 
loan is close to $600,000. If I were to guarantee the loan I 
would be in violation of SBIC regulations. The only way around 
that is to get SBA to approve an overline request. But if I do 
that I have used up my precious dry powder, as it were--no pun 
intended--to be able to give this company further assistance. 
So I will talk with the folks at the SBA and see if we cannot 
get an exception, but heretofore have not been able to do that.
    Chair Snowe. Ron, do you have any response to that?
    Mr. Bew. We can look into it. It is the first I have heard 
of it.
    Mr. Foren. It is an SOP issue. It is not regulatory, and it 
is not statutory.
    Mr. Brown. We have actually run into a similar type of 
dilemma using the 504 with our venture capital funds. Because 
CI is the sole owner of our for-profit venture capital funds, 
including our New Markets Venture Capital fund, we are 
restricted from using the 504 program with our equity positions 
in the companies that we are investing in. It would be nice to 
be able to combine the two.
    Mr. Foren. This would apply for 7(a) as well as 504.
    Chair Snowe. We will look into that.
    Ms. Cripe. I was going to go back to your original question 
and state that, yes, I believe the 504 and the SBA 7(a) are two 
distinct programs and are not needing to be combined. They meet 
different needs for the small businessperson. When a customer 
approaches me for a loan, I try to find what will best fit 
their business. For most of them in expansion, and the 504 
emphasizes businesses that are already operating and have a 
history, that is where we want to use that program, and then 
use the 7(a), as Wayne already identified, for working capital 
and equipment that does not have as long a life perhaps as the 
bullet-making equipment. But it really serves a distinct 
purpose, the 504 program.
    Chair Snowe. Ron, with respect to the disaster loan 
programs--anything else on the 504 or anything else?
    Mr. Bew. If I could just make one comment on the 7(a) and 
504 programs. That is somewhat of a controversial issue I 
guess. We did a run of the top 25 industries that both the 7(a) 
and the 504 programs lend to. I think the top four were about 
the same; a lot of larger loans for motels, restaurants, 
convenience stores, and gas stations with convenience stores, 
if I remember the four correctly. Both loans, the 7(a) and the 
504 were being lent for the same purposes, at least the same 
industries. There was some overlap.
    Ms. D'Agostino. I am pleased to be here to talk about GAO's 
work on the SBA disaster loan program. We have actually 
reviewed, and my statement would highlight, first of all, SBA's 
disaster lending for the 9/11 terrorist attacks. Second, some 
issues with the performance goals and measures that SBA uses 
for this program. Third, the loan asset sales, which actually 
had involved mostly sales of disaster loans. Actually, of those 
that were sold most, the number of loans not the dollar amount, 
were disaster home loans.
    First, our work showed that SBA was very responsive, 
flexible, and this was particularly true in light of the unique 
challenges of 9/11 which caused nationwide economic injury. For 
9/11 victims, the SBA modified some terms and lending 
practices, such as increasing maximum loan amounts and reducing 
the documentation needed. As Senator Snowe noted in her opening 
statement, there were a tremendous number of disaster loans 
approved for 9/11 victims in a very short period of time.
    Second, the SBA's performance goals, and measures for the 
disaster loan program, did not fully capture or give full 
credit to the programs true performance and results or 
outcomes. For example, SBA's loan processing performance goal 
has been set at 21 days within receipt of an application. Yet 
in both fiscal years 2001 and 2002 SBA actually achieved 
average times of 13 and 12 days, respectively. These numbers 
include 9/11 loan processing time.
    Also, the SBA does not include some key measures that could 
help them identify areas in which this fundamentally good 
program could be even better. For example, rather than 
surveying all loan applicants, the SBA surveyed only the 
successful applicants, thereby missing the opportunity to get 
valuable feedback on how the program could be improved.
    The SBA agreed to our recommendations to improve the 
program's goals and measures and said that it was preparing a 
customer service survey. Of course, we will be following in our 
normal recommendation follow-up efforts to see how that is 
going.
    Third, our work showed that SBA's loan asset sales program 
was very effective at selling loans to the private sector. In 
the first five loan sales, SBA sold nearly 110,000 loans valued 
at $4.4 billion. $3.8 billion in disaster loans were included 
in those sales and 84 percent of those disaster loans were 
performing loans. The SBA built in some safeguards to protect 
borrowers whose loans were sold to the private sector. Yet the 
SBA did not systematically or fully capture those borrowers 
complaints and concerns. Actually, about one-half of the 
letters we reviewed in the SBA's files seemed to warrant a 
closer look by SBA.
    SBA headquarters did have a tracking system for borrower 
complaints but because there was limited guidance to the field. 
Not all the complaints received in the field offices were 
actually included in the headquarters tracking system. Further, 
we found that the SBA may have overstated some of the 
operational benefits it achieved from the loan sales. For 
example, the SBA said that loan sales, which began in 1999, 
would reduce the servicing workload allowing staff to be 
reallocated to more mission critical areas like lender 
oversight, which we discussed yesterday, and business outreach. 
The servicing workload for disaster loans did decrease to some 
extent, but servicing and liquidation staff did not get 
reassigned to non-servicing activity.
    Finally, the SBA could not explain a significant decline in 
the subsidy allowance account for disaster loans. You have a 
chart that accompanies my testimony that would show what 
happened in those subsidy loan accounts. In simple terms, and 
hopefully you will not ask too many detailed questions of me, 
basically it shows that more was being taken out of this 
account to cover the costs than had ever been put in it. They 
also lacked reliable data to determine the overall financial 
impact of the loan sales, or their impact on the quality of the 
remaining disaster loan portfolio.
    These accounting flaws seriously affected the SBA's budget 
and financial statements. Ultimately, the overall benefits or 
cost to the Government from the loan sales remain uncertain. 
One thing I would mention too is because of the accounting 
issues, SBA's Auditor did have to withdraw its clean opinion 
from its audits for fiscal years 2000 and 2001, and they did 
issue a disclaimer for SBA's fiscal year 2002 financial 
statement.
    Chair Snowe. What does that mean?
    Ms. D'Agostino. That means that for those fiscal years that 
SBA's financial statements were audited by a certified public 
accounting firm, and they had issued a clean opinion saying 
that there were no material problems in these financial 
statements. What has happened as a result of this work is that 
the auditor basically issue a disclaimer on their clean opinion 
that said, those were wrong, do not rely upon those statements. 
