[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


                                                   S. Hrg. 102-000 deg.
 
   OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION'S FINANCE PROGRAMS

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

                                HEARING

                               before the

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, MARCH 9, 2006

                               __________

                           Serial No. 109-41

                               __________

         Printed for the use of the Committee on Small Business


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

JEB BRADLEY, New Hampshire Chairman  JUANITA MILLENDER-McDONALD, 
SUE KELLY, New York                  California
STEVE CHABOT, Ohio                   DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan          ENI F. H. FALEOMAVAEGA, American 
RIC KELLER, Florida                  Samoa
TED POE, Texas                       DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska           ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania    MICHAEL MICHAUD, Maine
                                     MELISSA BEAN, Illinois

                           Adam Noah, Counsel

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Hager, Mr. Michael, Associate Deputy Administrator for Office of 
  Capital Access, U.S. Small Business Administration.............     6
Mercer, Mr. Lee, President, National Association of Small 
  Business Investment Companies..................................     7
Wilkinson, Mr. Anthony, President & CEO, National Association of 
  Government Guaranteed Lenders..................................     9
Chilcott, Mr. Kurt, Chairman of the Board, National Association 
  of Development Companies.......................................    10
Schubert, Ms. Lynn M., President, The Surety Association of 
  America........................................................    12
Mayo, Mr. Grace, President & CEO, Telesis Community CU...........    13

                                Appendix

Opening statements:
    Bradley, Hon. Jeb............................................    33
    Millender-McDonald, Hon. Juanita.............................    34
    Velazquez, Hon. Nydia (Ex Officio)...........................    36
Prepared statements:
    Hager, Mr. Michael, Associate Deputy Administrator for Office 
      of Capital Access, U.S. Small Business Administration......    38
    Mercer, Mr. Lee, President, National Association of Small 
      Business Investment Companies..............................    45
    Wilkinson, Mr. Anthony, President & CEO, National Association 
      of Government Guaranteed Lenders...........................    53
    Chilcott, Mr. Kurt, Chairman of the Board, National 
      Association of Development Companies.......................    68
    Schubert, Ms. Lynn M., President, The Surety Association of 
      America....................................................    77
    Mayo, Mr. Grace, President & CEO, Telesis Community CU.......    83
Additional Material:
    Edwards, Mr. Bill, Association for Enterprise Opportunity....    90

                                 (iii)
      



   OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION'S FINANCE PROGRAMS

                              ----------                              


                        THURSDAY, MARCH 9, 2006

                   House of Representatives
          Subcommittee on Tax, Finance, and Exports
                                Committee on Small Business
                                                     Washington, DC
    The Subcommittee met, pursuant to call, at 10:30 a.m., in 
Room 2360 Rayburn House Office Building, Hon. Jeb Bradley 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Bradley, Chabot, Millender-
McDonald, and Velazquez (Ex Officio).
    Also Present: Representatives Moore and Sherman.
    Chairman Bradley. Good morning. I am going to open this 
hearing and welcome all of you to this hearing on the Tax, 
Finance and Export Subcommittee of the House Committee on Small 
Business. I am pleased to be working closely with my 
colleagues--I think they will arrive here shortly, hopefully--
as we review the current state of the finance programs of the 
Small Business Administration. And I look forward to hearing 
the recommendations made by our witnesses in this regard. That 
said, I would like to thank our distinguished witnesses for 
taking the time to appear before us today.
    Access to capital is a vital element in the success of any 
venture. And the knowledge of where to find such resources is 
equally essential. Accordingly, one of the key roles of the 
Small Business Administration is to provide financial 
assistance to American small businesses.
    Small businesses are responsible for more than half of the 
United States' gross domestic product, and the finance programs 
available at the SBA are vital to the development and expansion 
of those small businesses. SBA financial assistance is 
delivered through investment programs, loan programs, and 
bonding for contractors, among other approaches. It is through 
these programs that small businesses are able to obtain the 
means to grow, create more jobs, increase revenue, and help 
strengthen our economy.
    Over the years, the SBA and its methods of assistance in 
the strengthening of the small business sector of our economy 
have undergone changes and improvements. Today we have the 
opportunity to hear the comments and recommendations of those 
who are on the front line of these programs in order to better 
understand the demands of the small business sector and to 
continue our support in the most efficient and economical 
manner possible.
    The President's budget for fiscal year 2007 funds small 
business lending at $28 billion. $17.5 billion of that funding 
would go to guaranteed loan volume under the 7(a) loan program.
    The section 504 loan program, which provides guaranteed 
loans for fixed assets, such as land, equipment, and buildings, 
would receive $7.5 billion. And guaranteed long-term loans for 
venture capital investments in small businesses as a supplement 
to the capital of small business investment companies would be 
allocated $3 billion.
    Congress must continue to enable small businesses to have 
access to the capital needed to expand and prosper. The input 
of those working closely with these small businesses is vital 
to this committee as it moves forward with the SBA 
reauthorization. And with your testimony today, we can help 
create an environment that fosters the growth and development 
of American small businesses.
    I am looking forward to hearing the testimony from our 
witnesses here today. And I look forward to their thoughts on 
this extremely important topic. However, before we do so, I 
would like to recognize our ranking member of this 
Subcommittee, Mrs. Millender-McDonald. And I know that 
Congresswoman Velazquez will be here shortly. And she will have 
an opening statement, too. And I will recognize her when she 
gets here.
    Thank you.
    [Chairman Bradley's opening statement may be found in the 
appendix.]
    Ms. Millender-McDonald. Mr. Chairman, thank you so much. 
And good morning to all of you. I am pleased to join with the 
Chairman and those members who will be finding themselves into 
this committee room today as we discuss an issue of great 
importance to our nation's entrepreneurs. And that is access to 
capital.
    For budding small business owners, a five-year plan is an 
essential step towards building a business. This forward-
thinking planning sets a strong foundation and demonstrates a 
commitment to success.
    Unfortunately, it has been five years since the SBA has 
shown that same commitment to America's businesses in the form 
of a new reauthorization plan. Instead, every year we have seen 
force and have been forced to fend off cuts in the budget 
without any improvements to the SBA financial programs that our 
nation's entrepreneurs so desperately need.
    In our discussion today, I want to bring forth new ideas 
that we can use to update and improve our nation's 
entrepreneurs access to affordable capital. In today's economy, 
securing affordable capital is one of the most important 
components in growing a successful small business. Yet, many 
small business owners have difficulty qualifying for 
traditional bank loans. All too often, they are forced to use 
various methodologies of financing, such as credit cards and 
personal loans, to fund their business ventures. Because small 
business owners cannot access capital in the same way that 
large businesses can, it has been Congress' responsibility to 
ensure that there are special financing options geared to meet 
their specific needs.
    This is why it is so critical that we show a commitment to 
America's small businesses by enhancing and strengthening SBA's 
financing programs. These initiatives, including the 7(a), the 
504, new markets venture capital, and SBIC programs, fill an 
important role. These initiatives fill a financing gap for 
small firms by making loans on great ideas that probably would 
not have been looked at twice by traditional banks. By bridging 
gaps in the capital markets, these programs have more than 
proven their effectiveness over the years.
    In fact, since 1953, nearly 20 million small businesses 
have received direct or indirect help from one or another of 
the SBA programs. In turn, the agency's programs have become 
the government's most effective instrument for economic 
development: creating jobs and providing stability during times 
of uncertainty.
    These programs are especially helpful for women, 
minorities, and individuals in low-income communities that 
often face additional barriers in accessing capital. Their 
entrepreneurial success can greatly assist in uplifting their 
local economies. This is where special initiatives, such as 
SBA's microloan programs, come in.
    The microloan program assists under-represented small 
business owners with loans that they otherwise would not be 
able to attain, even through the SBA 7(a) program. Last year 
alone, the microloan program provided entrepreneurs with $20 
million in loans and helped our budding entrepreneurs progress 
from poverty to successful business ownership.
    Still, over the past three years, the Bush administration 
has proposed eliminating this vital program. This program 
deserves to be supported, not dismantled. Clearly, access to 
capital is access to opportunity for our nation's 
entrepreneurs. If we sincerely want our nation's entrepreneurs 
to have the ability to secure capital, spur economic 
development, and create job opportunities, we must support the 
SBA programs with the long-term initiatives that will ensure 
their survival. This is why it is so important that we are 
talking at this time today to review the success of SBA's 
financing programs.
    Today we will hear testimony from a variety of 
organizations and individuals representing the various small 
business programs.Drawing upon their experiences in helping our 
nation's entrepreneurs succeed, I am hopeful that their useful 
insight and recommendations can be used to improve the SBA 
programs and ensure the success of our nation's small 
businesses.
    Mr. Chairman, it is clear that our nation's entrepreneurs 
have done an outstanding job of creating jobs and spurring 
economic growth. In order to continue their good work, we must 
be empowered and they must be empowered with all of the 
necessary tools; most importantly, affordable and available 
capital. If we want our entrepreneurs to continue serving as 
America's main economic drivers and job creators, it is 
integral that we form a long-term vision for their vital 
initiatives.
    Mr. Chairman, I thank you so much for this hearing. And I 
look forward to the testimony of all of the witnesses who are 
here today.
    [Ranking Member Millender-McDonald's opening statement may 
be found in the appendix.]
    Chairman Bradley. Thank you very much, Mrs. Millender-
McDonald.
    Now I would like to yield as much time as you would like to 
consume to the ranking member of the committee, Congresswoman 
Velazquez. Thank you.
    Ms. Velazquez. Thank you, Mr. Chairman. I really appreciate 
it. I also would like to thank Congresswoman Millender-McDonald 
for letting me sit in on this hearing. And I appreciate all of 
the work you are doing on this issue.
    The President never misses an opportunity to proclaim that 
small businesses are a priority for this administration. Yet, 
time and time again, his policies simply do not back up his 
rhetoric. No place is this more apparent than in how SBA access 
to capital programs are being run.
    Ensuring loans are affordable and that relief from rising 
capital costs is available are both critical in helping 
entrepreneurs to remain a driving force in today's economy.
    While this administration has talked the talk, they have 
failed to walk the walk. For evidence of this, one only needs 
to look at the 7(a) program, the largest long-term lending 
initiative for small businesses.
    Under the current administration, lending has grown much 
more costly and harder to obtain. In the past two years alone, 
costs on borrowers have doubled and lender costs have risen by 
118 percent, making it increasingly difficult for small 
businesses to receive the capital they need.
    As if that was not bad enough, in the F.Y. 2007 budget, the 
administration plans to further increase the cost of this 
program by proposing to raise current fees and creating a whole 
new set of fees. This would make the program even more costly, 
only pushing 7(a) and other lending programs further out of 
reach.
    It has become very clear what type of effect these poor 
policy choices are now having. Lending was down by $300 million 
last quarter. When you factor these new costs, coupled with the 
rising interest rates, it is apparent that the trend of less 
and less capital going into the economy is only going to 
continue.
    Traditional capital is not the only place this 
administration is failing our nation's entrepreneurs. For the 
last year and a half, SBIC's participation in security programs 
has been shut down due to mismanagement and poor policy 
decisions. However, the agency has yet to propose a new plan to 
reopen the program.
    I think this speaks to the level of commitment that exists 
for this nation's small businesses. When you consider this 
decision in light of the fact that currently less than one 
percent of venture capital goes to minority businesses, it 
really makes you wonder where the administration's priorities 
are.
    Compounding this is the proposal to abolish one of the most 
significant policies affecting low-income entrepreneurs: the 
microloan program. So much for compassionate conservatism. It 
is just like this administration to put politics in front of 
good policy. They continue to call for an elimination of the 
microloan program when they do not have the support of one 
single member of the House or Senate.
    This program makes loans to entrepreneurs that are unable 
to get a traditional loan due to inexperience with credit, lack 
of access, or the need for an ongoing technical assistance. 
Clearly this initiative is crucial for the thousands of 
entrepreneurs that have no other means of financing available 
to them.
    By terminating the microloan program and not reopening the 
participating securities program, the administration is turning 
its back on start-ups of all types that need access to seed 
capital. Blocking access to start-up financing impedes the 
formation of new businesses and prevents the job growth that is 
still netted in so many parts of this country.
    Small businesses are the measured driver of this economy, 
but it is crucial that we work together to make sure that they 
have the tools needed to thrive and be successful. I don't see 
the administration coming to the table with the interest of 
small businesses in mind.
    This agency's proposals repeatedly represent OMB's interest 
and not those of our nation's entrepreneurs. Small businesses 
deserve better than this.
    Thank you, Mr. Chairman.
    [Congresswoman Velazquez's opening statement may be found 
in the appendix.]
    Chairman Bradley. Thank you very much.
    And now I would recognize Congressman Sherman for purposes 
of an introduction.
    Mr. Sherman. I am here to introduce Grace Mayo of the 
Chatsworth Community Credit Union. She is the president and 
chief executive officer of that credit union. And that credit 
union has really shown among valley organizations in my 
district for its dedication to the community. They're building 
a new building, which will have a community room.
    Grace herself is involved in virtually every charitable and 
business organization in the valley. And she has taken a lead 
in the credit union movement and will be particularly able to 
tell this Subcommittee how credit unions can be involved in 
lending to small business.
     So I introduce to you a real valley girl who knows her 
stuff, Grace Mayo.
    Ms. Mayo. Thank you, Congressman.
    Chairman Bradley. Thank you very much.
    Now I'll turn to the panel. Our first witness is Mr. 
Michael Hager, who is the Associate Deputy Administrator for 
the Office of Capital Access of the SBA.
    Our second witness is Mr. Lee Mercer, the President of the 
National Association of Small Business Investment Companies 
here in Washington.
    The third witness is Mr. Anthony Wilkinson, who is the 
President and CEO of the National Association of Government 
Guaranteed Lenders in Stillwater, Oklahoma. Thanks for coming 
so far.
    The fourth witness is Mr. Kurt Chilcott, Chairman of the 
Board of the National Association of Development Companies in 
McLean, Virginia.
    Our fifth witness is Ms. Lynn M. Schubert, President of The 
Surety Association of America here in Washington.
    And our last witness, as Congressman Sherman introduced, is 
Grace Mayo, President and CEO of Telesis Community Credit Union 
in Northridge, California. Thank you for coming so far.
    So first Mr. Hager. Thank you.

