[Senate Hearing 109-512]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-512
 
    REAUTHORIZATION OF SMALL BUSINESS ADMINISTRATION FINANCING AND 
                  ENTREPRENEURIAL DEVELOPMENT PROGRAMS

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

                                HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 26, 2006

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
28-334                      WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED NINTH CONGRESS

                              ----------                              
                     OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri        JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana                CARL LEVIN, Michigan
GEORGE ALLEN, Virginia               TOM HARKIN, Iowa
NORM COLEMAN, Minnesota              JOSEPH I. LIEBERMAN, Connecticut
JOHN THUNE, South Dakota             MARY L. LANDRIEU, Louisiana
JOHNNY ISAKSON, Georgia              MARIA CANTWELL, Washington
DAVID VITTER, Louisiana              EVAN BAYH, Indiana
MICHAEL B. ENZI, Wyoming             MARK L. PRYOR, Arkansas
JOHN CORNYN, Texas
                    Weston J. Coulam, Staff Director
                 Naomi Baum, Democratic Staff Director


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Snowe, The Honorable Olympia J., Chair, Senate Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Maine..........................................................     1
    Prepared statement...........................................     5
Levin, The Honorable Carl, a United States Senator from Michigan.    11
    Prepared statement...........................................    15
Isakson, The Honorable Johnny, a United States Senator from 
  Georgia........................................................    17
Thune, The Honorable John, a United States Senator from South 
  Dakota.........................................................    29
Kerry, The Honorable John F., a United States Senator from 
  Massachussetts, prepared statement.............................    70

                           Witness Testimony

Barreto, The Honorable Hector V., Administrator, U.S. Small 
  Business Administration........................................    17
    Prepared statement...........................................    20
Alford, Harry C., President and CEO, the National Black Chamber 
  of Commerce....................................................    38
    Prepared statement...........................................    40
Baird, James, Executive Director and CEO, Bay Area Development 
  Company, Walnut Creek, California..............................    43
    Prepared statement...........................................    45
Maxwell, James A., 504 Statement Manager, Granite State Economic 
  Development Corporation/New England Business Finance...........    51
    Prepared statement...........................................    53
Morrissette, Mark, Managing Director, North Atlantic Capital.....    59
    Prepared statement...........................................    61

          Alphabetical Listing and Appendix Material Submitted

Alford, Harry C.
    Testimony....................................................    38
    Prepared Statement...........................................    40
Almeida, Ann Marie
    Prepared statement...........................................   124
Baird, James
    Testimony....................................................    43
    Prepared Statement...........................................    45
    Responses to follow-up questions.............................    86
Barreto, the Honorable Hector V.
    Testimony....................................................    17
    Prepared Statement...........................................    20
Bianca, Zulman
    Prepared statement...........................................   121
Bond, the Honorable Christopher S.
    Prepared statement...........................................    82
Clark, Dr. Redmond
    Prepared statement...........................................    98
Coleman, the Honorable Norm
    Prepared statement...........................................    83
Fleming, A. V.
    Letter.......................................................   120
Isakson, the Honorable Johnny
    Testimony....................................................    17
Kerry, the Honorable John F.
    Prepared statement...........................................    70
Levin, the Honorable Carl
    Testimony....................................................    11
    Prepared Statement...........................................    15
Maxwell, James A.
    Testimony....................................................    51
    Prepared Statement...........................................    53
Morrissette
    Testimony....................................................    59
    Prepared statement...........................................    61
    Responses to follow-up questions from Senator Kerry..........    90
O'Connell, Daniel W.
    Prepared statement...........................................   102
    Biography....................................................   106
Preston, Susan L.
    Prepared statement...........................................   108
Redding, Mark A.
    Prepared statement...........................................    93
    Biography....................................................    97
Snowe, the Honorable Olympia J.
    Testimony....................................................     1
    Prepared Statement...........................................     5
Thune, the Honorable John
    Testimony....................................................    29
Wilson, Donald
    Prepared statement...........................................   131


    REAUTHORIZATION OF SMALL BUSINESS ADMINISTRATION FINANCING AND 
                  ENTREPRENEURIAL DEVELOPMENT PROGRAMS

                              ----------                              


                       WEDNESDAY, APRIL 26, 2006

                      United States Senate,
  Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:35 a.m., in 
room SR-428A, Russell Senate Office Building, the Honorable 
Olympia J. Snowe (Chair of the Committee) presiding.
    Present: Senators Snowe, Thune, Isakson, and Levin.