So they changed their position on the statements.
    Chair Snowe. So where does that leave us?
    Ms. D'Agostino. The SBA still has a lot of work to do on 
its financial statements and its accounting situation. I want 
to say that in response to our findings and recommendations, 
the SBA is working very diligently to determine the problems 
and correct them as quickly as possible.
    Also, the SBA did agree with our recommendations on 
tracking borrower complaints and better analyzing the 
operational benefits from the sales. So that is where the work 
stands now.
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    Chair Snowe. I know you said, do not ask too many 
questions--
    Ms. D'Agostino. I actually have somebody here who can 
answer your questions.
    Chair Snowe. Just to make sure I understand what this chart 
implies.
    Ms. D'Agostino. This is Linda Calbom, Director of Financial 
Management and Insurance at GAO.
    Ms. Calbom. Basically what that chart is telling you is 
that SBA's level of their allowance for their subsidy account 
was up around 20 to 30 percent. You can see this back in 1998 
and 1999, which is about where you would expect it to be. In 
1999 they changed their disaster model, and at that time they 
actually decreased some of the--one of the key assumptions 
which is the amount of time that they expected the loans to be 
outstanding. As you know, this is a highly subsidized program. 
It is mostly through an interest subsidy, so the longer the 
loan is outstanding, the more it costs. In 1999, and this is 
speculation as far as what we think was one of the major causes 
of this decline, they reduced the loan term, the expected loan 
term for those disaster loans from, it used to be 22, 23 years. 
They reduced it down to more like 16, 17 years, at the same 
time they started the loan sales. The disaster loans pretty 
much started in 2000. While the sales did not really cause the 
problems, the sales brought to light this problem. That in 
essence they were not putting enough costs into their allowance 
account to begin covering the real cost of the program.
    Now this has been an issue that they have been aware of and 
have been trying to resolve for sometime. With our work we went 
in and we were able to say, ``Look, this really does not make 
any sense. You cannot have a negative allowance account for 
this kind of a program.'' Then the auditors said, ``Gosh, we 
guess you are right, so we better reconsider.''
    Ms. Forbes. So if you were to boil this down, you are 
basically saying that the subsidy calculation is broken for 
this program? It sounds similar to problems we heard yesterday, 
and I know problems the 504 program has.
    Ms. Calbom. This subsidy calculation is definitely broken. 
As I said, the SBA has hired some consultants, and they believe 
they are getting down to the bottom of it. It does appear that 
one of the key things is this loan term issue. You could tell 
from the loans that were sold, the average loan was 25 years in 
the five sales we looked at, whereas their assumption was it 
was 16 to 17 years. So, yes, it is broken. That is not the only 
problem. There are some other problems--I will not get into 
them but very complicated problems--that also were leading to 
the decline in the account, the very unnatural decline in the 
account. Once they get this all resolved and figure out what 
assumptions need to be corrected, and they plug that back into 
their model--not that the model is broken per se, but it is the 
assumptions that went into the model. Once they get the right 
assumptions figured out, then they are going to need to go in 
and do a big re-estimate to bring the account back up to a more 
normal balance.
    Chair Snowe. Is that directly as a result of the changes 
that occurred in 1999?
    Ms. Calbom. I am not sure. That is speculation we had 
because--part of it I think is--because when they went to redo 
their calculation of their loan term they used a straight 
average apparently instead of a weighted average. So I think 
that is part of the problem.
    Ms. Forbes. Was that when the Administration's budget 
assumed that all the loans would be sold? Have you tracked it 
with what the budget proposals were to see, if what the budget 
was proposing in a given year was then incorporated into the 
subsidy model even though Congress did not act on what the 
proposal was?
    Ms. Calbom. I am not sure about that.
    Ms. Forbes. We would be interested in seeing some sort of 
follow-up on that.
    Chair Snowe. I agree. I think we need to follow-up on this 
issue and find out--Herb, do you have any comments? I have to 
go because we have a vote.
    Mr. Mitchell. I do not have any particular comments on that 
issue. That is obviously an issue for GAO, OMB, and the CFO to 
address.
    But just briefly, the disaster assistance program, while we 
have certainly been successful, has had a lot of cooperation 
from this Committee and the Congress. As you well know, 
disasters are not predictable and we project future needs based 
on the 5-year average. What happens when we do have emergency 
events like 9/11 and events that we have had in the past? We 
have gotten excellent support from this Committee and the 
Committee in the House to develop supplemental packages and 
legislation that give us the flexibility to address the needs 
of disaster victims.
    9/11 is unique in that historically about 80 percent of all 
disaster loans are to homeowners and renters as to opposed to 
businesses. That was reversed with 9/11. But we just simply 
appreciate the support that we have gotten as well.
    Chair Snowe. We appreciate that, Herb. Thank you.
    I have to depart and staff is going to take over, Mark, 
Greg, and Patty are here. Feel free to follow-up on any of the 
issues.
    I really do appreciate the time that you have given here 
today in participating in this roundtable. It will be very 
helpful, useful, and constructive as we proceed in the 
reauthorization.
    I want to express my appreciation to each and every one of 
you for being here today, and those of you here yesterday. 
Thank you.
    See you in Caribou.
    Mr. Foren. In fact, I am going up there Tuesday to work 
with a company that is a distributor of fasteners, working on 
the Humvees that are being rehabbed at Loring. We have some 
inventory in Philly we are going to see if we cannot put to 
work up there.
    Chair Snowe. We appreciate that. Thank you.
    Mr. Foren. Is the snow gone yet?
    Chair Snowe. Not quite.
    Ms. Forbes. Herb, I have a follow-on question regarding 9/
11 loans. You are intending to sell them as well, in the normal 
course? I do not mean you personally, but the Administration.
    Mr. Mitchell. I am not sure. At this point, the asset sales 
program has been put on hold until we can review a lot of the 
financial issues.
    Ms. Forbes. That is the entire asset sales program?
    Mr. Mitchell. Yes, that is correct.
    Ms. Forbes. Let us say it gets back on track and you were 
going to sell them. What year would that come up?
    Mr. Mitchell. I am not sure. I am not in a position to 
address that.