  STATEMENT OF MICHAEL HAGER, OFFICE OF CAPITAL ACCESS, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Hager. Well, thank you Chairman Bradley, Ranking Member 
Millender-McDonald,--
    Chairman Bradley. If I could just interrupt? I should have 
started out by saying that because there are six witnesses in 
this panel and we want to make sure we get to questions, if you 
could do your utmost to try to stay within the five-minute 
rule, summarize? And then we'll be able to have more questions. 
Thank you.
    Mr. Hager. Thank you again for inviting me to testify 
before this committee regarding the SBA's reauthorization and 
the fiscal year 2007 budget for capital access programs. I am 
here this morning to talk about the SBA's incredible loan 
growth over the last five years, our actions to manage that 
growth, and our actions to manage the risk associated with that 
growth.
    We have significantly increased our loan volume since 2001, 
more than doubling the number of 7(a) and 504 loans, doing so 
at zero additional cost to our subsidy rates to our taxpayers.
    The President's fiscal year 2007 proposal provides, as you 
indicated, Mr. Chairman, $28 billion for SBA's refinancing of 
small businesses. In 2005, we served more businesses than ever 
before in our two major loan products. And we increased the 
numbers of loans funded by 22 percent in one year, moving from 
80,000 in 2004 to 98,000 loans in 2005. During this period, 
lending to minorities increased by 23 percent and to women-
owned businesses by 39 percent in terms of the number of loans 
funded.
    To maintain the zero subsidy cost of these programs, minor 
fee changes will need to occur. And in the 7(a) program, the 
guaranty fee will increase slightly in 2007, from 54.5 basis 
points to 55 basis points, an increase of only one-half of one 
basis point.
    We are especially pleased that the performance of the 504 
program permits the SBA to lower the ongoing fee from 19.8 
basis points to 1.8 basis points.
    The SBA is seeking authority to cover more of its expenses 
through fee authority that will enhance the ability of the SBA 
to properly manage our programs. First, we are requesting 
authority to charge fees to certify development companies, the 
CDCs, in the 504 loan program to cover the cost of oversight. 
We have the authority for the 7(a) program and are requesting 
comparable authority for the 504 loan program.
    Second, we are proposing the addition of an administrative 
fee to cover the cost of making loans of more than one million 
in the 7(a), 504, and SBIC programs. Now, please, this is 
separate from the subsidy rate, which exclusively considers the 
credit and potential losses of a loan guaranty program. Again, 
it's separate from that.
    Based on SBA's 2005 experience, only 3 percent of 7(a) 
loans will be impacted. And under the 504 program, only 15 
percent of those loans would be impacted.
    Managing the tremendous growth of our loan portfolio is 
another key priority. Many improvements have been made over the 
past several years by centralizing lending functions. We have 
centralized 7(a) loan guaranty purchase and liquidation as well 
as 504 processing. We are moving toward centralization of the 
504 liquidation and purchase components and the remaining 15 
percent of 7(a) loan processing.
    We now process 504 loans in two to three days, as opposed 
to previous time frames of up to six weeks. We also process 
guaranty purchase requests in all-time record time. In order to 
streamline this process of becoming a preferred lender, we are 
also looking at setting up a national point of contact for PLP 
lenders, replacing today's 68 points of contact. This move will 
reduce processing time from up to 8-9 months to less than 30 
days.
    We are constantly looking at ways to improve lending 
functions and better manage operations. A major initiative 
underway is to streamline the liquidation process. The proposed 
changes will give the agency more flexibility in managing its 
loan portfolios that are being liquidated. If finalized, these 
regulations will give SBA more flexibility to sell purchased 
guarantied loans using asset sales. And we are also proposing 
that lenders fully liquidate loans prior to requesting 
purchase. This would be an essential component if we are to 
maximize our resources.
    We also need to manage the risk in our loan portfolio. We 
have a state-of-the-art loan and lender monitoring system 
provided by Dun and Bradstreet that incorporates the best 
practices of the financial industry. As part of the monitoring 
system, we have developed and are introducing the concept of 
lender risk ratings using both historical performance and 
projected future performance and are able to evaluate every SBA 
lender on a quarterly basis.
    Lender risk ratings also allow us to prioritize on-site 
reviews so those with the poorest performing lenders are 
reviewed first and if ratings decline, attention can quickly be 
focused on those lenders.
    Now, in conclusion, we are very proud of the growth of the 
programs and our efforts to ensure that this growth is managed 
effectively. Today SBA is helping more small businesses meet 
their financial needs than ever before and at no subsidy cost 
to the taxpayer.
    Let me say again we have three priorities in capital 
access: continuing our loan growth, managing that growth, and 
managing the risk of that growth.
    Thank you for your time today, Mr. Chairman, Ranking 
Member, and members of the Committee. I will look forward to 
the Q and A time.
    [Mr. Hager's testimony may be found in the appendix.]
    Chairman Bradley. Thank you, Mr. Hager.
    I recognize Mr. Mercer and remind everybody to try to stay 
within that five-minute time frame. Thank you.

