[Senate Hearing 108-514]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-514



                THE PRESIDENT'S FISCAL YEAR 2005 BUDGET
                     REQUEST FOR THE SMALL BUSINESS
                             ADMINISTRATION

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP

                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 12, 2004

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


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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



              Weston J. Coulam, Republican Staff Director
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Snowe, The Honorable Olympia J., Chair, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Maine..........................................................     1
Crapo, The Honorable Mike, a United States Senator from Idaho....     3
Pryor, The Honorable Mark, a United States Senator from Arkansas.    14

                           Witness Testimony

Baretto, The Honorable Hector V., Administrator, United States 
  Small 
  Business Administration, Washington DC.........................     5
Wilkinson, Anthony, President and Chief Executive Officer, 
  National 
  Association of Government Guaranteed Lenders, Inc., Stillwater, 

  Oklahoma.......................................................    40
Coit, David, Chairman, National Association of Small Business 
  Investment Companies, Portland, Maine..........................    47
Mathews, Mary, Former Board Chair, Association for Enterprise 
  Opportunity, Virginia, Minnesota...............................    64
Golden, Ellen, President, Association of Women's Business 
  Centers, Wiscasset, Maine......................................    70

          Alphabetical Listing and Appendix Material Submitted

Baretto, The Honorable Hector V.:
    Testimony....................................................     5
    Prepared statement...........................................     8
Bayh, The Honorable Evan:
    Post Hearing Questions for The Honorable Hector V. Barreto...   137
Burns, The Honorable Conrad:
    Post Hearing Questions for The Honorable Hector V. Barreto...   138
Crapo, The Honorable Mike:
    Opening statement............................................     3
Coit, David:
    Testimony....................................................    47
    Prepared statement...........................................    50
Golden, Ellen:
    Testimony....................................................    70
    Prepared statement...........................................    73
Kerry, The Honorable John F.:
    Post Hearing Questions for The Honorable Hector V. Barreto...   109
Mathews, Mary:
    Testimony....................................................    64
    Prepared statement...........................................    66
Pryor, The Honorable Mark:
    Opening statement............................................    14
    Prepared statement...........................................    92
Snowe, The Honorable Olympia J.:
    Opening statement............................................     1
    Post Hearing Questions for The Honorable Hector V. Barreto...    94
Wilkinson, Anthony:
    Testimony....................................................    40
    Prepared statement...........................................    48
                        Comments for the Record

                                                                   Page

Anderson, A. Scott, President and CEO, Zions Bank, Salt Lake 
  City, Utah, letter.............................................   160
Automated Food Systems, Inc., Duncanville, Texas, letter.........   161
Barnett, Ralph, President, Bay Area Association of Government 
  Guaranteed Lenders, letter.....................................   163
Bateman, Dwight, Executive Vice President, Community South Bank, 
  Knoxville, Tennessee, letter...................................   165
Bentley, J. Frayne, Senior Vice President, First Bank of the 
  South, Lawrenceville, Georgia, letter..........................   167
Berkowitz, Martin, COO and Interim CEO, The Veterans Corporation, 

  Alexandria, Virginia, letter...................................   168
Blasetti, Jennifer, Senior Vice President, Eaglebank, Everett, 
  Massachusetts, letter..........................................   169
Bowers, Billy, Knoxville, Tennessee, letter......................   170
Burns, The Honorable Conrad, a United States Senator from 
  Montana, 
  prepared statement.............................................   172
Cantwell, The Honorable Maria, a United States Senator from 
  Washington, prepared statement.................................   173
Casani, Drew, Director, The Texas Manufacturing Assistance 
  Center, Fort Worth, Texas, letter and attachments..............   177
Chevalier, Joseph, Senior Vice President, First American Bank, 
  letter.........................................................   186
Cowan, Sarah A.P., Vice President, National Bank of Middlebury, 
  Middlebury, Vermont, letter....................................   187
Crawford, Christopher L., President and CEO, The National 
  Association of Development Companies, Washington, DC, statement   188
Culver, Robert, CEO, 4dSolutions, Boyertown, Pennsylvania, letter   195
Cymerman, Z.A., CEO, NATO Expansion Engineering & Program 
  Management Corporation, letter.................................   197
DiFrango, Jerry, CPA, Controller, SMC Business Councils, 
  Pittsburgh, 
  Pennsylvania, letter...........................................   199
Dugdale, Raymond W., Vice President, North Shore Bank, Peabody, 
  Massachusetts, letter..........................................   200
Gill, William C., Vice President, ResourceBank, Virginia Beach, 
  Virginia, letter...............................................   201
Goddin, Scott, Director, U.S. Export Assistance Center, Portland, 
  Oregon, letter.................................................   203
Hampson, Tom, Executive Director, ONABEN--A Native American 
  Business Network, Tigard, Oregon, statement....................   204
Harvey, Judi, SBA Processing Manager, Community South Bank, 
  Knoxville, Tennessee, letter...................................   206
Hice, Alan J., Assistant Vice President, Community South Bank, 
  Knoxville, Tennessee, letter...................................   207
Homer, Jr., Pete, President and CEO, National Indian Business 
  Association, Washington, DC, statement.........................   208
HUBZone Contractors National Council, Washington, DC, statement..   210
Hurst, Jan Sandhouse, President, The JSH Group, Inc., Parker, 
  Colorado, letter...............................................   211
Jain, Rakesh, President, RJ Engineering Systems, Inc., Cedar 
  Rapids, Iowa, letter...........................................   213
Kirsch, Philipp, President and Entomologist, IPM Tech, Portland, 
  Oregon, letter.................................................   215
Knight, Ernest, Director of International Sales, PlayPower, Inc., 
  letter.........................................................   216
                  Comments for the Record--continued.

                                                                   Page
Landis, Marilyn D., President, Basic Business Concepts, Inc., 
  Pittsburgh, Pennsylvania, letter...............................   218
Lomell, Frank E., Vice President, SBA Manager, California Oaks 
  State Bank, Thousand Oaks, California, letter..................   219
Lowles, Thomas, Chair, Export Council of Oregon and S.W. 
  Washington, Portland, Oregon, letter...........................   221
Mahn, Sherlock B., President, Kwaplah International, Inc., 
  Corvallis, Oregon, letter......................................   222
Metcalf, Lori, Director of Operations, Enterprise Development 
  Corporation, Boca Raton, Florida, letter.......................   223
Miller, Jeffery, Foothills Sanitation Recycling, Inc., North 
  Wilkesboro, North Carolina, letter.............................   226
Moravick, David N., Vice President, Rivergreen Bank, letter......   228
Myers, Jim, CPA, Knoxville, Tennessee, letter....................   229
Mynatt, Michael D., Knoxville, Tennessee, letter.................   230
Nagle, Patrick F., Vice President, First Commonwealth Bank, 
  Indiana, 
  Pennsylvania, letter...........................................   231
Neese, Terry, President, Women Impacting Public Policy, Oklahoma 
  City, Oklahoma, statement......................................   232
Noonan, Agnes, Executive Director, WESST Corporation, 
  Albuquerque, New Mexico, letter................................   241
National Small Business Association, Washington, DC, statement...   243
Rappleye, Kevin, Vice President, Bank of the West, Sacramento, 
  California, letter.............................................   247
Redmond, Dorothy E., Director of Finance, BETA Calibrators 
  Corporation, Dallas, Texas, letter.............................   249
Riley, Joseph, Senior Vice President, Small Business Banking, 
  Eastern Bank, Lynn, Massachusetts, letter......................   251
Ross, Spencer, Chair, New York District Export Council, Cold 
  Spring Harbor, New York, letter................................   252
Ruhlman, William P., President and COO, Borrego Springs Bank, 
  LaMesa, California, letter.....................................   254
Russell, Karen, President, IBS Commodities, Inc., Newtonville, 
  Massachusetts, letter..........................................   256
Simon, Theresa A., Vice President, Ultima Bank Minnesota, Winger, 

  Minnesota, letter..............................................   257
Smith, Lee J., Program Director, BusinessLINC, Tucson, Arizona, 
  letter and attachments.........................................   258
Streich, Susan E., SBA Relationship Manager, Capital One, Glen 
  Allen, 
  Virginia, letter...............................................   291
Thamert, David A., Credit Analyst, United Prairie Bank, Owatonna, 

  Minnesota, letter..............................................   293
True, Scott C., Vice President, Danvers Savings Bank, Danvers, 
  Massachusetts, letter..........................................   294
Waldkoetter, Fred, Chairman, North Texas District Export Council, 
  Dallas, Texas, letter..........................................   295
Weaver, Andreas C., Senior Vice President, Gateway Business Bank, 
  letter.........................................................   297
Weldon, Tracy, Community South Bank, Knoxville, Tennessee, letter   298
Willmann, L.D., SulTa Manufacturing Company, Sulphur Springs, 
  Texas, letter..................................................   300
Wilson, Donald, President, Association of Small Business 
  Development 
  Centers, Washington, DC, statement.............................   301
Yancey, Jr., W. Kenneth, CEO, Service Corps of Retired Executives 

  Association, Washington, DC, statement.........................   311
Young, Thomas M., Vice President, Boston Private Bank & Trust 
  Company, Boston, Massachusetts, letter.........................   314

 
                THE PRESIDENT'S FISCAL YEAR 2005 BUDGET
                     REQUEST FOR THE SMALL BUSINESS
                             ADMINISTRATION

                              ----------                              


                      THURSDAY, FEBRUARY 12, 2004

                              United States Senate,
          Committee on Small Business and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:35 a.m., in 
Room SR-428A, Russell Senate Office Building, Hon. Olympia J. 
Snowe, Chair of the Committee, presiding.
    Present: Senators Snowe, Crapo, and Pryor.

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

    Chair Snowe. The hearing will come to order.
    Good morning and welcome to this morning's hearing on SBA's 
budget proposal for fiscal year 2005. I want to thank 
Administrator Barreto for being here this morning to examine 
some of the issues regarding the SBA's blueprint for priorities 
as well as several small business representatives who are also 
here to testify in the second panel.
    I know the Administration has made the economy, and 
specifically job creation, the cornerstone of its agenda and I 
could not agree more. As economic signs appear to be pointing 
in the right direction, we must also move heaven and earth to 
ensure that jobs remain job one, if this recovery is to be 
meaningful to Americans in their every day lives.
    So as we explore the SBA's bottom line for fiscal year 
2005, we must do so understanding that the bottom line for 
Americans is that 23 million small businesses are producing 
over 50 percent of the gross domestic product and that our 
Nation's small businesses have consistently created three-
quarters of the new jobs in the United States.
    Specifically, SBA programs have contributed to the creation 
of nearly 6 million jobs since 1999, a remarkable record of 
achievement in challenging times. Moreover, according to the 
SBA's own analysis, reauthorization of the Agency will result 
in an estimated 3.3 million jobs over the coming 5 years with 
the SBA and its programs predicted to support over one million 
jobs over that same period through prime contracts and 
subcontracts.
    So there should not be any doubt about the critical role 
that small businesses play in putting Americans to work. And if 
that is not enough, when you consider that the Small Business 
Administration budget represents only .03 of 1 percent of the 
Federal budget, yet at the same time small businesses are 
creating about three-quarters of all new jobs in America, can 
there be any question that assisting our small businesses is 
not only an investment in our country's economic future, but 
also the future of the fiscal health of our Federal Government?
    Therefore, I come to this hearing to examine some of the 
issues that have been raised with respect to the $678 million 
budget request of the Small Business Administration. This 
represents a 15 percent decrease from the 2004 request. And we 
have to examine some of the issues concerning whether or not we 
are sacrificing vital assistance to the very entities that are 
putting people at work which I think we can all agree is our 
mutual goal.
    This morning I will be listening very carefully and 
analyzing the SBA's budget line-by-line, because I believe that 
we have an obligation to ensure that we can continue not only 
to maintain, but also to strengthen and improve the SBA's key 
loan and assistance programs. I have heard time and again, from 
my constituents in Maine and throughout the country that SBA's 
key loan and assistance probrams are critical lifelines to the 
job generators that we call small businesses.
    Specifically, the SBA's lending and investment capital 
programs are two of the Agency's central resources in providing 
small businesses with capital to grow, expand and operate. In 
fiscal year 2003, the SBA approved a record number of loans and 
venture capital financed more than $16 billion for small 
businesses. Those loan programs, such as the 504 and the 7(a) 
loan programs have a proven record of helping small businesses 
to create and retain more than 2 million jobs throughout 
America.
    In 2003, the 7(a) program alone reached a level of $11.3 
billion in loans. Yet, as I have expressed many times, I have 
been deeply concerned about the management of this program over 
this past year in particular. In June of 2003, this Committee 
highlighted the potential for a shortfall in the 7(a) loan 
program and that shortfall occurred just last month, resulting 
in a shut-down of the program. Obviously, we have got to 
prevent this from recurring. And I am committed to finding a 
long-term solution to funding the needs of the 7(a) program.
    What that will require is the fullest possible disclosure 
from SBA regarding the past performance of this program and the 
data necessary to conduct a complete analysis and develop 
options for the future so that we can prevent this from 
recurring? Only by completely understanding the accounting for 
the program will we be able to construct the best possible 
solution to assist small businesses and ensure that they do not 
have to suffer from an inconsistent program or from 
unnecessarily high loan fees. And I will be looking to the SBA 
for that accountability.
    Moreover, while recent years have been difficult times for 
businesses seeking venture capital, the SBA has allowed for 
venture capital at a far greater level than would otherwise 
have been available. Indeed, over the last 5 years the Small 
Business Investment Company Program alone has made more than 
20,600 investments in small businesses with a total value of 
$19.4 billion with a dividend of the creation and retention of 
approximately 549,000 jobs and 4,800 investments to small 
businesses during this past year that totals almost $2.5 
billion in equity and debt capital.
    This is strong evidence that this program is worthy of our 
continued support to guarantee that it continues to benefit 
emerging businesses.
    Finally, we must ensure that we continue to build on the 
successes of SBA's Technical Assistance Programs. When we know 
that for every dollar we spend on counseling through the Small 
Business Development Centers creates $3 in return in the form 
of tax revenues while creating 64,000 new small businesses and 
retaining 68,000 jobs in fiscal year 2002; and, when we know 
that the SBA's Women's Business Center Program has helped to 
create more than 2,000 new small businesses and retain almost 
5,000 jobs through its unique training and counseling programs. 
Given the successes of these programs, who could argue that 
they are indispensable?
    So I will want to be assured and convinced that these 
programs will be strengthened, not jeopardized.
    Today, I also look forward to hearing from each of our 
participants on the SBA's budget proposal and its potential 
implications for small businesses. Your input is essential to 
identifying any barriers that might limit the success of small 
business. Because in the end, the SBA is one of our most 
valuable resources for ensuring the success of small business.
    As Chair of this Committee, I look forward to working with 
the Administration and with the Administrator, to assure that 
businesses can benefit and prosper in the future.
    So it is my pleasure to recognize a colleague from Idaho, 
Senator Crapo, who has been a real champion of small businesses 
and I welcome you. Any comments?