    Ms. Forbes. If it gets back on track, would you please let 
us know, because obviously there are a lot of these loans made 
across the country, and we often get the complaints when the 
loans are sold.
    Mr. Mitchell. Sure, we would be glad to.
    Mr. Warren. Davi.
    Ms. D'Agostino. Sure. Basically one of the protections, the 
borrower protections, that I mentioned in my brief oral summary 
was that SBA had been waiting for 2 years after disaster loans 
had been made before they put them under consideration for the 
Loan Asset Sales Program. The SBA waited 2 years because they 
thought that 2 years was a reasonable amount of time, any 
changes to the loans would have probably been made by then. 
Additional assessments of physical damage, et cetera, would 
have been made within the 2-year period.
    That is the thinking, I think, the SBA had behind this 2 
year date. I do not know if it is applicable to 9/11 victims 
and what have you, but that is pretty much their criteria.
    Ms. Forbes. The Bill that established the 9/11 loans, was a 
bill that this Committee worked on and it had a lot of co-
sponsors among our Members. We were trying to expand that two 
years to a 4-year waiting period. So that is one of the reasons 
why I am asking.
    Mr. Warren. If I can go back a little bit more broadly to 
the work that GAO has done, and Herb, your input would be real 
helpful here. One of the issues that was raised in these asset 
sales was that there was not a good mechanism for keeping track 
of the complaints from the outside. We certainly have heard a 
lot about them.
    Has anything been done or thought about, in terms of trying 
to put that type of a system in place?
    Mr. Bew. I will answer that.
    I think the complaints, to put it in perspective, to date 
170,000 loans have been sold and 350 have complaints. Yes, we 
have instituted a tracking system. I think there was a 
disconnect between the complaints coming into Washington and 
the complaints coming into the field. Now we have connected 
that together, put in an 800-number, and I think there is also 
a website. We have done three things to correct the tracking.
    Mr. Warren. How were complaints recorded prior to that?
    Mr. Bew. I think some were coming into the districts and 
some were coming into the headquarters. When they came into 
headquarters, we had a person assigned to contact the original 
lending entity and address it.
    Mr. Warren. Davi, did you want to add something?
    Ms. D'Agostino. Yes. I think there was a disconnect in the 
guidance that was out in the field. The field people were very 
conscious about trying to follow-up and respond to the 
complaints and inquiries. A lot of them are also just 
inquiries, like why are you selling my loan?
    So it is not all complaints about how they are being 
treated by the private sector purchaser.
    But basically, I think what was happening was only the 
congressional-backed complaints were being sent from the field 
to headquarters. So that if there were any people who did not 
contact their Congressman or Senator, and have that going on, 
their complaints did not make it to Washington. They did not 
have enough insight into that.
    But I think the SBA has clarified the guidance. We have not 
gone in and followed up yet, but from what we understand they 
have put out better guidance and have created a web-based 
system.
    Mr. Warren. From your review of those complaints, can you 
give us some idea of what the most common causes were?
    Ms. D'Agostino. I can get back with you on that. I do know 
that about half of the ones we saw, there were about 155 
complaints. We looked at 130-some complaints. About half of 
those were complaints surrounding the way the purchaser was 
dealing with them. They may not have been getting the same kind 
of treatment that they had gotten from the SBA, in terms of 
changing terms, things like that, subordination.
    But I can look into whether there was any particular trend. 
I am not sure that there was, but I will get back to you on 
that.
    Mr. Warren. Thank you.
    Ms. Forbes. So Ron, that 350 number is including the other 
complaints that GAO located when they did their work? Or that 
was your original number?
    Mr. Bew. I believe that includes it. I am not 100 percent 
sure on that, but I will check.
    Ms. Forbes. Can you just provide that for the record, 
please? Thanks.
    Mr. Warren. Going a little more broadly to Herb, are there 
plans to try to offer more in the way of disaster application 
or disaster loan applications online?
    Mr. Mitchell. Right now we do have a project underway to 
completely automate the disaster loan project. We have a 
contractor in place. In fact, we have a team of about 20 people 
that are working on that project right now. It is estimated 
that we will have the first iteration of that available in June 
2004 with a capability for applicants to apply online.
    The other thing that we are doing as well, is that we will 
have remote capability. For example, if you are in the disaster 
area where we have field locations, and obviously if your 
property has been destroyed, you will be able to come into 
these centers to apply online, or to give that information to 
us. If you are a homeowner, you can apply by telephone, or we 
will be able to take the application online.
    Mr. Warren. Any other comments on the disaster loan area?
    Why don't we move on to our final topic which is the SBA's 
investment capital areas. We know from a long history that 
these programs, namely we are speaking of the SBIC Program and 
the New Markets Venture Capital Program, that they have offered 
financing and investment opportunities that promote economic 
development, job creation and retention, and business expansion 
and growth. They have been incredibly important in this 
country.
    We would like to try to highlight this morning some of the 
lessons learned and look for ways that we can apply those 
lessons to improve the programs going forward. With that, who 
would like to start? Lee, would you like the honor?
    Mr. Mercer. Thank you.
    I am just going to briefly run over the issues, as we see 
them at NASBIC, and I will be submitting a formal statement. 
But I wanted to wait and see what the flavor was to make sure 
that I addressed all the issues that might be of concern. Think 
twice and write once, somebody once told me. I guess carpenters 
measure twice and cut once.
    So the issues, very briefly. Obviously, we hope to have a 
continued zero subsidy rate, which means authorization is 
extremely important to us, as well, this year. The 
Administration has asked for levels, fiscal year 2004 levels of 
$3 billion in debenture authority and $4 billion for 
participating security authority and we concur with that.
    If there is to be a 3-year authorization, as we suggested 
in the House testimony, I think market conditions are such that 
if those numbers were just bumped up maybe $250 million per 
year, that would more than cover, we think, the demand right 
now.
    As everybody who reads the financial pages knows, venture 
capital is shrinking dramatically. The good news is that the 
SBIC Program is not shrinking anywhere near as dramatically as 
the strictly private area. In fact, the SBA would be able to 
talk about the number of people who are in line to become 
licensees. So that is the good news.
    In order to maintain a zero subsidy rate in the 
participating security program, it would be required to 
increase the statutory rate that says not to exceed 1.38 
percent, which is a direct payment to the SBA, to 1.454 
percent, I believe. We suggest that the number be raised not to 
exceed 1.5 percent.
