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


                                                   

THE PRESIDENT'S FISCAL YEAR 2006 BUDGET REQUEST: WHAT DOES IT MEAN FOR 
                            SMALL BUSINESS?

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                   WASHINGTON, DC, FEBRUARY 10, 2005

                               __________

                            Serial No. 109-1

                               __________

         Printed for the use of the Committee on Small Business


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


                                 ______

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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

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Barreto, Hon. Hector, Administrator, U.S. Small Business 
  Administration.................................................     4
Wilkinson, Mr. Tony, President & CEO, National Association of 
  Government Guaranteed Lenders..................................    25
Crawford, Mr. Chris, Executive Director, National Association of 
  Development Companies..........................................    27
Vivian, Mr. Steve, Board Member, National Association of Small 
  Business Investment Companies..................................    28
Wilson, Mr. Donald, President, Association of Small Business 
  Development Centers............................................    30
Betancourt, Mr. Daniel, Executive Director, Community First Fund.    31

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    40
    Velazquez, Hon. Nydia........................................    45
Prepared statements:
    Barreto, Hon. Hector, Administrator, U.S. Small Business 
      Administration.............................................    48
    Wilkinson, Mr. Tony, President & CEO, National Association of 
      Government Guaranteed Lenders..............................    55
    Crawford, Mr. Chris, Executive Director, National Association 
      of Development Companies...................................    63
    Vivian, Mr. Steve, Board Member, National Association of 
      Small Business Investment Companies........................    71
    Wilson, Mr. Donald, President, Association of Small Business 
      Development Centers........................................    82
    Betancourt, Mr. Daniel, Executive Director, Community First 
      Fund.......................................................    93
Attachments
    Chairman Manzullo's letter to SBA Administrator Barreto......    96
    SBA Administrator Barreto's response to Chairman Manzullo....    98

                                 (iii)

 
THE PRESIDENT'S FISCAL YEAR 2006 BUDGET REQUEST: WHAT DOES IT MEAN FOR 
                            SMALL BUSINESS?

                              ----------                              


                      THURSDAY, FEBRUARY 10, 2005

                   House of Representatives
                                Committee on Small Business
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:24 a.m. in Room 
311, Cannon House Office Building, Hon. Donald Manzullo 
presiding.
    Present: Representatives Manzullo, Velazquez, Musgrave, 
Bradley, Fitzpatrick, Westmoreland, Millender-McDonald, 
Lipinski, Bordallo, Grijalva 

    Chairman Manzullo. The Committee will come to order. We 
welcome you to the Committee's first hearing for the 109th 
Congress.
    This room, 311 Cannon, is the first Committee room in the 
entire Capitol Hill complex to be restored to its original 
grandeur. Everything here has been restored to what it was 
originally with the exception of the carpet on the floor, and 
the floor is solid marble. The picture on the back wall of the 
ships was restored also, even to the extent that no one knew 
there were ships in the background, just a ship up front.
    This restoration took place over a period of about a year, 
and during the process of it, it was the culminating effort of 
two of the people from the House woodworking shop, who took 
countless hours and days and weeks to fastidiously restore the 
wood that you see here. We removed a lower group of seats that 
had been put up but was not there, according to original plans.
    So 311; this is a beautiful room, and the sound here is 
actually better than in boring Rayburn. So welcome to the first 
full Committee hearing in 311.
    Let me applaud the fact that our first witness on the first 
panel, Hector Barreto, was one of the longest-serving 
administrators of the SBA. He serves not because this is a 
position on its way to another position, unless it is 
president, but he serves because of his passion and his zeal 
and his love for small businesses.
    Let me also state this at the opening, that the 51-year 
tradition of Manzullos being in the restaurant business came to 
an end on December 31st. Those of you from the SBA who came out 
always would stop by and have a great opportunity there. My 
brother was honored to have a member of the president's cabinet 
come and to officiate over numerous small businesses coming to 
visit. It is one of those things where he decided to close up 
the family restaurant business. I wept for seven days straight. 
It was also the home where we were raised as children. But 
fortunately, he is holding onto the recipes and the family 
name. He sold the buildings, and a lady bought the family home, 
and she is going to have a quilting shop, and she is dedicated 
to restoring the old family home to its Victorian grandeur.
    So it is one of those things; but, in passing, my brother 
decided to sell the restaurant for many reasons, but, frankly, 
he just got tired of paying the high insurances. It simply 
reached the point where he said, All I am doing is working for 
insurance companies.
    I know Mrs. Velazquez shares that same concern, especially 
in the area of health and accident insurance, and, I think, the 
first hearing besides this is going to be in the area of what 
we can do to curb those costs.
    So that is how we start the year. Frank will probably be 
out to testify sometime about his experience in running that 
family restaurant for 41 years.
    [Chairman Manzullo's statement may be found in the 
appendix.]

    Chairman Manzullo. So I will now yield to the ranking 
Committee member, Congresswoman Velazquez of New York.

    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Chairman, 
before I make my opening statement, I just would like for the 
administrator to clarify to me what is the administration 
policy regarding requests from the members of this Committee 
because, two weeks ago, in preparing myself for this important 
budget hearing, I requested from your office, and you did not 
provide the information that was requested from me, and I think 
it is a lack of respect.

    Chairman Manzullo. I would like that question to be held in 
abeyance until the administrator has finished his testimony, 
and then you can ask that question during the regular course.

    Ms. Velazquez. Well, that is my question.

    Chairman Manzullo. Okay.

    Ms. Velazquez. Sure, Mr. Chairman. I am using the only 
venue that I have to make my views known in this Committee.
    Mr. Chairman, every year, when I think the budget cannot 
get any worse for the Small Business Administration, the 
administration turns around and proves me wrong. This budget is 
a failure to America's small businesses. It is nearly half of 
what it was when President Bush took office, and at least $100 
million has been cut each year.
    What was once a cabinet-level agency that had a seat at the 
table, a $1 billion budget, and a large role in the decision-
making process has sadly become the shell of an agency. It was 
not long ago that SBA was creating new, innovative programs to 
help entrepreneurs across the country start and grow their 
businesses. However, it is quite a different story today. This 
agency is failing to ensure that small businesses are receiving 
federal contracts and increasing the cost for entrepreneurs to 
access capital.
    SBA seems to have fallen off the path here. They are no 
longer helping small businesses to start and expand their 
dreams. Time and time again, SBA has not been shy about voicing 
all-time records for programs and loans, but, in reality, what 
SBA should be voicing today is an all-time record for cutting 
and terminating the most programs over the past four years.
    Let us go through the list of these programs. Cuts have 
been made to the Women's Business Centers, HUBZone, and SCORE, 
among others. Some of the small business programs that either 
were eliminated or slated for termination include Business 
Link, SBIR Rural Outreach, SBIR FAST, PRIME, New Markets, 
Venture Capital, and the flagship lending program, 7[a], all of 
which help to create jobs.
    Of more concern is the fact that SBA proposed to eliminate 
the Microloan Program again, a program that serves a unique 
role by providing small loans to low-income communities. So 
much for compassionate conservatism.
    In addition, by failing to request any program effort for 
the Small Business Investment Capital Participating Securities 
program, SBA's largest venture capital program, it has closed 
the book on this initiative, too.
    I want to make one thing clear. These are all valuable 
programs that have contributed to some of the greatest 
entrepreneurial success stories in this country. They have 
formed the foundation for millions to pursue and achieve their 
business venture. The real problem today is not the programs 
themselves. Their successful clientele and the economic gain 
they have generated over the years speaks for itself. The real 
problem is the fact that they are underfunded and mismanaged.
    This administration has a very unusual way of showing their 
support for small businesses. When the federal government 
cannot meet its contracting goal, instead of accepting 
accountability and working to fix it, they start counting large 
businesses towards a small business goal and flood the 
government tracking system with so much bad data that no one 
can really determine what has or has not been done.
    Capital is not flowing to small businesses like it should 
be. Rather than putting money into the lending programs, this 
agency gutted their staff in towns across the country that do 
outreach to small businesses and created cost burdens for 
lenders. Afterwards, the agency claims they have improved the 
process.
    This administration would also claim that these cuts are 
fine, and entrepreneurs simply need to do more with less, yet, 
at the same time, SBA has not been able to balance their books 
for the past four years. They have not had one clean audited 
opinion since these cuts began. If Mr. Barreto was the CEO of a 
corporation with this track record, he should be removed by 
stakeholders.
    The bottom line here is that our small businesses deserve 
better than this, yet we are facing a massive budget deficit 
now, and we are involved in a war on terror. These 
entrepreneurs are some of the most patriotic people out there. 
They will do anything to help out. However, it is not fair that 
we expect them to bear the burden of these cuts once again.
    I will say to my colleagues on the other side of the aisle 
and in the administration, if you do not believe in these 
programs, and if you think they deserve to be cut, that is 
fine; just say it. Let us have that debate. I have no problem 
standing up for these programs. I do believe in them, and I 
know they are valuable, but do not cut these programs year 
after year, mismanage them into the ground, and then come to 
the Committee and claim things are better than ever before. 
That is simply wrong. Our nation's entrepreneurs know this, and 
they deserve better than that. They deserve to be told the 
truth about where people stand on these programs. Let us give 
them that much. Thank you, Mr. Chairman.
    [Ranking Member Velazquez's statement may be found in the 
appendix.]

    Chairman Manzullo. Thank you very much.
    Mr. Barreto?