             OPENING STATEMENT OF HON. MIKE CRAPO, 
               A UNITED STATES SENATOR FROM IDAHO

    Senator Crapo. Thank you very much, Madame Chair and I do 
have a few comments.
    First of all, I want to indicate that it is interesting as 
I listen to your remarks that you pretty much gave my speech. 
So I can make this short and associate myself with your 
comments.
    Administrator Barreto, I welcome you here and I want to 
tell you that, although you will hear some concerns from us 
today about the budget that the SBA is presenting to Congress, 
I want to personally thank you for your leadership at the SBA 
and for your attention to Idaho and to the needs of people in 
Idaho and your recent trip there.
    In fact, I was just on the radio doing an interview today 
talking about some of your upcoming activities in Idaho for 
some of our Hispanic community members. And again, I appreciate 
that very much.
    I also want to say, by way of introduction, that I will not 
be able to stay for the whole hearing. I have three hearings 
today going on at the same time. Secretary Thompson is front of 
the Budget Committee right now and Chairman Greenspan is in 
front of the Banking Committee, and I have got to be with you 
and with both of them. And so I apologize if I have got to step 
out.
    I do ask, Madame Chair, that my questions and so forth that 
I may not get to ask be made a part of the record and submitted 
if possible.
    Chair Snowe. Without objection, so ordered.
    Senator Crapo. Thank you. I just want to briefly indicate 
that I share some of the concerns--well, all of the concerns 
that Chair Snowe raised in her comments. I want to make it very 
clear that I, with all Americans, support the President's call 
to balance the budget, or to at least cut it in half over 5 
years. Actually, I am going to work, when I go to the Budget 
Committee in a few minutes, to try to get us on a glidepath to 
balance it in less than 5 years. I realize that that calls for 
some pretty stringent measures as far as the budget goes.
    As we move ahead in that process, however, and I look at 
what has happened with the SBA budget over the last 5 years and 
in the most recent 1 year period, I have to wonder whether we 
are making the right decisions about this budget and whether 
sacrifice is being asked to be shared across the Federal 
Government. When you look at the fact that the SBA has been 
reduced in its budget by 25 percent since 2001 and we see a 15 
percent reduction proposed just from last year to this year, 
that concerns me when our number one issue is jobs, and when 
the engine for driving jobs is small business in this country.
    It also concerns me when I look at the broad picture of all 
other agencies. There are only four other agencies in the 
Government that have had overall reduction in their budget over 
the last 5 years. Again, although I am a very strong fiscal 
conservative who is going to be fighting to make that sure that 
we have an even more fiscally conservative budget than the 
President has proposed, once we have that budget out there I am 
going to be looking to be sure that those parts of our 
Government that drive the important priorities are adequately 
funded and that they receive adequate priorities. And I just do 
not see that right now, frankly, in terms of the allocation to 
the SBA.
    In particular, with regard to the 7(a) program, I know this 
is not a partisan issue and I know you knew you were going to 
talk about it today when you got here. Each of us is concerned 
about what has happened with the 7(a) program to this point and 
want to make sure that this--which I consider to be the 
flagship program of the SBA--that this program is adequately 
funded and managed. And that whatever we end up seeing with 
regard to the actual budget for the SBA, that the allocations 
and the management of that budget make certain that the 7(a) 
program is made whole and is put on a glidepath for success. It 
is that, that I believe is behind much of the success of the 
small business endeavors in this country and we must not see 
that lost.
    And then again, interestingly, the Small Business 
Development Centers were also on my list of things to talk to 
you about. So Chair Snowe I am going to leave those issues in 
your hands to cover when I have to leave.
    But again, Administrator Barreto and Chair Snowe, I thank 
you for being here, and Chair Snowe for this hearing, and look 
forward to discussing these kinds of issues.
    Chair Snowe. Senator Crapo, I appreciate the comments that 
you have raised and actually I think you have identified some 
very key issues and statistics with respect to what has 
happened to the Small Business Administration. And the fact 
this is the very program that we ought to be buttressing and 
reinforcing because of its job creation capability, we ought to 
be leveraging the number of programs within SBA to create the 
kind of jobs in America that strengthen our economy.
    I mean, there is a cause and effect. I think all too often 
so many in Congress and outside of Congress do not appreciate 
the value of these programs and the SBA becomes a target for 
reductions. That is one of the things that hopefully we can 
continue to do more of is to expound the value of these 
programs.
    I appreciate what you have mentioned here this morning and 
I know it is very interesting in illustrating the point that 
SBA is one of four other programs that has been cut over the 
last 5 years.
    Senator Crapo. That is right.
    Chair Snowe. So I think that highlights some of the 
problems that we have been facing in the past where people do 
not realize that it creates a real incentive for job creation 
at a time when we certainly need it the most.
    So I appreciate your comments. You can be sure I will raise 
many of the issues that you have raised here this morning on 
your behalf.
    Senator Crapo. Thank you very much. I leave you with my 
proxy. You had it to start with.
    Thank you, very much, Mr. Barreto.
    Chair Snowe. Thank you for taking the time to be here.
    Administrator Barreto, we thank you for taking the time as 
well to be here. We thank you for your commitment and your 
leadership at the Small Business Administration. You truly have 
been the champion of small business in America and we thank you 
for all that you have done. So we appreciate the fact that you 
are here today to explain the Administration's request and the 
SBA's submission on its priorities for the coming fiscal year.
    You may begin, and I will obviously incorporate your entire 
statement in the record. You may proceed.

      STATEMENT OF HON. HECTOR V. BARRETO, ADMINISTRATOR, 
               U.S. SMALL BUSINESS ADMINISTRATION

    Mr. Barreto. Thank you very much Madame Chair and thank you 
for inviting me here today to talk about the Small Business 
Administration's 2005 budget and our strong commitment to 
continue to offer the very highest quality services to 
America's small business owners.
    A lot has happened over the last few years, both in 
America's small business community and at the SBA. When I 
became the SBA Administrator, I wanted to change the culture of 
our Agency. I wanted to create a new environment at the Agency 
and a new environment for America's entrepreneurs. And that 
meant not sticking with the status quo. That meant not doing 
things the way that we have always done them before. And that 
is what I would like to talk to you about today.
    The SBA is ready to send legislation to Congress that could 
add as much as $3 billion to our 7(a) Lending Program this year 
while simplifying the application process and moving the 
program towards a permanent zero subsidy rate. The President 
and I believe that this proposal provides a clear long-term 
vision for a more successful 7(a) program, a bold new 7(a) 
program that addresses the real issues of these new economic 
times.
    The plan calls for the expansion of the successful SBA 
Express program which accounted for a remarkable 33,000 SBA 
loans in 2003 and has proven effective in reaching underserved 
and rural markets.
    I know there are some skeptics in the industry that doubt 
the ability of this plan to succeed. Some of those same people 
doubted the success of the SBA Express program. They doubted 
our ability to convince banks to go into markets they had never 
been in before. They said banks would not make those loans. 
They said it would not be profitable.
    Well, the numbers do not lie. SBA Express was a tremendous 
success and this bold new 7(a) proposal will help continue that 
success so that our loan programs remain a powerful source in 
our growing economy. This proposal will move 7(a) loans to a 
lower guarantee rate, allowing the Agency to increase lending 
authority by 34 percent. That 34 percent increase will allow 
the SBA to remove the caps on 7(a) loans.
    But it will do too far more than that. At a program level 
of $12.5 billion in fiscal year 2004, that 34 percent increase 
in lending authority could mean 90,000 new loans in 2004 and as 
many as 500,000 new or retained jobs. This proposal allows 
lenders to use their own forms and procedures to apply for 7(a) 
loans, reducing the burden of excessive paperwork and making 
7(a) loans more accessible for rural and community banks and 
their customers.
    Our plan also helps move the 7(a) program towards our goal 
of a zero subsidy rate. There is also long-term potential for 
reducing fees on lenders and borrowers.
    There is more. I am proud to say that the budget we are 
submitting also increases the SBA 7(a) lending authority for 
fiscal year 2005 by 30 percent. That will allow us to reach 
thousands, perhaps tens of thousands more entrepreneurs than we 
ever have before.
    There is an added benefit to these proposals, because we 
are moving towards a zero subsidy rate for 7(a) loans. These 
tremendous increases in loan authority go hand-in-hand with 
demanding savings for America's taxpayers. Furthermore, zero 
subsidy for 7(a) loans also translates into long-term stability 
for the 7(a) program, something our partner lenders will 
appreciate.
    Let me hasten to add that our 7(a) program is not our only 
successful loan program. Our budget submission includes $4.5 
billion in lending authority for the 504 Certified Development 
Company program. The 504 is a great program for our small 
business customers and for the American economy. It is a job 
creator and we are particularly proud that the 504 program is 
continuing to make more and more loans to minority small 
business owners, yet another sign that the fastest-growing 
segment of the small business community continues to thrive.
    But that is not all that we are doing. I am also extremely 
proud that this budget strengthens the SBA core service 
delivery systems. We are investing in the successful delivery 
systems that we know get results for our clients. $88 million 
for Small Business Development Centers. $5 million for the 
Service Corps of Retired Executives. $12 million for Women's 
Business Centers. $750,000 for National Women's Business 
Council. $750,000 for veterans outreach. $1.5 million for 7(j) 
technical assistance.
    These proposals are part of our commitment to a new SBA 
with new ideas and new ways of serving our customers: new ways 
of reaching out, like our regional roundtable events, one of 
which you attended, Madame Chair, in Bangor last year;
    Madame Chair, our ongoing efforts to open up new offices in 
underserved areas known as alternative work sites, as we have 
done this month in Maine, in Portland and Bangor; new ways of 
fighting for the things that small business owners need like 
less burdensome regulations and association health plans; new 
ways to help create an environment of success for small 
business. That is the culture I want at the SBA, the new SBA. I 
am proud of the progress we have made.
    In 2003, the SBA approved 74,169 loans in our two major 
loan programs, more than ever before in our 50 year history. 
Nearly one-third of those loans went to minority business 
owners. In 2003, 2.1 million entrepreneurs received business 
counseling and technical assistance through SBA's counseling 
and training programs. In 2003, the Office of Advocacy saved 
small businesses $6.3 billion in regulatory costs. In that same 
year, the SBA website recorded more than 54 million visits. In 
2003, the SBA's Disaster Assistance Loan program made almost 
26,000 loans.
    Those are real results and that is what matters the most. 
Let me tell you why.
    At a business matchmaking event in Houston a few months 
ago, a businesswoman came up to me with tears on her cheeks. 
She said to me, ``Mr. Administrator, I am not a statistic. I am 
a real, living, breathing business owner. I want to thank you. 
After 9/11, it was an SBA disaster loan that kept my business 
open. And now I am here, learning and making connections to 
make my business grow.''
    That is what is important. That reminds us of what our job 
really is. This is about real people and real lives. Our 
responsibility is great.
    I am proud of these proposals, because I believe that they 
live up to that responsibility. I believe that they reflect an 
SBA that understands what is at stake. It is not about just 
programs and statistics. It is about results, measured by the 
success of our clients.
    I hope we can work together to get those results and help 
usher in more of that success for even more American 
entrepreneurs. And again, I want to thank you very much for 
having me here and I would be glad to answer any questions you 
might have.
    Thank you very much.
    [The prepared statement of Mr. Barreto follows:]

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    Chair Snowe. Thank you Administrator Barreto. We appreciate 
your testimony and obviously, I am going to be following up 
with some questions.
    But before I do so, I would like to recognize Senator 
Pryor, a very important member of this Committee. We welcome 
you, Senator Pryor, for any comments that you care to make.

             OPENING STATEMENT OF HON. MARK PRYOR, 
             A UNITED STATES SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Madame Chair, and I want to thank 
you for your commitment to small business and helping small 
businesses get started and to maintaining themselves throughout 
the country.
    I also want to thank Senator John Kerry who--I do not know 
where he is today, I am not sure he knows where he is today, 
but I know that he has been a very valuable member of this 
Committee and something that we are very focused on is trying 
to help small businesses.
    I must say that I am a little bit troubled in that, as I 
understand this budget, there have been a number of decisions 
made that will not only impact Arkansas, but impact the 
country. For example, the budget does not fund the 7(a) 
Guaranteed Loan Programs, it eliminates the Microenterprise 
Program, and it cuts funding both for the Women's Business 
Center Programs and Small Business Development Centers.
    And I know in my State, and I am sure everybody else's, the 
colleges and universities have taken advantage of some of those 
programs and they have really helped and had a good positive 
impact on communities all over this Nation.
    So let me say I acknowledge completely the very important 
role that SBA plays with small businesses. And also, I 
acknowledge the extremely important role that small business 
plays in our economy. If you look at all the numbers, you look 
at real job creation, you look at employment numbers, small 
business is really where the action is.
    A lot of times we focus on maybe the top 500 companies or 
the top 1,000 companies, whatever it may be. But really the 
bread-and-butter of this country and this economy is small 
business, entrepreneurhip, people who are willing to get out 
there and take a risk and put it all on the line. They are 
facing a lot of challenges, whether it is health care, finding 
the ability to retain employees, et cetera. They have a lot of 
challenges on their plate and I just hope that this budget will 
help and assist small businesses.
    So, I appreciate your comments and I look forward to the 
question period.
    Chair Snowe. Thank you very much for your comments, Senator 
Pryor, and points well taken. These are some of the issues that 
we want to explore here today.
    Just to reinforce what Senator Pryor has indicated about 
the job creation potential of SBA, I have a chart here--
unfortunately, we just do not have it on a large chart--to show 
the total jobs created or retained by SBA programs since 1999.
    [The information of Chair Snowe follows:]
    [GRAPHIC] [TIFF OMITTED] T2957.007
    