    It should be noted that the increase that is required is 
not related to a change in assumptions. It is related really to 
the fact that because 10-year Treasury rates are so low, the 
profit participation that participating security SBICs have to 
pay the Government, which are directly related to that rate, 
are much lower. So when you are filling the subsidy bowl, if 
you will, you have got to get your money from someplace. If you 
are getting less money from the SBICs in terms of profit, you 
have to get more from SBICs in a preferred return. So the SBIC 
is not being punished, it is kind of being taken from one pot 
and put in the other pot.
    Unrelated to reauthorization--I just want to highlight this 
right in the middle--is our proposal with regard to UBTI and we 
feel extremely fortunate that Senator Snowe and Senator Kerry 
are such strong supporters of that. It has nothing to do with 
the reauthorization bill but as the staff in the Senate Finance 
Committee becomes increasingly unavailable as the bill is 
written, we are hopeful that staff on the Small Business 
Committee can be in direct contact with staff on the Finance 
Committee and perhaps urge them to consider putting that 
provision in the Chair's mark. I get calls, more and more calls 
every day, about the debenture program. Sometimes good timing 
is everything.
    The tax-exempted investors, the pension programs, the 
pension funds, really do have an appetite for what are 
considered safer investments in the venture capital area. The 
debenture program is certainly far less volatile than the 
participating security program, and fills a real need. I think 
we have a great opportunity there.
    Going back to reauthorization, an issue that we hope to 
address is what we think is a congressional clarification in 
the area of capital impairment. As you know, there is a 
statutory imperative that in advancing leverage to an SBIC that 
the SBA has to make a decision as to whether or not advancing 
that additional leverage will create an unreasonable risk of 
loss to the Government. We are not suggesting that that 
statutory imperative be changed.
    However, ending a support of leverage is a little bit 
different than taking some of the actions that over the years 
the SBA has decided to go along with. For instance, the SBA 
asserts a right to, at a time when it stops supporting an SBIC, 
to reach out for any private capital commitments that have yet 
to be paid into the SBIC, and require them to be paid in and 
then paid directly to the SBA to pay down leverage without 
having first been invested in small businesses.
    I just want to read you from an investor. This is the 
Arkansas Development Finance Authority, which has authority to 
invest in venture capital funds and is considering an 
investment in an SBIC. They may not do it.
    We are very concerned with the SBA's unilateral right or 
the assertive right to call outstanding portion of private 
capital commitment to the SBIC and require that it be applied 
not to new or existing investments, but to outstanding 
leverage. We view ourselves no different than private investors 
who expect their money, less fees, to be invested in small 
businesses not to be used to repay SBA. We understand that the 
SBA has a preferred position with respect to return of capital 
upon dissolution. However, that is much different from an 
expectation that private capital will never be deployed as 
investment capital that carries with it a potential for both 
return and gain.
    I will submit that for the record.
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    Mr. Mercer. That is a significant issue for many private 
investors, and we think that perhaps through the 
reauthorization bill Congress could kind of clarify what the 
intention was.
    In a related area, we are working with the SBA to probably 
suggest a change in the participating security distribution 
laws. We do not have an exact proposal yet, but I think we are 
getting closer. What this will do is it will have a positive 
impact on the subsidy rate. It will allow the SBA to get its 
money back faster without being a disincentive for private 
investors to continue the strong support for the participating 
security program.
    Other issues that we hope to discuss with the Committee, as 
we develop the bill, are the leverage cap. As you know, there 
is a leverage cap that any one SBIC or group of co-managed 
SBICs cannot exceed right now under the law, about $112 million 
in leverage. The SBIC program is a program of smaller venture 
capital funds, making smaller investments, and we really do not 
want to change that.
    By the way, you might be interested that over 65 percent of 
money committed to venture capital funds in 2001 went to funds 
with more than $250 million. The SBIC program is really a small 
fund program, and we want to keep it that way.
    But what is happening is for funds that are on the larger 
size of the SBIC program and are successful, and if they 
succeed in getting an additional license from the SBA, because 
of market conditions liquidity events are being pushed further 
and further out in their first fund. They are not able to get 
their money back in the first fund, even though value might be 
there, and the SBA has supported that by giving them a second 
license. Therefore they cannot pay leverage down on the first 
fund and start to draw leverage in the second fund.
    I think what we would like to discuss, and we have not even 
discussed this with the SBA, but thought about it last night, 
to discuss it as we go forward in reauthorization, is perhaps 
having the cap as it exists now apply to any one fund, as it 
does, but to provide a bridge for subsequent funds by saying 
that no more than $150 million for multiple funds. I just took 
a third and said maybe we can bridge this so that they will be 
doing that.
    Finally, and I did this in the House testimony, and I think 
Wayne will be an awfully good person to ask about some of these 
issues, is one of the values of the SBIC program is that fund 
managers not only provide money but work very closely with the 
entrepreneurs that they support. They serve on board seats and 
they do much more than that. They spend a lot of time working 
with individual companies.
    There is a provision in the law that says that all SBICs 
must invest 20 percent of their money in smaller funds, smaller 
businesses, which is a subset of permissible small businesses. 
For the very large SBICs, and we are talking about probably 
less than 10 percent or about 10 percent as the SBICs who have 
been able to raise private capital of say $50 million or more, 
what that does is it starts to force them to invest in far more 
portfolio companies than they have personnel to actually go out 
and work with.
    What we would like to discuss, both with the SBA and with 
the Committee as we go forward in reauthorization, is taking 
away the mandatory nature of that statutory clause for SBICs 
with $50 million or more. I think Wayne would agree with me 
that once you are forced to invest--you always need a 
diversified portfolio for safety and soundness rules, and that 
covered by the overline limits. In other words, SBICs have to 
have a certain number of portfolio investments. But if you 
start to make them invest in too many investments, then they 
lose the ability to work with the entrepreneurs.
    I have well exceeded my 5 minutes.
    Mr. Warren. Lee, I think I can say for Senator Snowe that, 
at least on the UBTI issue, that the message has been 
delivered, so you are in good shape there.
    Wayne, did you want to add anything?