STATEMENT OF LEE MERCER, NATIONAL ASSOCIATION OF SMALL BUSINESS 
                      INVESTMENT COMPANIES

    Mr. Mercer. Thank you, Chairman Bradley, Ranking Member 
Millender-McDonald, and full committee Ranking Member 
Velazquez, members of the committee.
    I appreciate the opportunity to appear today to discuss the 
status of the SBIC program. My written testimony speaks for 
itself. I believe it addresses all of the issues of relevance. 
And I will not repeat that testimony here in detail. Rather, I 
would like to make the following points.
    The SBIC program is one of the most effective programs in 
the world, in the world, in stimulating investment in the 
smallest of fast-growing companies called gazelles by many 
experts that are the foundation of America's economic 
structure. The program has been studied by virtually all 
foreign countries interested in stimulating growth in their 
small business sectors and has been replicated in one form or 
another by many.
    At the current time, the Bush administration is bent on 
eliminating the equity investment portion of the program, the 
participating security program, which represents more than 55 
percent of investments made last year, and has proposed an ill-
considered, ill-defined, and damaging new fee for the 
subordinated debt investment portion of the program, the 
debenture program.
    With regard to the participating security program, the 
administration's actions ignore the demonstrated need for the 
program, a need established in the 2005 hearing held at the 
full committee level last year.
    The participating security program still exists in law, 
though no new funds have been licensed since the close of F.Y. 
2004. However, the administration has kept the industry and 
this committee jumping through hoops trying to find a 
replacement structure because it claims that the underlying 
security, the participating security, as an equity security 
does not meet the requirements of the Federal Credit Reform Act 
for the purposes of a credit subsidy program that can be scored 
for appropriations purposes. Without that qualification, the 
program would need a dollar for dollar appropriation, obviously 
a non-starter.
    Now, in January, the administration states in writing that 
participating securities are debt securities and specifically 
requires SBICs to list those securities as debt in their 
financial statements. It cites the Financial Accounting 
Standards Board, FASB, as authority for this position.
    It seems to me that the administration cannot have it both 
ways. And if the participating securities are debt securities, 
we can restart the program this year by making simple 
adjustments in the fees and cash flows to bring the subsidy 
rate to zero. If need be, Congress, the author of the Federal 
Credit Reform Act, can state in the reauthorization bill that a 
participating security is a debt security for all purposes of 
that act.
    If the participating security program is not restarted one 
way or another, whether, as I have suggested, which is the 
easiest way, or through passage of H.R. 3429 or a like bill, 
the Bush administration will have succeeded in cutting the SBIC 
program by more than half and will have eliminated all of the 
SBIC money flowing to start up early stage companies. I do not 
believe that that will be a legacy to be proud of.
    We hope the committee will hold the administration's feet 
to the fire this year so we can solve the problem in a way that 
will benefit the small businesses that depend on the program 
for equity capital, the precursor to all growth.
    To return to the matter of proposed fees for the debenture 
program, for all the reasons stated in my testimony, the 
proposal is ill-considered and will do significant damage to 
individual SBICs, in particular, and the program in general. It 
attempts to pass costs to SBICs that they have no ability to 
control. Who has the ability to control those costs? That's a 
question we would like to have answered.
    SBA cannot even tell us to this date how the fee would be 
imposed. The Investment Division was not involved in developing 
the fee. So we hope and urge the committee to oppose the budget 
proposal in that regard.
    Finally, I believe our suggestions for the reauthorization 
bill are self-explanatory. We have raised them in the past. We 
look forward to working with the committee to determine how 
those proposals might be adopted to further improve the SBIC 
program.
    Thank you for your attention. I will be happy to answer 
questions at the appropriate time.
    [Mr. Mercer's testimony may be found in the appendix.]
    Chairman Bradley. Thank you very much.
    Mr. Wilkinson?

    STATEMENT OF ANTHONY WILKINSON, NATIONAL ASSOCIATION OF 
                 GOVERNMENT GUARANTEED LENDERS

    Mr. Wilkinson. Thank you, Mr. Chairman, Ms. Millender-
McDonald, Ms. Velazquez, Mr. Chabot. Thank you for the 
opportunity to testify today. I'm just going to quickly 
summarize my written statement.
    The budget request for 2007 touches on just a few items. 
Number one, the administration requests a $17.5 billion program 
level for 2007. We had requested $18 billion, just a little 
more than they had in their budget proposal. We find the 17.5 
to be acceptable.
    The budget request also increases the lender fees up to the 
statutory maximum. It's not a big increase, going from .545 up 
to .55, but the real point is that we are now at the statutory 
maximum for that fee and it cannot be increased any further.
    The administration also proposes an administration fee. 
This is something we are adamantly opposed to. It is, in 
effect, a step towards a government-sponsored enterprise. And, 
most broadly stated, if we want to move in that direction, we 
should have proper debate before we start covering what truly 
is a government function at this point.
    The other thing that shows up in the fiscal year 2007 
budget request is the fact that we have a declining average 
guaranty fee in our program. We are making more and more small 
loans, which is a good thing. What is missing from the mix is 
fewer and fewer large loans. The large loans, in fact, 
subsidize the cost of the smaller loans. What has happened over 
the last five years is that the dollar volume of small loans 
has gone from 18 percent up to 25 percent. Those loans pay a 
much lower guaranty fee than do larger loans.
    To stop this trend, we are proposing an increase in the 
maximum loan size from $2 million up to $3 million and an 
increase in the maximum guaranty amount up to $2.25 million. We 
think this will be a way to stop the trend of a declining 
average guaranty fee. And if we don't stop that trend, we are 
going to be faced with some tough decisions in the fiscal year 
'08 budget that would include raising fees even further on 
borrowers and lenders, something we would not like to see 
happen.
    The rest of our legislative proposal is to be able to use 
the alternative size standard that is available in the 504 and 
the SBIC programs. We have requested a national PLP program. 
This is something that the SBA has agreed to. And we are 
working to get that done.
    And, lastly, we had the authorized level of $18 billion.
    That summarizes the written testimony. And I would be happy 
to answer questions.
    [Mr. Wilkinson's testimony may be found in the appendix.]
    Chairman Bradley. Thank you very much

STATEMENT OF KURT CHILCOTT, NATIONAL ASSOCIATION OF DEVELOPMENT 
                           COMPANIES

    Mr. Chilcott. Again I would first like to thank Chairman 
Bradley, Ranking Member Millender-McDonald, and the Committee 
Ranking Member Velazquez, as well as the other members of the 
Committee on Small Business for your continued support of the 
CDC industry and the SBA 504 program.
    I represent NADCO as its chair of the board and also CDC 
Small Business Finance based in San Diego, where I serve as 
President and CEO. I am going to address two things with you 
this morning: the proposed SBA budget for 2007 and then NADCO's 
legislative proposal.
    NADCO has two concerns regarding the proposed budget. First 
of all, the authorization ceiling that has been set of 7.5 
billion is too low. We have experienced 30 percent annual 
growth in this program the last three years. We expect that to 
continue. And we need a larger authorization to accommodate 
that growth.
    If we meet that authorization and exceed it during the 
year, it means the program is shut down, rationed, not 
available to small businesses. It is disastrous. There is no 
reason not to provide more than adequate authority for this 
program given the fact it's zero subsidy. NADCO requests that 
you provide an authorization level for 2007 of 8.5 billion to 
avoid the shutdown in service and accommodate program growth.
    The second major issue, as you have heard, is on fees on 
small businesses that are proposed for 7(a) and 504 programs. 
NADCO agrees with the committee that these fees should be 
removed from the budget. It's as detailed in our written 
statement.
    We do not believe we should place additional costs on our 
small businesses that detract from their ability to grow and 
create jobs. We are concerned about the precedent of 
establishing such an administrative fee. How can we be sure 
that, in fact, these costs are justified or SBA will not 
continue to increase this fee to cover more of the agency's 
overheads?
    We also are concerned about that this might be the first 
step in moving SBA's capital programs off budget and out of the 
purview of Congress. So, in sum, we urge you to make removal of 
these fees a top priority.
    In the last several years, the CDC industry and SBA have 
gone through unprecedented structural changes. We have seen the 
centralization of our loan processing functions. And we have 
seen considerable expansion of the CDC's area of operations.
    These changes are already and are continuing the 
fundamentally change the nature of the industry and the 504 
program. NADCO believes it's critical that Congress take action 
to firmly establish the purpose and future of the CDC industry 
and the 504 program.
    Aspects of our legislative proposal will help streamline 
the program, reduce costs to small businesses, and increase 
their ability to utilize the program, but I really want to 
focus on one issue. And that is the definition of a certified 
development company.
    CDCs are the most recent embodiment of state and local 
development corporations that were established over 50 years 
ago. Our mission and the value that we bring to small 
businesses, the SBA, and the communities that we serve has not 
and should not change.
    That mission is economic development. As not-for-profit 
entities, our priority, our passion is to help small businesses 
grow, to create jobs, to invest, and become owners and to build 
strong communities in local economies.
    We play a role, provide expertise and service to small 
business and communities and undertake initiatives that banks 
cannot and should not do. We don't set profitability, return on 
investment, return to shareholders as our mantras. We count how 
many businesses we help, how many loans we provide, how many 
jobs we create, how much private capital we leverage, how many 
loans we make to women, minorities, veteran, rural, low-income, 
and what program services and support we provide to meet our 
economic development mission.
    Our boards of directors and our membership are made up of 
economic development directors for cities, counties, and 
nonprofits, the Chamber of Commerce, the local CPA, the 
community banker.
    NADCO is deeply concerned that SBA has taken steps to blur 
the lines between the 7(a) and 504 programs, despite their 
different missions. And of even greater concern, SBA has 
introduced competition to the regulatory process that is 
blurring the lines between CDCs and for profit lenders, 
deemphasizing our economic development and our accountability 
and commitment to our communities.
    We urge you to take the steps that are outlined in 
legislation, set the course for the future, and clearly define 
the purpose and role of the CDC industry as not-for-profit, 
financial intermediaries that deliver small business programs 
for the purpose of economic development.
    Finally, we ask you to recognize and acknowledge the 
network of 250 small nonprofit organizations as created over 
the course of 25 years, tremendously successful and efficient 
economic development finance program that, in turn, supports a 
tremendous amount of local economic development programs and 
services throughout the country.
    I would be happy to answer any questions the committee has. 
Thank you.
    [Mr. Chilcott's testimony may be found in the appendix.]
    Chairman Bradley. Thank you.
    Ms. Schubert? I believe also we have a vote in a few 
minutes, but I think we can hear both of your testimonies and 
then come back for questions.