   STATEMENT OF THE HONORABLE HECTOR BARRETO, SMALL BUSINESS 
                         ADMINISTRATION


    Mr. Barreto. Thank you, Mr. Chairman, Ranking Member 
Velazquez, and members of the Committee. Thank you for inviting 
me here today to discuss the president's budget request for the 
SBA for Fiscal Year 2006.
    The past year was not without its challenges for SBA. 
However, I am proud to say that last year was a great success 
for both the administration and this Committee. We were faced 
with several critical issues, and we worked together to reach 
agreements that benefitted both America's small businesses and 
America's taxpayers.
    When 7[a] loan demand exceeded its budget authority, SBA 
and the Committee were able to come together with our lending 
industry partners to provide an additional $3 billion in 
lending for the 7[a] program at no expense to the taxpayers. 
This allowed the agency to lift the loan caps and guarantee a 
record $12.7 billion in small business loans in 2004.
    At the beginning of Fiscal Year 2005, SBA began operating 
the 7[a] program at a zero-subsidy rate. This trial period 
showed that a zero subsidy would not hinder access or delivery 
of the 7[a] program. As a result, SBA, the Committee, and the 
lending industry came together to craft legislation that 
ensured long-term stability in the program.
    Since October 1st, SBA has guaranteed over $4.4 billion in 
loans, and our lending partners have shown renewed support for 
the program. In addition, we are making more loans than ever to 
minorities, to women, to veterans. At this time last year, 
SBA's program under the Small Business Act had not been 
reauthorized for over four years, and the agency and the 
Committee seemed to be deadlocked in the negotiating process. 
However, persistence and diligence in pursuit of this goal 
produced a compromise, two-year SBA reauthorization which the 
108th Congress approved.
    Chairman Manzullo, I would like to compliment you and your 
staff on ensuring that this compromise was part of the Fiscal 
Year 2005 Omnibus Appropriations Act and for your support of 
SBA's efforts to become more efficient. This legislation allows 
the agency to better serve more small businesses at less cost. 
Our Fiscal Year 2006 budget submission reflects a continued 
commitment to this goal.
    Small business customers are taxpayers and understand the 
need to cut unnecessary costs and to keep up with an ever-
changing marketplace. Last year, I stressed to you that SBA's 
goal was to do more with less. I know that in Washington, D.C., 
it is difficult to imagine supporting a program without 
continually increasing its budget, but SBA has proven that it 
can be done. Since I became SBA administrator in 2001, the 
agency's annual appropriation has decreased, yet SBA's programs 
have reached more and more American entrepreneurs year after 
year.
    Last year was a great example of this kind of success at 
the SBA. The agency provided a record $21.3 billion in loan 
guarantees and related financing for nearly 88,000 small 
businesses. Out of that $21.3 billion, nearly one-third went to 
women-owned and minority-owned businesses, more than in any 
prior year. Over $500 million went to African-Americans. 
Approximately $2.8 billion went to women, over $1.2 billion 
went to Hispanics, and over $115 million went to the Native 
American community.
    These figures represent the administration's continued 
commitment to ensuring that SBA's loan programs serve those 
businesses that would otherwise have a difficult time accessing 
capital from the lending world. SBA's core infrastructure of 
technical-assistance programs--SBDCs, SCORE, Women Business 
Owners, and district offices--provided their services to record 
numbers of small businesses in Fiscal Year 2004. SBA's 
Entrepreneurial Development programs provided expertise and 
guidance to entrepreneurs who have the drive and the idea but 
need a little help putting all of that together into a working 
business plan.
    SBA continued to support the federal government's statutory 
commitment to provide a fair share of contracting dollars to 
small businesses. Small businesses received a record number of 
federal contract dollars in Fiscal Year 2003, $65.5 billion, 
and exceeded the 23-percent, government-wide goal.
    SBA has also been innovative in creating contracting 
opportunities for small businesses. For example, the Business 
Matchmaking program has given small businesses around the 
nation a better opportunity to obtain government and private 
contracts by introducing them to procurement officials who 
otherwise would be very difficult to meet.
    The program stimulates jobs and growth for small businesses 
by taking advantage of opportunities that are normally confined 
to distinct geographical areas, such as Washington, D.C., or a 
city where a major corporation is located. Since the program 
started two years ago, 23,000 one-on-one appointments between 
small business owners and federal and corporate procurement 
officials have been conducted. This allowed small business 
firms to learn about and bid on procurement opportunities in 
their areas of expertise. As a result, $29 million in federal 
and private contracts have already been awarded.
    SBA has been active in other areas of contracting as well. 
I am proud of the hard work done to implement the provisions of 
Public Law 108-183 in record time, providing contracting 
officers with a powerful tool to award contracts to those who 
have given so much to our country: service-disabled veterans.
    In December, the agency implemented a new policy to more 
accurately monitor contracts when a small business is purchased 
or merged with a larger business. The new policy requires the 
business to recertify itself as small when federal contracts 
are transferred to it in order to continue to be counted as a 
small business contract.
    For years to come, victims of the worst hurricane season on 
record will remember how SBA helped them to get back on their 
feet. During Fiscal Year 2004, SBA's Disaster Assistance 
program provided more than $884 million in low-interest loans 
to over 28,000 homeowners and businesses. The supplemental 
appropriations allow SBA to increase these numbers to over 
100,000 loans for up to $4 billion. This will enable the local 
economies to recover as quickly as possible.
    President Bush understands the vital role of America's 
small businesses and the role that they play in creating 
opportunities. He also recognizes that small businesses 
generate approximately two-thirds of all of the new private 
sector jobs. The president's plan for economic growth and job 
creation, along with his Small Business Agenda, has been 
successful in creating an environment in which entrepreneurship 
can flourish.
    Health care continues to be one of the largest burdens a 
small business owner must bear. Time and again, as I meet with 
entrepreneurs around the nation, they talk to me about the cost 
of health insurance, and it is only getting worse. We will 
continue to support the use of Health Savings Accounts and urge 
Congress to pass association health plans. We also plan to make 
the President's tax proposals permanent to help small 
businesses and their employees keep more of what they earn and 
reinvest that money in their families and their businesses.
    Recognizing these successes, we look toward the future with 
renewed dedication to serving America's small businesses in a 
financially responsible manner.
    Now, I would like to lay out the specifics of our Fiscal 
Year 2006 budget request. SBA's total request is $592.9 
million. This request provides for a strong, active SBA that 
can effectively and efficiently meet the demands of its 
customers, America's entrepreneurs, while minimizing the cost 
to the taxpayer. Through improved management and program 
reforms, SBA will better serve small businesses.
    SBA requests $16.5 billion in lending authority for its 
7[a] loan program. This record amount of lending authority will 
provide the loans small businesses need in a timely manner and 
without disruption due to the stability of a zero-subsidy rate 
policy. This request will also give SBA the authority to 
provide $5.5 billion in loans through its 504 Certified 
Development Company program, also at no cost to the taxpayers.
    SBA continues to support venture capital for small 
business. SBA requests $3 billion in authority for the SBIC 
debenture program. For 50 years, this program has provided 
venture capital success stories, such as Nike, Intel, Calloway 
Golf, just to name a few. However, we are not proposing to 
reinstate the Participating Securities program. In 10 years of 
operation, this program has resulted in reestimated losses of 
$2.7 billion.
    Through a more flexible budget structure, SBA is seeking 
increased efficiency and quality of services. The request 
proposes that the agency work through its nationwide 
infrastructure of Women's Business Centers, Veterans Outreach 
Centers, SCORE chapters, SBDCs, and district offices.
    This budget also includes continued funding for the 
agency's Disaster Loan program. As you are aware, the SBA is a 
major part of the government's mechanism to help disaster 
victims get back on their feet.
    Some of the heaviest burdens borne by small businesses in 
America are the result of federal regulation and red tape. That 
is why I am pleased that the SBA's budget includes $9.1 million 
for the Office of Advocacy. This funding will allow Advocacy to 
fulfill its mission. In Fiscal Year 2006, the Office of 
Advocacy expects to save small businesses $5.6 billion in 
potential regulatory costs. Mr. Chairman, that is a substantial 
amount of savings for America's entrepreneurs.
    All of us are quite proud of the agency's legacy of 
achievement. Many of today's most successful businesses 
received SBA assistance in their formative stages. Who knows 
which of tomorrow's industry leaders are today receiving their 
7[a] or their 504 loans, their government contracting 
opportunities, or their counseling through SBA's programs and 
services?
    However, we at the SBA cannot rest on our laurels. We must 
be forward thinking. We must anticipate changes in the 
marketplace and adjust our programs based on the realities of 
today's small business environment.
    SBA's Fiscal Year 2006 request is good for America's small 
businesses and taxpayers. We ask for your support for our 
budget request. Thank you for the opportunity to appear here 
today. I am happy to answer your questions.
    [The Honorable Barreto's statement may be found in the 
appendix.]

    Chairman Manzullo. Thank you, Administrator Barreto.
    By SBA's own analysis, participating securities funds 
licensed between the years of 1994 through 2000 have performed 
as well as non-SBIC venture funds of the same vintage years 
that CalPERS invested in. Over $2.5 billion in leverage was 
invested in the three years, 1998 to 2000, immediately before 
the collapse of the economy. Thus, my question to you is, is it 
fair to ask how much of this loss is attributed to the 
recession, and how much to a flawed program?

    Mr. Barreto. Well, Mr. Chairman, as you mentioned, there 
are a variety of reasons why this has happened. Some of it has 
to do with the downturn in the whole venture capital industry 
over the last couple of years. Some of it has to do with the 
way that the Venture Capital program was structured and the 
profit participation in that structure. Some of it has to do 
with the funds that were chosen to invest in.
    I cannot give you an exact number. I would be happy to go 
back and research this for you, but I think there is a 
combination of reasons why we have seen this downturn. I do not 
think we can say it is just one reason.

    Chairman Manzullo. Would you be willing to commit to 
working towards a solution of this problem and the 
participating securities?

    Mr. Barreto. Absolutely, Mr. Chairman. As you know, we have 
been in a dialogue all last year with the industry, with this 
Committee, and we are committed to continue those dialogues and 
stay in a relationship with all of the stakeholders to 
determine the best approach for the Participating Securities 
program.

    Chairman Manzullo. Could you provide the detail on the 
changes made in the 7[a] subsidy rate and reestimate models? 
These changes have caused an increase in lender fees. What will 
you do to stem further increases in lender fees?

    Mr. Barreto. Well, one of the things I want to do is put 
this into perspective. Obviously, the fees are still within the 
framework that we negotiated last year. It is going to be 54.5 
basis points. We had a max of 55 basis points. We think that 
this change is incremental. It is a nominal change and should 
not affect the small businesses. Obviously, these are the fees 
for the lenders, the lender fees.

    Chairman Manzullo. If I may interrupt,--

    Mr. Barreto. Sure.

    Chairman Manzullo. --if the fees get too high for the 
lender, then they will drop out of the program. So we are 
willing to work with the SBA on a zero subsidy because that is 
our goal, and so I do not have to go to the well every year to 
get 77 to $100 million, but I would just advise the 
administrator that if the fees increase too much on the lender 
side, then the whole program will collapse.

    Mr. Barreto. I completely understand, Chairman.

    Chairman Manzullo. Okay. Did you have more that you wanted 
to talk about on the 7[a]?

    Mr. Barreto. I brought several charts to kind of give you 
an idea of where we have been with regards to the subsidy rate. 
It is really incredible what we have been able to accomplish--

    Chairman Manzullo. Why don't you go ahead because I cut you 
off?

    Mr. Barreto. --with this Committee. If you will notice, 
this chart on the far left is the 7[a] subsidy rate from 2001 
to 2006, and what you see here is a line that has precipitously 
gone down. I remember the first time I testified before this 
Committee, I was told that we had a severe problem with the 
subsidy rate for the 7[a] loan program, and that had been a 
chronic problem for years and years. As you see, working 
together, we have been able to take that subsidy rate down from 
where it was, almost 1.2 percent, down to zero.
    The other thing I wanted to mention is that I also 
understood from our lenders that this was a critical issue for 
them, and what they explained to me is that they needed to have 
consistency in the program, that they could not afford for this 
program to shut down for one day, that they have millions of 
dollars invested in this, and what has happened by us working 
together and getting to zero subsidy, we have been able to 
avoid that. We have been able to increase the budget authority. 
We are not going to have to put caps on these loans anymore. We 
are not subject to the fact that we have not had a budget at 
the beginning of our fiscal year.
    So we believe that the zero-subsidy solution that we have 
come up with has been very positive for our lenders, for our 
small businesses, and obviously we are seeing the fruits of 
that. Right now, our loans at the beginning of this year are up 
double digits again, well in excess of 20 percent in the 7[a] 
loan portfolio, so we are building on an historic year that we 
already had last year, and this will be the best year in our 
history in terms of 7[a] loans, not only numbers but the 
dollars that we will guarantee for every community.

    Chairman Manzullo. Thank you. Ms. Velazquez?

    Ms. Velazquez. Wow, Mr. Barreto. That is a lot of loans. 
That is great.
    Mr. Barreto, can you tell me how many lenders are in SBA's 
loan program?

    Mr. Barreto. Well, in total, it is approximately 6,000 
lenders. These are not branches. These are 6,000 different 
lending companies.