    Mr. Foren. Yes. We have a small SBIC that is a 
participating security SBIC. We have $15 million in private 
capital and with that small capital base we are then eligible 
for the third dollar of leverage, which we are in the process 
of seeking a forward commitment on.
    Our focus is growth stage businesses. $1 million to $3 
million is the amount that we invest in a company. We very 
seldom put in $3 million. It is usually $1.5 million to $2 
million, keeping a little dry powder because you always need 
it.
    Our focus, in terms of type of business, is manufacturing, 
distribution or B-to-B service, business-to-business service. 
We have 13 to 14 businesses in our portfolio, eight of which 
are manufacturing.
    It is interesting to note, when we think of the LMI area, 
of our companies, three of them are in enterprise zones and 
four of them are either minority-owned or minority-managed. I 
think, without being an LMI-type company, that we are doing 
what is appropriate. We seek to do businesses whether or not 
they are in that area. We are not an LMI-type fund, but from 
time to time we run across pretty good deals in that regard.
    With respect to the point Lee was making, having every fund 
focus on smaller businesses is not a bad idea. When we 
established that rule in 1993, it was with a purpose. We did 
not want larger SBICs to forget from which they came.
    Now the smaller standard is $6 million in tangible net 
worth or $2 million in net income after taxes. That is the old 
SBIC standard. Having said that, it is also important to 
realize that the management team can only shepherd a certain 
number of investments.
    To the extent that you hold that fast and grow the fund, 
you are forcing them to have a larger staff. However, to some 
extent, you are also requiring them to continue to serve that 
smaller business.
    Ms. Forbes. Wayne, can I just do a follow-up on that? Why 
is it bad for them to have a bigger staff?
    Mr. Foren. There is nothing wrong with having a bigger 
staff.
    Ms. Forbes. That is just a natural flow from having--
    Mr. Foren. As you grow the fund you are going to have a 
larger staff. I used to think that it would be an easy task for 
an SBIC person to do five or six deals a year. It is like 504 
loans, you ought to be able to do one a month. I have to tell 
you, it does not work that way.
    I would like to reitierate the point that Lee made. When we 
provide financing to small businesses we do not just give them 
the money. If we make an equity investment, we always take one 
board seat, sometimes two, on a five-person board. That other 
seat would be occupied by an independent director who can add 
value to the company, either by being an industry person or 
somebody who is of value.
    If we are doing debt deals, of course, we have observation 
rights. We do not take board seats, but we are actively 
involved. We like to think that we are knowledgeable, actively 
involved, add value, but we do not take control unless the 
company gets off its plan that we have financed.
    We have a couple of our companies that have gone sideways 
to us, and of our four partners, two are acting as CEOs. In one 
case, we bought back a sub-debt strip that was in a deal for 20 
cents on the dollar. But by doing that, and that required an 
overline investment and we appreciate that. But by doing so, we 
were able to protect not only our investment but keep the SBA 
from suffering losses because we could walk away from our total 
equity investment and recover it all out of the sub-debt strip 
through collection. It is a traditional business, and it has 
revenue. But it was just overleveraged, so we will do fine on 
that bill.
    However, Patty, it requires a lot of work.
    Ms. Forbes. I could not understand what the downside of 
having a bigger staff would be. It seems to be part of your 
point, too, and frankly, it sounds like an argument on why you 
should not have bigger funds if they cannot handle more than 20 
to 30 deals.
    Ron, do you have a view on that?
    Mr. Mercer. Essentially, to run a venture capital fund, I 
mean people try to run them in the most efficient manner. In 
other words, deploy the capital in a way where you have 
mitigated as much risk as you can but without spreading 
yourself too thin, because management fees are capped at some 
level. Actually there is a pressure on reducing management fees 
across the industry.
    At some point, you cannot keep expanding. It just does not 
work.
    Ms. Forbes. But are not management fees a percentage of the 
total funds?
    Mr. Mercer. Right.
    Ms. Forbes. So if it is bigger, there would be more fees?
    Mr. Mercer. There is only so much time that these are 
highly paid individuals. At some point it starts to break down.
    Ms. Forbes. Does Ron have a view on this?
    Mr. Bew. I think one of the 5 problems the industry is 
having is the average size of the investment was probably $1 
million last year, and it has now dropped to close to $500,000. 
So it is meaning more investments going up. But it would appear 
that 2.5 percent is the cap the fees would allow for.
    Mr. Mercer. That is the maximum allowable.
    Mr. Foren. 2.5 percent of combined capital which is 
leveraged on private capital.
    Mr. Mercer. But private limited partners, as I am sure 
Wayne would attest, are starting to revolt at 2.5 percent, 
because most private limited partners are trying to get 
managers to accept less.
    Mr. Foren. But it is a balance. The limited partners give 
you a reality check. They are watching. We have got great 
limited partners. They want to make sure that you are properly 
managing the fund, so that you get enough resources to 
effectively manage it. When you have deals that go sideways on 
you, make sure that you do not just walk away from them but 
handle them right, and that takes time.
    We have not had pressure with respect to the management 
fee. What our limited partners want to know is what are you 
doing with the deals? Are you acting responsibly to get the 
money back and to grow the fund? They have not questioned the 
management fee, at least ours have not.
    Mr. Warren. Wayne, can I go back for just a second to 
something you mentioned earlier on in terms of the LMI work 
that you have done? Following up on the theme of a question 
that Senator Snowe asked earlier, is there an overlap between 
the SBIC program and the New Markets Venture Capital Program?
    Mr. Foren. SBICs ought to be doing deals that deserve to be 
done, whether new markets or otherwise. SBICs, in my opinion, 
ought not to say, because we have a new markets initiative, we 
do not have to focus or do not have to give consideration to 
that market area.
    Going back to the 1970s, the specialized SBIC program 
started in 1972 as an initiative before there was a legislative 
initiative to provide financing to a specific area, those who 
were socially or economically disadvantaged. Out of that grew 
the specialized SBIC program, and it served a purpose.
    If you would like to emphasize a given area, then proceed 
with your LMI initiative. If you want to have the mainstream 
program provide assistance to that area, then encourage and 
give incentives to do so.
    Our fund, we have committed to our limiteds to put money to 
work where we have raised it. For example, we have raised part 
of our fund in Puerto Rico. I believe that we are one of few 
SBICs that have done deals in Puerto Rico. It is because we 
have raised money down there.