    Chair Snowe. But I think it is illustrative of the point 
that SBA does have the capacity for job creation in this 
country. And I think those of us who represent small States 
like Arkansas and Maine, it certainly has been true. But it 
also is true across America.
    So that is why there are concerns, Administrator Barreto, 
about perhaps some of the issues concerning, for example, the 
7(a) program and the restructuring that is being proposed in 
the Administration's request. So let us start with that.
    Obviously, we know what happened in the last few months. It 
has been a concern of mine, because actually I convened a 
roundtable last year around the whole issue of 7(a) and to what 
extent we should authorize that program.
    And I heard a very different figure than what was included 
in the Administration's budget. That figure would have been 
more consistent with the demand that occurred and ultimately 
that led to the shutdown of the program, albeit it was 
temporary, but it did affect the credibility and the integrity 
of the program and the SBA with respect to this issue.
    So I would like to have you address that issue, because 
clearly the program was reopened. But those small businesses 
that had submitted applications prior to the closure, prior to 
the deadline, they were then subjected to the cap of $750,000 
even though their applications were not large.
    Was there not a way of spacing out those loans so that we 
could adhere to our commitment and to their expectations? What 
is clear from everything that I received in the form of 
anecdotal information throughout last year, the demand was far 
greater than what was ultimately going to be authorized for 
meeting the demand in the program of $9 billion.
    So could we have done it in a different way that did not 
affect the credibility of the SBA program and people's 
dependency on it?
    Mr. Barreto. First, let me explain why it did happen. First 
of all, one of the things that we have really been challenged 
by over the last couple of years is the fact that we have been 
operating under a continuing resolution for 2 years in a row. 
It is very difficult for us to be able to manage a program like 
this when you are getting an apportionment for something that 
happened a year ago. If we would have had our budget, it would 
have been much easier for us to be able to manage and navigate 
this.
    So that is what happened. There was no intention on our 
part to close down our program. We simply ran out of money. 
Obviously, as soon as that happened and as soon as it was 
beginning to happen, we notified Congress of our intention to 
look at possibly putting a cap on the loan program. And by the 
way, we had to put in a cap last year because we were on a 
continuing resolution. Last year, the cap was $500,000. We were 
going to propose a $750,000 cap.
    I would like to put up a chart that shows the fluctuations 
in the volume that we were getting in the 7(a) loan program, 
because it is very illustrative. You see here at the end of 
last year what was happening to our loan volume. Usually we get 
about $25 million a day. But you see here these incredible 
spikes. We had days with $80 million. We had one day it was 
$115 million. It was absorbing a lot of our budget authority.
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    Something very important to know, Senator Snowe, is that 95 
percent of the loans that the SBA guarantees are under 
$750,000. It is only 5 percent that are over $750,000. The 
problem for us is that those larger amounts are real estate 
loans or fixed asset loans that eat up one-third of the money.
    This proposal that we are submitting today will help us to 
mitigate that. If we can move forward with that proposal in 
this year, we will be able to do some of those larger loans in 
the 7(a) loan program. Obviously, we want to achieve more in 
the 504 loan program as well.
    The last point I want to make on this is that it would not 
have mattered what we would have asked for in a previous budget 
cycle. That would not have helped our situation at the 
beginning of this year because we were operating under a 
continuing resolution. So we were getting an apportionment that 
would have been similar to the previous year when we were not 
seeing these kinds of spikes in volume.
    So I hope that helps to illustrate some of the challenges 
that we were faced with as we were ending last year and 
beginning this year.
    Now, we have our budget. The Omnibus Bill has passed, 
thankfully. We are happy for the support that we were able to 
receive on that Omnibus Bill, because that helps us to be able 
to manage the situation a little bit better.
    It does not solve all of the problems. We still want to 
pursue this proposal that we are making for this year. With the 
30 percent increase that we are asking for in budget authority 
for next year, up to the $12.5 billion, we believe that the 
increase is going to help us to be able to accommodate this 
volume that we are seeing. We have kind of been the victim of 
our own success. We are not complaining about that, but we are 
making proposals that will address those issues.
[GRAPHIC] [TIFF OMITTED] T2957.009

    Chair Snowe. First of all, was this last year unique in 
terms of the volume and the spikes?
    Mr. Barreto. Yes, it was.
    Chair Snowe. I am sorry, I cannot read it.
    Mr. Barreto. I am sorry.
    Chair Snowe. Is that big spike, what is on the bottom? Are 
those years?
    Mr. Barreto. Let me explain it to you, and I promise I will 
get you a smaller copy of this.
    Chair Snowe. I wish I had better eyesight.
    Mr. Barreto. This is starting at December 8th and it is 
going to January 6th. Basically what we are doing here is 
tracking daily volume. For us, a normal day would be $25 
million. We did not have very many $25 million days in 
December. Usually, when you get into the holidays, volume 
spikes down. But you see here, on December 9th, we had an $85 
million day. On December 12th, we had an $80 million day. On 
December 22nd, 3 days before Christmas, we had a $90 million 
day. On the day before Christmas we had a $90 million day. On 
January 6th we had $115 million day. So, incredible spikes.
    By the way, some of those spikes are related to the fact 
that we communicated to Congress that we were going to look at 
putting a cap in. And what ended up happening is the industry 
flooded us with larger loans, these multi-million dollar loans 
that eat up much of the budget authority. It really exacerbated 
our situation.
    I have one other chart I would like to show you. This is a 
5-year average of what the program has actually done. I think 
there is some confusion here as to what it is that we asked 
for.
    If you look at this chart, which is actually in billions, 
the yellow represents the actual expenditures. The blue line is 
SBA request and the orange line is the industry request. You 
see in 1999 the industry asked for something in excess of $10 
billion. Well, SBA only did $9 billion. In 2000, they again 
asked for something close to $11 billion. Well, we only did $9 
billion. In 2001, they asked for $11 billion. We only did about 
$9 billion. In 2002, the same. In 2003, the same. In 2004, the 
industry asked for $12.5 billion and that is what we are 
addressing in the proposal that we are making today, to obtain 
that $12.5 billion with an expansion of the SBA Express 
program.

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    In 2005, we are asking for $12.5 billion, because now we 
know that the volume is there. For the last 5 years, our 
request has always been appropriate for what it is that we 
actually have done.
    Chair Snowe. In response to the earlier chart, in terms of 
volume, first of all the small businesses were playing by the 
rules and all of a sudden they were subjected to a cap. That 
cap has not been lifted.
    Mr. Barreto. That is right.
    Chair Snowe. And that is a problem, because those 5 percent 
of the 250,000 businesses remaining. Their applications 
exceeded that cap already are going to be affected. They have 
spent a lot of money in making investments and processing that 
type of loan and their plans for the future.
    I think it is a matter of trust in the final analysis. I 
mean, irrespective of what happened the question is those were 
the rules, that was the program. And there should have been 
some way to resolve the remaining issues regarding that program 
for those who were subjected to the cap and their applications 
exceeded it. I think we should have found a way to equitably 
resolve that problem in fairness to them.

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[GRAPHIC] [TIFF OMITTED] T2957.012