   STATEMENT OF LYNN M. SCHUBERT, THE SURETY ASSOCIATION OF 
                            AMERICA

    Ms. Schubert. Thank you, Mr. Chairman. And thank you for 
inviting us here to testify today on this critical issue.
    We are here for one purpose only. And that is to testify 
about the SBA surety bond guaranty program. You may notice this 
is the first time you have heard those words, ``surety bond 
guaranty program'' since the Chairman's opening remarks. This 
is not a program well-known outside of the construction 
community and the insurance community, but it is critical and 
vital to small businesses, particularly at this time.
    The Surety Association was involved many years ago in 
creating the program. And we remain committed to the viability 
of the program and the workings of the program.
    The existing leadership, new leadership, of the program 
also appears to be committed. And we look forward to working 
with them. But they cannot do it alone. They need your help in 
making this program work.
    For those of you who are not completely aware of what this 
is all about, to obtain a construction project on a public 
project, whether it's federal, state, or local, a contractor 
needs to provide a surety bond. Small and emerging contractors 
have a very difficult time obtaining those bonds until they 
show that they have a track record of success and they have 
financial backing.
    Obtaining loans for these contractors is a wonderful thing, 
but it will not get them a surety bond. And they will not get 
that work without both the loan and the surety bond.
    There are contractors who have the opportunity to 
participate, particularly right now, in the reconstruction in 
the Gulf Coast states in helping to rebuild those areas as well 
as rebuild their own businesses. But those contractors are 
going to need surety bonds.
    Surety companies, when the economy is good and everything 
is strong and contractors are being paid rapidly, sureties are 
willing to participate with those contractors and put their 
backing behind the contractor because they believe the 
contractor will be able to perform the work. If they don't 
perform the work, the surety then pays the loss.
    In slow economic times, however, those contractors have a 
more difficult time completing the work because pay comes to 
them slower. Owners are slower in making the payments on the 
project. It is more difficult for them to complete the work.
    Sureties understand that. They have a responsibility to 
make sound business judgments. They have a responsibility to 
their shareholders. They cannot take a risk that the contractor 
is not going to perform when it's not a sound business risk. 
That is where the bond guaranty program comes in.
    What the SBA does is provides guarantees up to 70, 80, or 
90 percent of the loss depending on the particular program, for 
small contractors if a surety will write that bond.
    Because the surety writes the bond, the contractor can work 
on public construction. They can establish a track record. They 
can become a stronger contractor. They then are moved by those 
sureties from the bond guaranty program into the standard 
surety market, meaning that the surety will write that 
contractor without the guaranty, allowing, then, more 
capability or capacity for new and different contractors to 
come in through the guaranty program.
    It's a win-win for everybody who is involved in the 
program, but the program is in serious trouble. There has been 
very little commitment to the program over recent years. And 
there are a few fundamentals that just absolutely have to be 
changed to make this program work for small contractors.
     First, the program has to recognize that as surety 
companies lose money in certain years, the program is not going 
to be self-sufficient every year. It will make money some 
years, and it will lose money some years.
    OMB has determined it needs to be self-sufficient and has 
proposed a 60 percent fee increase to the sureties. This is 
absolutely untenable. A proposal has been made to reduce the 
fee increase but to make up the funds to increase the fee to 
the small contractor. The small contractor is already paying 
enough to participate in this program. This needs to be 
changed.
    The rates that sureties are allowed to charge in the 
program are stuck in rates that were established in 1987. Those 
are 20 years old. If we can just have a change that would allow 
sureties to charge the rates that are approved by the state 
insurance departments, then the program would be more 
financially viable. And there needs to be more funding for 
staff and for education of the staff on the surety bond 
program.
    As you could probably tell by listening to all of the 
testimony here today, just like everyone else, the staff at the 
SBA regional offices know a great deal about the loan programs 
and very little about the bond program. They need training on 
the bond program. There needs to be a commitment at the highest 
level to this program.
    Sureties are interested in the program. However, it has to 
be financially viable for them to participate. We would like to 
work with the SBA and with Congress to make this a workable 
program for small businesses in the United States.
     Thank you.
    [Ms. Schubert's testimony may be found in the appendix.]
    Chairman Bradley. Thank you very much. I think that we are 
down to just a few minutes of the close of the vote. So if it 
all right with you, Ms. Mayo in particular, Mrs. Millender-
Mcdonald, I think both of us would like to go. And she would 
like to be here to hear your testimony.
    So if we can postpone you until we get back in about--I 
think it's one vote. So probably about ten minutes we should be 
back. Thank you. We will be in recess.
    [Brief recess.]
    Chairman Bradley. Thank you again for your forbearance. At 
this time I would like to recognize Ms. Mayo. Thank you once 
again for coming so far.