    There are some good deals down there, but just like any 
other area you have to be careful what you do. I believe there 
are good deals in the LMI area. If you are going to have a 
fund, you have to propose that you are going to give those 
deals consideration. Again, if you want to have a special 
emphasis program, then obviously you are going to get more 
attention to that special emphasis area.
    However, you're spreading the risk. If you have the SBICs 
do some assistance in that area, then you are spreading the 
risk and you are not having it focused in a specifically 
targeted area.
    Mr. Tesdell. My name is Kerwin Tesdell.
    I would agree with that and think that the SBIC program, 
which is very important, has a different focus. It is getting 
equity capital into smaller businesses. The specialized 
program, the New Markets Venture Capital Program, has a 
different focus which is getting equity capital into lower 
income communities.
    You had asked about lessons learned. I think one lesson my 
organization has learned is that this is a specialized activity 
that knowing how to do developmental venture capital in these 
areas is a different kind of thing from--many of the tools are 
similar. But what Blake and the folks at CEI do is a different 
practice from traditional venture capital and you need 
specialized funds that know how to do that. Also, you need a 
program that provides appropriate resources. We can address 
that, I guess, in a few minutes.
    [The prepared statement of Mr. Tesdell follows:]
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    Mr. Warren. Actually, this whole topic covers both SBIC and 
New Markets Venture Capital, so feel free to jump in.
    Mr. Brown. Blake Brown, Chief Financial Office at Coastal 
Enterprises.
    We are a sponsoring organization of a New Markets Venture 
Capital fund, CEI Community Ventures, Inc. We just closed our 
fund last month after a fairly lengthy effort. But we are 
really excited about the program.
    Also, to address some of the concerns that Wayne had 
brought up, I think this program really has been crafted and 
structured to address some of the management issues of a fund 
by providing some matching technical assistance funding that 
goes along with the financing piece. I think that is a critical 
distinction between SBIC's and the New Markets Venture Capital 
companies, in order to provide that service to the small 
business.
    I think the critical piece here, is making sure that they 
get that hands-on experience and help. As Wayne said, it is 
hard to manage a fund with a lot of deals in it. It is a very 
labor-intensive business, venture capital is.
    I am on the board of both of our venture funds and we have 
very talented and qualified staff who go the extra mile, but 
they need that additional help. Part of the program, under the 
way it is set up under New Markets Venture Capital, is to allow 
us to be able to set up a mechanism whereby we can develop an 
appropriate range of outside expertise that can be brought in 
to assist the companies that we are investing in.
    Again, that is a critical component to this, to our effort, 
and we think that that is what is really going to make the 
difference between failure and success in terms of the 
businesses that we are supporting.
    We have had Venture Capital experience that goes back to 
mid-1980s. We started our first formal venture fund in 1997 
with $5.5 million and have been able to invest that fully and 
are starting to generate some reasonable returns from that 
fund. So small funds can be managed. It does not have to be a 
$30, $40, $50 million fund. I think the average size of our 
investments has been between $100,000 and $300,000, which is 
what the New Markets Venture Capital program is targeted to.
    It is interesting that under the SBIC program they have 
gone from $1 million down to $500,000. It is still above the 
target market that we are looking for in our venture funds.
    I think the other distinction is the fact that we are 
focused on underserved low income communities. Those are areas 
that need directed capital, and support. It cannot be just kind 
of an offshoot of a larger program. I think it takes that 
concerted effort to make things happen in those communities.
    That is why we are really excited to have this fund. We are 
one of six that, I believe, have closed and have received 
funding. We are a little bit concerned that funds have not been 
authorized going forward for this.
    We think there is a lot to be learned with this program. We 
are really excited about it.
    I would just cite an example of the deal that we did 
through our first fund. It is basically a company that is 
called Maine Coast Organic Products in Washington County, 
Maine, which has an average wage of $12,500. It is a very low 
income county. We have invested a little over $100,000 in this 
particular company that converts waste product, from fisheries 
to blueberry barrens, into what we call designer dirt, or 
compost. I think you can actually buy it here in Washington, 
D.C. But it is a company that would not have come up on the 
radar screen.
    Mr. Bew. Does it come with black flies?
    Mr. Brown. Depends on the season.
    I think this probably would not have come up on the radar 
in an SBIC-type of situation and would not have attracted 
traditional equity. We think there are a lot of those 
opportunities that are being missed because venture capitalists 
have got their radar set a little bit too high.
    Again, I think the SBA can play a big role here in 
promoting that kind of activity. Those are my comments.
    Mr. Tesdell. Maybe I can just add a little bit. I am the 
President of a community development venture capital alliance, 
the Association of Community Development Venture Capital Funds.
    As you know, we are sort of the new guy on the block, a new 
program. I think I can report that at least so far the program 
has been a tremendous success. There were seven conditionally 
approved New Markets Venture Capital companies and, at this 
point, all of them--while they have not all completed the full 
process with the SBA--all of them have raised their private 
sector match. That is $70 million that is going into lower 
income areas. This is money raised from investors, many of 
which are not traditional venture capital investors. It is 
coming from colleges and universities, from foundations, from 
local governments, and from local corporations, all interested 
in supporting the development of their communities.
    This is a really remarkable success, given what is 
happening in the rest of the Venture Capital field where 
capital raising has come to a standstill. We had a situation 
where we had a new Government program, and our sales pitch was: 
give us money to invest in some of the most disinvested areas 
of the country. Yet, these companies have been successful. I 
think that is remarkable.
    Again, just to emphasize some of what Blake was saying 
about the differences between new markets and some of the other 
programs that the SBA operates, first of all, we are targeted. 
We are specialized companies. The kind of expertise that 
organizations like Coastal Enterprises and others around the 
country develop in doing this developmental venture capital 
activity is really necessary in doing the kind of work that we 
do.
    Also, this sort of flows directly from your discussion, the 
issue of the program providing this technical assistance money 
to help pay for the extra assistance that our funds provide to 
smaller companies run by people who do not have Harvard MBAs 
and experience at Intel and so forth. That is the key portion 
of this program that allows New Markets Venture Capital 
companies to play this developmental venture capital role.
    I want to emphasize that this is not a program that was 
invented in Washington, that there is an entire industry out 
there of funds that do this sort of thing. We count 79 
community development venture capital funds and funds in 
formation around the country, with more than $500 million under 
management.