    Mr. Barreto. I agree with you 100 percent, Senator Snowe. 
By law however, SBA cannot make loans if we do not have money. 
We would be in violation of the law. We did return those 
applications out of fairness to the small businesses. We did 
not know how long our program was going to be closed. We did 
not know if we were going to be able to get any kind of a 
budget passed.
    Luckily, we finally did get our budget passed. We were able 
to reopen the program.
    By the way, a lot of those applications that were returned, 
they have come back to us and we have processed those loans.
    Now, I want to reaffirm, 95 percent of the loans that the 
SBA does are under $750,000. We are helping 95 percent of the 
people that apply. Now, some of those loans that were above 
that $750,000 cap, they have already gone over to the 504 loan 
program, which we think is an excellent program. It is intended 
for those large real estate loans and fixed asset loans. So, we 
have addressed that.
    We would love to take the cap off. But one of the things 
that the industry has told us is: look, caps are one thing. But 
when you close down the program, that is just impossible for 
us. We cannot have the program closed even for one day. So what 
we are doing is managing the program right now with a cap.
    With the new proposal that we are making, we would be able 
to remove that cap tomorrow and accommodate some of those 
larger loans. The new proposal is going to get us pretty close 
to $12.5 billion in budget authority this year because we are 
going to be able to reduce that subsidy rate.
    Chair Snowe. In your previous chart, were we not still on 
track for the $12 billion in authorization? I think the point 
is, from everybody's calculation the demand for the program was 
going to result in at least $12 billion in authorization. Why 
did you not make that request last year?
    Mr. Barreto. There is no doubt about it. The reason is that 
we had no idea that 5 percent of the loans, those large, multi-
million dollar real estate loans that are coming into the 7(a) 
program, the working capital program. We had no idea that those 
loans were going to eat up one-third of the money. You see, 95 
percent of the people that borrow money from us are affected by 
the 5 percent who are making those large loans.
    We are not opposed to making large loans. We want to make 
large loans. We have a program that can do that. The 504 loan 
program leaves $2 billion on the table every single year. We 
had no idea. It has never happened before.
    And again, we have taken steps to address that. The 
industry has said: look, we want to do some large loans in the 
7(a) loan program. That is why we put forward our proposal for 
this year. We will be able to do some of those large loans if 
we expand the SBA Express program.
    Chair Snowe. I have further questions on this issue, but I 
will recognize Senator Pryor.
    Senator Pryor. Thank you, Madame Chair.
    One of the former members and chairs of this Committee, 
Senator Dale Bumpers from Arkansas, one time was in Pine Bluff, 
Arkansas and they had this locally operated loan program they 
called the Good Faith Fund. And basically, he took the concepts 
of that and brought it to Washington and he started the 
Microloan program.
    My understanding of the Microloan program is that it has 
been very successful and it has helped an untold number of 
businesses and people get started in the process and really be 
productive in this economy.
    In fiscal year 2004, in that budget, the Administration 
states that ``the demand for microlending has increased because 
of the weakening economy and the increased awareness among 
potential entrepreneurs of the benefits of this program.''
    So can you explain to me, here we are one year later, can 
you explain to me with, I assume, the same demand or even 
greater demand, the Administration has determined that this 
program is now unnecessary?
    Mr. Barreto. I would be happy to Senator. A lot has changed 
in 12 years. We have been phenomenally successful with our loan 
programs.
    Let me give you an example. When I first came to the SBA, 
the average loan size at the SBA in our 7(a) loan program was 
close to $250,000. Those were not Microloans. Most small 
businesses do not need $250,000 for working capital. They need 
smaller loans. They need a $50,000 loan or a $100,000 loan. 
They do not need millions of dollars.
    So one of the things that we wanted to do was to get that 
average loan size down. And that is one of the reasons why the 
SBA Express program has been so phenomenal.
    Let me give you an idea of what I am talking about. Last 
year, in our Microloan program, we did 2,442 loans nationwide. 
We lended out about $30 million.
    By the way, we are not the only ones that do Microloans. 
There are many other organizations that do Microloans. They do 
them better than we can do them!
    Now, through the 7(a) loan program, our flagship loan 
program, we did 23,335 loans for $424 million. Those loans were 
smaller loans. Those loans were under $35,000.
    They were going to those underserved communities. Last year 
we broke a record, Senator Pryor. We not only did 30 percent 
more loans overall, a 50 year record at the SBA, we did 75 
percent more loans to African-American businesses, 44 percent 
more loans to Hispanic-owned businesses, 35 percent more loans 
to women, 20 percent more loans to Asians, and 20 percent more 
loans to veterans. Across the board, we did more.
    When we started this outreach initiative and started to 
promote our SBA Express loan program, everybody said it would 
not work. The lenders do not want to do loans in those 
communities. They are not profitable. They will not do the 
small loans. Do you know what? They were not correct. We were 
not only able to do more loans, we were able to do more small 
loans in every community.
    As I said, those loans now are going into the flagship 
program. It costs us 97 cents for every dollar that we lend out 
in the Microloan program. We are not as efficient in 
implementing that program.
    What is happening is that 10 times more people get those 
smaller loans in our flagship program than they do in the 
Microloan program. That is what has happened over the last 12 
years in our Microloan program.
    Senator Pryor. As I understand the Microloan program 
criteria versus the Express loan and the flagship loan, et 
cetera, the demographics, the terms, the conditions, the 
purposes are different than the Microloan program. Is that a 
fair statement? How is SBA going to handle that?
    Mr. Barreto. I am not sure what you mean by criteria. I 
will tell you somebody has to submit to us when they apply for 
the 7(a) loan program. It is almost the size of a phone book. 
This is what they have to submit to us when they do a SBA 
Express loan. This is what is happening at the SBA now. This is 
one of the reasons why we are up 38 percent in our minority 
loans. It is easier to access our flagship program than ever 
before.
    You see, I know a little bit about minority communities. I 
spent my whole life in those communities. Those communities 
deserve to have access to our best programs and our best 
services. That is one of the reasons why we have done the 
unprecedented outreach.
    The good news is that the lending industry has spoken loud 
and clear. They like these loans, and they like these 
communities. And the reason that they do is because they 
understand it is good business.
    Senator Pryor. This budget also asserts that eliminating 
funding for the 7(a) loan guarantee program ``will result in 
savings of approximately $100 million.'' Could you elaborate on 
that?
    Mr. Barreto. Absolutely. We think that is a very positive 
sign. There is a lot of talk right now about the SBA budget 
being decreased $100 million. It is being decreased $100 
million because we are proposing a zero subsidy rate on our 
7(a) loan program. This is not anything new for the SBA. Our 
504 program is a zero subsidy program. Our SBIC program is a 
zero subsidy program.
    What is happening is the 7(a) program is joining some of 
our other successful programs. We are modernizing the way that 
we treat that 7(a) program. We have a new econometric model 
that allows us to get that subsidy rate down.
    And so the $100 million is not a decrease in what the SBA 
can do. It is a return to the taxpayers of $100 million that we 
do not need anymore, because the 7(a) program will be a zero 
subsidy program.
    Senator Pryor. I understand what you are saying about you 
do not need it, but my question is do those small businesses 
out there need it? Do they need that access to that extra $100 
million that they are not going to have now?
    Mr. Barreto. What they need is a 30 percent increase in the 
SBA's budget authority. We have $9.5 billion in this year. With 
the zero subsidy proposal we are going to $12.5 billion.
    The small businesses do not understand all of this talk 
about subsidy rates and apportionments and appropriations. They 
just want to know is it going to be easier for me to get a 
loan? And is there going to be enough money for me to borrow? 
This proposal does that, and at the same time, saves the 
American taxpayer $100 million.
    Senator Pryor. Let us talk about the fees that you are 
charging to process these loans, et cetera. As I understand it, 
some of these fees are going up fairly substantially in your 
budget; is that right?
    Mr. Barreto. I want to explain that, Senator. The SBA is 
not raising fees on small businesses. What is happening is that 
the legislation that Congress passed 2 years ago to take those 
fees down is expiring at the end of this fiscal year. What is 
happening is that we are going back to the previous fee 
schedule that existed. These fees are fees to the lenders.
    I want to give you an example. There is a lot of talk about 
what these fees are going to mean. If you are processing a loan 
for $150,000 or less, the fee is going to be $8.34 a month. 
That would be the difference in the payment if that fee was 
passed on to the small business owner. If you are processing a 
loan for an amount between $150,000 and $700,000, one of those 
larger loans, the fee is going to be $29.14 a month.
    There is a lot of talk on these larger loans, with $700,000 
plus loans, there is no change in the fee. So we are not 
raising fees on small businesses. The legislation that Congress 
enacted expires at the end of this fiscal year. We are going 
back to the fee schedule that was there before.
    Senator Pryor. Would it be your preference that we continue 
those reduced fees?
    Mr. Barreto. My sense of it is that what the banks have 
proven is that these loans are very profitable. They are going 
to do these loans. I just think this is a more balanced and 
equitable way. And it also gets us to the zero subsidy rate and 
the 30 percent increase in our budget authority. The lenders 
have told us that is critically important to them. They cannot 
have the program shut down. They do not want to have any caps 
on the loans. They want to give larger loans inside the 7(a) 
loan program. Our budget, and also the proposal that we are 
making for this year, allows them to do all of that.
    Senator Pryor. Madame Chair, I have one last question I 
would like to focus on, although I may submit some for the 
record, if that is okay.
    Chair Snowe. Without objection, so ordered.
    Senator Pryor. Last year, you centralized the liquidation 
functions of the 7(a) loan guarantee program and you moved a 
number of employees to Herndon, Virginia. And I understand and 
actually agree that we should look for ways to save money and 
to save the taxpayers money and tax dollars and we should try 
to improve service.
    But the implementation of the plan, whatever we do, I think 
needs to be done in a way that is fair and is not drastic. I 
must say that I believe you gave employees only about 7 days to 
decide whether they were going to relocate or take a buyout 
from the Government. Now, if they took the buyout, as I 
understand the terms of it, they could not return to work for 
the Federal Government for 5 years.
    Under the circumstances that you had there, it was at the 
end of the year, it was during the holiday season, and 
obviously, it was a gut-wrenching decision for many of your 
employees around the country, I just do not know if it is fair, 
in my mind, to get rid of employees in that manner when they 
may be months away or maybe a year or two away from retirement. 
And I think that you should not be opposed to granting hardship 
exceptions for employees under these types of circumstances.
    And I would like to hear your explanation about why you did 
what you did in the manner that you did it? And I would also 
like to know exactly how much money you saved by doing this?
    Mr. Barreto. First of all, let me explain exactly what this 
is all about. This is really about Transformation of the SBA. 
See, when we first came on board at the SBA, we realized that 
we were not as efficient or effective as we needed to be. And 
if we were going to be relevant in the future we needed to take 
some strong looks at how we do business. How is it that the SBA 
delivers its services?
    This is not a new thing. We have been working on 
Transformation for almost 2 years. Obviously, we wish we could 
have done it much sooner than that, but we needed to work very 
closely with all of the stakeholders and make sure that we got 
their input.
    We had an agreement with our union to be able to proceed 
with transformation. Transformation is working. It is working 
big time. We have now been able to reduce the time it takes to 
process 504 loans. For example, what used to take a couple of 
months is now down to as little as a couple of weeks. We have 
reduced the time it takes to do liquidations from years to a 
couple of months.
    SBA does not do a lot of liquidations anymore. Most of our 
lending partners do the majority of those liquidations.
    We determined that we needed to free up our offices in 
places like Little Rock and Maine to be able to work more with 
small businesses. We were bogging them down with a lot of 
process, with a lot of bureaucracy. So we made a determination 
to centralize that function. We offered every SBA employee a 
position with the Agency. We did not terminate those employees. 
We offered them a position in a new location.
    Again, this is not something that happened in one day, in 
one week, in one month. This is something that we have been 
talking about for years. We took every effort to be as 
communicative and as responsive and sensitive to every one of 
our employees situation.
    You are right, we offered some of them early retirement and 
some of them took it. We offered some of them buyouts and some 
of them took it. We offered some of them the new position in 
the new location and some of them took it. But not all of them 
took it.
    It is very difficult for us, OPM has no standard for 
classifying hardship. We received many requests, and 
unfortunately, we were not in a position to put one person's 
hardship over another person's hardship. We gave those 
employees every opportunity to continue on with us.
    We understand one of our most important assets is our 
personnel, and we want to keep our personnel whenever possible. 
But Transformation has worked. It has not only worked for the 
Agency and the taxpayer, but it has worked for the small 
businesses. We are doing things faster and better than we ever 
have in our history and that is what is at stake with 
transformation.
    Senator Pryor. If you could answer the second part of my 
question, how much money have you saved by doing that?
    Mr. Barreto. I do not think we can give you a specific 
answer. We think it is roughly $5 million that we will be able 
to save in this year, in 2004.
    Senator Pryor. Let me say this, and I do not want to speak 
for all the other Senators here, but I have heard a number of 
complaints from my constituents about this, about first the way 
you treated your employees during that process. I do not think 
you did yourself any favors, I do not think you built any 
positive morale by doing that in the way you handled it.
    Secondly, from your customers, the people who are getting 
these SBA loans who are accustomed to being able to contact a 
local office, or at least someone that is fairly close by. For 
example, in our State, and our State capital in Little Rock, 
now they have to call someone in Virginia and who knows who 
they are going to get?
    I will say that there seems to be, with my constituents, a 
disconnect in the quality of service that they are receiving 
because of this move.
    Now it is a little too early to be able to judge that 
completely. But from anecdotal evidence, phone calls, letters, 
e-mails we have received in our office, this has not been 
received positively in Arkansas. And I am sure that is true in 
a lot of other States, as well.
    Mr. Barreto. Senator, we will be happy to come up and brief 
you on some of the success stories, some of the things that are 
actually happening. I just want to clarify, the liquidators, 
those are when loans are not successful. They are liquidating 
the assets of the small businessperson.
    Liquidators are not out there in the community making 
loans, doing technical assistance, helping small businesses get 
contracts. We are much more efficient now.
    I think it is much easier and much better for somebody to 
know that it is not going to take a year or more to go through 
the process. They can go through it in a couple of months now.
    Again, we take very serious our relationship with our 
employees. I can tell you that I have been around the country--
I have been to Little Rock, Arkansas several times, met with 
our district office people--we have some of the best people in 
the country working in our district offices--to make sure that 
this was not a surprise. Again, we did have agreement from all 
of the necessary parties that we needed to be able to do this.
    Change is very difficult. It is always difficult. People 
would rather if we did not change, but we do not have any 
option but to change. If the SBA is going to be relevant and 
successful in the future, we have got to make good business 
decisions.
    I think the decisions that we have made, especially in the 
long term, will be very positive. And I would be happy to meet 
with you and your staff to discuss what it is that we are doing 
with Transformation, because we think it is one of most 
important things that we will do for the future of the SBA.
    Senator Pryor. That is all I have, Senator Snowe. Thank 
you.
    Chair Snowe. Thank you very much, Senator Pryor.
    Administrator Barreto, on the issue of the 7(a) program, 
and obviously, this Committee is going to be examining the 
proposal that you have submitted to the Committee, but one of 
the issues and it gets back to last year and what occurred, 
because obviously, the program was on track for doing 
essentially at least as much as the previous year. That was 
clear. In fact, the previous year in the 7(a) program was about 
$11.3 billion. So that is why I was mystified, and the 
Committee was mystified, as to why you would request something 
less than that, $2 billion less than that, on the $9 billion.
    We do not want to have a repeat scenario. And so that is 
what we really have to examine with your request now of a 
little more than $12 billion when you have a statutory 
authorized level of $16 billion. So the question is why you 
have not requested the full authorization? That is number one.
    Secondly, on the zero subsidy rate, and obviously I am 
going to hear from the next panel and there will be concerns 
raised about what that rate is going to imply. Is it going to 
be too onerous for some small businesses?
    Secondly, the 50 percent guarantee that is a decrease from 
the 75 percent, is that going to make it more difficult for 
small businesses to get the type of loans, because some of them 
may be riskier and require a higher guarantee? That is going to 
be another question that will be raised. So those are some of 
the issues.
    I know you have also requested eliminating the 15-day 
notice and it probably will not come as a surprise to you that 
I will not be supporting that, because I do think it is 
important to have a 15-day notice to Congress. And I know that 
did not happen with the 7(a) program on three different 
occasions in this last month.
    We really do need to be notified, because we have a public 
accountability and oversight responsibility as well.
    So obviously, I certainly do not intend to move in that 
direction, because I do think it is important for Congress to 
be notified and I hope that we can, in the future, adhere to 
that 15-day notification.
    On that, because I want to go to the next issue on HUBZone 
and also to what Senator Pryor raised on Mircroloans. We are 
going to have to look at those issues, because those are some 
of the questions. I hope that the Committee can work with you 
on those issues and to examine them. Because I know in just 
reading the testimony of the second panel, there will be those 
issues raised.
    And will there be uncertainty with the size of the rate 
that will be required, since it will not be an appropriation? I 
understand the value and the attractiveness and not depending 
on appropriations to move ahead in the 7(a) program. I think 
that is obviously an interesting notion. The question is what 
does that mean in the final analysis with the type of rate that 
will be imposed on small business?
    Mr. Barreto. I think there were several questions in there 
and I want to make sure I answer all of them.
    Chair Snowe. Can you also include the piggyback issue?
    Mr. Barreto. You may have to remind me what order those 
questions came in, but I will do my best.
    First of all, last year was not an apples-to-apples 
comparisons. You are right, we did $11 billion, but $2 billion 
of that was STAR money. In other words, that was money made 
available to people that were affected by 9/11. That was a 
temporary program. If you take that $2 billion off, we did a 
little bit more than $9 billion.
    As illustrated on the chart, we have consistently done 
between $9 billion and $10 billion. It is only now, because we 
have been making these changes to our program, especially the 
SBA Express program, that we have seen the kind of growth in 
the volume. That is a good thing.
    The changes that we made in the SBA Express program, I wish 
I could take all of the credit at the SBA, but it really did 
not come entirely from the SBA. See, when we first came in 
office, one of the first things that I wanted to do was find 
ways for us to do more loans, to do smaller loans, to get into 
the minority communities, to do more women business loans.
    So, I convened the lenders, all of my major lenders, 
community lenders, rural lenders. I brought them into the SBA. 
It had been a while since they had been there. And we talked to 
them. And they gave me a list of things that they wanted done. 
It was a long list. It was about 15 or 20 things.
    And I said to them, I cannot do all of those things, but I 
can do a few of those things. What are your top priorities? And 
they said we will tell you what our top priorities are. We want 
you to expand the SBA Express program. Take it from $150,000 
and move it to $250,000. And they said if you do that we will 
take less of a guarantee, we will take a 50 percent guarantee.
    And they said and by the way, while you are at it, we do 
not want to give you a phone book of information anymore. We 
are tired of giving you this. We are not going to give you this 
anymore. We want to give you this.
    And by the way, we do not want to use your forms anymore. 
We want to use our own forms. Can we do that?
    And lastly, we do not want to be calling back and forth all 
the time. We want to transmit information to you 
electronically. Would you allow us to do that?