    STATEMENT OF GRACE MAYO, TELESIS COMMUNITY CREDIT UNION

    Ms. Mayo. Thank you, Chairman Bradley; Ranking Member 
Millender-McDonald; and, of course, Ms. Velazquez. On behalf of 
the Credit Union National Association, which we refer to as 
CUNA--and I will do that within my message--I obviously 
appreciate the opportunity to address the Small Business 
Administration's funding level and fee structure for the 7(a) 
guaranteed program.
    I am Grace Mayo once again, President and CEO of Telesis 
Community Credit Union. And my wonderful congressman, Brad 
Sherman, was delightful to come in and give me that intro. So 
thank you for seeing him.
    Just so you know, I am also the chairperson of a credit 
union service organization as credit unions are cooperatives. 
And one of the things that we do best is we share our resources 
amongst each other. So with that, we created this MBL CUSO, 
member business service called Business Partners. We are 
cooperatively owned by 14 credit unions around this country, 
and we service 160 of them nationwide.
    What we do is we try to use our resources in assisting them 
to provide member services, especially the SBA lending program. 
So we unite, use these expertise, and get to the membership as 
soon as we can.
    CUNA represents basically 90 percent of our nation's 
approximately 8,800 state and federally chartered credit 
unions. With that, we represent over 87 million members. So, 
once again, we are so thankful to let us be here and share this 
because we are a growing entity in obviously the 
entrepreneurship. These are members that have either lost their 
jobs, have downsized, and now are looking at becoming 
entrepreneurs.
    And within my written testimony, as you will notice, 
Telesis has been very active. In fact, we are the largest SBA 
lender in California. And, darn it, we're going to continue 
that because we have seen the enrichment that this program 
along with our business lending programs give to the 
entrepreneurs.
    In my written document, you will see that the first two 
have been females. They are, of course, the ones that we are 
also trying to make sure that we support accurately. And the 
movement totally understands that.
    The industry has only been given SBA approval since 2003. 
They issued a legal opinion removing restrictions. And so we're 
very new to this marketplace. However, we love SBA. And I use 
that adjective, but we do sincerely mean that.
    Without this program, because of our overregulate burdens 
on the member business side, we have no choice but to make sure 
that we utilize the wonderful SBA programs. This is good news 
for credit unions, and obviously it's even better for small 
businesses as you have documented in your written testimonies.
    So we understand the SBA. And we understand it is very 
difficult from the SBA that some of our small business owners 
cannot get these loans from the larger banks, especially as the 
conglomerates take its place.
    Credit unions are very well-known to give out smaller 
business loans. In fact, our average SBA loan limits are 
somewhere around 98,000 on the average. This is our niche. This 
is what we want to do. And when we help our members, I'm not 
kidding you. I would believe if they were here today, they 
would hug each and every one of you for getting it because the 
entrepreneurship is the growth of our economy.
    Once again, credit unions are homegrown. We are community 
credit unions for the most part, regardless of our bonds. And 
so this is our mission.
    CUNA is hopeful that credit union participation in the 7(a) 
program will continue to grow. Of course, we have concerns, 
though, with the appropriation. We highly support the 
appropriation funding, not only for this fiscal year but 
beyond.
    And, of course, we urge you not to support the fee 
increases because our small business members are the ones that 
are burdened. And the last thing we want to do, obviously, is 
to turn them away.
    And what has happened is when we have SBA loans that are 
turned down in our institution, we literally have calls from 
the outside market, capital venturists, hard money lenders, 
that say, ``If you didn't approve of the SBA loan, can we have 
that referral?''
    Now, that might be a good thing to a certain degree, but 
the down side is for the long term, that small business owner 
is giving up sometimes their equity position in the company. 
And they're obviously not being charged the up-front fees, but 
their interest rate is severely higher.
    So, once again, CUNA strongly supports legislative 
initiatives to reduce the program's fees, especially when it 
comes to the smaller loans, and has advocated for the highest 
possible appropriation.
    Additionally, as credit unions and credit union members 
are--and you have to understand they are accustomed to almost 
no fees from credit unions. This really takes us out of the 
marketplace so that we can provide this type of wonderful 
program's ongoing futures.
    Many credit unions, including mine, have been approached, 
as I said, once again, by outside entities. And we don't want 
to turn these entrepreneurs down.
    Another roadblock--and this is significant for us--is that 
there is a threatening ability for us to expand in the 7(a) 
program. As gracious as they were and Hector Barreto was 
wonderful in aligning our industry to come in and support this 
program, we are imposed with a very big cap. In fact, this 
program in member business loans has a cap of 12.25.
    CUNA strongly supports H.R. 2317. It is called the Credit 
Union Regulatory Improvements Act, which proposes, among other 
things, to increase the current cap that credit unions are 
limited to in providing business loans at 12.25 to just up to 
20 percent. It also increases the loan threshold from 50,000 to 
100,000.
    Through the government guaranteed portion of the 7(a) 
program, basically we believe that if you help us raise this 
cap, we can then continue to support the SBA program. The 
arbitrary limits that are currently in place greatly restrict 
many credit unions' ability to offer business loans and, as a 
result, once again, may prohibit us in providing the 7(a) 
program to our members.
    In reforming credit union member business limits, as 
proposed in H.R. 2317, Congress will help to ensure a greater 
number of available sources of credit to small businesses. More 
credit unions could enter the business lending market and take 
advantage of the SBA's 7(a) and other loan programs, which 
ultimately benefits the small business owner.
    In closing, we urge Congress and this Subcommittee to 
reconsider the importance of the 7(a) program in helping 
support small business in this country and improve the funding 
process for this very significant program by, one, pursuing 
legislation that would reduce the program fees without 
affecting the program level; two, restoring the 80 million 
appropriation for 2007 and, I urge greatly, in the future; and, 
of course, three, reforming the credit union members' business 
lending limits.
    I thank you so much for this opportunity.
    [Ms. Mayo's testimony may be found in the appendix.]
    Chairman Bradley. Thank you all very much.
    Let me start out the questioning with a question to Mr. 
Hager. There has been testimony about increasing the cap size 
of the 7(a) loan to $3 million. What would be your position on 
that? Would you favor something like that?
    Mr. Hager. The $3 million proposal that we received 
information on in the last couple of days in 2007 would have a 
slight positive impact on the subsidy rate.
    We have not seen, I have not seen personally a lot of 
demand for a $3 million loan. We believe what we have is 
sufficient.
    Chairman Bradley. So you don't think it is necessary? Okay.
    A question to Ms. Mayo. In your testimony, you mentioned 
that the credit union average loan size is less than $100,000. 
I think you said 98,000. Yet, 7(a) loans under $150,000 have 
grown pretty significantly, even after fees were raised. Why do 
you support the appropriation to eliminate the fees in that 
case?
    Ms. Mayo. Because even though we have all grown--and 
honestly when you design a program which focuses on the smaller 
loans and as lenders, that is exactly the marketplace we will 
go for--what is happening here is that if you start increasing 
those types of fees, it makes it much more difficult for us to 
persuade our member borrowers to take this program.
    So what we are hoping for is that there will be less of 
these fees in the future. I mean, if we are going to live with 
what we do today, I believe we will continue. But if you lessen 
it, I believe it gives us all more opportunities to go after 
and help those entrepreneurs that have already been gun-shy.
    So for all the increases you see, the other question is, 
how many have we not helped because of this?
    Chairman Bradley. Mr. Wilkinson, would you comment on the 
same question?
    Mr. Wilkinson. Could you repeat the question, please?
    Chairman Bradley. Well, the question is that the loan 
growth of under $150,000 has been pretty significant, I believe 
about 25 percent over the last couple of years, despite the 
increase in the fees.
    And I would say, just for full disclosure, I think I have 
agreed with the minority members on the committee and have 
opposed, actually, when we have had a chance to vote on this on 
the floor imposition of the fee.
    So I am interested in the fact that, even despite these 
fees, the loan growth has been pretty significant. Why do you 
think that is the case? And is it as major an impediment as 
some people believe it is, obviously Ms. Mayo?
    Mr. Wilkinson. Well, the fees have just been one part of 
the issue. And yes, there have been some fee increases, but the 
small loans have taken the smallest portion of the increase. 
But the other side of that coin is that the indirect costs of 
this program have actually gone down.
    SBA has done a very nice job over the last five years with 
their SBA Express program. And they have taken other 
initiatives that have streamlined the process, making the 
smaller loans much easier today than it was five years ago. So 
while there have been some fee increases, there have been some 
indirect cost decreases to offset that. And yes, volume has 
been up 20-25 percent.
    Chairman Bradley. And even if the fees are to continue, as 
the administration's proposal would have it, do you feel that 
that volume growth is also going to continue as the demand is 
out there?
    Mr. Wilkinson. I don't know that we will continue to see 25 
percent growth, but that would be more of a function of the 
significant rise in interest costs we have seen over the last 
couple of years, too.
    I mean, a couple of years ago, prime was half of what it is 
today. And higher interest rates slow down demand. And so we 
are seeing a little softening, but it would be more 
attributable to higher interest rates.
    Chairman Bradley. Another question to you, Mr. Wilkinson. 
The 7(a) loan program has now been without an appropriation and 
has been self-funded for a fairly long period of time. Are your 
members happy with this situation?
    Mr. Wilkinson. Yes. We went to zero subsidy at the 
beginning of the last fiscal year. So we have been on zero 
subsidy now for a year and a half. And we have had plenty of 
loan authority to meet demand. We have not faced any of the 
caps, shutdowns, program restrictions that we suffered through 
the decade previously. So thus far, zero subsidy has worked 
just fine.
    Chairman Bradley. Ms. McDonald?
    Ms. Millender-McDonald. Thank you so much, Mr. Chairman. 
And thanks to all of you for your testimony.
    Mr. Hager, I am deeply concerned about the increase in 
fees, especially to those who tend to not have the opportunity 
to get loans in the manner that they solely need. And when you 
have a community such as mine, which starts at the base of 
Watts but goes down to Virginia Country Club, then I have from 
the most impoverished to the most affluent. But I am speaking 
about those that are the small ones in the Watts and the 
Compton area.
    We know that SBA eliminated the prime and the microloan 
programs in its budget. Why is it that SBA is opposed to having 
specific programs targeted to low-income communities?
    Mr. Hager. Thank you for the question. You know, if you 
take a look at 2005 and 2006, the number of loans at 150 and 
below, the total loan portfolio of the SBA, 78 percent of those 
loans were less than 150.
    Ms. Millender-McDonald. Were less than?
    Mr. Hager. A hundred and fifty thousand. So we are making 
lots of smaller loans. I mean, our growth in the smaller loans 
has been outstanding. We believe that a combination of--
    Ms. Millender-McDonald. To whom are you making those loans? 
I need to have them more specifically identified. Are they 
women? Are they minorities? And within the minority, who are 
they? Are they disabled? I need to have some specifics on that 
percentage that you're speaking of.
    Mr. Hager. You know, I would be pleased to--
    Ms. Millender-McDonald. Provide that for me?
    Mr. Hager. Absolutely.
    Ms. Millender-McDonald. Would you please do that?
    Mr. Hager. The thing I would like to comment on is that in 
my opening comments, I referenced the number of loans that were 
being made to women and--
    Ms. Millender-McDonald. You have. And I have that.
    Mr. Hager. Yes.
    Ms. Millender-McDonald. You have 23 percent to minorities--
    Mr. Hager. That is correct.
    Ms. Millender-McDonald. --and 39 percent to women.
    Mr. Hager. That is correct.
    Ms. Millender-McDonald. But within that scope, I need to 
know how many within that--the 39 percent are women. How many 
of the 23 percent to minorities are that of women? You see, 
because sometimes when you say 39 percent women, 23 minorities, 
they are still intertwined within those percentages.
    Mr. Hager. That is correct.
    Ms. Millender-McDonald. So that's why I want to know just 
where are we in terms of that.
    Mr. Hager. I will get the number for you.
    Ms. Millender-McDonald. I need to have that, sir.