    Again, differences from the SBIC program. While 50 percent 
of the money of the investments from SBICs recently have gone 
to five high wealth states--California, New York, Texas, 
Massachusetts, and Illinois--community development venture 
capital fund focus on places like Appalachian, Kentucky and the 
Delta region of Mississippi, and northeastern Minnesota areas, 
that traditionally have been disinvested and where rates of 
unemployment are very high.
    We also mentioned investment sizes. The average investment 
size for a community development venture capital fund is 
$350,000, as compared with the numbers you were just hearing.
    Through SBICs over the last few years, about 41 percent of 
the financing has gone to higher tech companies. For community 
development venture capital funds, fully half of our 
investments have gone into manufacturing companies, the types 
that provide good jobs for lower income people.
    Just to sum up, I think Congress originally authorized and 
created this program because it saw a need to bring equity 
capital and the power that that tool has brought through the 
SBIC program and other venture capital funds to the Nation and 
focus that on areas of the country that need it most. That was 
in December 2000. If you look at the economic situation right 
now, the program is even more needed.
    We are asking that this program be reauthorized and also we 
are hoping that the appropriations will continue to this 
program.
    Mr. Foren. Just an observation. I would expect that your 
investors, your limited partners, would require a lower rate of 
return. Is that true?
    Mr. Brown. No, not necessarily. Again, our philosophy has 
always been what we talk about as two bottom lines, and we 
added a third. We really are conscious about what we invest in 
with respect to the environment, but also we are looking for 
the social mission and the financial return. We do have some 
banks that are investing in our funds.
    I think they are looking for a reasonable rate of return. 
Venture capital returns are all over the ballpark, we know 
that. But the whole point is that we are here to try to make 
money, but also to have social impact.
    Mr. Foren. But I would think the thesis would be, because 
you did have the public purpose focus, that your investors 
would have a greater tolerance for a lower rate of return, as 
opposed to venture funds that limiteds are putting money into 
with the expectation of getting a higher rate of return.
    Mr. Brown. Again, some of our investors may have that 
philosophy, but our approach has always been that we are here 
to make money but also to provide the social impact and to test 
that thesis, that you can make money and be socially oriented.
    Mr. Tesdell. If I can add, I think those two things tend to 
go together. You can have a successful business that creates 
profits for your fund, but that also creates jobs and is a 
sustainable business.
    Mr. Warren. Wayne, can I ask for your comments, in terms of 
how is technical assistance handled when your SBICs make 
investments in LMI businesses?
    Mr. Foren. We do not, when we make an investment we are 
looking at where this company is going. Our focus is growth 
stage companies. We are looking for a growth plan. The business 
plan we expect to show growth.
    Frequently, the only thing we would do is, which is a 
little different, is that we typically have a management 
consulting arrangement with them, established right at the 
outset, whereby if we have to put a lot of time unexpected into 
that company, we expect to get paid for it because we have 
limited resources. But that is not giving technical assistance 
where they are getting it for free or on the cheap. That is 
where they are paying us, getting back to this point of having 
limited fees income.
    When we make an investment, it is a determination that we 
believe in the business proposition, in the plan, the concept, 
and we are there to do what we can to help grow that company. 
So whatever we give, we give. But there is no concept of 
funding that ``technical assistance''.
    Mr. Warren. Lee, I know you have been patiently waiting.
    Mr. Mercer. I do not want this to be a battle of 
statistics, but since you opened the door, last year $737 
million of SBIC money was invested--that is 28 percent of all 
money--was invested in 434 manufacturing companies in 41 
States. So I do not want it left on the table that somehow this 
program is some high-tech program for rich kids.
    Secondly, of all the money invested last year by SBICs, 27 
or 28 percent of it, again over $700 million, was invested in 
companies located in LMI areas. My understanding actually, in 
talking to some people at the SBA, is it may be closer to 45 or 
50 percent of the money, depending on the definition.
    So NASBIC has remained neutral, and has never taken a 
position on the New Markets Venture Capital Program. We do not 
profess, as an organization, to have expertise to say whether 
or not the targeted program is necessary. All we can show is 
what we do, and our members, like Wayne, invest in small 
businesses that show the potential for growth, wherever they 
are, and whatever the industries they are in.
    Thank you.
    Mr. Warren. Ron, did you want to add to that?
    Mr. Bew. I can follow up on that. Lee makes an interesting 
point. Those numbers are pretty close to correct. It is 
interesting to note that the market is serving with great 
impact the LI and LMI areas. The LI area, I do not think you 
quoted that number, since I have them all in my head, was $1.2 
million.
    Mr. Mercer. I did not know there was an LI area.
    Mr. Bew. We looked at the LI impact and it is around 25, 
almost 26 percent, $725 million. I think the New Markets 
Capital Ventures Program was more akin to an LI area. The SBIC 
program actually, stunningly, went up to 46 percent by dollar 
and $1.2 billion. That is the market serving these areas.
    Mr. Tesdell. I obviously did not, at all, mean to imply 
that the SBIC program was not doing important things in low 
income areas. In fact, this whole tool of using venture capital 
equity tools to promote growth is something that we certainly 
believe in.
    I guess the question is whether there is a place within the 
SBA and within the federal programs for a program that can 
specifically target these areas and that can provide the kind 
of resources and support needed for funds like Blake's that 
very specifically target these areas and develop that kind of 
expertise.
    Ms. Forbes. We have some questions about the SBA's 
processing of these proposals. Evidently, you got through the 
process of conditionally approving NMUC's just fine. But then 
there seemed to be a number of holdups in the closing process. 
I am wondering, as you are going forward, do you know how many 
of the seven conditionally approved NMUC's have actually 
closed?
    Mr. Bew. I think five have actually closed. Is that 
correct? Jeff Pierson is here and can add some of the details. 
Five of the seven have closed. We extended the program to July 
9th. I also think we expect the other two to close. Am I 
mischaracterizing that?
    Ms. Forbes. Is that correct?
    Mr. Pierson. That is correct.
    Ms. Forbes. Right now the money has been rescinded for the 
second round, but if we were successful in getting that 
restored, would you be prepared to continue work on this 
program?
    Mr. Bew. To do what?