    Ms. Velazquez. I think it is closer to 10. Barely 25 
percent of these 10,000 lenders made a loan last year. Why? Do 
you think it could be due to industry consolidation?

    Mr. Barreto. No, ma'am, I do not. What happens a lot of 
times is that there is somebody that has been signed up for the 
SBA program, and they may not have done a loan with us for 
years, and some of that just has to do with education. You 
know, what happens out there is a lot of times they believe 
that they understand the SBA program, but they do not 
understand all of the changes that have occurred in the SBA 
program and how this can be a good business opportunity for 
that bank.
    So the training and outreach that we do to lenders of all 
sizes is critically important, not only to attract new lenders 
but also to maintain lenders.

    Ms. Velazquez. You do not understand my question, Mr. 
Barreto, and I do not have much time, and I have a lot of 
questions to make. I do not want to leave the impression that 
there are not any lenders that love the program. There 
certainly are. In fact, one lender makes nearly 20 percent of 
all 7[a] loans, 20 percent, Mr. Barreto, and 0.2 percent of the 
lenders account for almost 70 percent of the entire 7[a] 
program's lending. Is this level of concentration something 
that SBA is proud of?

    Mr. Barreto. Well, obviously, we want to work with as many 
lenders as we possibly can, and also we understand that one 
size does not fit all. We have some large lenders that do a lot 
of loans, but we also have some community lenders and rural 
lenders that make very few loans as a percentage but are 
critically important to the communities they serve.

    Ms. Velazquez. No. That is not the case, Mr. Barreto, 
because maybe this is not a problem because lenders are 
geographically dispersed, but that does not seem to be the 
case. The majority of the lenders are concentrated along the 
East and West Coasts, leaving middle America without adequate 
access to the program. What are you doing to reengage the 
smaller community lenders in this part of America?

    Mr. Barreto. As you know, we have a responsibility to serve 
every community in America. That is why--

    Ms. Velazquez. But it is not happening.

    Mr. Barreto. That is why we have 70 major program offices 
in every state. I would tell you that we work very closely with 
our district directors, and we make sure that they are reaching 
out to all of the lenders in their community. In fact, I have 
personally been involved in this outreach effort. When I go 
into the a community, oftentimes what will happen is we will 
set up business roundtables for lenders in that community.

    Ms. Velazquez. Okay, Mr. Barreto. Is SBA providing more 
localized outreach and education to lenders and working one-on-
one with these smaller lenders? Are you doing that?

    Mr. Barreto. Absolutely. You know, I would like to share 
with you--

    Ms. Velazquez. Let me ask you another question. You said 
``absolutely.''

    Mr. Barreto. Yes, ma'am.

    Ms. Velazquez. The agency has fired, relocated, or forced 
into retirement much of the district staff that was responsible 
for working with lenders, mainly smaller banks that do not have 
the resources to fully operate the 7[a] lending program. Is the 
agency looking to draw more out of the program by making the 
processes smoother for lenders?

    Mr. Barreto. Well, first of all, let me make sure that we 
characterize this correctly. We are not forcing anybody out of 
the agency, firing anybody, et cetera, and some of the 
individuals that you mentioned that retired actually did not--

    Ms. Velazquez. Didn't you send a letter to staff saying 
either you relocate, or you will be fired?

    Mr. Barreto. Again, in that particular instance, these were 
for people that were liquidating loans, not generating loans. 
These are the individuals--

    Ms. Velazquez. Let us move on here. What is it that you are 
doing to make the program smoother?

    Mr. Barreto. Can I share with you this chart right here? 
This is our 7[a] loans to lots of communities that you 
mentioned, and what you see here is almost a stair step of 
progress over the last four years. What you see here, these are 
loans to minorities.

    Ms. Velazquez. Sir, answer my question. What is it that you 
are doing to make the program smoother?

    Mr. Barreto. Well, you know, when I was in business, 
Congresswoman, I used to say that you learn a lot more by 
listening to your customers than you do by talking at them. 
What we have done is we have brought those lenders in, of all 
sizes, and asked them how the SBA could be a better partner. 
That is why you have seen so many changes to the program.

    Ms. Velazquez. Okay, sir. Let us talk about small 
businesses now.

    Mr. Barreto. Okay.

    Ms. Velazquez. During the fourth quarter of Fiscal Year 
2004, the last quarter before SBA raised fees on small 
businesses, the SBA did nearly $4 billion in 7[a] loans. When 
compared to the most recent quarter that you are so proud of,--
you were just talking about all of the numbers--this shows a 
decline of nearly half a billion dollars in 7[a] lending. What 
impact has the SBA fee increase on small business owners, which 
added between $1,500 to $3,000 for each loan, had on this 
decline in SBA lending?

    Mr. Barreto. First of all, let me make sure that we 
characterize it correctly. The SBA did not raise the fees on 
lenders. Those fees went back to previous levels because 
legislation that this body put forward expired. So SBA did not 
raise those fees; those fees just went back to a normal level.

    Ms. Velazquez. Sir, you have the flexibility to lower the 
fees if you want.

    Mr. Barreto. I would like to answer the question in terms 
of what effect it has had. The effect that it has had is that 
so far this year we are up 27 percent on the 7[a] loan, we are 
up 16 percent on 504 loan, we are up 55 percent to African-
Americans, we are up 49 percent to women, 15 percent to 
Hispanics, 285 percent to other minorities. We are on track--

    Ms. Velazquez. We are talking about 7[a]. We will talk 
about loans to minorities later because I am going to stay here 
until I ask you the question.

    Mr. Barreto. Yes, ma'am.

    Chairman Manzullo. The gentlelady's time has expired.
    Mrs. Musgrave?

    Ms. Musgrave. Mr. Chairman, I apologize. I had a radio 
program to do. I hope this has not been asked, but could you 
please comment on the HUBZone program and any changes that have 
been made to it? Much of my district is rural, and so this is 
very important to me.

    Mr. Barreto. Well, as you well know, Congresswoman, the 
HUBZone program has been a very successful program over the 
last couple of years. Procurement levels inside of that program 
have been consistently rising.
    One of the things that we have done is we have wanted to 
make sure that we have gotten more firms who are interested in 
this program registered in this program, and we have had great 
success there as well. I want to say that we have over 7,000 
firms now that are part of the historically Underutilized 
Business Zone program. We work very closely with the industry, 
the HUBZone national organization, and Ron Newlan, and we 
participate in a lot of their activities. We are also inviting 
lots of HUBZones to participate in our procurement events, the 
Business Matchmaking events that we do.
    So as we do with all of our programs, we are wanting to 
make sure that we are capitalizing on every opportunity, and 
some of this is just getting the word out. A lot of times 
people do not realize that they could register for a number of 
different programs. In other words, they could be an 8[a] firm, 
they could be a HUBZone firm, they could be a small 
disadvantaged business firm, they could be certified as a 
woman-business-owner firm, and that just gives them more 
opportunities to access those federal contracts.

    Ms. Musgrave. Thank you, Mr. Administrator.

    Mr. Barreto. Thank you.

    Ms. Musgrave. That is all, Mr. Chairman.

    Chairman Manzullo. Congresswoman Bordallo?

    Ms. Bordallo. Thank you very much, Mr. Chairman, and thank 
you for your testimony, Mr. Barreto. What I got out of it was 
cuts are more efficient, but, you know, Mr. Barreto, cuts have 
far-reaching effects on people.
    I am very concerned to hear about all of the cuts in the 
domestic programs across our nation. I really am very 
concerned, particularly in the area of the small business. I 
know the ranking member here mentioned the fact that some 
people were asked to relocate.
    Well, I am from Guam. We have a very small program there, 
but it was a very important program. We had 12 to 15 employees, 
and I guess they received your letter, and, you know, it is 
rather difficult to relocate when you are 10,000 miles away. So 
now we are down to three, with one employee on loan from 
Hawaii. So we are not in very good shape, and I have a few 
questions to ask you.
    First of all, on the 7[a] loan program, you have terminated 
or transferred over 100 district and branch office loan program 
staff as part of its workforce transformation. Now, that means 
that the Guam branch office has been practically decimated, and 
with the loss of these employees, the district offices are 
having problems bringing new lenders into the program. How is 
SBA ensuring that there will be adequate staff out there to 
help? What are your specific plans?
    The other one, and I want to bring them all together 
because they are all basically the same, if you terminate the 
7[m] Microloan program, completely terminate it, there is a 
void in the provision of technical assistance to low-income 
entrepreneurs. Do you plan to add SBA district staff to reach 
out to serve this particular community?
    And then on the Women's Business Centers, once again, the 
budget request for the WBCs has remained the same as last year, 
yet you would like to expand the clientele served by this 
program. How do you think this is going to happen?

    Mr. Barreto. Thank you for the questions, Congresswoman. I 
will be happy to answer those in the order that you presented 
them.
    First of all, you are referring to what the SBA, and not 
just the SBA, but government, has been going through over the 
last couple of years. We need to continually look for ways to 
be more efficient to do the right things and to do them better. 
Any business has to do that all of the time. We are not a 
business, but we also have to be concerned with efficiencies 
and the effectiveness that can come from those efficiencies.
    The individuals that you mentioned were liquidators; in 
other words, folks that were responsible for liquidating a loan 
after it had gone bad. These were not the individuals that were 
out there generating new loans. We did not terminate them, but 
we terminated the functions that they performed inside of those 
district offices.
    What was happening to us was a lot of the lenders said to 
us; look, we cannot have 70 different ways of doing it. You 
have got to centralize this so that we can have a better 
situation, we can save time, and obviously we will make more 
money by doing that. And so that is what has happened. We 
offered those individuals an opportunity to move to another 
location to be able to continue the work that they did, and 
obviously it had some impact on individuals that decided that 
they did not want to move. But these are things that happen, 
again, in every organization and in every business.
    With regards to the Microloan program, and I would like to 
ask that we put up our Microloan chart, you know, the thing 
that has happened for us there, and we have been aware of this 
for a long time, is that we do not do a very good job on 
Microloans. It costs us a dollar for every dollar that we lend 
out. We did 2,400 of these loans over the last year. At the 
same time, I did 10 times that many loans of the same type and 
size, loans under $35,000, inside the flagship loan program.
    At the same time, there are other entities that are making 
these loans. There are 600 nongovernment microlenders that do a 
phenomenal job, so it is not like small business does not have 
other places to go. But we have determined that this is a 
program that we can much better deliver those kinds of services 
to those communities in our regular programs, our regular 
network of providers.
    This map right here shows you a depiction, and you have a 
copy of this in front of you, of all of the resource providers 
that we have across the United States. It is one of the things 
that makes SBA so strong.
    With regards to Women's Business Centers, I guess, this is 
another conversation that we have had over the last couple of 
years. We understand very clearly that the fastest-growing 
segment of small business in the United States are women 
business owners, but the purpose of Women's Business Centers 
was for us to give these organizations a hand up, not a 
handout, but a hand up, to allow them to get started and, over 
a period of five years, to become self-sufficient.
    What we have seen with Women's Business Centers, those 
centers that are being successful, that have been around for 
five years, are oftentimes in partnership with another 
organization. In other words, they are leveraging their 
resources. They may be working with a chamber of commerce or a 
business association. At the same time, we are concerned that 
there are large segments of the United States that do not have 
an opportunity to get a Women's Business Center because we 
continually invest all of the money in the existing centers 
instead of what the program was intended to do.
    An example, and something that Congresswoman Millender-
McDonald knows, is that up until recently, we did not have a 
Women's Business Center in Los Angeles. One of the cities with 
the most small businesses in the United States did not have a 
Women's Business Center. That is impossible to believe, but 
that was the fact. There are other areas around the country 
that fall into the same situation.
    We are committed to Women's Business Centers. We are 
committed to women. We are excited about the results that we 
have seen for women over the last couple of years. Loans are at 
historic highs, contracts are at historic highs, training is at 
historic highs, and we are going to continue that commitment 
this year and in the years to come.