    Mr. Hager. I want to bring up--I keep hearing the fee 
issue. And, you know, it was part of the comment here.
    Ms. Millender-McDonald. Yes.
    Mr. Hager. I want to show, if I may--I've got an exhibit 
that I would like to show. If you take a look at this chart, 
this chart represents the fee, 7(a) fees, since the year 2002. 
And if you take a look at these fees, the only fee that is 
greater than at any time since 2002 is the half of one basis 
point we're talking about for next year, for the annual fee. 
And it's going up to the threshold that we're allocated to. But 
all other fees are no more than they were back in 2002. We have 
held those fees.
    We believe our fee structure is very solid. We believe it's 
good when you compare it to what has gone on with rising costs 
throughout the country in financial services. So we feel pretty 
good about the fee structure.
    Ms. Millender-McDonald. Well, is that fee structure 
anyplace within your group, sir?
    Mr. Hager. No, ma'am, it is not.
    Ms. Millender-McDonald. The other question that I do have 
is that your 7(a) program has returned in excess of $1.2 
billion in excess of these fees to the treasury in the past 10 
years. And it's due to its overcharging of small businesses and 
lenders in the program.
    Now, rather than increasing 7(a) fees, as the 
administration recently did and proposes to do it again, why 
didn't the SBA propose a plan to write this wrong and return 
the money that it wrongfully took from the program participants 
in the first place?
    Mr. Hager. You're going back in history on me that I--
    Ms. Millender-McDonald. I understand that. And I'm saying 
you don't go back that far but as far back as you go. And I 
would like for you to look into that. I would like for you to 
look into that because if there is any funding that is being 
returned back to the treasury from those who have been 
overexposed by fees, then certainly that should be something 
that is put back into a pot for these small business people to 
get.
    Mr. Hager. I will absolutely when I get back look into 
that.
    Ms. Millender-McDonald. Okay.
    Mr. Hager. It's a good point.
    Ms. Millender-McDonald. Mr. Wilkinson?
    Mr. Wilkinson. Ma'am?
    Ms. Millender-McDonald. You said in your presentation--I 
started writing all these names until I don't know now just 
what. I might ask you a question that should have been someone 
else's. But you did speak to administrative fees.
    Mr. Wilkinson. Yes, ma'am.
    Ms. Millender-McDonald. And you don't know whether that's a 
government function in the first place?
    Mr. Wilkinson. It is a government function, the lender 
oversight part.
    Ms. Millender-McDonald. But you did have some question 
about the administration fee imposition?
    Mr. Wilkinson. This is a fee that has nothing to do with 
credit subsidy. It is a fee to start paying salary and expense 
dollars.
    And I still don't understand why the magic number of 7 
million. It just appears to be a start of okay. This year is 7 
million. Next year is 17 million. At some point in time, they 
want to have all the administrative costs covered by the 
program, which, in effect, what a government-sponsored 
enterprise is. And so if we're going to go down that road, we 
should just recognize it up front. Let's have that discussion.
    Ms. Millender-McDonald. And, Mr. Chairman, just, really, 
one more question, please. And that is I see my red light, but 
I have got to ask this question.
    Now, when you talk about the amount of increase in the 7 
loan--I think, Mr. Wilkinson, you proposed that. I was trying 
to follow you.
    Mr. Wilkinson. The increase in the maximum loan size.
    Ms. Millender-McDonald. Yes. Yes, it is yours.
    Mr. Wilkinson. Up from 2 million to 3.
    Ms. Millender-McDonald. That is correct. And, yet, small 
businesses don't really partake in that because those small 
loans still do not go to the smallest entrepreneur. Those loans 
tend to still go to the highest level of those who are 
requesting loans and do not go to the lower borrower, which 
means even if it's an increase, this does not necessarily help 
that lower entrepreneur, it seems, from the data that I have 
gotten.
    Mr. Wilkinson. Okay. I guess I am not totally following the 
question.
    Ms. Millender-McDonald. All right.
    Mr. Wilkinson. But we're missing a gap in our program. I 
disagree with Mr. Hager from SBA that he hasn't seen them in. I 
just had our management retreat last week. And the number one 
topic from the folks who attended was ``We need a way to 
service our clients who need bigger loan requests. And we're 
missing those loans between 2 and 3 million dollars.''
    Now, that is a different kind of product than the small 
loan product that is being done through SBA Express.
    Ms. Millender-McDonald. And we understand that. But our 
7(a) loan programs have also been for the little guy and girl, 
too, to some degree.
    Mr. Wilkinson. Well, I think that is why you see 78 percent 
of our numbers of loans that are being made are in the small 
loan category.
    Ms. Millender-McDonald. All right. Let me just say this. 
This committee is Tax, Finance and Export. I want to see more 
small businesses have an opportunity to go international, but 
how can they when they do not even in their own country have 
the propensity to get loans and to have those in a credible way 
where fees are imposed in a way that they cannot broaden their 
horizon, if you will?
    Thank you, Mr. Chairman.
    Mr. Wilkinson. If I could just add one quick comment on 
that? Without the bigger loans, we're going to see pressure in 
the subsidy rate going forward, which we're going to have to 
consider raising fees on those small loans in the future. And 
that's why we need to add the bigger loans that pay higher 
guaranty fees that subsidize the cost of smaller loans included 
in our loan mix.
    Ms. Millender-McDonald. I will come back to this later.
    Chairman Bradley. Congresswoman Velazquez?
    Ms. Velazquez. I will defer to Ms. Moore and then the--
    Chairman Bradley. I am sorry. Congresswoman Moore?
    Ms. Moore. Well, thank you, Mr. Chairman. Thank you, 
Ranking Member, for yielding.
    I think I want to start my line of questioning out to Mr. 
Wilkinson because I was confused or stunned a little bit by a 
comment you made as I was coming into the room. And perhaps you 
have answered it already. But you talked about the larger loans 
subsidizing the smaller loans.
    I'm very concerned because there seems to be a huge gap in 
loans made to minority businesses versus majority businesses. 
And as those loan volumes decrease, most of them being made 
under $150,000, the guaranties also decrease, which squeeze 
minority businesses more and more and more.
    I am wondering because it is my sense that there are many 
small minority businesses that come with the same portfolios, 
the same capacities to borrow but, yet, they don't get the 
larger loans and they also don't get the larger guaranties.
    And given our discussion here today regarding increasing 
fees for borrowing and so forth, I want to know how we meet our 
goals to provide more funds to minority businesses in this 
environment.
    Mr. Wilkinson. Well, first of all, looking at the number 
and the dollar amount of loans going to minorities back to 
2000, we have gone from 26 percent of the numbers of loans up--
    Ms. Moore. How about the amount? I'm talking about the--
    Mr. Wilkinson. --to 34 percent. And the dollar amount, we 
have gone from 30 to--let me get on the right line here--33 
percent of the dollars. And that's year to date in 2006.
    Ms. Moore. But you seem in your testimony to be advocating 
for lower loans, for under $150,000 loans, which also reduces 
the guaranties.
    Mr. Wilkinson. We support making small loans. And you can 
see that. There has been a tremendous growth in the amount of 
small loans being made. But those loans pay a 
disproportionately low guaranty fee.
    So as that part of the portfolio becomes bigger and the 
large loan part becomes less, we collect a smaller guaranty 
fee. That means the subsidy costs are going to go up. So what 
we have to do is get some more larger loans into the mix so 
that the fees on those smaller--
    Ms. Moore. Give the larger loans to minorities is what I 
want you to do.
    Mr. Wilkinson. I would be happy to give it to whoever.
    Ms. Moore. But that is not what is happening from those 
data.
    I want to ask Mr. Hager before my time expires questions 
about the commitment to venture capital for minorities. The 
President has--you know, there has been a rescission of the new 
market venture capital program. For as long as I have been 
here, last year and this year again, there has been no 
reauthorization of the new market venture capital program.
    I know you are going to tell me about the SBIC and so 
forth. Those loans are available to more mature companies, the 
debenture program. Can you tell me how we propose to meet our 
goals to help minority business, small businesses, women-owned 
businesses when we are not committing to the generating of 
these businesses?
    We are proposing higher fees. We just heard Mr. Wilkinson 
talking about--you just heard the dialogue between us regarding 
minority businesses getting lower and lower and lower loan 
amounts. And I am concerned that we are not meeting our mission 
to help grow minority businesses in this environment.
    Mr. Hager. Thank you. Congresswoman Moore, more than 15 
percent of SBIC funds licensed between 2002 and 2005 had at 
least one minority or female fund manager.
    Ms. Moore. Thank God for that one.
    Mr. Hager. I said either one minority or one female that 
was in a very large position within that SBIC.
    I believe that one way to accomplish what you're concerned 
about is making sure that the infrastructure of the SBIC 
ownership, if you will, are minority and women. And they will 
definitely look out for--
    Ms. Moore. But why not just fund the new market venture 
capital program, which would be a more direct--there would be a 
more direct match in those types of businesses that could 
benefit from it, as opposed to those minority businesses that 
have to reach such a high bar?
    The SBIC clearly is targeted for more mature businesses. 
And we know that minority businesses are last in. So what I am 
saying is that translation to me is--because we saw what 
happened with the first round of the new market venture capital 
program. There was significantly more minority participation.
    And the fact that it has not been reauthorized indicates to 
us a lack of willingness to generate those businesses. It's a 
more direct way of doing it. Wouldn't you agree?
    Mr. Hager. I still believe that one way to achieve the 
concern that you have is to make sure that we have women and 
minorities in fund manager positions, meaning the very top of 
the leadership of that SBIC, to enable that SBIC to be looking 
and targeting more venture capital funds to minorities and 
women. I believe again that that--
    Ms. Moore. You have completely not answered my question 
because the fact is that the SBIC loan program structure is 
inimical to minority businesses that make up 50 percent of the 
small business community. The new market venture capital 
program is structured to assist businesses that are minority 
businesses.
    And you have so not answered my question. Thank you.
    Chairman Bradley. Congresswoman Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Hager, we are working on a reauthorization of SBA. In 
light of your earlier comments that the larger loan proposal 
creates a positive subsidy rate for F.Y. 2007, would SBA 
support putting this proposal in the committee's 
reauthorization bill?
    Mr. Hager. We support the proposal that is in the budget 
today. I would not go beyond that.
    Ms. Velazquez. So that means that anything that is not in 
the proposal, you are opposed to?
    Mr. Hager. I would not go beyond what is in the budget.
    Ms. Velazquez. In your testimony, you mention that the loan 
monitoring system is able to draw on historical as well as 
projected performance of SBA loan portfolio.
    Mr. Hager. Right.
    Ms. Velazquez. I am concerned that the recent hurricanes 
could increase defaults in SBA loan programs and lead to 
further fee increases in the future. How have the recent major 
hurricanes affected the SBA's portfolio to date? And what are 
your expectations of the potential future impact?
    Mr. Hager. Congresswoman, that is an outstanding question 
and one that as we look upon the Gulf area--I have spent a lot 
of time down there. I was down there two days last week. I've 
gone back and forth many times, concerned. What are we going to 
start seeing in trends?
    And I am pleased to say so far we have not seen a 
degradation of those trends. We will continue to monitor it. We 
will continue to watch it. We will continue to be flexible 
wherever we can. But so far we have not seen a degradation of 
the portfolios down there yet.
    Now, again, it's still early. And it takes a lot of 
constant monitoring to see what kind of trend may develop. But 
so far it's okay.
    Ms. Velazquez. Ms. Grace Mayo, 85 percent of the 1,759 
credit unions that offer business loans do not participate in 
the 7(a) loan program. And only 93 credit unions have actually 
made at least one loan in the program. Are the high and 
constantly increasing fees associated with the 7(a) program 
deterring credit unions from participating in the 7(a) program?
    Ms. Mayo. To a certain degree, yes. And I do have a 
suggestion, though. If we do have the larger loans come in, one 
of my concerns, obviously, as an industry is, is that going to 
impact all of the 7(a) program, especially if we're talking 
about the smaller loans?
    If anything, maybe as a committee, my suggestion could be--
and this is just Grace Mayo alone--that possibly if we have the 
continuation of the subsidy or the zero subsidy, then maybe we 
can consider a higher guarantee for the smaller cap, the 
smaller loans. Maybe then we can have even more momentum to the 
minority groups and really carve that program out.
    But, going back to your question, the other problem with 