    Ms. Forbes. To propose another round of funding and do the 
conditional approvals. We have a lot of concern that SBA seemed 
to be dragging its feet on this program. It was a new program 
and did not seem to be given the proper attention. So we are 
just wondering, as the money comes to you, the next time there 
is a supplemental for example, you will be prepared to move 
forward on the next step?
    Mr. Bew. Of course, I was not here back then, but the SBA, 
the Investment Division area is running the program. The market 
is difficult and this program has gone on for close to 3 years. 
There has been difficulty. These five to seven New Market 
Venture Capital funds have had difficulty, just getting support 
in the marketplace and investments.
    Ms. Forbes. But there have been significant delays in the 
processing at the SBA. My question is really going forward, 
will you be prepared? Is the New Markets Office going to 
continue, up and running, so that when the SBA gets this money 
restored, you are going to be prepared to act on it? Or are you 
going to have to reconstitute an office or add people?
    Mr. Bew. We are running the program now.
    Ms. Forbes. Your intention is to keep the office open? The 
separate office for New Markets Venture Capital?
    Mr. Bew. We will continue to operate the program. We have 
people dedicated to the program, yes.
    Ms. Forbes. We will have some follow-up questions on how 
many people are staffing that, et cetera. Because we do not 
want to re-create another delay.
    Mr. Bew. It takes some resources, because it is not just 
funding or licensing going through competitive bidding. It is 
also an oversight issue. So it will take some resources to 
manage the fund.
    Ms. Forbes. You are continuing to do that?
    Mr. Bew. We are.
    Ms. Forbes. Great.
    Mr. Warren. Are there any other comments on the SBIC and 
New Markets Venture Capital area?
    Ms. Forbes. I actually have some questions for Lee. You are 
recommending that the percentage go up to 1.5 percent?
    Mr. Mercer. Correct.
    Ms. Forbes. Are you confident that that will be okay for a 
3-year reauthorization period? Or is there some way that we 
should allow for adjustments in year two and three of the 3-
year reauthorization?
    Mr. Mercer. Well, the suggested 1.5 has no magic in it. If 
the number that were put in were higher than that, I think it 
probably would leave more room for variations over a 3-year 
period so we would not have to come back in.
    There is really no, right now, existing sensitivity 
analysis that I can point you to that says at X percent it 
becomes a disincentive for people to invest in SBICs.
    But clearly, and I think some in the SBA have suggested--
well, the SBA, I believe, has suggested 1.7 percent, am I 
correct? We would not have any quarrel with that.
    Ms. Forbes. Ron, what is that based on, the 1.7?
    Mr. Bew. It is just the allowance going forward.
    Mr. Mercer. It is the fudge factor.
    Ms. Forbes. It would be up to 1.7 percent? Right?
    Mr. Mercer. It is a floating percentage.
    Ms. Forbes. You would only place it at whatever it takes to 
get to the zero subsidy rate?
    Mr. Mercer. Right. Our hope is that actually when we come 
to the Committee with--when the SBA and the industry come, 
hopefully within the next 30 days, with a proposal to change 
the law on participating security distributions and how they 
are characterized, that that is going to have a positive impact 
on the subsidy rate so that not to exceed 1.5 or not to exceed 
1.7 would hopefully trend down. Unless OMB makes some serious 
errors in their assumptions.
    Ms. Forbes. You will have some sort of projection about the 
effect on the subsidy rate that the new proposal is likely to 
have?
    Mr. Mercer. As I understand it, the SBA right now is trying 
to--and I do not want to put words in their mouths. NASBIC has 
suggested one potential change in the law. What we have asked 
is whether the SBA could determine if the law were to change 
that way, say for this year, if it had been changed this year 
what would the subsidy rate have been. So that we can get a 
feeling for what the impact would be.
    That is what the SBA is working on now, and we are hopeful 
that that will bear fruit in the next 30 days.
    Mr. Warren. Lee, we would obviously like to continue 
working with you on that package, as well. I now you and Greg 
and others have discussed it and we are wide open for that.
    Mr. Mercer. I just do not want to lay anything on the table 
yet because we are uncertain as to--A, we want to be in 
agreement with the SBA, if it is at all possible. We do not 
want to lay anything on the table until we try to understand 
exactly what the impact will be. We know it will have a good 
impact. We just do not know how much.
    Ms. Forbes. And there is no cross subsidization? Sometimes 
in the subsidy rate calculations, when one thing goes up, and 
the other thing goes down.
    Mr. Mercer. There certainly is the potential, that is why I 
mentioned OMB. There certainly is the potential for OMB to 
readdress some of the assumptions that are in the model that 
are unrelated to what we are suggesting. Those could have a 
negative impact on the subsidy rate. The two could end up 
either balancing each other out or one having more impact than 
the other.
    Ms. Forbes. I have one last question for Kerwin. Do you 
have a sense of the demand for the second round of funding? If 
this were reauthorized, do you have any sense of what the 
demand would be be for the third round of funding?
    Mr. Tesdell. Right. Among our membership, already, there 
are six or seven funds that have expressed very strong interest 
or had plans to apply for the second round. We expect a much 
higher demand than that for the third round.
    I think, to the extent that we are seeing people holding 
back, it is because of the uncertainty of what is going on with 
the program. But once that uncertainty is clarified, I think 
there will be very strong demand.
    Mr. Warren. Thank you very much. I think this has been very 
helpful. We have had a lot of good positive feedback and some 
excellent suggestions on all of the programs we have covered 
today.
    We are coming towards the end of our phase of collecting 
feedback on programs, looking for recommendations. We have a 
little bit more work to do in that area, and then obviously 
then the Committee is going to turn to preparing the 
reauthorization legislation, which it is certainly our hope to 
have a 3-year bill as we move forward into the summertime.
    We know time is of the essence, and we are keeping that in 
mind. So we will obviously be calling on you.
    As we have done with the prior roundtables, the record will 
remain open for 2 weeks. If there are additional comments or 
suggestions that occurred to you that there was not an 
opportunity for, please, if you would, send them in. One of the 
easiest ways to do it is if you will e-mail them in to our 
hearings clerk, Lindsey Ledwin, or to any of us and we will get 
them into the record that way.
    With that, I thank you, and we will be adjourned.
    [Whereupon, at 11:30 a.m., the roundtable was adjourned.]
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