    Chairman Manzullo. Thank you.

    Ms. Bordallo. Mr. Chairman, if I could just make a 
concluding remark, I appreciate your answers to the--

    Chairman Manzullo. I understand, but other members have--I 
have gone over one and a half minutes.

    Ms. Bordallo. I am just going to invite Mr. Barreto to come 
out and observe our Guam office. It is the greatest complaint I 
have as a public official.

    Mr. Barreto. Yes, ma'am.

    Chairman Manzullo. Thank you. I am coming if I get a 
chance. I am coming. You know that.
    Mr. Bradley?

    Mr. Bradley. Thank you very much, Mr. Chairman. Mr. 
Barreto, always a pleasure to see you here. Mr. Chairman, I 
know you have taken a bit of a tongue lashing this morning, so 
I want to thank you for your advocacy on behalf of an 
American--

    Chairman Manzullo. If the gentleman would yield, I have a 
great relationship with Mrs. Velazquez. Her passion for small 
business is unsurpassed, and I respect her. She is a great 
member of Congress, does a tremendous job, and whatever she 
says comes from her heart,--

    Ms. Velazquez. And the truth and the facts.

    Chairman Manzullo. That is correct. Thank you. I am doing 
fine, thank you.

    Mr. Bradley. I would like to talk about the facts of how 
you helped a company in my district enforce the provisions of 
the Buy America Act, and were it not for your advocacy and your 
willingness to hold a hearing, my company would not have been 
able to expand its workforce by 10 percent.
    And Hector--excuse me--Mr. Barreto, I just received an e-
mail yesterday or this week from a gentleman whose 7[a] loan 
program was caught up in a lack of funding perhaps a year ago, 
and you and I talked on the phone about that, and he told me 
the success of his company.
    I truly think, when I look at your budget numbers, going 
from a budget authority of about $800 million as recently as 
2003 to what is being proposed now, just slightly under $600 
million, juxtaposed with those graphs that you have shown us 
today, show that you have been able to do more with less, that 
you have run a government agency the way a business should be 
run, doing more with less, more efficiency, better use of 
technology, all of the things that the productivity of our 
economy has improved. You have made your government agency do 
that, and you have been able to increase your overall capacity 
to make these loans and to get them out there to the people 
that need them the most.
    So I salute you for that and look forward to continuing to 
work with you. I would yield back the rest of my time, because 
you have not had a lot of time to talk about the charts that 
you have had up there, and allow you to, you know, go into them 
in further depth. Thank you. Thank you, Mr. Chairman.

    Chairman Manzullo. Thank you, Congressman.
    Congressman Grijalva from Tucson?

    Mr. Grijalva. Thank you, Mr. Chairman and Ranking Member. I 
am very glad to be part of this Committee.
    Mr. Administrator, I do not have the specificity in the 
questions at this point, but as I get acclimated, I will. If I 
may just ask for a comment on something. In reading your 
submitted remarks, you mentioned the importance of SBA, the 
agency that you administer, supporting the President's agenda 
for small businesses. No point of difference there. Then you 
talk about health plans and the cost impact on small 
businesses, and I agree. I think this Committee should explore 
all options in terms of how we provide relief there.
    You mentioned the 800-pound gorilla in your comment, which 
was social security. If I am not mistaken, as part of the 
comment, and I think the ranking member mentioned social 
security as an issue that maybe this Committee should talk 
about, as it is going to be a primary area of debate for 
Congress in the coming days and months.
    Let me ask you a question. We can debate the size of that 
800-pound gorilla. We can debate the issue of whether it is a 
crisis or a challenge, and we will do that, but let me ask you 
another part of a gorilla that I see, and that is the deficit, 
the debt ceiling, the trade imbalance, and the impact that that 
is having on small businesses across this country. And one of 
the obvious impacts, to me, is the more-with-less mantra that 
we are hearing more and more about in domestic programs because 
you do have less, regardless, in an effort to try to deal with 
that deficit that has been created in the course of the last 
four years.
    So respond for me or have a dialogue regarding how you see 
this other gorilla I see and its impact on small businesses: 
the deficit, the debt, and the trade imbalance that this 
country has.

    Mr. Barreto. Sure. Thank you, Congressman Grijalva, and 
welcome to this Committee. I am looking forward to working with 
you and providing any information that you might need on any of 
these programs.
    I did not mention social security in my remarks. I have 
spoken about it before, but anything that affects the economy 
is definitely going to have an effect on small business. You 
know, we say all the time that small business is the engine 
that fuels the economy, and it is true. Fifty-two percent of 
the gross output--in other words, of all of the products and 
services that are produced in the economy--comes from small 
business.
    Small businesses also are creating most of the net new 
jobs, and we talk about that, but a lot of times small business 
does not get the credit for creating those jobs. A lot of 
times, people do not realize that small business also creates a 
lot of the innovation and technology. Small business has 14 
times more patents for products than large businesses do, but 
you would think that all of the great inventions come from big 
business. They do not; they come from small business.
    So we need to do everything that we can--the President 
talks about this all of the time--to create the right 
environment. That is why I am proud of this budget because this 
budget is fiscally responsible. The President wants to cut the 
deficit in half over the next five years. With regards to 
trade, that is a huge opportunity as well for us. Ninety-seven 
percent of all companies that do international trade are small 
businesses, 225,000 companies, but they only represent 30 
percent of all of the trade that is going on. So any time, and 
I know this is very important in your state, any time that you 
create more opportunities, grow the pie, you are helping those 
small businesses to grow their opportunities, as well.
    But small businesses need a lot of things. They need 
permanent tax relief. They need regulatory relief. They need 
tort reform. They need an energy policy. They need access to 
affordable health care. They need new markets. All of those are 
part of the president's small business agenda. So we not only 
work at providing them the tools in the SBA, but we also work 
hand in hand with the administration and this Committee to 
create an environment where small businesses not only can start 
their business, but where they can be successful over the long 
term.

    Mr. Grijalva. I appreciate it. Thank you, Mr. Chairman. I 
have no other questions.

    Chairman Manzullo. Thank you, Mr. Grijalva.

    Mr. Grijalva. I appreciate that.

    Chairman Manzullo. Thank you. Mr. Fitzpatrick?

    Mr. Fitzpatrick. Thank you, Mr. Administrator, for taking 
the time to be here with us today and for your professionalism. 
You obviously have great knowledge of not only the programs of 
SBA but what is going on in small business. This has been very 
helpful to me as a new member of Congress.
    I have been a public official for 10 years before coming to 
Washington. Over the course of those years, I have referred 
quite a few members of the small business community of Bucks 
County, Pennsylvania, southeastern Pennsylvania, to the SBA, 
and I have been very happy with the responsiveness and the 
programs of the SBA, as have those small business persons. But 
one of the issues I hear from time to time has to do with the 
length of time in loan processing. I was wondering if you have 
any ideas, whether it be creative staffing of the processing 
center, something that could be done to reduce the loan 
processing time.

    Mr. Barreto. Thank you very much for that question, 
Congressman. You are absolutely right. You know, I referenced 
that when we sat down with those lenders, and, by the way, we 
just do not sit down with them once; we sit down with them on 
numerous occasions, and I meet with them all across the 
country, but they are constantly asking us to streamline our 
processing. I think I was talking to Congressman Westmoreland 
about this, that they said to us, you know, time is money. We 
are not philanthropic organizations. If you can save us time, 
we can make more money, and we can make more of the loans that 
you want to make.
    So we have implemented a lot of the recommendations that 
the lenders wanted us to do. For example, on the SBAExpress 
Portfolio, we allow the lenders to use their own form, not our 
form. We allow them to transfer information to us 
electronically now through eTrans. So this is happening almost 
real time now. We allow them to make their own decisions. They 
do not have to go back and forth to the SBA and negotiate a 
buying decision on an SBAExpress loan. So all of those things 
have helped speed up the time.
    On top of that, I have referenced some of the 
transformation efforts that we have been undergoing over the 
last couple of years. We have literally been able to shave down 
the amount of time it takes us to actually process the loan, 
once we receive it, from weeks down to days now on both the 
7[a] loan portfolio and our 504 loan portfolio. That has been 
one of our big successes, as well. And so we continually stay 
committed to finding ways that we can even squeeze more 
efficiencies out, and I believe that we still can. The chairman 
referenced using technology even more to be able to cut out a 
lot of that time.
    You know, when I was in business, small businesses like to 
say, ``I can take a yes, and I can take a no, but those maybes 
kill me.'' So we are removing a lot of the maybes out of doing 
business with the SBA.

    Mr. Fitzpatrick. That is good news. Congratulations.
    On the 7[a] program, I noticed one of your previous graphs 
was talking about the subsidy going from one-point-something, I 
think, to zero. I suspect that that must have resulted in a net 
savings to the American taxpayers.

    Mr. Barreto. That is absolutely correct, Congressman, and I 
think that is one of the points that gets lost. When we talk 
about the funding differentials, we are really not talking 
about that much difference in terms of what we have been 
spending on these programs over the last couple of years. There 
will be some differences, but when you are at zero subsidy, you 
are able to save the American taxpayer well in excess of $80 
million that we used to need to be able to provide these loan 
programs.
    This program now is self-sufficient, the way that our 504 
portfolio has, the way that the venture capital program has, so 
we have history, we have precedent here, and it is one of the 
things that is really allowing us to be much more efficient 
than we ever have been, but you are right. We have saved the 
taxpayers about $80 million just by going to zero subsidy.

    Mr. Fitzpatrick. Thank you, sir. I appreciate it.

    Mr. Barreto. Thank you.

    Chairman Manzullo. Congresswoman Millender-McDonald?

    Ms. Millender-McDonald. Thank you so much, Mr. Chairman, 
and good morning, good morning. It is great to see you, Mr. 
Barreto. It was great to be with you on the ``McLaughlin 
Show.''

    Mr. Barreto. Thank you for being part of that.

    Ms. Millender-McDonald. It is great to have you, as a 
Californian.

    Mr. Barreto. Thank you.