our industry is, one, we're very new to the SBA world because 
we did not have that authority until 2003.
    The other reason is SBA in its own right--and I'm not 
putting any negative comments, but they have had to downsize 
their resources. So it takes us a while. The SBA program is not 
that simple to administer. And we would obviously like to 
engage. But it is also the MBL cap that we're prohibited to 
really commit ourselves into these programs.
    Ms. Velazquez. So let me ask you if there is a point at 
which higher lender fees make this program not worth it for 
credit unions.
    Ms. Mayo. Right. We would see less participation, 
absolutely.
    Ms. Velazquez. Mr. Wilkinson, in your testimony, you state 
that ``It is significant that the budget clearly shows, as 
NAGGL has long argued, that the large loans subsidize small 
loans.'' Given the significant decline in the average size of 
the 7(a) loan, is it your opinion that SBA's focus on making 
smaller loans through SBA has ironically created the dire 
situation that we now face?
    Mr. Wilkinson. Well, they have had a focus on small loans, 
particularly through the Express product, but I don't think 
they have tried to exclude large amounts up to the point where 
they banned us from using combination financings. That 
provision of law expired, a combination financing or piggyback.
    So we don't have a way to get the larger loans into the 
loan mix. That's where we need that big loan back in the mix to 
keep the fees down so we don't face fee increases in the 2008 
budget.
    Ms. Velazquez. I will come back, Mr. Chairman.
    Chairman Bradley. As long as everybody is okay, we will 
have a second round of questions.
    Ms. Velazquez. Sure.
    Chairman Bradley. Mr. Wilkinson, I would like to go back to 
the microloan situation. The testimony of the SBA and Mr. Hager 
is, if I can paraphrase it correctly, that because more and 
more smaller loans are being made and a greater percentage of 
smaller loans, that the microloan program is not as necessary 
as it is in the past. Would you agree with that assessment?
    Mr. Wilkinson. First of all, I am not a microloan expert. 
So I have not ever participated in that program. I have had 
some discussions with some folks who have done microloans. And 
it is my understanding from them that their average credit 
scores are quite a bit lower than the average credit scores 
that we would use in a 7(a) product. But that's the only 
information I would have.
    Chairman Bradley. Anybody else want to chime in on that?
    Mr. Chilcott. Sure, Mr. Chairman. CDC small business 
finance is an SBA micro lender. We also offer a number of other 
products for small businesses that would not otherwise be 
available as a part of our mission. And, in essence, what we 
are able to provide is if a small business contacts us, we 
provide access to a full range of alternative finance programs 
for that small business.
    It could be a 7(a) loan. It could be a 7(a) community 
express loan. It could be our SBA microloan. It could be a loan 
pool that we have that a number of banks have created. So in 
the full range of financing that is available out there, 
certainly the SBA microloans that we are making are for those 
who cannot access a traditional 7(a) community express type of 
loan.
    Chairman Bradley. So you would support retaining the 
microloan?
    Mr. Chilcott. We believe it still serves a viable purpose 
out there in terms of meeting a need that is not met by other 
programs.
    Chairman Bradley. I would like to go to Ms. Schubert for a 
moment. There has been so much talk about the Gulf Coast. And 
you focused a little bit on that in your testimony.
    First of all, I think you said that there was a necessity 
for further training for the bond guaranty staff. Would you 
talk about that briefly?
    Ms. Schubert. Yes. Under the Plan A, the regional staff 
actually approves a bond before it's written. And so for a 
surety to submit applications to regional staff to ask for 
approval of a bond, you need someone at the staff level who 
actually knows something about underwriting surety bonds.
    Unfortunately, there have been over the years changes in 
the staff, reductions in the staff. And there are not as many 
well-trained surety folks out there.
    Chairman Bradley. And is this essential in getting 
reputable contractors into the Gulf Coast area and ability to 
rebuild?
    Ms. Schubert. We believe it is. If you want to allow the 
local and the small businesses to participate in that 
rebuilding, they're going to need bonding capability, 
particularly with some of those businesses having had the same 
kinds of issues as other businesses in the Gulf Coast. They 
have lost some of their capacity. They have lost some of their 
people, some of their construction equipment.
    We are going to need a guaranty to back up the sureties' 
willingness to take that risk to assist those contractors to 
participate in those programs.
    Chairman Bradley. Let me move in the time remaining in this 
round of questions to Mr. Mercer. Sir, what happens if there's 
no legislation that restarts the participating securities 
program or a similar equity-focused program?
    Mr. Mercer. Well, equity financing, as the Chairman knows, 
is how you start small businesses. I mean, you can't have debt 
without equity. So all the SBA lending programs to any small 
businesses depend on those small businesses having a strip of 
equity, sufficient equity, to qualify them for loans.
    The participating security program is the only pure equity 
program in the SBA arsenal. So a company like Build-A-Bear, for 
instance, which I think maybe you know of or anybody who has 
children knows of, was launched by two SBICs, now a very 
successful public company. That's not the type of program that 
traditional venture capitalists, who focus on high tech 
investments and biotech, are going to invest in.
    Over the past four or five years, about $4 billion of 
investments have gone into manufacturing companies, 30 percent 
of the investments last year. That disappears. So small 
companies--and they are few in number, but they tend to be the 
gazelles that grow dramatically and then will need senior lines 
of credit--will not have equity available to them.
    Chairman Bradley. Mr. Hager, do you want to chime in on any 
of those questions?
    Mr. Hager. The only thing I would say, Chairman Bradley, is 
that the participating program is going to cost the taxpayers 
$2.4 billion. We have another 3.6 billion promised. That's 
going to yield another 500 million to 700 million. We don't 
know what that number is yet.
    The program is a bad deal for the taxpayer. The program, I 
think the venture capital monies that we believe can more 
effectively be used will be the debenture program. We have 
absolutely no problem with that.
    We do have a problem with funding a program that is costing 
the taxpayers unbelievable amounts of money of their dollars.
    Mr. Mercer. Could I?
    Chairman Bradley. Sure
    Mr. Mercer. One, SBA is in a negative cash position. That's 
correct. We won't know for 12 or 13 years what the eventual 
outcome will be in terms of absolute loss. Right now it's in a 
negative cash position.
    The economy has improved. SBA receipts from the 
participating security program are increasing dramatically. So 
maybe in 12 years, we can come back here and figure out what 
the actual loss is going to be.
    There's no question and the industry has agreed that there 
should be some restructuring of the economics, if you will, in 
quotation marks of the participating security program to 
address the risk that SBA has.
    And a substantial amount of that $2 billion in negative 
cash is the result of the crash of the economy that we just 
went through in the recession. I don't think anybody's 
portfolio remained unscathed. And participating security SBICs 
during that period did not perform any worse than the funds 
that, for instance, CalPERS invested in.
    So to say it was a fatally flawed program is just not true. 
Does it need adjustment? Can it be restarted? Yes. It really 
depends on whether Congress wants to have an equity program.
    Thank you.
    Chairman Bradley. Congresswoman McDonald?
    Ms. Millender-McDonald. Yes. Thank you so much.
    Mr.--is it Chilcott?
    Mr. Chilcott. Chilcott.
    Ms. Millender-McDonald. Why is it that the 504 programs are 
not as well-known as the 7(a) programs? And has the reduction 
of the SBA fill staff affected the 504 programs' liquidation?
    Mr. Chilcott. I would be happy to answer that second 
question first if that's okay.
    Ms. Millender-McDonald. Whatever.
    Mr. Chilcott. I will get to the first one. But certainly 
with regards to what is happening with SBA 504 liquidations, we 
have a major concern, which we have expressed for some time 
now, that as the District's portfolio management staff has been 
eliminated, that, in fact, a number of our loans that are 
supposed to be handled by SBA are not being liquidated in an 
effective and timely manner.
    And there are many CDCs across the country that do not have 
information about what is happening with their loans. We're not 
sure about the status of that. We know that they are there, but 
we have been unable I think to really get the kind of 
information that would provide any sense of recoveries, what's 
happening with those loans. And if I'm a small CDC and I've got 
a couple of loans in liquidation and they are not liquidated in 
a timely manner and I suffer losses, that has a big impact on 
my ability to deliver loans and on SBA's oversight of my 
organization.
    So we continue to be concerned about those loans that have 
been stuck between eliminating the portfolio management staff 
and our hope and legislation that will hopefully move that 
responsibility with compensation to the CDCs themselves.
    In terms of why the 504 program is not well-known, I think 
my first response to that is that in many ways it depends on 
the area of the country that you're in in terms of how well-
known the program is.
    I would say in California, we have--that program is very 
well-known. We probably have more banks that are helping to 
offer and market that program. We have an extremely strong 
secondary market that is buying the first trust deeds. And the 
program is just very well-known out there in the marketplace.
    Ms. Millender-McDonald. And I know you support the 504 
programs. I am just saying that you might think in California, 
perhaps in some areas, there is a great appreciation for the 
program, but there are some areas that still do not.
    And, Mr. Hager, I come back to you on that because we know 
that 504 lending is expected to increase by at least 20 percent 
this year. So how many employees does SBA intend to add on to 
the centers to process this increased loan volume, especially 
in minority communities?
    Mr. Hager. An excellent question. We have a strategy that 
has been created to handle the loan volume. I mentioned it in 
my opening comments.
    Ms. Millender-McDonald. Yes, you did.
     Mr. Hager. We are going to manage the growth. And the way 
we manage the growth is to make sure that we have a proper 
infrastructure to handle the increased loan volume.
    The SBA has a number of proposals that are very close to 
closure, centralized loan processing. And in 504 liquidation, 
as a matter of fact, we will hopefully very soon move from a 
lot of the field staff into two processing centers to be able 
to leverage our resources to handle and accommodate the loan 
volume.
    We believe that longer-term we have a proposal also on the 
table to require liquidation from the CDCs and the 7(a) lenders 
before we actually provide the guaranty. They know more about 
the liquidation than we do.
    So our proposal is let the liquidation take place in the 
CDCs. We'll manage the growth.
    Ms. Millender-McDonald. Providing you have the staffing.
    Mr. Hager. Well, the CDC would provide that staffing.
    Ms. Millender-McDonald. Staffing. Okay. Mr. Wilkinson, do 
you want to comment on that?
    Mr. Wilkinson. Could I comment on that? Yes. The comment 
period on SBA's proposal to liquidate first, as we call it--
they call it the business loan and development company loans, 
liquidation, and litigation procedures--had some proposals that 
would be very detrimental to the 8(a) program.
    We have sent in a comment letter. And I would like to 
provide a copy of that letter to the committee and ask that it 
be included for the record.
    Mr. Wilkinson. We are happy to work with SBA. And we have 
passed this on to them. Our members are happy to do the work of 
the liquidation process. But honoring the guaranty in a timely 
fashion is going to be very important.
    Delaying any kind of payment of that guaranty to the end of 
a liquidation, which can sometimes take 18 months to 2 years, 
becomes very expensive. Those costs are going to turn right 
around and be put back on--
    Ms. Millender-McDonald. So, Mr. Hager, then how do we honor 
this in a timely manner, then, to circumvent any imposition of 
negatives?
    Mr. Hager. We believe, again, that the overall process of 
transferring the actual liquidation to the lender will enable, 
actually, a more effective processing of that claim, that, in 
fact, that at the end of the day won't create delay problems. 
It won't worsen the purchase of the guaranty or delay it more 
than what we have today. That's our opinion.
    Ms. Millender-McDonald. Ms. Mayo, do you want to patch in 
here?
    Ms. Mayo. I just want to support the 504 program in 
California. In fact, we just did a drug rehab right outside of 
your area, in Crenshaw, and it was through the--
    Ms. Millender-McDonald. Not in my area.
    Ms. Mayo. No, it wasn't yours.
    Ms. Millender-McDonald. I'm further south.
    Ms. Mayo. It was Maxine's, actually.
    Ms. Millender-McDonald. That's right.
    Ms. Mayo. And she was very happy to--
    Ms. Millender-McDonald. Don't get us mixed up here.
    Ms. Mayo. I won't, but I just want to reiterate that the 
504 program is very valuable in helping this type of 
insurgence, really, to the communities. One area--