    And we said yes to all of those things. It is one of the 
reasons why SBA had the banner year last year with regards to 
the 7(a) program. It is why we got our average loan size down. 
It is why we reached more communities than ever before.
    So these proposals that we are making to you today and also 
with our budget next year are reflective of the direction in 
which SBA is moving. We believe that the SBA has become a 
better partner to the lending industry. The lending industry 
has told us very loud and clear what they expect from us, and 
we have tried to respond in each one of those cases.
    With regards to the piggyback loans----
    Chair Snowe. Can I just ask why would you not request a 
higher authorized level allowed under law, $16 billion as 
opposed to the approximately $12 billion?
    Mr. Barreto. SBA, for the last 5 years, has done $9 billion 
to $10 billion. We try to look at what we have done to try to 
predict what we will do. I will give you an example----
    Chair Snowe. Excuse me, I just think that the point here is 
if we are trying to create jobs why put ourselves in the 
position of what occurred this last year? You can talk about 
appropriation, but this time you are going to talk about 
hitting a ceiling. Why create that ceiling when you are allowed 
to go $4 billion more? It just does not make sense to me when 
we are trying to create as many jobs as we can in America. I 
mean, we are desperate to create jobs.
    Mr. Barreto. That is why we are requesting the $12.5 
billion in our proposal for this year. That is why we requested 
$12.5 billion for last year. We agree with you that we need to 
do loans that create jobs. That is the purpose of the 504 loan 
program. That is one of its basic centralized assumptions: if 
you do these larger loans in the 504 loan program, you are 
going to create more jobs.
    Last year, we were up 20 percent in our 504 loan program. 
We have opened it up for competition and we think we can do 
more. But 504 is very illustrative, because we ask for $4.5 
billion every year on that program. We are asking for it again 
this year. We are going to do that next year, as well. But we 
do not do $4.5 billion in the 504 loan program. I want to. I 
think that we can, especially with some of the changes that we 
are making in that program. But we leave $2 billion on the 
table every single year on that program.
    So we want to be accurate, and we want to ask for what we 
need. We believe that this proposal will help us to do 
everything that we are being asked to do: the larger loans, to 
get the cap off of it, to possibly reduce fees for the lenders 
in the future. And that is why we have brought this proposal 
forward this year.
    Chair Snowe. Also, on the other issues, on the rate, how 
predictable will that rate be?
    Mr. Barreto. You are talking about the fees on the loans.
    Chair Snowe. That is right.
    Mr. Barreto. I mentioned to Senator Pryor that our figures 
tell us that the fees for loans worth $150,000 or less would be 
about $8.34 a month. For the loans up to $700,000, you are 
probably talking about a little bit higher fee, $29.14.
    Chair Snowe. Do you pretty much think that that will remain 
static?
    Mr. Barreto. If we get support on this new proposal, we 
think there is an opportunity to lower the fees this year and 
forward. We are working those numbers out right now and I will 
be happy to share some estimates with you, but we think that we 
can get some relief on the fees this year if we have support on 
the proposal that we are bringing forward.
    Chair Snowe. Obviously, we will be working with you on 
that. I plan to conduct a roundtable of interested parties on 
this very issue over the next week or so, because I do believe 
we need to have a sense of what direction we should take with 
respect to that. Because that is a profound difference. I 
understand why you are doing it, because I understand the 
nature of not wanting to depend on appropriations. It is a 
question of making sure that we all understand how it will work 
inevitably.
    On the Microloan program, to which Senator Pryor referred 
to, because it is a critical program and it is one that 
obviously has worked well in Maine. Now I know that I am going 
to hear from the subsequent panel on some of these issues that 
you have just raised. The question is whether or not we will 
get sufficient lenders who will be willing to engage in this 
process for these small loans. I think that is going to be one 
of the questions.
    I know you are suggesting in your testimony that somehow 
lenders will be willing to make these loans. So that is one 
issue, whether or not that is true.
    Secondly, in terms of the cost, we hear from other 
witnesses who say that the cost of the technical assistance and 
the program operations are also counted in determining the loan 
and that is why it contributes to the higher cost in delivering 
that loan that you have indicated in your statement.
    The question is whether or not many of these banks are 
going to be willing to make these loans. And I think this 
Microloan is also very appealing, because it does begin the 
process of business startups. It really does encourage 
entrepreneurship in our economy, which is also needed.
    So I just would like to have you address some of those 
issues, because I do think it is going to be important and this 
is a program that I have certainly supported and has worked 
well in Maine. And obviously, Senator Pryor and others, from 
smaller States especially, for small businesses or individuals 
who might not be able to get loans elsewhere.
    Mr. Barreto. Yes, Senator. The good news is that the 
lenders are already making the smaller loans. I mentioned to 
Senator Pryor that last year we made 2,442 Microloans. Those 
are the smaller ones that we make. Last year, in the 7(a) loan 
program, especially through our Express program, we made 23,335 
loans, 10 times more than we make in the Microloan program for 
more than 10 times the dollars, $424 million in those 7(a) 
loans under $35,000 versus $30 million. That is $424 million 
versus $30 million in the Microloan program.
    Just to break it down, for example, in Maine we did 7(a) 
loans, 409 loans for about $40 million. Loans under $150,000, 
we did 331 loans for a little over $15 million. The SBA Express 
loans, we did 230 of those loans in Maine for almost $11 
million.
    Now in terms of Microloans, in Maine we did 39 Microloans 
in Maine for $786,000. But we did 169 7(a) loans under $35,000 
for $3.4 million in Maine.
    What I am trying to say is that the lenders have already 
spoken. Not all lenders. Many lenders have told us that they do 
not want to do small loans. They said: we are not going to do 
them. That is not the business that we are in. We do not care 
about those loans, they are not profitable. We are not a 
philanthropic organization. I understand that.
    Our responsibility is different. We have to make sure that 
we help as many small businesses as we possibly can in every 
community. Not just big businesses, not just medium-sized 
businesses, but small businesses, start-up businesses, minority 
businesses, women-owned businesses. And that is what we are 
doing with our 7(a) loan program now. That is what we are doing 
with SBA Express.
    That is what our proposals that we are submitting today and 
the budget in 2005 are going to do.
    So the good news is that I think that we can do both. I 
think we can do some of those larger loans, and our proposal 
allows us to do that. But we will continue doing what we have 
been doing. I do not think it is a bad thing that we do more 
loans than ever before, that we got that average loan size 
down, and that we reach every community within the small 
business community. That is what we are supposed to do, and 
that is what we are committed to doing.
    Chair Snowe. Again, we are going to explore those issues 
with you in the future to make sure that we know what direction 
we are taking and what the ultimate impact would be.
    Finally, just on the HUBZone, I know you are not going to 
make a request for a separate line item. The Senator from 
Missouri will be mighty disappointed if I do not raise these 
questions. And it is important, because obviously, you have 
chosen to put that in the category of Government accounting and 
business on the budget.
    The question is one, as to what the implications will be 
for that program, what the impact would be? Secondly, why was 
more not requested for the HUBZone? It is only 17 percent of 
the 8(a) program and yet there are many more firms under the 
HUBZone program than there are in the 8(a) program.
    So I wish you could address some of those issues and again 
we will explore it. Obviously, we are not opposed to new ideas 
and delivering these programs differently or more efficiently 
or whatever. I think the question is making sure that we have a 
true understanding of the impact in the final analysis.
    This program is working very well, especially in distressed 
areas. It has worked well in Maine. I know it has worked well 
in Missouri and in other parts of the country and we want to 
make sure that it does. So I was just wondering why it is 
budgeted so much less than some of the other contracting 
programs?
    Mr. Barreto. Thank you, Senator, for that question.
    We have learned a lot over the last couple of years. One of 
the things that we know is that HUBZone programs are important. 
They are very important. And they are too important to take a 
risk that they are not going to be funded.
    You see, over the last couple of years, we have requested 
funds for HUBZones and they have been zeroed out. Now we did 
not zero the HUBZone program out, because we think it is 
important. So we kept managing that program, but it really put 
a strain on us, because we did not receive an appropriation.
    So we have moved that program into where we believe it 
should have been all along, inside of SBA's program office 
called Government Contracting and Business Development. It is a 
Government contracting program. We will continue to support 
that program, but I believe that we ensure its future by moving 
it in there and making sure that we invest resources.
    As you know, we have requested a much larger amount for our 
Government Contracting Business Development program, over $2 
million that will be sufficient for us to be able to support 
not only the HUBZone program, but all of the other programs.
    And you are right, it is currently receiving less funding 
than the 8(a) program. 8(a) is a very important program, too. 
In fact, those programs are at parity.
    One of the things that we have seen is that the number of 
businesses participating in the HUBZone program now has 
increased dramatically since we have been on board. We have 
close to 10,000 companies. We think we can get that to over 
13,000 or maybe 14,000 companies by next year.
    We are also seeing other positive signs. Not just the fact 
that we still have a HUBZone program, but those HUBZone 
programs are doing more contracting than ever before. The most 
recent figures that are available to us show that it went from 
about $680 million to almost $1.7 billion in contracts. That is 
good, good but it is not enough. It is nowhere near to what the 
8(a) program does, but 8(a) has been around a lot longer. It is 
more established.
    So we think there is a lot of opportunity for us to 
continue growing the HUBZone program. A lot of times people do 
not understand that there are many companies that are both 
HUBZone and 8(a) certified companies.
    So those are tools. Those programs are tools to help small 
businesses in historically underutilized business zones and 
socially and economically disadvantaged small businesses get 
their access, their fair share of the Government contracting 
pie. And we are very committed to that.
    So I hope that you will share with my original home State 
Senator, Senator Bond, that the HUBZone program is healthy and 
its prospects for the future are very good.
    Chair Snowe. I appreciate that. One of the issues 
concerning HUBZones is the volume of contracts awarded to the 
HUBZone firms. And I gather it has fallen below the 3 percent 
statutory goal of .71. Why is that the case? I know in my State 
it is like a 39 percent decrease.
    Mr. Barreto. We are making significant increases and as I 
mentioned, probably $1 billion more in the last year for which 
we have information. It will be a lot more in 2003.
    Again, there has been also this rapid growth in the number 
of HUBZone companies. When I first came, I think there were 
about 4,000 HUBZone companies. There are 10,000 HUBZone 
companies now, and that is going to go to 13,000 or 14,000.
    The day before yesterday, I was at one of my business 
matchmaking events in Anaheim. I want you to know that we had 
over 1,000 businesses there, not just from Southern California, 
but from other states, as well. Ron Newlan, the head of the 
HUBZone organization was there. We work very closely with him. 
And I was very happy that he had a number of his HUBZone 
companies there, because we are thinking outside the box. We 
are not just waiting for those opportunities to materialize, 
but we are really facilitating a lot of those opportunities. 
The things that we have done with regards to contract 
unbundling, the changes that we are making to our program and 
streamlining the process so that we can get more people 
involved in there.
    We know that before, it used to take somebody a long time 
to get in one of these Government contracting programs. And 
then once they got in, then it was good luck to you. We do not 
do that anymore. What we try to do is surround those small 
businesses with the tools that they need to succeed. They need 
training and education. We are providing that. And they need 
real access to decision makers.
    Last year, through these matchmaking events, we set up over 
11,000 one-on-one matches between small businesses and hundreds 
of Government agency buyers and Fortune 500 companies. We will 
do more than that this year.
    I think we have a chart here, just to give you an example 
of the growth of some of these matches that we are 
facilitating. These are some of the events that we have done 
over the last year-and-a-half. Cleveland, we set up 1,600 
appointments; Orlando, 2,400; Chicago, 1,800; Birmingham, 749.
    One in Birmingham was with the Black Chamber of Commerce 
and Harry Alford's Group. NECE, that was our national 
conference last year, 1,300; Houston, 3,300. We just did 
Anaheim, we will do more than 3,300.
    We need to do more of that. It gives those small businesses 
the confidence that we really are doing something proactive for 
them. They have told us for years it is very hard to do 
Government contracting, and we are trying to streamline that 
and make it easier and provide them with some real 
opportunities.
    We cannot guarantee them contracts. We should not guarantee 
them contracts. But we should create the right environment for 
them to succeed.
    Chair Snowe. Senator Pryor, do you have any additional 
questions?
    Senator Pryor. I do not really, Madame Chair, except for 
maybe just one. And that is you talked about zero subsidy and 
that is a good thing in your mind?
    Mr. Barreto. Yes, sir.
    Senator Pryor. You are moving the SBA toward the zero 
subsidy approach pretty much across the board; is that fair to 
say? Or you are trying to get to zero subsidy in all the 
programs you can?
    Mr. Barreto. We have been at zero subsidy with the 504 loan 
program, a very successful program. We have been at zero 
subsidy for some time with the SBIC program. And so the 7(a) 
program is just following what I believe is a positive trend. 
It allows us to be able to do more loans and reach more people 
than we ever have before.
    And at the same time being able to save the American 
taxpayer over $100 million that we do not have to spend for a 
program that can support itself.
    Senator Pryor. As I understand, when you talk about zero 
subsidy, you are talking about there are no tax dollars wrapped 
up in the loan?
    Mr. Barreto. No appropriation to do 7(a) loans; that is 
correct.
    Senator Pryor. But do not some companies need that subsidy? 
Do they not need that to help them get started? And will not 
the Government get their money back fairly quickly in payroll 
taxes and getting people off unemployment rolls, et cetera? Are 
there not cases where some companies need a subsidy?
    Mr. Barreto. In this case the subsidy is going, because of 
the subsidy rate that we have, we believe that with the 
improvements that we have made, the econometric modeling that 
we have done with regards to the subsidy rate, we can get that 
down. With the management changes that we have made, we can 
improve our ability to be able to offer those funds.
    What is happening is--what small businesses tell me is I do 
not care what you call your program. I do not care how the 
watch is built. I just want to know what time it is. And will 
they be able to get these loans easier? Will there be less 
paperwork? Will they be able to get loans at larger levels if 
they need to? Will there be more money available to be able to 
get these loans? And in all those issues, the answer is yes. 
That is what has been happening now over the last year. It is a 
very positive trend. We are breaking 50-year records and will 
break records every single year if we continue doing the things 
that we have been doing.
    At the end of the day, that is what is important to small 
businesses.
    You see, when I first came on board, many small businesses 
said I can take a yes and I can take a no, but the maybes kill 
me. Too much paperwork, too expensive, takes too long. And so 
what we have done is we have streamlined our process so that we 
can be a better partner to them. We have become a more 
passionate advocate for the things that are more important to 
them and we have definitely been more responsive to them than 
at any time in our history.
    So at the end of the day I think that is what small 
business expects from us.
    Senator Pryor. In my mind, streamlining the process is 
great, but that is slightly different than zero subsidy. That 
is apples and oranges.
    What I am asking is if you have a zero subsidy approach to 
these loan programs, are there some businesses now, because you 
have gone to zero subsidy, that will not be able to get the 
loan, because you have gone to zero subsidy?
    Mr. Barreto. I do not believe there is any business that 
can qualify for a loan that will not be able to get a loan 
because we are at a zero subsidy rate. Again, we have other 
successful programs that are zero subsidy that are doing more 
than ever before.
    I think it's because we have been able to prove that we can 
make these loans more efficiently, that we are more effective 
at doing them, that this is a cost-effective way of lending. 
That is one of the reasons that we are able to get that subsidy 
rate down to zero. So we believe that this is actually going to 
be a net benefit for thousands of small businesses.
    Let me give you an example. This last year we did 67,000 
loans in our 7(a) loan program. 67,000 loans. That never 
happened before.
    With this new proposal, we think we can get to 90,000 
loans. Tens of thousands of small businesses that were not 
getting loans from us before will get them now. That is what I 
think is critically important, more job creation, more capital 
where it belongs, in the hands of small businesses.
    Senator Pryor. I am not trying to dicker with you on this, 
but what I am saying is you have emphasized how you are getting 
efficient, less paperwork, and I understand that. What that 
means to me is that there is a smaller barrier between the 
lender and the borrower. If it is easier to fill out the 
paperwork and faster and it is more certain, that is great. But 
the question I am asking is, are we also not reaching down low 
in our economy with these struggling businesses that cannot 
qualify? They cannot go to a bank and get a loan. They have to 
work with the SBA to get a loan.
    So as I understand your testimony, what you are saying is 
it is your belief that we are not denying anyone loans 
otherwise?
    And the reason I say that is because the numbers do not 
mean anything to me, because if it is easier to get it maybe 
there are a lot of other companies out there that are now 
trying to get it that just did not want the hassle before. But 
what I am worried about is the weaker companies or the start-
ups, whatever you want to call them, that really otherwise--I 
mean SBA is their only way they are going to get the resources 
they need.
    Mr. Barreto. Senator, I hope this will assure you. The 
reason that we are going to zero subsidy is because we are 
reaching more of those small businesses. Let me explain to you 
why.
    There is no way we get to zero subsidy if we do not have an 
SBA Express program. The SBA Express program allows us to get 
that subsidy rate down to zero. It is a 50 percent guarantee 
which moves that subsidy rate down.
    And the reason that we did more loans, more smaller loans 
to all of those groups that I mentioned before, minorities and 
women, is because many of those loans were happening through 
the SBA Express program.
    In other words, the exact opposite is true. We will reach 
more of those struggling businesses, more of those businesses 
that were never getting loans with the SBA. When I first came 
on board, the average loan size was almost $250,000. That shut 
out a lot of those businesses. Our average loan size last year 
was a little over $160,000 and going down.
    It does not mean we can not do big loans. We will do big 
loans. We will do big loans in the 7(a) loan program and we 
will also do them in the 504 loan program. But we will reach 
more of those smaller emerging market businesses than we ever 
have in our history. And that is what allows us to go to the 
zero subsidy rate, because of the success and the effectiveness 
of the SBA Express program.
    Senator Pryor. Thank you.
    Chair Snowe. Thank you very much, Administrator Barreto. We 
appreciate the fact that you took the time to be here today to 
answer our questions forthrightly, and we are looking forward 
to working with you. We applaud you for what you have been 
doing as an advocate on behalf of small business throughout 
America and for your enthusiastic and energetic leadership on 
behalf of the Small Business Administration. So many things 
have worked very well.
    I also appreciate the innovation that you have brought to 
the Agency, as well, and to programs and thinking differently 
and creatively. I want to express my appreciation on the 
alternate work sites, including Maine in that program now. I 
think it is just another example of the type of creativity and 
innovation that you have brought to the Agency. And also in 
showing how things can be done differently and bringing those 
resources to people who need them.
    So I thank you and I commend you.
    Mr. Barreto. Thank you very much, Senator Snowe, Senator 
Pryor, it has been an honor to be in front of you today. Thank 
you very much.
    Chair Snowe. Thank you.
    We have a panel and I notice we have a vote. Let us bring 
forward the second panel. Mr. Tony Wilkinson, who is the 
President and CEO of the National Association of Government 
Guaranteed Lenders; Mr. David Coit, who is Chairman of the 
National Association of Small Business Investment Companies; 
Ms. Mary Mathews, who is the former Board Chair of the 
Association for Enterprise Opportunity; and Ms. Ellen Golden, 
was is here to represent the Association of Women Business 
Centers that represents 89 Women Business Centers across 
America.
    I would like to have you all summarize your testimony if 
you can. There is a vote on, so Senator Pryor is going to chair 
the Committee and I will go vote and come back. So we will ask 
you to begin with Mr. Wilkinson.
    Senator Pryor. [Presiding.] Go ahead, I am ready when you 
are.