    Ms. Millender-McDonald. At the time that you and I were on 
that show, I mentioned to you that if the President was really 
for small businesses, he would have authorized your budget. We 
have yet to see that, and by your own admission this morning, 
you say that we did not get that authorization.
    When we look at the 2006 budget that he is proposing, we 
are still looking at an anemic budget proposal for the Small 
Business Administration. It appears to me that if he has this 
cognition of knowing that small businesses are the engine that 
drives the economy, and you know that, Mr. Barreto, he would 
not do the cuts that we are seeing proposed in his budget.
    So my question to you is, and hopefully I will send a 
letter myself to the President asking him, why is it that he is 
cutting so much from SBA budget when he wants to create this 
environment of more jobs, helping Women Business Centers, which 
has really no money, and as you said by your own admission, Los 
Angeles did not have one initially; Long Beach--that one was 
taken away. We are talking about some of the largest cities in 
the State of California not having even the technical 
assistance that would help drive the women.
    But as I look at this notion of the President terminating 
nine of 25 top SBA programs, can you identify what those nine 
are because we cannot continue to say that the President really 
does embrace small businesses when he is cutting at this type 
of rate? And, again, the proposed budget is nearly half of what 
it was when President Bush took office. So when we are talking 
about the 2006 budget and the President wanting to create this 
type of positive climate for small businesses, it is not 
identified in his proposals of the small business cuts.
    So I just want you to talk about that, and you did a litany 
of the loans to minorities and Native Americans, and yet the 
Native Americans with the highest unemployment, that program, 
the Native American Outreach program, has been zeroed out. 
Please tell me what is it that this President is trying to say 
to us when we are trying to tell small businesses that this 
President wants them to flourish?

    Mr. Barreto. Thank you for the question, Congresswoman. Let 
me see if I can put some of this into perspective. You know, I 
mentioned to Congressman Fitzpatrick that you could start right 
away with the $80 million-plus that we saved on the 7[a] 
appropriation that we used to need. That is going to be a 
differential that we saw in previous budgets; we are not going 
to see it in this budget.
    You could look at monies that we used to request for 
disaster loans, but, as you know, we got a tremendous amount of 
resources through the supplemental, and we still have a lot of 
that money left over. You could look at, for example, something 
that we might see in the future is some of the money that is 
going to be added for congressional initiatives. We did not ask 
for any money for congressional initiatives. That is going to 
have a differential.
    But when you look at the money that we spend on all of our 
major programs and services, for example, the money that we put 
out into the district offices; that money is still there. The 
money that we put into GC/BD programs; that money is still 
there. The money that we have for all of our key programs is 
still maintained.

    Ms. Millender-McDonald. May I just interrupt you for a 
second to say that you were speaking about the total amount 
that you are putting into advocacy,--

    Mr. Barreto. Yes.

    Ms. Millender-McDonald. --which was a small amount, really, 
given that a lot of folks do not know about the money that you 
are talking about in these various districts. The advocacy 
program must be enhanced, and we must see that, equivalent to 
the money that the President should be proposing in his 2006 
budget, and it is not.

    Mr. Barreto. Just to give you an example, in the 2005 
appropriation line item, we are looking at in excess of a 
million dollars. In 2006, with all of the monies that we intend 
to spend on it, it will be over $9 million that we will be 
spending in the advocacy program. When you add in everything 
that we will provide for advocacy, we have allocated $9.13 
million for the advocacy program. Now, just to clarify, it does 
not mean that we went from $1 million to $9 million because 
even though that $1 million was delineated as a separate line 
item. We also invested more, and we will in 2005, than just 
that $1 million. Significantly more.

    Chairman Manzullo. Let me cut you off. Let me move to Mr. 
Westmoreland to get in as much as I can.

    Ms. Millender-McDonald. Mr. Chairman, hopefully, the next 
time, we can have more time.

    Chairman Manzullo. Yes. Okay. I understand. Thank you.

    Mr. Westmoreland. Mr. Barreto, thank you for being here 
today. You know, I want to thank you for small businessmen 
across the country, and I happen to be a small businessman, and 
I applaud you in the way you have handled yourself here today 
and also in the way that you have run your agency.

    Mr. Barreto. Thank you.

    Mr. Westmoreland. You know, sometimes people believe that 
the amount of money that you have or that you spend correlates 
with the efficiency of your business or your agency, and that 
may be a syndrome up here, and that is the reason that we spend 
so much money on so many of these agencies. We try to throw 
money at everything.
    I want to commend you on being able to do more for small 
business with a less amount of money. I think that is a great 
attribute to you, and I know that coming into the office in 
2001 after eight years of being under a different 
administration. From an entrepreneur's standpoint, it is easier 
to start a business than it is to come in and take over a 
business. I think you have done a wonderful job in coming into 
a situation where you have had to trim fat. You have had to put 
the administration on a diet, so to speak, but not cutting any 
muscle, and still providing and increasing the loans for the 
people who do it.
    And the other comment is I want to commend you also, from 
when we talked yesterday, about making it easier for lenders to 
operate with the Small Business Administration. You know, you 
can have 10,000 lenders, you can have 20,000 lenders, but you 
cannot make them do business. You can just make it as easy for 
them to do business, and that is really the government's 
responsibility. It is not to make it harder. It is not to make 
it more complicated. It is to make it simpler so our citizens 
know how to interact and companies know how to interact with 
government, and I think you have done a wonderful job with 
that.
    So I just want to thank you for what you are doing, for the 
job that you took on, coming in and being able to do what you 
have with the amount of money that you have had to do it with. 
Thank you, Mr. Chairman.

    Chairman Manzullo. Thank you. Mr. Lipinski?

    Mr. Lipinski. Thank you, Mr. Chairman. I look forward to 
working with you and with Ms. Velazquez on this Committee. I 
think we all share the desire to help out small businesses. I 
know I have hundreds of small businesses in my district, and I 
look forward to doing what I can to help them on this 
Committee.
    And Administrator Barreto, I have no doubts about your 
commitment and your expertise in this area. I do have 
concerns--I share concerns with some of my colleagues--about 
the budget for this year, but I do believe that you are 
certainly committed to small business, and I look forward to 
also working with you and seeing what we can do, and hopefully 
maybe we could get a little bit of help. Maybe we could get a 
better budget, get some more help for our small businesses in 
that budget. I look forward to working on the Committee and 
working with you.

    Mr. Barreto. Thank you very much, Congressman.

    Chairman Manzullo. Thank you. We have got to go vote. Mr. 
Barreto, if you would not mind sticking around. In the interest 
of fairness, I have acquiesced to Mrs. Velazquez's request for 
five more minutes of questioning.

    Mr. Barreto. Sure.

    Chairman Manzullo. Okay.

    Ms. Velazquez. Thank you for your kindness.
    [Whereupon, at 11:28 a.m., a brief recess was taken.]

    Chairman Manzullo. If the other witnesses could be seated, 
as soon as we are done with the additional five minutes from 
Mrs. Velazquez with Hector Barreto, then he will be excused, 
and we can move immediately into the opening statements of the 
second panel.
    The gentlelady from New York is recognized for five 
minutes.

    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Barreto, let us see if we can do this again. Let us 
talk about small businesses and access to capital.
    During the fourth quarter of Fiscal Year 2004, the last 
quarter before SBA raised fees on small businesses, the SBA did 
nearly $4 billion, in fact, $3.95 billion. When compared to the 
most recent quarter that you are so proud of, this shows a 
decline of nearly half a billion dollars in 7[a] lending. 
Again, I ask you, what impact has the SBA fee increase on small 
business owners had on this declining SBA lending?

    Mr. Barreto. First of all, Congresswoman, let me also put 
that in perspective. We had a tremendous fourth quarter of last 
year, and I believe that a lot of that was in anticipation of 
us coming to a zero-subsidy-rate program this year. In other 
words, lenders were taking advantage of the fee structure in 
the fourth quarter, so we got a tremendous amount of volume 
that we normally do not see in a fourth quarter. Having said 
that, our first quarter is doing phenomenally well.

    Ms. Velazquez. Let us talk about January of this year. This 
January, the 7[a] loan volume average, $47 million per day, 
this is 16 percent below last January when it was shut down and 
even averaged $56 million per day.

    Mr. Barreto. Well, what we believe is happening is a lot of 
the loans that we would have seen in January in a normal course 
of business, we saw those at the end of--

    Ms. Velazquez. Can you answer, if the $3,000 fee has 
anything to do with this decline?

    Mr. Barreto. We do not believe that it does, and part of 
the reason why I say that is because every month so far, we 
have seen incredible increases.

    Ms. Velazquez. So you do not think $3,000 is much for any 
small business person in this country.

    Mr. Barreto. We were averaging, in January of 2004, 42.6, 
and this year we are averaging 46.9, an increase on our daily 
average from a year ago.

    Ms. Velazquez. Well, I guess we have a problem with the 
numbers that you have and the numbers that have been given to 
us, and you know what? The problem is that you have always had 
a problem with the numbers. They do not add up. When it comes 
to Medicare legislation and prescription drugs, it did not add 
up, and one more time it does not add up.
    Let us go to minority businesses. There is a picture being 
painted by you that small business opportunities are increasing 
in the federal marketplace. In Fiscal Year 2002, SBA claimed 
that the small business achievement was 22.62 percent. 
Recently, the Office of Advocacy published a report contending 
that the $2 billion counted toward the small business 
accomplishment in Fiscal Year 2002 was miscoded and should not 
be included. If we subtract this $2 billion from the Fiscal 
Year 2002 small business achievement, the actual accomplishment 
was 21.62 percent, a full percentage point lower. Can we agree 
that the small business achievement in Fiscal Year 2002 is 
21.62 percent rather than 22.62 percent?

    Mr. Barreto. Well, actually, Congresswoman, we actually 
believe it was 23.61.

    Ms. Velazquez. So is Advocacy lying?

    Mr. Barreto. Well, first of all, I think we are talking 
about two different things.

    Ms. Velazquez. Oh, are they wrong?

    Mr. Barreto. Well, if I may, I will describe the Advocacy 
study and also the--

    Ms. Velazquez. Sir, I just want for you to answer my 
question. My question is about 2002, not 2003.

    Mr. Barreto. Right. That is absolutely correct. We are 
dealing with 2002 data, and obviously what we depend on is the 
FPDS, and that is where all of the agencies of government, 60 
agencies of government, are responsible for putting their 
information in there.

    Ms. Velazquez. My question is, 2002 goal was not achieved.

    Mr. Barreto. That is correct.

    Ms. Velazquez. Correct. Okay. So let us move on.
    After the mistakes in Fiscal Year 2002, SBA claimed that 
the small business achievement was 25.37 percent in 2003. What 
did SBA do from 2002 to 2003 to ensure that those large 
business contracts counted in 2002 would not be miscoded again 
in 2003?

    Mr. Barreto. You are referring to the Advocacy study, and 
one of the things that we did, even before the Advocacy study 
came out, is that we put a rule forward as our novation, rule 
that basically requires a small business--

    Ms. Velazquez. And I know that, sir. I know about the rule. 
This is my five minutes' questioning, Mr. Chairman.
    The rule is not regressive. Basically, nothing was done 
between 2002 and 2003 to fix it.

    Chairman Manzullo. We will let Mr. Barreto answer the 
question.

    Mr. Barreto. I think that one of the things that I want to 
make very clear is that we do not have a trend in the federal 
procurement environment where large contracts are being taken 
away from the small businesses on a wholesale basis. In fact, 
what we found when we looked at those, Congresswoman, is there 
are two main reasons that that happens. One is that a small 
business gets a contract when they are a small business, and we 
want these businesses to be successful, and then, over time, 
they fall out of the size standard because they have grown.
    The other issue that we found is that sometimes small 
businesses, because they have been successful, are taken over 
by a larger business. In other words, they sell to a larger 
business. Those are the primary examples that we found in the 
advocacy setting, not that there are large businesses that on a 
wholesale basis are misrepresenting their size and taking 
contracts away from small businesses.

    Ms. Velazquez. You are being dishonest with the numbers, 
and you have been cooking those numbers.

    Mr. Barreto. No, ma'am.

    Chairman Manzullo. You do not call the Administrator 
dishonest. All right? You may disagree with him.