    Ms. Millender-McDonald. We want to see more in my district, 
though.
    Ms. Mayo. I would be happy to as long as you open up our 
field of membership, but that is a whole different story.
    Ms. Millender-McDonald. Mr. Hager is going to help us to do 
that, I'm sure.
    Ms. Mayo. He is absolutely right. And the only thing that 
we do ask is when we go and, unfortunately, if the business 
does go in failure, then obviously the guaranty portion needs 
to be expedited very quickly back to us as a lender.
    So we're happy to take that initiative. I believe that is 
our role. I think that helps expediently get through the 
process of losses. But then the response back from the agency 
needs to be just as efficient.
    Ms. Millender-McDonald. I just want to again make a 
statement that our communities need these programs. And they 
have got to be broadened where they get to the very little Joes 
and Janes in the communities. And that is what I am talking 
about.
    Thank you so much.
    Chairman Bradley. Congresswoman Moore?
    Ms. Moore. Well, thank you, Mr. Chair.
    I believe it was Mr. Mercer who really gave us the 
discourse on how the SBA loan programs were in a negative cash 
position and that was one of the bigger problems. I guess that 
leads me to sort of take another stab, Mr. Hager, at my 
question that I had for you.
    I am wondering, I am suspicious, quite frankly, that 
programs that benefit minority communities and minority 
entrepreneurs, women entrepreneurs, that the SBA is balancing 
its act on their backs.
    We look at the 7(a) program. I mean, it's a program 
designed for those people who are unable to get financing on 
reasonable terms. The new market venture capital program that 
we talked about before, it focused on investments in low-income 
communities. The community express program again focused on 
under-served communities, with 85 percent loan guaranty.
    It seems to me that given the strapped position of SBA, 
that they're targeting the programs where program guidelines 
would more benefit minority lenders. And I'm wondering why the 
administration is--it appears that they are balancing their 
acts on the backs of minorities. I guess I want you to respond 
to that.
    Mr. Hager. Congresswoman Moore, in all due respect, I 
totally disagree that we are balancing anything on the backs of 
minorities and--
    Ms. Moore. These are the programs that are not getting 
refunded. The funds have been in rescissions, the programs, the 
very programs, that would help them the most.
    Mr. Hager. We spend and we have a budget in the SBA of $100 
million to assist those that need education on how to apply for 
a loan. They need education on how to create a business model. 
They need education on ``Well, what do I do with it now? How 
can I take it on to reality? We have an extremely strong, $100 
million outreach program to handle these kinds of issues.'' 
Yes, the community express program has historically made loans 
to a very large degree to women and minorities.
    Ms. Moore. But that's what I'm saying. It expires May 31st.
    Mr. Hager. The pilot for the community express program was 
extended to May. And there are lots of alternatives being 
worked out in the community express program.
    Ms. Moore. But I heard just from the ranking member here 
and others that microloans--how much are you allocating to 
them, new markets programs?
    Mr. Hager. The microloan program is a program that has been 
flat. If you take a look at--
    Ms. Moore. Flat? Is that the same as zero?
    Mr. Hager. No, in growth. Microloan has been flat in growth 
over the last several years. We believe that those loans that 
historically perhaps the bank walked away from today they're 
not walking away from those loans. They're making them.
    Our loans less than $150,000 amount to 78 percent of our 
portfolio. I mean, we are making small loans. We are reaching 
out to communities with $100 million investment in education.
    Ms. Moore. We appreciate the two percent of the venture 
capital financing that you're giving to minority businesses. We 
appreciate that two percent. But, you know, just because I'm 
paranoid don't mean it ain't happening that you're destroying 
the infrastructure for minority businesses.
    And it seems obvious, you know, because, you know, budgets 
aren't just about dollars and cents. And you have failed to 
tell me how much money you have put into these programs. They 
are about priorities. They're about what your values are.
    So you can tell us all day long that you want to help, you 
want to get information out to minority businesses about how to 
be a business, but when you don't give up the money and when 
there are recisions on program funds and you flat-fund the 
programs, you know, like Peter Drucker said, communication is 
about what ain't being said and in this case about what ain't 
being done.
    My time has expired.
    Chairman Bradley. Thank you.
    Congresswoman Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Hager, recently the SBA IG team concluded a report 
about the STAR loan program. While I know that you were not at 
the SBA at the time, what is your perspective on their report? 
Did SBA implement the program in a manner that was unclear or 
did lenders simply hear what they wanted to hear?
    Mr. Hager. Congresswoman, that's, again, an excellent 
question. The STAR program was done before I arrived. I've done 
a lot of work on the STAR program.
    One, the IG audit was at the request of the administrator. 
He asked for it. Two, the disaster that we all remember on that 
morning on 9/11 will be with us for the rest of our lives. The 
need to get money, capital into the affected areas was 
extremely--
    Ms. Velazquez. Sir, you know, I have five minutes.
    Mr. Hager. Okay.
    Ms. Velazquez. I just can't go into the whole background 
and history.
    Mr. Hager. You know, very quickly--
    Ms. Velazquez. Will you please answer my question? Was it 
SBA or the lenders--
    Mr. Hager. It was--
    Ms. Velazquez. --based on the report and the conclusion of 
the report?
    Mr. Hager. The report concluded that in some cases, 
documentation was not adequate. We do not believe there is a 
problem. We think that the lenders that made these loans made 
them with good faith. And we have a robust process now in--
    Ms. Velazquez. No. I'm not talking about now. I'm talking--
    Mr. Hager. No. I think the program--
    Ms. Velazquez. --at the time when the report was made.
    Mr. Hager. The program served its purpose. It served it in 
my opinion well.
    Ms. Velazquez. So SBA did everything fine and the lenders 
did not?
    Mr. Hager. SBA did, we believe, everything fine. The 
lenders in some cases have not documented. They reached a 
conclusion without support documentation in some cases.
    Ms. Velazquez. Okay. Let me ask you this. SBA has announced 
that it will not process repurchases of STAR loans that do not 
possess suitable lender documentation justifying the loans as a 
STAR loan. Have you exercised this policy to block the SBA 
repurchase of a defaulted 7(a) loan?
    Mr. Hager. We are today making sure that there will be no 
guaranty completed without the proper documentation. In those 
cases where documentation is not appropriate they are being 
returned to the lender to make sure that the documentation is 
there.
    Ms. Velazquez. Mr. Wilkinson?
    Mr. Wilkinson. I would agree with Mr. Hager that the STAR 
program served its purpose. There has been a very limited 
number of instances where--
    Ms. Velazquez. I just want for you to tell me if you have 
any concern about the new policy.
    Mr. Wilkinson. No, ma'am. The situation seemed to be where 
there are files with no documentation whatsoever. If the lender 
did not do that, they need to go put it in the file.
    But thus far, the good news is that star loans perform 
better than the other 7(a) loans made during the same time 
period. And the issues coming to me regarding STAR loan 
defaults have been zero.
    Ms. Velazquez. Do you believe, Mr. Hager, that the negative 
publicity surrounding STAR contributed to the failure of the Go 
Loan program?
    Mr. Hager. No, ma'am, not at all. By the way, STAR was 
implemented according to the direction of Congress. The Go Loan 
program, by the way, is not creating hundreds of millions of 
dollars, but Go Loan is serving a good purpose.
    I talked to Guy Williams, Gulf Coast Bank in New Orleans. 
And he will--
    Ms. Velazquez. Mr. Wilkinson, the Go Loan program has no--
    Mr. Wilkinson. I would respectfully disagree. I had members 
who said they would not participate in the Go Loan based on the 
way the STAR issue was blown totally out of proportion. The 
rider on STAR confused STAR loans with disaster loans. And the 
mess went from there.
    Ms. Velazquez. Thank you.
    Mr. Hager, the significant backlogs related to the recent 
hurricanes have created substantial processing backlogs for 
disaster loans. Has the SBA been using District employees 
assigned to other SBA programs to help with the processing of 
those loan applications?
    Mr. Hager. Yes, ma'am, they have.
    Ms. Velazquez. How is this affecting these other programs?
    Mr. Hager. It is not affecting those programs. We have 
loaned in some cases on a very limited basis, and then we 
transferred those folks back.
    Ms. Velazquez. Mr. Chilcott?
    Mr. Chilcott. Certainly the use of some of our centralized 
processing staff in Sacramento for disaster loan purposes 
slowed down our approval processes. But I would add that those 
five people are back in the processing center. And we have seen 
that processing time get down to certainly a reasonable, quick 
turnaround.
    Ms. Velazquez. Mr. Chilcott?
    Chairman Bradley. One more?
    Ms. Velazquez. May I?
    Chairman Bradley. Yes.
    Ms. Velazquez. Okay. Well, let me ask this one. Mr. Hager, 
looking forward, you have indicated that the agency is not 
ready to support larger loans to make up a possible funding 
shortfall in the 7(a) program. You opposed those in 
appropriation.
    What would be our option? Would the agency propose more 
fees to make a future shortfall in the 7(a) program?
    Mr. Hager. We have everything on the able that we think is 
required right now. We are not proposing any more fees other--
    Ms. Velazquez. If there is a shortfall, can we get a 
guarantee that you will not come to us for an increase in fees?
    Mr. Hager. No, ma'am.
    Ms. Velazquez. ``No, ma'am'' why?
    Mr. Hager. I will not give you a guarantee we won't be 
back.
    Ms. Velazquez. So what you are telling me is that higher 
fees are a possibility?
    Mr. Hager. I'm not saying. I will have to wait and see the 
facts. I can't give you that answer right now.
    Ms. Velazquez. Tony?
    Mr. Wilkinson. We are concerned that SBA has used all of 
the tricks in the bag to get us to zero subsidy this year. We 
are concerned that if the trend with the declining average 
guaranty fee continues, that there is not going to be a choice 
but to push for higher fees. That is why we are pushing so hard 
on the $3 million loan size to try to keep that average 
guaranty fee from declining any further.
    Ms. Velazquez. But when we were discussing loan size and 
all of that, they say, Mr. Hager, it seems to me that he is 
saying, that higher fees are not an option. So between higher 
fees and appropriation, what would be your position?
    Mr. Wilkinson. Well, our position is the bigger loan size 
because we think it is subsidy rate--
    Ms. Velazquez. He said, he is on record, that they do not 
support the loan size.
    Mr. Wilkinson. I did not hear him say he didn't support. I 
heard him say that--
    Chairman Bradley. I think what he said is that it was not 
necessary at this time. Isn't that correct, Mr. Hager?
    Mr. Hager. That is correct.
    Mr. Wilkinson. I think what he is talking about is the '07 
budget. There is nothing needed for the '07 budget. our concern 
is the '08 budget because we have driven this car to the end of 
the road.
    If I could, I hate to go back to the liquidate first. There 
are some fee increases in the '07 budget. The lender fee goes 
up a little bit. That pales in comparison to what the cost of 
the liquidate first policy can be. And I am really hopeful that 
we can spend some time on this.
    There are two pieces. Who does the liquidation work? 
Lenders are happy to do that. We originate the loan. We service 
the loan. We will be happy to liquidate it. But when do we 
honor the guaranty? Judicial disclosure states it could take up 
to two years for a foreclosure to be completed with the lender 
sitting there holding an asset on non-accrual. And it would. It 
would disproportionately hurt smaller banks.
    We're very concerned on the liquidate first policy. That's 
more expensive than the fee increase we're seeing in the '07 
budget.
    Ms. Velazquez. I am telling you we have two options. On 
larger loans, it is not going to happen. So it's either 
increasing the fees or appropriation. Where do you stand?
    Mr. Wilkinson. I don't know what the fee would be in the 
2008 budget. And there may not be one. Performance of the 
portfolio may be good enough that that is not anything we would 
have to address. We are just concerned that that is where we 
are headed.
    Chairman Bradley. And on that note, if there are further 
questions for any of the witnesses, they can be submitted for 
the record. I thank the members for participating in the 
hearing and thank the--
    Ms. Velazquez. Mr. Chairman, I just would like--
    Chairman Bradley. --witnesses very much, too.
    Ms. Velazquez. --to make it clear that I will be submitting 
some written questions to SBA.
    Mr. Hager. Thank you very much.
    Ms. Velazquez. And I expect answers as soon as possible,--
    Mr. Hager. You will get them.
    Ms. Velazquez. --not three months from now.
    Mr. Hager. No. You will get them right away. Thank you.
    Chairman Bradley. And once again I thank all of the 
witnesses for participating in this hearing today.
    [Whereupon, at 12:41 p.m., the foregoing matter was 
concluded.]
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