  STATEMENT OF ANTHONY WILKINSON, PRESIDENT AND CEO, NATIONAL 
       ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS, INC.

    Mr. Wilkinson. First of all, I want to thank the Chairwoman 
and Senator Kerry, Senator Pryor, for your leadership on the 
7(a) issues that are before us today.
    As Senator Snowe said in her opening, that the SBA loan 
programs are a critical lifeline for many small businesses and 
that is absolutely correct. From bank call reports we know that 
there are about $485 billion in outstanding small business 
loans in this country. But of that $485 billion, only about 20 
percent of those loans have maturities in excess of 3 years, 
which would put that at about $95 billion.
    Compare that with the outstanding 7(a) portfolio, which is 
about $40 billion, and you can see that the SBA 7(a) program is 
one of the largest, if not the largest, single source of long-
term capital for small businesses in this country. This program 
is critically important to the health and vitality of the small 
business sector.
    Yesterday there was a hearing on the House side, in the 
Small Business Committee, where four small businesses testified 
about the adverse impacts they have suffered under the actions 
the Administration has taken regarding the closing of the loan 
program earlier this year and then subsequently not being 
allowed to resubmit their loan applications.
    It is unbelievable that applicants who lived by the rules, 
filed their applications on time, did everything they were 
supposed to do, had the rug pulled out from underneath them and 
were told simply too bad by the Agency. They have not been 
allowed to resubmit their applications, because these were 
applications that were in excess of $750,000.
    These small businesses create jobs. They needed the 
financing to grow and hire new employees and to do the things 
that they needed to do in their communities and they have not 
now been able to do so. It is a travesty and I hope that with 
your help we will continue to fight this issue to see that 
those applications that were filed on time get processed and 
get approved, because there is simply no reason why the Agency 
is not processing those loans.
    Rather than summarize my testimony, I am just going to 
touch on a few things that the Administrator talked about. 
First of all, the Administrator seemed to be a little bit 
selective on the information he provided regarding the 
industry's estimate of loan demand. For the current fiscal 
year, we had anticipated loan demand at $12.5 billion. At the 
end of the first quarter we had done $3.122 billion, which puts 
us on pace of $12.5 billion, a pretty good estimate.
    Last year we estimated $11.8 billion. We did $11.3 billion 
and there was a $500,000 loan cap in place for the first 5 
months of the year. Obviously, we would have done more lending 
had the loan cap not been in place, and our estimate of demand 
would have been pretty close.
    For 2002, we estimated $11 billion. We did $9 billion in 
the regular program and an additional $1.7 billion in STAR. So 
our estimate of demand for the last 3 years has been very good.
    The Administrator also mentioned that 95 percent of the 
loans made have been under $750,000. But with the loan caps in 
place, both this year and last year, we have missed an 
opportunity to finance a lot of businesses that need financing. 
I can tell you that there been businesses that have been caught 
in the current prices who had made down payments on contracts, 
who had approval from their PLP lender, which is a pretty good 
comfort factor in this program, only to have the rug pulled out 
from underneath them. They have lost down payments. I cannot 
tell you the number of firms that have been financially harmed 
by the actions taken by the Administration this year.
    Now the Administration rolls out a new proposal that we 
have not been briefed on nor have we had any discussions about 
it. From our perspective, this program is not broken. It does 
not need to be overhauled. It needs the support of the 
Administration.
    The concept of a 50 percent guarantee, or excuse me, 
expanding the Express program. The Express program today is 
primarily a credit scored product. Major commercial banks in 
this country use their credit scoring models. The average loan 
size in the Express program today is $48,000. They have got the 
ability today to take Express up to $250,000. There are a few 
loans that are made in excess of $100,000, but not many. Most 
of the Express loans are the under $100,000 variety.
    So to conceptually put in place a plan that would make all 
loans at 50 percent guarantee really does not seem to be 
reasonable on our part.
    The Administrator said the industry flooded them with 
larger loans during the notification period. Well, every time 
the Administration announces a loan cap, the requirement for 
the announcement is intended to allow those applicants who have 
started their processing and begun to pay fees to get the 
necessary documentation together time to finish their 
application. That is exactly what happened. People heard the 
deadline. They took the steps necessary to finish the 
application. This is not the first time that this has happened. 
Every time that there has been a loan cap announcement we get a 
spike in loan demand. This is nothing new.
    So to say that the industry flooded them with larger loan 
applications, that meant that there was strong demand from 
small business out there who need access to capital and they 
were the ones who took the steps necessary to get their 
applications turned in on time.
    The Administrator also talked about a 30 percent increase 
in loan authority in the fiscal year 2005 budget. Well, they 
needed it this year. They needed the $12.5 billion level this 
year. They are a year late to the party. All they are asking 
doing now is asking for straight-line authority into next year 
when chances are we are going to see continued demand on this 
product. So hopefully we can work through these issues and come 
up to some solutions.
    The Administrator also said that the industry has said we 
need to get the restrictions lifted and get this program back 
up and running as quickly as we can. And we absolutely agree 
with that.
    As you know, getting information from the Administration on 
some of the SBA issues has been very difficult. The 
Administrator said that the new proposal was going to be a 
savings to the taxpayer.
    In the fiscal year 2005 budget, in the credit supplement 
page, there is documentation that says borrowers and lenders 
have overpaid in the 7(a) program $1.2 billion in the last 
decade. And to say now we need to take another $100 million out 
of the hide of small business does not seem quite reasonable.
    Now the Administration did take some steps last year, they 
developed an econometric model. Thanks to the leadership of 
this Committee we passed legislation to allow SBA to use that 
model. Before we have any further discussions about 
programmatic changes, we would like to see the results of a GAO 
report validating that model. Is it fair and is it reasonable? 
Are we through with the period of time where we are 
overcharging borrowers and lenders for using this program? My 
understanding is that SBA has not been forthcoming with 
information and it has been a struggle for GAO to get the data 
necessary to validate the model. Until we see the results of 
that report, it is going to be difficult for us to engage in 
discussion about how the program might be changed.
    Senator Pryor, I would be happy to answer any questions.
    [The prepared statement of Mr. Wilkinson follows:]

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    Senator Pryor. Why do not we let Mr. Coit go ahead and make 
his comments and then we will take all the questions when 
Senator Snowe gets back. Go ahead.

  STATEMENT OF DAVID COIT, CHAIRMAN, NATIONAL ASSOCIATION OF 
              SMALL BUSINESS INVESTMENT COMPANIES

    Mr. Coit. Thank you, Senator Pryor.
    Thank you for the opportunity to appear before you today to 
give NASBIC's views about the Administration's fiscal year 2005 
budget proposal as it relates to the SBIC program.
    The major point I want to stress is that the Participating 
Securities Program will end on October 1st if SBA's proposal is 
enacted. We agree that legislative restructuring is required, 
but it must not be done along the lines proposed by the 
Administration.
    As the managing director of two participating securities 
SBICs, my goal today is help the Committee understand why SBA's 
proposal will not work and why we believe that NASBIC's 
proposal will work for all stakeholders in the program.
    The Participating Securities Program is critical to the 
continued success of the SBIC program. Participating Securities 
investments currently represent 55 percent of all SBIC 
investments. Participating Securities investments have totaled 
$7.5 billion since the start of the program 10 years ago. 26 of 
36, or 72 percent of all new SBIC licenses issued by SBA in 
fiscal 2003 were Participating Securities SBICs.
    NASBIC supports SBA's proposed $4 billion in Participating 
Securities leverage for fiscal year 2005. However, NASBIC 
strongly opposes the restructuring proposed by the 
Administration. The proposal would not work for the talented 
management teams and knowledgeable investors we want to have in 
the program. I cannot stress that enough.
    The current structure has worked because there is the 
potential for substantially enhanced returns to private 
investors investing in Participating Securities funds, but only 
if the SBIC performs above an annual 12 percent level of 
profitability.
    That potential for enhanced returns is required to offset 
the many program negatives. Not the least of these are upfront 
fees and preferred returns for SBA, capital impairment and 
restricted operations regulations, SBA's liquidation 
preference, and the very real fact that private investors fare 
substantially worse than they would in a non-SBIC if 
profitability falls below 12 percent.
    SBA's proposal would destroy the balance of the current 
program by increasing the negative elements and substantially 
reducing the positive elements.
    SBA's proposal will not work for knowledgeable investors. 
In fact, even the existing program structure is too complex and 
too risky for most sophisticated institutional investors, 
particularly those with fiduciary responsibilities. As an 
example, the Maine State Retirement System gave strong 
consideration of a substantial investment in our first SBIC 10 
years ago. Their review of the investment--and the Maine State 
Retirement System had never made a venture capital investment 
in the past--it had passed review of their Investment Committee 
and their Board and their Fund Adviser in Chicago. It actually 
got approved formally. But when the manager of the retirement 
system looked into the regulations, he went back to the board 
and said this is too complex. This is already a risky business. 
Adding in the complexity and the risks of the program, I think 
we should not go forward with our investment.
    In contrast, NASBIC's proposal is simplicity itself. 
Investors, private investors, and SBA would share SBIC profits 
and losses on a pro rata basis. Based on the 20-year venture 
capital industry return statistics and average Treasury rates, 
adoption of our proposal would see the subsidy rate fall to 
zero. In fact, all data available indicates that the Government 
would actually make money as a long-term participant in the 
program.
    Our proposal would eliminate all of the negative elements 
that most institutional investors object to in the current 
structure and attract additional capital sources to the 
program.
    In conclusion, structured as we propose, the Participating 
Securities Program would accomplished the mission at no cost 
and likely a gain to the Government, would accomplish the 
mission without distorting the operations of the private 
capital markets, would attract the largest possible percentage 
of knowledgeable private investors and quality fund managers, 
and would stimulate investment in U.S. small businesses to the 
greatest possible extent during times of scarce capital
    I just want to give one example of how SBICs provide 
capital to companies, particularly during a recession. There is 
a company in Maine named the Diamond Phoenix Corporation. It is 
in Lewiston, Maine. Diamond Phoenix is a world-class provider 
of warehouse automation systems.
    In fact, I do not know if you remember a company called 
Webvan. This was one of the biggest dotcom companies back in 
the late 1990s. It raised $1 billion to build warehouses around 
the country to deliver groceries that are ordered online, and 
it failed.
    Webvan searched the world markets for systems that would 
automate their warehouses and chose Diamond Phoenix Corporation 
of Lewiston, Maine. They actually also invested in the company 
so that Diamond Phoenix would not sell its technology to 
competing companies.
    Obviously, Webvan did not survive and as the recession came 
on, capital equipment orders across the country declined 
substantially. So this company, which had world-class 
technology, began to suffer.
    The management team did everything they could to keep the 
company going. They took cuts in their salaries, they mortgaged 
their homes, put money into the company. They got out 
themselves into the marketplace and did selling. They did all 
of the right things.
    But the other element that allowed the company to survive, 
and I am proud to say it is back and profitable again as the 
economy is beginning to recover, is the fact that an SBIC, its 
only investor, was there and willing to step in and support 
them financially. That company could not get financing from the 
normal venture capital community and they are there today 
because of this program.
    So in closing, I would like to reiterate how important the 
Participating Securities Program is in providing capital to so 
many of this country's small businesses, many of them in 
underserved markets like Lewiston, Maine.
    I urge you to continue to support the Participating 
Securities Program and to consider NASBIC's proposal to make 
the program better for all its from stakeholders.
    Thank you, Senator.
    [The prepared statement of Mr. Coit follows:]

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    Senator Pryor. Thank you.
    Ms. Mathews, we have a vote and the Chair is going to be 
back any moment. But I better leave and go vote, or I am going 
to miss the boat.
    So why do we not take about a 3-minute recess or something 
like that. I know that Senator Snowe will be right back. She is 
on her way back right now, but I better race over there and 
vote or I am going to miss it.
    There she is. Perfect.
    You are recognized, Ms. Mathews.
    Chair Snowe. [Presiding.] Proceed, please.

STATEMENT OF MARY MATHEWS, FORMER BOARD CHAIR, ASSOCIATION FOR 
                     ENTERPRISE OPPORTUNITY

    Ms. Mathews. Thank you, Senator Snowe. Just in time.
    I want to thank you for this opportunity to appear before 
you this morning to talk about the proposed termination of the 
SBA Microloan program and PRIME in the President's 2005 budget.
    I am here today representing the Association for Enterprise 
Opportunity. I am also President of the Northeast Entrepreneur 
Fund in Virginia, Minnesota. The Entrepreneur Fund is a rural 
microenterprise and small business development organization. We 
provide training, technical assistance, and financing to 
emerging and existing businesses in 11 counties in northeastern 
Minnesota and northwestern Wisconsin. We have been an SBA 
Microloan program participant since 1992. We do grass roots 
entrepreneur development in rural communities.
    As you know, the President's 2005 budget terminates the 
Microloan program and zero funds PRIME. The SBA contends that 
the program is too expensive and that banks will use the 7(a) 
Express, Community Express and low doc guarantee programs to 
make the kinds of loans that we make now. We strongly disagree 
that these programs are capable of serving our Microloan 
borrowers.
    The Microloan program was created in 1992 to help small 
business owners in need of small amounts of capital that are 
not yet bankable. The program is today the single largest 
funding source for microenterprise development organizations 
across the country and it funds about 185 organizations.
    Intermediaries since 1992 have made over 19,000 loans 
totaling $213 million. Last year was a record year. We made 
over 2,400 loans, 2,442, as Secretary Barreto attested to 
earlier, totaling nearly $30 million. The program exceeded the 
goals that the SBA set for it in 2003. The goals were $28 
million in new loans.
    Our organization's average loan size is $9,000, 
considerably less than the 7(a) average of $167,000 which does 
not get quite to Microloans.
    There two key issues that I would like to address. One is 
that we evaluated our portfolio. Senator Pryor asked Secretary 
Barreto about how deep the current SBA Express programs are 
reaching. So I am going to talk to you about our portfolio as 
compared to the lending criteria for Community Express, Express 
and low doc programs. Here is what we found.
    First, 85 percent of the loans in our portfolio do not meet 
the minimum guidelines for equity injection. Two-thirds of our 
loans would not meet the minimum commercial lending 
institutions' creditworthiness guideline. Many of these 
customers show recent bankruptcy activity or judgments. The 
average credit score for our borrowers in 2003 was 561.
    Over half of the loans in our portfolio the entrepreneur 
had no experience in the business they started and even more 
lacked the ability to manage a business in general.
    The SBA's premise for terminating the Microloan program is 
that banks will use guarantee programs to make these loans. I 
would ask any banker in this room if they are interested in 
making loans to the people that I just described. Their answer 
would be no.
    So what does that mean? The Secretary talked about programs 
that show real results and real measurable results. Our 
portfolio today, at 30 days our Microloan portfolio has a 2 
percent delinquency rate. We have historically charged off 10 
percent of our loans. In the loans we have made since 1997, 94 
percent of those businesses are still in business and still 
operating. This is grass roots business development. These are 
real measurable results.
    The SBA has contended that the program is inefficient and 
costly. A 97 cents per dollar loan number is used. The context 
for those numbers has not been presented.
    This is an expensive program. Bankers say, and our 
experience confirms, that is costs as much to make a small loan 
as it does a large loan. If it was able to be done by banks, 
banks would be doing it. But they will not, because the 
transaction cost for a small loan is too expensive, in addition 
to the loans being high risk.
    In closing, we would ask that the Committee support in the 
2005 budget $15 million for PRIME, $30 million for loans to 
Microloan intermediaries, and $25 million for Microloan 
technical assistance. Banks using SBA loan guarantees will not 
fill the gap that we are filling as organizations. The demand 
is currently outpacing supply.
    AEO and the intermediaries have worked with the SBA for 
program improvements. We know that there are more program 
modifications that could be made and we are willing to work 
with the SBA to do that and would like to have opportunity. We 
ask you to fund these programs, not terminate them, because 
terminating them closes the door on economic opportunity to 
businesses that will not be served by any other source.
    Thank you, Senator.
    [The prepared statement of Ms. Mathews follows:]

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    Chair Snowe. Thank you, Ms. Mathews.
    Ms. Golden, welcome.