    Ms. Velazquez. Those numbers are dishonest.

    Chairman Manzullo. You are out of order.

    Ms. Velazquez. General Accounting Office--

    Chairman Manzullo. The numbers may be dishonest, but do not 
call the Administrator dishonest.

    Ms. Velazquez. This is my five minutes, and I am telling 
him--

    Chairman Manzullo. All right. Your five minutes have ended, 
Mrs. Velazquez.
    Mr. Barreto, thank you for coming. I appreciate it very 
much and look forward to again working with you. Okay?

    Mr. Barreto. Thank you, Mr. Chairman.

    Chairman Manzullo. You are excused.

    Mr. Barreto. Thank you very much.

    Chairman Manzullo. Tony, if you guys could just shift down 
one, and our goal is to end at 1 o'clock because we have a 
series of votes coming up there, so please keep your opening 
remarks to five minutes or under. Tony, you are up first.
    Mr. Wilkinson is the President and CEO of the National 
Association of Government Guaranteed Lenders, and, Tony, we 
look forward to your remarks. Thank you.

  STATEMENT OF ANTHONY R. WILKINSON, NATIONAL ASSOCIATION OF 
              GOVERNMENT GUARANTEED LENDERS, INC.


    Mr. Wilkinson. Thank you, Mr. Chairman. I appreciate the 
opportunity to come before the Committee again.
    As you know, last year at this time, I testified about the 
many challenges facing the 7[a] program, and thanks to the 
efforts of this Committee and our counterpart in the Senate and 
Mr. Barreto and his staff, that problem that we encountered in 
2004 has been resolved. We finished Fiscal Year 2004 setting 
records with both numbers and dollars loaned. Fiscal Year 2005 
is also off to a record pace, with almost $3.6 billion lent in 
the first fiscal quarter. As part of the compromise that we 
worked out at the end of the 108th Congress, the 7[a] program 
received a $16 billion program level for this current fiscal 
year, which should be sufficient to meet the net lending 
demands of small business.
    A couple of comments on the Fiscal Year 2006 budget. The 
administration has requested a 16-and-a-half-billion-dollar 
program level. Some have already forecasted that all $16 
billion available for this year will be used, and given the 
growth rate we are experiencing in the program, we respectfully 
request that this Committee support a $17 billion program for 
Fiscal 2006. That $17 billion level would match the 
authorization level that was passed in the Omnibus 
Appropriations Bill just this past December and would lessen 
the risk of any future program caps or restrictions. So please 
support a $17 billion program level.
    There is also an increase in fees in the 2006 budget. From 
the start of Fiscal 2004 to the start of Fiscal 2006, lender 
fees will have increased 116 percent if the increase proposed 
in the 2006 budget is put into effect. Although the latest 
increase would be within the compromise we worked out in the 
108th Congress, the trend of higher and higher fees must be 
reversed. It is disturbing that the 7[a] program faces further 
fee increases, considering that this compromise deal 
establishing fee levels was signed into law just a couple of 
short months ago.
    It is also disturbing to see that the administration 
reports that the Fiscal Year 2004 subsidy rate has been 
reestimated downward by some 70 percent, which causes us great 
concern that, in one short year, we would see that kind of 
shift in the subsidy calculation for Fiscal 2004.

    Chairman Manzullo. Would the gentleman yield for a second? 
Tony, could you give me a letter setting that forth, and I will 
get it immediately to the administration to get an answer back 
ASAP?

    Mr. Wilkinson. I will do that.

    Chairman Manzullo. Thank you.

    Mr. Wilkinson. I appreciate your help in getting this 
clarified. We would simply like to see what has changed in the 
model and why, and to have an understanding about what is 
included in the subsidy model. We will get you that letter.
    The Administration is also requesting the authority to 
charge a fee for loans sold into the secondary market. 
According to the 2006 budget in Table 6 of the Federal Credit 
Supplement, the administration shows that the projected subsidy 
rate for next year is zero, so there really is not any need 
yet. So we are opposed in granting authority to the SBA right 
now for this secondary market fee, and would urge the 
Committee, again, to review the subsidy calculation. We would 
like to see the subsidy calculation on the secondary market 
fee, as well.
    As part of the compromise deal reached this past December, 
this Committee, the Senate Committee, and the Administration 
all agreed to a national Preferred Lenders program, and it was 
to be included in the Omnibus Appropriations Bill. 
Unfortunately, due to a clerical error, that provision was not 
included, so we would ask that that provision be included in 
the near future in any appropriate legislative package, 
particularly in any technical corrections bill which SBA will 
probably submit. We would like to see that national PLP program 
authorized.
    Lastly, we still have a prohibition against piggybacks, or 
combination financing loans. We have submitted a proposal to 
SBA, which they are reviewing. Hopefully, we can come to some 
sort of agreement on the reinstitution of piggyback loans. With 
the piggyback prohibition now, many applicants have no solution 
to their needs of larger loan packages, so we would request 
your assistance as we continue to work on getting piggybacks 
reinstituted.
    Mr. Chairman, that is my testimony. Thank you for having me 
today.
    [Mr. Wilkinson's statement may be found in the appendix.]

    Chairman Manzullo. Thank you very much.
    Our next witness is Chris Crawford, President and CEO of 
the National Association of Development Companies and 
Development Funding Corporation, from McLean, Virginia. I look 
forward to your testimony.

 STATEMENT OF CHRISTOPHER L. CRAWFORD, NATIONAL ASSOCIATION OF 
                     DEVELOPMENT COMPANIES


    Mr. Crawford. Thank you. Good morning, Mr. Chairman. My 
name is Chris Crawford.

    Chairman Manzullo. Chris, you have got to talk into the 
microphone there.

    Mr. Crawford. I am pleased to provide a statement on the 
2006 504 budget and a couple of other 504 issues.
    First, I would like to comment on the 504 2005 
authorization situation. Certified Development Companies 
provided $4 billion in 504 financing last year, and when you 
add our First Mortgage Partners loans, this totaled $9 billion 
in long-term capital to small businesses. This represented an 
increase of 26 percent over 2003 and is truly a tribute to the 
growing demand for the 504 program to meet the capital needs of 
small businesses.
    However, despite this Committee's efforts, a hard cap was 
placed on the 504 program for 2005 of only $5 billion. We 
project the demand will exceed $5 billion, and this does not 
include any forecast at all of the impact on the debenture 
increases nor the new manufacturing debenture that Congress 
passed last December. We plan to provide the Committee with a 
request to increase the authorization within a month as we 
assess loan demand. We will ask the Committee to sponsor an 
amendment to increase the 2005 cap.
    Now, on to 2006. The Administration is requesting only $5.5 
billion for 2006. For a loan program growing at an average of 
over 20 percent for the last five years, this is certainly 
going to be insufficient. We ask the Committee to approve an 
authorization level of at least $6.5 billion for 2006. With 504 
at zero subsidy since 1997, there is absolutely no cost to the 
taxpayer and, therefore, no downside to this program level.
    We congratulate the Administration on its success in 
centralizing both 504 loan processing and portfolio servicing. 
These changes have resulted in decreased program costs for 504 
while substantially improving the service to both small 
businesses and to lenders. However, we are concerned that the 
Sacramento Loan Processing Center may have insufficient staff 
to keep up with the demand for 504 loans. We urge the 
Administration to both continue to streamline loan operations 
and to consider the need for added staff at that critical 
processing center.
    There is one area of loan operations that needs increased 
attention by the Administration, and that is 504 liquidation 
and recovery. While SBA has reorganized to improve its other 
loan program liquidation activities, we are very concerned that 
504 defaults are not being addressed sufficiently to maintain 
the OMB forecasted recovery rate of 42 percent in this year's 
subsidy model. Failure to address this critical issue will lead 
directly to increased loan fees for all future 504 borrowers.
    SBA abandoned its asset sale program over two years ago 
while downsizing its portfolio management staff. That is what 
the administrator referred to as the ``loan liquidators.'' They 
downsized the staff in order to centralize both 7[a] and 
disaster loan liquidations. Unfortunately, 504 appears to have 
gotten lost in the mix.
    Since the last asset sale, there have been over 800 504 
loan defaults, since the last asset sale in 2002. While the 
default rate has not increased, we are gravely concerned about 
the limited SBA efforts to recover on these existing defaulted 
loans. We ask the Administration and this Committee to work 
with our industry to increase the effort to recover on 504 
defaults and to immediately publish for comment the liquidation 
regulation that is already drafted within the SBA. The sooner 
504 defaults are addressed, the greater the recoveries will be 
for these projects.
    Our industry recognizes both the leadership of this 
Committee and the administrator for strongly supporting 504, 
and we look forward to working with you to grow this no-cost 
program in the future. Thank you very much.
    [Mr. Crawford's statement may be found in the appendix.]

    Chairman Manzullo. Thank you.
    Our next witness is Steve Vivian with the National 
Association of Small Business Investment Companies. Steve?

  STATEMENT OF STEPHEN VIVIAN, NATIONAL ASSOCIATION OF SMALL 
                 BUSINESS INVESTMENT COMPANIES


    Mr. Vivian. Thank you, Mr. Chairman, for inviting me to 
Washington today. It is an honor to testify on behalf of the 
National Association of Small Business Investment Companies 
and, specifically, to have an opportunity to express my 
personal disappointment that the participating securities 
program, a program which I have been involved with for six 
years and a program that works, has not been included for 
consideration in the Administration's Fiscal 2006 budget.
    I request that my testimony be included in the record, and 
I will summarize it here, to the best of my ability, for you.

    Chairman Manzullo. The written statements of all of the 
witnesses will be included as part of the record. Proceed.

    Mr. Vivian. Thank you.
    First, we would like to acknowledge and thank the 
Administration for its continued strong support of the 
Debenture program, with a $3 billion recommended authorization 
for Fiscal 2006. However, as I indicated, we are confused, 
disappointed, and concerned for America's small businesses that 
the Administration proposes no participating security leverage 
in Fiscal 2006, particularly given the proposed $4 billion 
authorization level in Fiscal 2005.
    I respectfully disagree with Administrator Barreto that the 
Debenture program alone will support America's venture capital 
needs. The Debenture program serves a critical role in the 
nation's economy but does not, and should not, be expected to 
incent debenture managers to serve the nation's smallest and 
youngest businesses across diverse industries and geographic 
with true equity venture capital. In fact, the genesis of the 
Participating Securities program in 1994 was a direct result of 
the government's belief that the smallest and youngest 
companies in our country cannot, and should not, be served by 
the Debenture program.
    The Participating Securities program accounts for roughly 
half of all SBIC investment dollars and, since inception in 
1994, has infused nearly $9 billion into U.S. small businesses. 
That $9 billion has been estimated to have created over 240,000 
jobs and over $40 billion of portfolio revenue. The majority of 
those jobs and revenue were created during the recession while 
the rest of the venture capital industry was effectively in 
hibernation. Thirty-five percent of that $9 billion, or over $3 
billion, went into small and growing U.S. manufacturing 
companies. That dwarfs anything coming out of the traditional 
venture capital industry into mainstream, rustbelt 
manufacturing.
    This program works. It serves overlooked niches of this 
country's businesses which are avoided by the traditional 
venture capital community due to their size, their location, or 
their industry. These biases are understandable if one 
understands the traditional venture capitalist's mindset. 
However, these biases are amongst the key reasons why there is 
a need for this program.
    Once again, I believe this program works. It works across 
the country. It works in the Midwest, and it works in Illinois, 
where over $240 million has been invested out of the $9 
billion. In our small, Chicago-headquartered firm alone, our 
$50 million Participating Securities SBIC has invested in 14 
companies. Six of those are headquartered in Illinois; ten of 
those are headquartered in the Midwest.
    We have supported manufacturing and companies like Banner 
Service Corporation, which was a second-generation, family-
owned business under consideration for liquidation and winding 
down by its owner. Together with another Chicago-based 
Participating Securities SBIC, we supported an entrepreneur who 
purchased the $17 million, Carol Stream, Illinois-based, 
manufacturing concern, and we are now going about the business 
of growing the company.
    As a result of our investment and support of strong 
management, in a little more than a year, the business has 
increased revenue and profitability substantially and has added 
12 percent to its manufacturing workforce.
    In another situation, our investment was used to open a 
Paxton, Illinois, manufacturing facility for a consumer water-
bottling company. That plant now employs 30 people during peak 
bottling season in a small town in central Illinois.
    These investments could not have been made out of the 
Debenture program. Mr. Chairman, this program works across the 
country. It works in the Midwest, and it works in Illinois. At 
Prism alone, our active portfolio companies have created over 
100 jobs in Illinois and nearly 250 jobs in the Midwest and 
approximately 1,000 jobs across our portfolio since our 
inception in 1999.
    In conclusion, we acknowledge that the program has 
experienced losses, many of which can be attributed to the 
recession, but some of which are a direct result of structural 
flaws in the original Participating Securities program.
    Mr. Chairman, I believe I speak for the NASBIC Board of 
Governors and much of its membership when I say that the 
industry stands ready to work with you, your Committee, and the 
Administration in a collaborative effort to restructure this 
program and to ensure that it remains in place, serving its 
crucial role: fertilizing the roots of America's small 
businesses and its manufacturing base.
    Thank you for your time, and I would be pleased to answer 
any questions.
    [Mr. Vivian's statement may be found in the appendix.]

    Chairman Manzullo. Thank you very much.
    Our next witness is Don Wilson, President and CEO of the 
Association of Small Business Development Centers. I look 
forward to your testimony.

   STATEMENT OF DONALD WILSON, ASSOCIATION OF SMALL BUSINESS 
                      DEVELOPMENT CENTERS


    Mr. Wilson. Mr. Chairman, we appreciate very much the 
opportunity to be with you representing the nation's Small 
Business Development Center program.
    One of the things that we have heard so much today is the 
discussion of doing more with less. When we look at the 
significant increase in the last five or six years in domestic 
discretionary spending, and then we look at the downward spiral 
in the budget for the SBA, it does seem a signal is going out 
that there are higher priorities in the domestic sector, and 
that troubles us if we all agree that between 75 and 80 percent 
of jobs come from small business.
    The economic data are particularly disturbing. We know that 
we are in a recovery, but we are much later, in terms of 
growing this economy, than in any previous recession since 
World War II. The labor force participation rate is the lowest 
since 1988. So what it means is that, yes, we went down from 
5.4 to 5.2 in unemployment figures, but what it basically means 
is we went down because people quit looking for jobs.
    The GDP in the last quarter of last year was the lowest in 
the past 24 months. So the recovery that we are hoping for is 
not moving along at the rate we want. You know that so very 
well because you are concerned in manufacturing. For the last 
five months in a row, manufacturing jobs have declined after 
having a meaningful increase in the first half.
    Now, these statistics indicate that all is not well with 
small business. The charts that were up here earlier talking 
about how much SBA loans have gone up; I am not sure that that 
is a good sign. If small businesses cannot get conventional 
loans, it means their balance sheets are not healthy enough, 
and they are having to turn to government loans. The 
conventional loans; they just will not make them because you 
are not healthy enough.
    So I am not sure it is a positive sign that we are 
increasing the number of SBA 7[a] loans, and I think somebody 
ought to look at that really closely. Yes, SBDCs have trained 
and counseled more people in 2004 than at any time in history. 
Now, you can say we are doing more with less, but there is a 
very disturbing thing that happened last year. The hours per 
client went down. We are pushing people through faster. If you 
did that in a medical office, you would not go back to that 
doctor.
    Our counselors indicate to us, we need five to 12 hours of 
counseling. We are going backwards in the hour per client 
ratio. We are seeing more people, but we are not providing them 
the depth and quality of service that we were three or four 
years ago, and that is the reason job creation is not happening 
like we need it to.
    The most staggering statistic, Mr. Chairman, is despite the 
fact that we have finally reached the point, in January, where 
we had as many jobs as we did when the recession ended, the 
fact is that private sector employment in January was six-
tenths of a percent below what it was 46 months ago. So the 
growth in jobs in this country is government jobs, local, 
state, and federal level; it is not private sector jobs.
    So, clearly, small business is suffering, and the reason 
they are suffering is they need help in hard times with how to 
manage their business better.
    We are trying to be innovative. We are trying to work with 
the new group of people who are coming in. A 23-percent 
increase in about the last five or six years in people over 50 
who are starting new businesses. Why is that happening? People 
over 50 are being laid off in enormous numbers as a result of 
acquisitions and mergers and downsizing. These people should be 
at the peak of their earning power, and, unfortunately, they 
are on the unemployment lines. So they are turning to self-
employment, and they are turning to the SBDCs, women's centers, 
and so forth, and we do not have the resources to serve them.
    Small states have 17 percent less in real-dollar terms than 
they did in 1998. Large states, like your state and Ms. 
Velazquez's state, in 2006, despite the President giving us 
about a $150,000 increase, for which we are deeply grateful--I 
mean that as sincerely as I can say it, but your state, 
Pennsylvania, New York, Indiana, Ohio, Michigan all have less 
resources than they did in 2001. So we cannot do the job for 
these small businesses and get jobs created and bring revenues 
back into the Treasury if we continue this trend. Thank you, 
Mr. Chairman.
    [Mr. Wilson's statement may be found in the appendix.]

    Chairman Manzullo. Thank you.
    Our next witness is with the Association for Enterprise 
Opportunity, Daniel Betancourt. I look forward to your 
testimony.

      STATEMENT OF DANIEL BETANCOURT, COMMUNITY FIRST FUND


    Mr. Betancourt. Thank you, Mr. Chairman. Thank you, Ranking 
Member Velazquez.

    Chairman Manzullo. You have to press the button on your--

    Mr. Betancourt. Thank you, Mr. Chairman. Thank you, Ranking 
Member Velazquez. I am representing the Association of 
Enterprise Opportunity here today. I am also a board member, 
and I am also a practitioner for Community First Fund in 
Pennsylvania.
    Just a couple of things about AEO. We represent over 500 
members-micro-enterprise organizations across the U.S. Of the 
four main programs that micro-enterprises use, three of the 
four are actually being recommended for cut, and I really want 
to talk to you about those programs.
    Just a few facts about myself. I work, as I said, at 
Community First Fund. We cover a 10-county area in 
Pennsylvania. We are an SBA microlender. We are an SBA 
technical assistance provider. We are also a Women's Business 
Center. About half of AEO's members are involved in these 
programs that we are talking about.
    What the AEO is requesting is that we continue funding at a 
$20 million level for lending capital for the Microloan 
program, at a $17 million level for the TA program, at $5 
million for the PRIME, and $16.5 million for the Women's 
Business Centers.
    The funding that we are talking about is unique, at least 
in two ways. One is that it is helping entrepreneurs, small, 
micro-entrepreneurs, and generally the sales are $100,000 and 
less than five employees. We believe that the private sector, 
in many respects, is unable to reach this market. The 7[a] 
program, while you hear that it is doing well in many respects, 
it is unable to reach the market that we are serving. In our 
particular case, 90 percent of our borrowers are people of 
color. Forty percent are women. I think that if you look at the 
7[a] numbers, you are going to find that those numbers will not 
correspond.
    As a matter of fact, the Administrator indicated that these 
programs are expensive, the TA program itself. Well, let us 
talk about that for a moment. We are spending, in some cases, 
20 to 40 hours with our entrepreneurs, and, in many respects, 
our loans might get, at best, $1,000 in interest. The other 
thing is that there is a less-than-one-percent default rate on 
the SBA Microloan program. The SBA gets its money back, and so 
do the organizations that we work for. What we are talking 
about is very intensive training for these entrepreneurs.
    The Administrator also talked about that these services 
could be provided by other organizations across the nation. He 
said about 600 organizations, or CDFIs. I represent a CDFI in 
Pennsylvania, and I can tell you that we use SBA Microloan 
money so that we can provide technical assistance, and I will 
say that again. We are a CDFI, a community development 
financial institution. We do get money from other programs, but 
this is the only federal program that we use for technical 
assistance. So while you may say that there are other 
organizations that provide this to micro-entrepreneurs, if you 
eliminate the SBA Microloan program and Technical Assistance, 
and PRIME, you are going to eliminate the services that are 
being provided by those CDFIs.
    Another point that was said today, in terms of geographic 
scope, was that the 7[a] program is dominated by many of the 
larger banks. The SBA micro-organizations are represented 
across the nation. We are in rural areas. We are in urban 
areas. We are in suburban areas. And I think that you will 
notice that about, as I mentioned earlier, 40 percent of our 
loans are in rural areas.
    Many of our borrowers have credit issues that would not 
qualify for 7[a]. Forty percent of our borrowers are start-ups, 
and you will note that in the 7[a] program generally they are 
one to three years in terms of years in business. Our borrowers 
are not necessarily in business for one to three years.
    So I would say, in conclusion, we are asking you to keep in 
your budget views and estimates the $20 million for the 
Microloan program, $17 million for technical assistance, $5 
million for the PRIME, $16.5 million for the Women's Business 
Centers. Thank you very much.
    [Mr. Betancourt's statement may be found in the appendix.]

    Chairman Manzullo. Thank you. I just have a couple of 
questions.
    One of the problems, at least from the Administration 
perspective, is the overlapping and redundancy of programs. I 
guess my question is, the technical assistance that comes from 
the Microloan Technical Assistance and SCORE and SBDC and, in 
many cases, Women's Business Centers because I have a Women's 
Business Center and an SBDC in the district I represent; do 
these services overlap?

    Mr. Wilson. Mr. Chairman, that is a huge question. OMB has 
maintained that for the last 10 years.

    Chairman Manzullo. OMB does not like small business.

    Mr. Wilson. SBA commissioned a study this past year of all 
of their ED programs.

    Chairman Manzullo. ``ED,'' Don?

    Mr. Wilson. Entrepreneurial development. That is the 
section at SBA that covers SBDCs, Women's Centers, SCORE, and 
so forth.
    The study has just been concluded, and the results are in, 
and what it shows unmistakably is that these programs are not 
duplicative. The Women's Centers serve businesses with about 
$60,000 in sales and about one to one-and-a-half employees. 
SCORE serves businesses with about $125,000 in sales, on 
average, and three employees. SBDCs, on average, serve 
businesses with $250,000 in sales and six to seven employees.
    They are clearly, clearly, addressing different market 
segments. And so SBA has got the data. I feel certain they will 
share it with this Committee, but it absolutely refutes the 
long-held claim that these technical assistance programs 
duplicate each other's work. They are serving completely 
separate market segments.