  STATEMENT OF ELLEN GOLDEN, ASSOCIATION OF WOMEN'S BUSINESS 
                            CENTERS

    Ms. Golden. Senator Snowe, I would like to thank you, 
Senator Kerry, and the members of the Committee for giving me 
the opportunity to participate in today's hearing.
    I am Ellen Golden, Senior Development Officer for Coastal 
Enterprises, Incorporated in Wiscasset, Maine, and I am also 
here representing the Association of Women's Business Centers.
    The Association of Women's Business Centers is a national 
non-profit organization that represents Women's Business 
Centers and women business owners across the country. Coastal 
Enterprises is a private non-profit community development 
corporation and a community development finance institution 
which provides financing and technical assistance in the 
development of small businesses, social services, and 
affordable housing.
    CEI has been a Women's Business Center since 1995 and we 
are currently funded under the sustainability pilot.
    The Women's Business Center program was created in 1988. It 
is a leveraged Federal investment in women's economic 
development that has enjoyed consistent widespread bipartisan 
support from Congress, and we certainly thank you, Senator 
Snowe, and the other members of the Committee for your 
consistent support for this program.
    The 89 centers serve a range of women, minorities, low 
income women, women with disabilities, and veterans, as well as 
businesses at all stages of development, in all sectors and at 
a range of sizes. The program has grown from a demonstration 
with 3-year funding to a permanent program with an initial 5-
year funding cycle. In 1999, with the overwhelming support of 
Congress, the program incorporated a sustainability pilot 
program that allows centers to apply on a competitive basis for 
an additional 5 years of funding.
    In their brief history, the Women's Business Centers have 
become a key SBA resource partner. Their importance is 
recognized in the President's budget request where the Women's 
Business Centers are acknowledged as a component of the SBA's 
primary infrastructure, as highly effective, and as having a 
well developed infrastructure.
    There are three points, however, I would like to make about 
the President's budget. The first has to do with the requested 
level of funding. The President requests $12 million, which is 
less than we received last year and it is simply not enough. 
The Association is asking that funds be appropriated at a level 
consistent with the current authorization, which is $14.5 
million. This is what we need in order to meet the current 
commitments of the program and also to support the addition of 
new centers in areas that are currently not served by the 
program.
    The program has been flat funded at $12.5 million for the 
past 3 years. In reality, flat funding means a reduction in 
funding. In addition to the effect of inflation and the 
increasing cost of operations, the sustainability centers lost 
between 12 and 19 percent of their funding last year, because 
there simply was not enough money to go around.
    In fiscal 2005, under the current funding model, with an 
appropriation of $12 million, the grants to the sustainability 
centers would be cut in half. I think you can easily imagine 
what the impact on the program would be.
    My second point addresses the goals of the Agency for the 
program. First, as noted, many centers have already had their 
funding reduced. Their resources are stretched to the point of 
breaking and, as I already said, $12 million does not cover 
current needs. Nonetheless, the centers are being expected to 
increase the number of women served by 18 percent to an 
unprecedented 130,000 women.
    Secondly, the goals that have been developed for the 
Women's Business Centers have been developed without any 
discussion with either the Association or the centers 
themselves. There has been no attempt to determine whether or 
not they are realistic or achievable.
    For example, in the President's request the Women's 
Business Centers are being asked to train SBA personnel on 
doing business in Native American communities, to implement and 
evaluate pilot technical assistance programs for Native 
American communities, to generate articles for the online 
women's business center, and to host the online women's 
business message board, which would be available 24/7. All of 
this with less money and increased levels of service.
    Thirdly, we think it is unrealistic to imagine that the 
Women's Business Centers and the other key resource partners 
will absorb the additional demand resulting from the 
elimination and reduction of other SBA programs such as the 
Microloan technical assistance grants and PRIME. These programs 
serve different markets.
    Moreover, the current demand for Women's Business Center 
services is already so high that clients at our center in Maine 
have to wait from 3 to 6 weeks in order to get services. The 
Women's Business Centers can simply not fill the gap left by 
the elimination or reduction of other programs.
    The Women's Business Centers are as eager as other resource 
partners to contribute to the SBA's overall goals and to bring 
these essential services to existing and emerging entrepreneurs 
across America, but we need to be involved in the process of 
setting those goals and making sure that they are realistic and 
doable.
    My third point addresses the issue of sustainability. As 
you well know, the SBA's currently operating under temporary 
reauthorization which expires on March 15th. Without 
reauthorization, the sustainability pilot will expire. Although 
there are some differences between them, both the Senate and 
the House reauthorization bills contain provisions for renewal 
grants beyond the initial funding period of what we have been 
calling sustainability.
    We are deeply concerned that sustainability or renewal 
grants have not been taken into account in the President's 
budget request. There are currently 33 centers in the 
sustainability pilot and at least another 20 will be eligible 
to apply this year. Together, these two groups account for 
nearly two-thirds of the currently funded Women's Business 
Centers. These are the more experienced centers that have 
demonstrated their ability to meet the program's goal and to 
deliver quality services.
    These are the well developed infrastructure referenced in 
the President's budget. These are the very programs that the 
SBA is relying on to achieve its ambitious goals and yet there 
is no mention made of a commitment to fund them.
    The Women's Business Centers are a well developed and 
highly effective infrastructure. But if we pursue a strategy of 
inadequate funding, unrealistic goals, and an unwillingness to 
invest in existing capacity we will quickly undermine the 
effectiveness of this important resource. Thank you.
    [The prepared statement of Ms. Golden follows:]