    Chairman Manzullo. Mr. Betancourt, somebody cheerleading 
for your program there. He left out what Microloan Technical 
Assistance serves compared to the four programs he mentioned?

    Mr. Betancourt. Yes. The Microloan Technical Assistance, 
you will note, is tied to the loans that we provide. It 
requires that we follow up when we provide the loans. The 
reason why there is a one-percent default rate is because we 
are following our borrowers. I can tell you that the average 
for non-SBA microlenders in the nation for Microloans is a 10- 
to 15-percent default rate, and the reason is because there is 
no technical assistance provided.
    In our particular case, our organization, we have a less-
than-one-percent default rate, and we do about 100 loans a 
year. We are one of the largest lenders in the nation when it 
comes to Microloans. Now, a subset of that is SBA Microloans.
    Let me just be clear. We provide about 30 SBA Microloans a 
year. We do another 75 on our general fund. We are able to 
leverage your dollars, raise another 75 percent beyond that, 
and provide these services. It is just a small portion of what 
we are able to do in these communities.
    More to your point about duplication, we work very closely 
with the SBDCs and the SCORE, and the gentleman is right. When 
we have tough cases of intensive training of very small 
businesses of women and people of color, they are always 
referred to our organization because that is what we specialize 
in.

    Chairman Manzullo. Is your default rate a lot less than the 
rest of the nation on the Microloans? You said you are only one 
percent?

    Mr. Betancourt. The industry as a whole has a one-percent 
default rate under the SBA Microloan program.

    Chairman Manzullo. Is that the amount of dollars or the 
number of participants?

    Mr. Betancourt. It is number of dollars. In other words, 
when you take the aggregate number and what is charged off, it 
is one percent.

    Chairman Manzullo. Okay. I do not have any further 
questions. Mrs. Velazquez?

    Ms. Velazquez. Mr. Vivian?

    Mr. Vivian. Yes.

    Ms. Velazquez. Do you think that by SBA not requesting any 
program level for the participating securities, that this 
closes the book on the program?

    Mr. Vivian. I hope not. We are certainly willing and able 
and ready, as we tried last year, with the strong support of 
this Committee and the hard work that you all put in, to 
resolve the problem. Our hope is that it is not.

    Ms. Velazquez. Okay. Why has NASBIC continued to support a 
zero-subsidy-rate program for participating securities? It 
clearly has not worked for the industry and has not produced 
the desired stability.

    Mr. Vivian. We believe that the program can support a zero-
subsidy rate. The reason that it has not in the past worked is, 
as I suggested in the testimony, there are some structural 
flaws in the existing Participating Securities program, and we 
are actually in the process right now of preparing to come to 
the Committee with some proposals on how to solve that problem 
to be able to maintain a zero-subsidy rate.

    Ms. Velazquez. Thank you.
    Mr. Wilkinson, I know that SBA is focused on making smaller 
loans largely because they believe that they are better at 
creating jobs, but also because they believe that they are less 
expensive. What is your opinion of SBA's focus on smaller 
loans?

    Mr. Wilkinson. Well, they came up with a new program called 
SBAExpress a few years back to try to get the large banks back 
involved with the SBA. It is a different kind of product, and 
that program has taken off, and that is where they are getting 
large numbers of smaller loans. But we still have what I call 
the ``regular 7[a] program'' in existence, and it continues to 
grow, but that is really a long-term loan. It is a niche 
product. So SBA's numbers have increased primarily because of 
Express, but the regular 7[a] program is doing just fine.

    Ms. Velazquez. And what is the 7[a] program's subsidy rate?

    Mr. Wilkinson. For the current fiscal year, it is zero.

    Ms. Velazquez. So, then, why is there a cap on its program 
level? It does not make any sense. There is no cost to the 
government. Why do we not stand behind these estimates?

    Mr. Wilkinson. First of all, we are seeing some 
unprecedented growth that we have not seen in previous years. 
It looks like we are going to do about $16 billion this year. 
We did $12.7 billion net last year. Our belief is that since it 
is now at a zero subsidy, there really should not be a limit on 
what we are doing. That is why we have supported the $17 
billion estimate for next year, Fiscal 2006, to match the 
authorized level.

    Ms. Velazquez. Mr. Wilkinson, can borrowers of the 
Microloan program secure loans through the Community Express 
program?

    Mr. Wilkinson. I am not a Microloan expert, so I really do 
not know much about their clientele. What I have heard from my 
members is that, based on the credit scores that they are using 
for their loans in the Express program, those are credit scores 
that are higher than the credit scores of borrowers in the 
Microloan, so, based on that, I would say they are a different 
clientele.

    Ms. Velazquez. Mr. Betancourt?

    Mr. Betancourt. The credit scores in our case, in many 
cases, are less than 550; in some cases, bankruptcies.

    Ms. Velazquez. And Community Express, SBAExpress loan; what 
will be the score, 700?

    Mr. Betancourt. I would say 700, 650 or more. I am not an 
expert in that area.

    Mr. Wilkinson. I think, from some of my members that are 
here, they are saying their minimum is around 630 for an SBA 
7[a] loan.

    Ms. Velazquez. But the SBA continues to say that borrowers 
of the Microloan program can get loans through the 7[a] 
program. Is this true?

    Mr. Wilkinson. Again, our members, with their Express loan 
programs, seem to have minimums in the 630 to 650 range. A 
borrower would have to fit that range to be approved through 
the regular 7[a] program.

    Ms. Velazquez. So what we are saying is that the clientele 
that will get loans through the Microloan program would not be 
able to get loans through the Express program because the score 
that is required, they might not meet. Correct?

    Mr. Betancourt. I would agree with you, Ms. Velazquez, but 
I would also say, they would not even get to the table or at 
application without the technical assistance that is provided.

    Ms. Velazquez. Mr. Crawford, the message NADCO gave to 
Congress last year was that they wanted the larger Debenture. 
Less emphasis was given to the cap on the 504 program. Why?

    Mr. Crawford. I am sorry, ma'am. Could you repeat the 
question? Less emphasis--

    Ms. Velazquez. --has been given to the cap on the 504 
program. Why?

    Mr. Crawford. I am not really sure, given the point that 
you just made, we are at zero subsidy. I would have hoped, as 
this Committee passed last year in its own reauthorization 
bill--you endorsed, I believe, $6 billion for 2005. We 
certainly supported that figure because we thought that figure 
would take care of the larger Debenture as well as the 
manufacturing debenture promoted by the chairman.

    Ms. Velazquez. What would happen if 504 lending exceeded 
the cap?

    Mr. Crawford. I would presume, at some point, the agency 
will move to some sort of credit-rationing scheme, which is 
what they have had to do with 7[a] on two or three occasions 
over the past several years. I would hope that would not be the 
case. As you saw the disruption in the 7[a] program, it will 
certainly disrupt our program.

    Ms. Velazquez. Do you think that is possible?

    Mr. Crawford. Do I think it is possible?

    Ms. Velazquez. Uh-huh.

    Mr. Crawford. I assume, without increasing the cap from $5 
billion, they will not have much alternative except to move to 
some sort of credit rationing.

    Ms. Velazquez. Mr. Betancourt, do you see demand for the 
Microloan program increasing or decreasing and why?

    Mr. Betancourt. In terms of their budget, the 2006 budget?

    Ms. Velazquez. Demand for the program.

    Mr. Betancourt. Oh, demand. I did not hear you.

    Ms. Velazquez. Demand.

    Mr. Betancourt. In our case, we doubled our volume from 
last year in the SBA Microloan program.

    Ms. Velazquez. Okay. So can you tell us the profile of a 
borrower in the Microloan program?

    Mr. Betancourt. I think it was said earlier, and it was a 
good profile, we are talking about businesses with less than 
$50,000 in sales. About half of our clients are start-up. In 
many cases, this is a part-time business they are trying to 
start off the ground. They might work and then build this up. 
Not a lot of collateral, credit is not great, but, you know, 
with a good business plan and the character of the borrower, we 
are able to provide the seed funding, follow-up, and then 
things work out.

    Ms. Velazquez. If the program is terminated, where do you 
think the clients will go to get loans?

    Mr. Betancourt. I think it is going to be a hardship for a 
lot of organizations in a lot of small, rural communities, some 
urban areas. I know, for example, in Washington County in 
Pennsylvania, they only have an SBA Microloan program. There 
are very few banks. If you eliminate this, I kind of doubt they 
are going to be able to offer it.
    In our particular case, it is going to hinder a lot of what 
we can do. We will just have to cut back some services.

    Ms. Velazquez. So how is the technical assistance provided 
by the Microloan program different from the Community Express 
program?

    Mr. Betancourt. Well, I think that this is a partnership 
that the SBA has with the banks, in terms of Community Express, 
where the banks provide the funding, and the SBA is providing 
the guarantee. You have my resume there. I am a former vice 
President of a bank, 15 years, and I know how it works at a 
bank. It is a bump and run. If the deal works, you get a 
guarantee, and you move on, but you do not have the time to 
provide technical assistance. You would not have your job. It 
is a for-profit business.

    Chairman Manzullo. Okay. Thank you for coming. We 
appreciate it. We have got a lot of work to do. I think, on the 
subsidy rate of the 7[a], we probably should have a preemptive 
hearing within the next 60 days because this is a 70-percent 
increase. SBA is going to have to justify that, and on the 
Participating Securities, you know, lack of capital is the 
biggest problem that we have.
    Don, you are right on the manufacturing. The largest city 
in our district, Rockford, Illinois, we are somewhere around 
nine and a half to 9.8 percent unemployment. It is double the 
rate. We have lost 29 percent of our manufacturing base, and 
the Secretary of the Navy has just awarded a $1.7 billion 
contract for Marine One to the Europeans. I hope he is proud of 
that.

    Mr. Wilson. I would like, Mr. Chairman, if I could,--I 
mentioned it in my written testimony--I would like to get it to 
you. We had Dr. Chrisman do three studies over the last six 
years of what SBDCs are doing for manufacturers, and it is 
very, very significant.

    Chairman Manzullo. Well, obviously, we would not spend a 
lot of time working on that, but we look forward to working 
with all of you. The budget estimates have to be in--February 
23rd, we will be getting that document in and making our 
statements and observations on it. Thank you for coming.

    Ms. Velazquez. Mr. Chairman?

    Chairman Manzullo. Yes.

    Ms. Velazquez. Can I have one more question?

    Chairman Manzullo. Sure, of course.

    Ms. Velazquez. Mr. Crawford, how has the decline of local 
SBA staff affected CDC's ability to liquidate and service 
defaulted loans?

    Mr. Crawford. Well, the problem we have with CDC's 
liquidating defaulted loans is that we are not empowered yet by 
the Administration to do that. We have been crying for the 
regulation they have had in draft for more than six months to 
move towards liquidations. If we do not do something about 
that, the subsidy costs of this program are actually the 
borrower fee because they will keep us at zero. The borrower 
fee will skyrocket.

    Ms. Velazquez. And, in your opinion, does SBA need to 
increase staffing at the 504 processing center and by how much?

    Mr. Crawford. I am not sure. I could hesitate a guess for 
that. I certainly would not advocate doubling the staff, but it 
is clear that those folks out there are working as hard and as 
fast as they can work, and I personally believe that there is a 
staff increase needed there.

    Chairman Manzullo. Thank you. The meeting is adjourned.
    [Whereupon, at 12:35 p.m., the Committee was adjourned.]

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