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    Chair Snowe. Thank you, Ms. Golden.
    I will start with you on the question regarding the 
funding. Obviously, it is a decrease from last year and it is 
flat funding over the last 5 years, so obviously, it does 
represent a hardship.
    What appropriation do you think would be sufficient?
    Ms. Golden. If we want to increase the size of the program, 
and I know that this is a concern that has been brought before 
this Committee in the past, and I know that there are parts of 
the country that are not currently served by Women's Business 
Centers, if we want to maintain current capacity as well as 
increasing it, then the $14.5 million, which is the current 
authorized amount, would cover all of that.
    Chair Snowe. And you feel in the Administration's request 
on sustainability centers, that is one of the crucial issues 
that is overlooked, obviously. And adding new ones and not 
obviously providing a sufficient amount for those that exist.
    Ms. Golden. I think you will recall that at the roundtable 
on entrepreneurial development programs that you held last 
spring, the SBA at that particular hearing offered testimony 
that indicated that they had a clear preference for opening new 
centers over funding the current sustainability centers.
    As I said earlier, and I made the point last spring, those 
are the heart of the program. Those are the centers that have 
demonstrated their capacity to deliver the programs effectively 
and efficiently. So it does not make sense to us to cut those 
programs out.
    Chair Snowe. There should be some kind of balance, 
obviously, we need to create in this whole program. 
Insufficient funding it makes it even harder. But for those who 
have existed and have a proven track record, it clearly make 
sense to ensure that they are supported.
    So we will have to look at that particular issue, in 
addition to the other issues concerning the technical 
assistance that are going to be part of your program is the 
Native American program. I know that you have commented on that 
as well.
    Ms. Golden. It is not that we would be opposed to taking on 
responsibility for additional tasks or activities, but we would 
like to be compensated for it. I think the point is that at the 
current level of funding we cannot assume additional 
responsibilities.
    Chair Snowe. Ms. Mathews, you heard the Administrator 
respond to Senator Pryor's comments regarding the Microloan 
program. Could you address those, in terms of how you think it 
would not work with respect to zeroing out the amount and 
having the other programs compensate for it? Are you saying 
essentially that the loans are too small, take too much time, 
obviously greater cost would be required in order to process 
those type of loans?
    Ms. Mathews. Yes.
    Chair Snowe. All of the above?
    Ms. Mathews. All of the above.
    Chair Snowe. And the other programs would not be adequate 
to compensate, because they are too small and take too much 
time?
    Ms. Mathews. There is the question of credit quality. A 
bank does not do a 561 credit score loan. They do not do that 
level of loans. But yet we are producing strong growing 
businesses from these targeted customers.
    The loans are small. The SBA Express Program in Minnesota 
in 2003 made six loans under $10,000. This year to date it has 
made one loan under $10,000. So they are making $10,000 to 
$35,000 loans.
    Our average loan size last year was $9,000. We made a 
number of loans at the $1,000 level. Those loans will not be 
made because of credit quality and borrower capacity, because 
of the size, and because banks do not have the capacity or the 
resources to provide any kind of technical assistance to be 
tied to the loan.
    Chair Snowe. And every dollar spent, do you agree with that 
calculation by the SBA with respect to every dollar spent costs 
97 cents to process the Microloan?
    Ms. Mathews. I do not know the context in which that number 
is created. I suspect that that number also includes the cost 
of training and technical assistance as part of the Microloan 
program.
    The major cost of the Microloan program is actually the 
entrepreneur development process, yet it is included in the 
SBA's credit budget. So we are not sure what is included in the 
number. There is no other loan program in the SBA that has all 
of the associated costs for technical assistance loaded in to 
the cost of the loan. So there is great comparison of apples 
and oranges.
    I have another example of how numbers are used out of 
context. In our region, for example, the small business 
development center serves 800 people a year. We serve 800 
people a year. In reports, they are given credit for serving 
800 clients. We made 29 loans. So their 800 clients are 
compared to our 29 loans. There is no comparison of the work 
that we have done in the process to determine efficiency and 
effectiveness.
    So there is a number of ways in which the calculation does 
not tell the whole story.
    Chair Snowe. I appreciate that.
    Mr. Coit, I understand my staff tells me you mentioned 
Diamond Phoenix and my home town area, as a successful SBIC 
investment.
    As you know, I know you testified on your issue and I wish 
I had heard your testimony as well, about the restructuring 
proposed by the SBA. I would like to have you comment on that.
    What concerns specifically do you have with the SBA's SBIC 
proposal? Do you think it is unrealistic, the fact that 
obviously they would restructure with providing the SBA a 
higher percent of the profits?
    I have had a chart made to compare the proposal of your 
association to that of the SBA and there are some fundamental 
differences in terms of what currently is allowed and compared 
to what the SBA is proposing.
    What concerns do you have specifically and primarily? And 
secondly, your proposal, why do you think it would be 
preferable? Keeping in mind the interest of the taxpayers, as 
well, because we have public accountability with respect to 
these issues. And obviously, it is a riskier proposition.
    And so therefore, I would be interested in your comments as 
to why you think your proposal, the association's proposal, 
would be better, the National Association of Small Business 
Investment Companies.
    Mr. Coit. Thank you.
    We actually, before putting this proposal forward, spent a 
lot of time with our industry, both the managers and members of 
NASBIC to understand their preferences for this. But very 
importantly, also spent time with the institutional investor 
community, including a group called the Small Business 
Investment Alliance which represents some of the major banks 
that support the program, to make sure that whatever we 
proposed worked for them.
    Of course, it has to work for the taxpayer and it has to 
work for the small business community, as well.
    Obviously, the taxpayer has a difficult time in the program 
over the last 3 years. Anybody in venture capital has had a 
very difficult time. Until 3 years ago, the industry as a whole 
never actually lost money in any single year and it has now had 
3 years in a row where there have been substantial losses. So 
the Participating Securities Program, which started 10 years 
ago and grew substantially during the late 1990s, was 
unfortunately and uniquely positioned to participate in the 
very significant decline in our industry.
    One of the things we did do was to try to understand the 
taxpayer's position if the program had been structured the way 
we are proposing over the last 10 years. The actual losses to 
the taxpayer, we understand SBA has also looked at these 
numbers--would have been substantially less, maybe even zero. 
So we think our proposal actually protects the taxpayer by 
increasing their profit share in the program without really 
diminishing the risk all that much. We think the trade-off for 
the taxpayer is actually substantially better.
    For small businesses, what this is going to do is to 
actually attract more institutional investor capital and 
sophisticated capital to the program. As I said, the SBIA group 
has endorsed this approach.
    I did talk while you were out about the Maine State 
Retirement System, which we approached for our first--actually 
for both of the two SBICs we formed. In the first instance they 
had actually approved an investment in our SBIC. They had gone 
to Ennis Knupp, which is their advisor in Chicago. And they had 
approved it, in terms of our quality as an investor.
    Then the director of the Maine State Retirement System took 
the next step, which was actually to look at what the SBIC 
regulations were about, and then went back to the board and 
said we should not do this as a fiduciary.
    The point is that by restructuring the program and making 
it more simple, more money both from the banking community 
which has traditionally supported the industry, but also 
particularly from public pension funds which have a regional 
interest in making investments in local venture capital funds, 
that this would open up substantial amounts of additional and 
sophisticated capital to the program.
    That sophisticated capital will also be a screen for more 
sophisticated managers. So the quality of the program from the 
point of view of the institutional investor supporting the 
program and the managers who will be attracted to the program 
will be improved. If the taxpayer is going to have a higher 
percentage of profits, the taxpayer should also do better.
    For the small businesses, this just means there is going to 
be more money in the program. It is going to be more 
competitive. It will lower the cost and create more 
availability to small businesses.
    Chair Snowe. I appreciate it and obviously this is an issue 
that we will have to explore, the Association's proposal as 
well as the Administration's. Obviously, we do not want to make 
it less attractive to investors or make it unfeasible.
    At the same time, I realize the last 3 years hopefully were 
an exception to the rule and not the norm, which has obviously 
contributed to the problems of the SBIC and venture capital in 
general.
    Mr. Wilkinson, I know Senator Pryor wants to ask a 
question, but just on the 7(a), as I said earlier, I do plan to 
convene a roundtable to have a more in-depth discussion of the 
fundamental changes to the program and making it zero subsidy 
rate and changing the guarantees, prohibiting the piggybacks 
and so on. So I am certainly going to want to have your input.
    What is your greatest concern about this approach?
    Mr. Wilkinson. Well, the greatest concern today is the 
number of borrowers who had their applications in on time and 
had the rug pulled out from underneath them. We have got three 
applicants sitting in the audience today who testified 
yesterday on the House side about the financial damage their 
small businesses have incurred.
    This is a problem that the SBA can resolve today. The 
applications were in on time and they can process them if they 
so chose to.
    By not doing so, they are, for whatever reason, making 
these applicants pay a punitive price. And it is just, in our 
opinion, a mean-spirited attempt by the SBA to reduce loan 
volume. These applications and the others like them across the 
country should not be ones paying the price for the way the 
funding situation was managed.
    Chair Snowe. I would agree with that. I think it does 
breach a trust----
    Mr. Wilkinson. It does.
    Chair Snowe. In the agency and in the program itself.
    Mr. Wilkinson. And circumvented the 15-day notice 
requirement in the Small Business Act.
    Chair Snowe. I agree, on three different occasions, I 
mentioned earlier. But the fact is people obviously applied 
based on the rules and the law.
    Mr. Wilkinson. Correct.
    Chair Snowe. So I regret that and we will continue to work 
with the Agency on this particular issue. There is no reason to 
keep in place a cap at this point.
    Mr. Wilkinson. Thank you.
    Chair Snowe. I can assure you that we will continue to work 
on that matter, because I agree with you totally. I just think 
it is a huge problem for anybody who anticipated irrespective 
and--as I recall we had the roundtable here and it was you who 
expressed the thought that we need to have a much higher level 
of authorization, irrespective of the previous year. Every year 
it is going to get larger. The demand is going to be greater, 
irrespective of the fact that is includes the STAR loans or 
whatever.
    All of the testimony submitted to this Committee, other 
than the SBA's, was the fact that it would be a much higher 
level than requested by the Agency. That is what is so 
regrettable about it.
    Mr. Wilkinson. The agency's 2004 budget request made the 
assumption that small business loan demand was going to go away 
simply because a program expired and that simply was not the 
case, is not the case, and there is substantial demand from the 
small business sector looking for long-term capital and that is 
what the SBA should be providing.
    Chair Snowe. So what you are telling me is that first and 
foremost we should rectify the problem with respect to this cap 
so that those who have submitted their applications can be 
helped.
    Mr. Wilkinson. Absolutely. They have not been treated 
fairly or equitably. It is embarrassing.
    Chair Snowe. Senator Pryor.
    Senator Pryor. Thank you.
    This is a very experienced panel with a lot of background 
and years of understanding how the SBA works and how it should 
work and the things that are going right and going wrong at 
that Agency.
    I would like to ask, if I may, at the risk of sounding like 
a public opinion poll, I would like to ask each of you if you 
think the trends and the developments at the SBA today, in your 
opinion if the SBA is going in the right direction or the wrong 
direction? And why?
    I know that is kind of a vague question, but if you do not 
mind, Mr. Wilkinson, I will let you start.
    Mr. Wilkinson. I would be happy to start on that one. The 
actions taken in the 7(a) program, in my opinion, have been 
intended to not only limit the background of the 7(a) program, 
but to shrink it. It is our belief that there are those in the 
Office of Management and Budget that do not believe that the 
Federal Government should be in the credit program.
    We disagreed. There is a sizable gap for long-term credit 
for small business and that is exactly what this program does. 
This program is not broken. It does not need to be overhauled. 
It just needs to be supported. And the direction that we are 
going, I do not believe, is the correct one.
    Senator Pryor. Mr. Coit.
    Mr. Coit. There are parts of the SBIC program that work 
very well. The debenture program has been around for 45 years. 
It has been well vetted. There have been changes made to it. 
More and more the changes are minor. Our industry is very happy 
with the way it is operated by SBA. The debenture program is 
working. It is not broken.
    The Participating Securities Program is broken and that is 
why we have put forth our proposal.
    I will say that I think the relationship with SBA is 
constructive. This process, we will see where we come out in 
the end, but right now we seem to have a good dialogue. So I do 
not think the relationship is broken, but the program is 
clearly structurally broken.
    I do have one other concern and that has to do with cuts. 
There is an important part of the process of oversight that SBA 
has and that is the examination process. My understanding is 
that the SBA is actually going to outsource the examination 
process.
    This was tried on an experimental basis I think 6 years ago 
and it was a dismal failure. It actually created more costs. It 
was very disruptive to the licensees. My understanding also is 
that the current examination function actually breaks even or 
makes a small profit for SBA. In other words, the fees that are 
charged to licensees for the exam actually cover the cost to 
SBA.
    So the idea of outsourcing this as a way to reduce SBA's 
budget is really not going to improve SBA's bottom line, but it 
is going to dramatically, I think, decrease SBA's ability to do 
functionally accurate oversight and it is going to put a big 
burden on our industry.
    Senator Pryor. Ms. Mathews.
    Ms. Mathews. Obviously, since the Administration is 
proposing to terminate the largest single funding source for my 
organization it is hard for me to think about that being a 
positive direction.
    When you were out of the room, Senator, I described how we 
reach deeper into the economy than what the SBA loan guarantee 
programs do. There is nothing about the proposed changes that, 
other than a reduction in paperwork, that are going to reach 
deeper into the market that we serve.
    The SBA has made some remarkable improvements in the 
efficiency of the loan guarantee programs and their ability to 
serve larger numbers. We have worked with the SBA over the 
years and had some good results in creating efficiencies in the 
Microloan program, but there are many, many more efficiencies 
that could be created.
    Secretary Barreto made the comment that the economy has 
changed in the last 12 years and that the environment has 
changed. The Microloan program, in many respects, is still 
operating in the 12-year-old environment. We have a system of 
185 organizations that do this kind of work. If we put our 
minds to it we could create greater scale and we could create 
greater efficiencies.
    Will it outpace the 7(a) program? No, because the 7(a) 
program makes the case that capital is the primary issue. The 
Microloan program makes the case that capital is only necessary 
once the business owner is prepared. Capital is tied to 
entrepreneur training and technical assistance. That is what 
makes the program successful. If you separate those two, if you 
separate entrepreneurial development from Microloans, the 
program will not be successful and it will not have the kinds 
of results that intermediaries are providing today.
    While it is not large, it was pretty important to 2,442 
people in the United States last year. It made a difference in 
their lives. And that will not happen if those programs are 
gone.
    Senator Pryor. Ms. Golden.
    Ms. Golden. Thank you.
    Obviously, the Women's Business Centers are pleased to be 
included as part of the key infrastructure. But we have been 
disappointed with the levels of funding requested by this 
Administration for the past 3 years.
    As I mentioned earlier, just an additional $2.5 million 
would enable this program to be fully funded and allow it to be 
expanded into areas that are currently not covered. It seems 
like a rather modest amount, given the return to local 
communities and economies in terms of new businesses created 
and jobs and income tax revenue developed through the work of 
the Women's Business Centers.
    The apparent lack of support for sustainability, for those 
most experienced centers with a proven track record, is 
something that we think is a wrong direction. So again, that is 
a disappointment. It feels like that is weakening rather than 
strengthening the program.
    Then the last point is that the Association maintains 
fairly constant communication with the Office of Women's 
Business Ownership and we do have a good relationship. But we 
find it very difficult that goals are imposed on us without our 
being asked whether or not they are realistic and doable.
    We are happy to work with the SBA to see how the Women's 
Business Centers can help them achieve what they want, but we 
want to be participants in that dialogue, and not be just have 
goals handed to us, particularly without additional resources.
    Senator Pryor. I would like to thank all of you for your 
candor on those answers. I think those were very insightful.
    Mr. Wilkinson, a few moments ago the Administrator said the 
Agency could not have predicted the loan volume to avoid 
shutting down the lending to small businesses. I would like to 
hear your thoughts on that. Could they have predicted that?
    Mr. Wilkinson. Yes, Senator, the testimony that we gave 
last year in February we anticipated a loan demand this year of 
$12.5 billion. If you go to SBA's very own website, they will 
tell you that in fiscal year 2003 they did $11.3 billion and 
they had a loan cap of $500,000 in place for the first 5 
months. So obviously, loan volume would have been higher than 
the $11.3 billion.
    In addition, the last several months of fiscal year 2003, 
loan volume was approximating $1 billion a month. October we 
did $1 billion for the month. November, we did $1 billion a 
month. So they had known for quite some time what loan volume 
was trending.
    Senator Pryor. That is my impression as well.
    Ms. Mathews, let me ask you about rural economic 
development which is something that is near and dear to my 
heart since I come from a rural State. It is very, very 
important to my State. My sense, my impression, having talked 
to a lot of business owners around the State, is that the SBA 
programs, especially the Microloan program, is really an 
important element in strengthening rural America's economy. 
Would you agree with that? And what is your experience in 
helping businesses out in rural America?
    Ms. Mathews. Thank you, Senator.
    90 percent of the SBA Microloans in Minnesota are done in 
rural Minnesota. They are not done in urban Minnesota. In the 
region that I live nearly 20 percent of the workforce is 
engaged either in self-employment or works in a business with 
four or fewer employees. Those are micro businesses. That is a 
huge percentage. In some of the counties in which we serve, the 
percentage is as high as 30 percent.
    The services that we provide are critical to help people 
create a job wherever they want to live. And there are all 
kinds of businesses. It is everything from hairdressers and 
auto repair to--we are working on a project with our community 
colleges to help train technology workers and build technology 
businesses in rural Minnesota, jobs where people want to live 
and are living. This is where it is going to happen.
    Senator Pryor. That is, at least in my view, one of the 
purposes of the SBA is to reach out in rural communities 
because, as you well know given your background and experience, 
in many, many instances these rural communities do not have 
access to capital. Maybe they could go to the bigger cities and 
go to the larger banks and try to get loans, but it is not a 
very appealing environment for a lot of these banks. They do 
not want to go out in the rural parts of various States to try 
to loan that money.
    So my sense is the SBA plays a very, very important role in 
keeping the economies going across rural America.
    I do not want to talk too much about the Microloan program, 
I focused on that with the Administrator, but I know that one 
of the great benefits of that that we have already touched on 
is the Microloan program helps folks in rural America. It helps 
women, minorities, it helps first-time businesspeople. It just 
seems to me that it is a program that if done correctly can be 
a very, very smart use of tax dollars to get out there and 
target weaker sectors of our economy and strengthen those 
sectors with hopefully using good business practices and being 
able to get a big return on taxpayer investment out there in 
these communities.
    One thing I was going to ask you, Ms. Mathews, is that it 
seems to me unfair to compare the 7(a)'s Express program to the 
Microloan and Microloan technical assistance program when this 
Administration really has not funded the Microloan and 
Microloan assistance programs like it should have. And then to 
try to compare those. That seems inherently unfair to me. Do 
you have any comments on that?
    Ms. Mathews. Like the Women's Business Centers, the SBA 
Microloan program has been either flat-funded or has seen 
decreased funding over the last few years. It is spread in each 
year among more and more programs. So our funding has declined, 
yet the numbers of Microloans has actually increased. So there 
is greater efficiency every year.
    It will take more money to improve and to build the 
program.
    Senator Pryor. One last thing, I was out during your 
testimony, but I believe you gave a statistic about the average 
Microloan?
    Ms. Mathews. Our average Microloan, across the Microloan 
program it is about $11,000. Our organization's is about 
$9,000.
    Senator Pryor. And I know Mr. Barreto a few moments ago 
said that the SBA Express average, I believe he said $47,000. 
He was citing a lot of statistics and every time we would ask 
questions he would always bombard us with statistics. But it 
seemed to me that we need to differentiate these programs and 
the purposes of these programs. Not all small loans are the 
same. There is a differentiation within that definition of a 
small loan.
    Madame Chair, that is all I have right now.
    Chair Snowe. Thank you, Senator Pryor, and I appreciate all 
the panel's work and testimony. Obviously, we are going to be 
following up with each and every one of you.
    Before I adjourn, just one general question. In all the 
proposals in the respective areas in which you have testified 
here today, what would you support, if anything, do you 
support? Is there anything?
    I am turning it around, I know.
    Mr. Wilkinson. I will start here. We have not seen a 
proposal. We were not consulted about putting a proposal 
together.
    Chair Snowe. We have not either.
    Mr. Wilkinson. So I do not even know what I would be 
commenting on.
    Chair Snowe. Except obviously we get the framework, but we 
have seen the specifics of the 7(a) proposal.
    Mr. Wilkinson. That is correct.
    Chair Snowe. I agree, that we have not.
    Mr. Coit.
    Mr. Coit. With respect to the Participating Securities 
Program, we have our competing proposal, so we actually do not 
support the Administration's proposal.
    Chair Snowe. Ms. Mathews on the Microloan or PRIME.
    Ms. Mathews. We do not support the proposals to terminate 
the Microloan program. We are actually very concerned about 
what happens to those existing borrowers and that existing 
portfolio. The PRIME program is targeted at very low income 
individuals, so it too has a specific focus and is zero funded. 
So we do not support the proposal.
    Chair Snowe. Ms. Golden.
    Ms. Golden. I do support the Administration's endorsement 
of the Women's Business Center program as a key component of 
the SBA's primary infrastructure, but we do not support the way 
that they are proposing to support us.
    Chair Snowe. And merging technical assistance into the 
program, as well? That is something I gather they did not work 
with you on?
    Ms. Golden. No, they never consulted us with that and I 
think that it is an unrealistic expectation. There is a finite 
resource. As I said, the Women's Business Centers are already 
swamped in terms of demand for services. If you were to expect 
us to take on these additional responsibilities, it would 
simply displace current customers. It does not really add any 
capacity.
    In terms of expecting us to take on the Microloan technical 
assistance grant, I think it is unrealistic, because the 
programs have two very different purposes. The charge, the 
responsibility for the Women's Business Center program is much 
broader. The majority of our clients are not coming to us 
because they want help with access to capital. They are coming 
because they have management issues. There is a whole range of 
things they needed. They are looking for help around e-commerce 
or how to use the Internet, or any one of a number of things 
that do not really relate to the purposes of the technical 
assistance component of the Microloan program.
    The same would be true for PRIME which, as you know, is 
targeted to extremely low income individuals. It is also not 
targeted specifically to women, nor is the Microloan program.
    While the Women's Business Centers do work with low income 
individuals, that is not our sole responsibility. We are 
charged with working with a range of women business owners. So 
again, it is not really a good fit.
    I know that there are other programs that are also slated 
for elimination or reduction and again I do not think it is 
necessarily realistic to expect us to take on responsibility 
for those, as well.
    Chair Snowe. And you have identified that the level of 
assistance that Women's Business Centers would be required to 
provide would be 18 percent without the commensurate support or 
funding?
    Ms. Golden. Right, we served 106,000 women this past year 
in 2003. The goal for 2005 is 130,000 with a reduction of 
funding. It is unclear to me how they expect us to be able to 
do that. I think we have already demonstrated increased 
efficiency in our ability to serve more and more women every 
year, but at some point there is just a limit to that.
    Chair Snowe. I appreciate your testimony and your views 
representing your respective programs and constituencies and 
that certainly will be helpful as we begin to shape and respond 
and explore and examine all of the programs and the 
programmatic changes submitted to this Committee in the 
proposed budget for the next fiscal year.
    So I truly appreciate it and we will be following up with 
each of you and other members of your organizations as we try 
to develop a response. And obviously, it is going to be 
contingent upon getting more specifics on these proposals as 
well.
    But I really appreciate it and we are going to do 
everything we can to ensure that the SBA and its resources are 
targeted efficiently and effectively to the people it is 
intended to serve. So I truly appreciate your being here today.
    The record for this hearing will remain open for an 
additional 2 weeks until noon on March 3rd. Certainly any 
written questions for Administrator Barreto must be sent to the 
Committee by noon on March 3rd and we will forward them to the 
Administrator at that time with a request for response by April 
1st.
    So again I thank all of you for joining us here this 
morning and for being so responsive.
    With that, the hearing is adjourned
    [Whereupon, at 12:00 p.m., the hearing was adjourned.]

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