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

    Chair Snowe. Good morning. The hearing will come to order 
on the reauthorization of the Small Business Administration's 
financing and economic development programs.
    I want to say that my colleague Senator Kerry was going to 
be here today, but he had a personal commitment that detained 
him. He just wanted to express the fact that he very much 
wanted to be here today and regrets that he was unable to do 
so.
    Administrator Barreto, I noticed the smile on your face 
today. Is it perhaps because this is your last hearing before 
this Committee?
    [Laughter.]
    Chair Snowe. Well, I want to thank you very much for being 
here today as we examine the SBA's priorities and 
responsibilities and goals for the future. As this may be your 
last appearance, I want to extend my personal appreciation, on 
behalf of the Committee as well, to you for your service to 
this country.
    As you prepare to move on from your position as the second-
longest serving administrator since the SBA was created by 
President Eisenhower and Congress in 1953, you have very been a 
strong voice for small businesses and for the Small Business 
Administration. You have served the President and our Nation 
exceptionally well in leading this vital agency.
    You have been a very strong voice for small businesses in 
America. We truly appreciate the service that you have rendered 
to our country, and I just want to wish you very best wishes 
for your future endeavors.
    Mr. Barreto. Thank you very much, Senator.
    Chair Snowe. Thank you, Administrator.
    Indeed, today, when we look at the entrepreneurial spirit 
of our 25 million small businesses, it dates back to our 
Nation's founding. Small businesses are the cornerstones of 
economic growth and job creation, representing 99 percent of 
all employers, creating nearly \3/4\ of all net new jobs, and 
employing over 50 percent of the private sector workforce.
    From family firms to software development, small businesses 
are the foundation of our economy and the linchpin for the 
innovation that moves our country forward. Americans who assume 
the risks and responsibilities inherent in owning and operating 
a business deserve our praise, admiration, and unwavering 
support.
    The Small Business Administration plays a vital role in the 
economic growth and well-being of our Nation by providing 
entrepreneurs with the capital they need to start and grow 
small businesses. SBA's programs have had a tremendous return 
on investment, helping to create or retain over 5.3 million 
jobs since 1999.
    In 2005, SBA programs disbursed record-breaking totals of 
loans to small businesses both in numbers of loans and total 
dollars provided to small businesses. During the last fiscal 
year, the SBA guaranteed over $24 billion in loans and venture 
capital for small businesses, the highest level of capital ever 
provided.
    I have long sought to expand the power and reach of the 
SBA's financial and business development tools, which are used 
by millions of aspiring entrepreneurs and small businesses 
across the United States. We must continue to strengthen the 
core SBA programs because they have proven invaluable in aiding 
the efforts and dreams of America's entrepreneurs.
    I am committed to supporting our Nation's small business 
community by increasing its access to capital. For 
entrepreneurs and other aspiring small business owners, a self-
evident truth since the founding of our country is that it 
takes money to make money. We are here today to make that goal 
a little easier for all Americans.
    The SBA's entrepreneurial development programs demonstrate 
how Congress can play a positive role in enhancing private 
sector financing for startup companies. SBA loan investment 
programs have produced success story after success story, which 
include assisting the founders of Intel, Staples, Federal 
Express, Outback Steakhouse, Ben & Jerry's, Calloway Golf, as 
well as thousands of other successful businesses.
    My plan is to build upon these successes and to capitalize 
on the reauthorization process to make the SBA's programs even 
more effective. Today marks the beginning of this process. The 
Committee will conduct hearings, examine the oral and written 
testimony, and evaluate the performance of SBA programs. I hope 
that this reauthorization process will lead to a renewed SBA 
that is wholly dedicated to fostering small business ownership 
in America.
    The reauthorization process began with three of the bills 
that I have introduced. The first is the Small Business Lending 
Improvement Act that streamlines the process to help small 
businesses obtain the capital they require to compete. It 
brings fundamental and long-awaited reforms to the operation of 
the Preferred Lender Program.
    Rather than mandate 71 separate applications, the PLP 
program lenders would only be required to complete one 
application. This would create a national Preferred Lenders 
Program that will remedy the inefficiencies in the cost of 
applying for PLP status in each district.
    Currently, in the 7(a) program, a small business's 
eligibility to receive a loan is determined by a confusing 
multi-page chart that has different size standards for every 
industry. This chart is nothing more than a bureaucratic 
impediment, and this bill will address that particular problem.
    The second bill reforms and enhances the Small Business 
Investment Company Program. SBICs use their own capital, 
combined with funds borrowed from other private investors and 
supported by an SBA guaranty, to make equity and debt 
investments in qualifying small businesses. The structure of 
the program is unique and has been a model for similar public/
private partnerships around the world.
    This bill creates a new SBIC program that would be a zero 
subsidy program with no Federal appropriations necessary that 
would also provide financing to small businesses. Additionally, 
the new program would prevent financial losses to the 
Government by increasing its share of SBICs' profits.
    The third bill is the Local Development Business Loan 
Program Act, which improves the 504 program by streamlining the 
lending process and providing small businesses with greater 
opportunities to obtain affordable financing. The statutory 
purpose of the 504 program is to create new jobs and strengthen 
the local impact of the 504 loan program.
    To reflect that, the legislation that I have introduced, 
along with many other changes, renames the 504 program the 
Local Development Business Loan Program. This new name will 
help borrowers understand the intent, and many of the small 
business owners have told the Committee that the name ``504 
program'' was neither clear nor indicative of the program's 
purposes.
    I plan to advance these bills and move toward a successful 
rejuvenation of the SBA. That goal includes rejecting any 
attempts to eliminate the SBA's Micro Loan Program, which 
provides loans up to $35,000 and technical assistance to new 
and growing small businesses. This relatively inexpensive 
program helps entrepreneurs start and grow small businesses 
throughout our Nation.
    In my own State of Maine, almost 90 loans have been made in 
the program over the last 2 years for a total of over a million 
dollars. It has a proven record of helping small businesses 
that could not otherwise get financing, and yet the 
administration regrettably proposes to eliminate this crucial 
source of small business growth.
    Today, I want to make clear this Committee's opposition to 
the SBA's plan to charge additional fees on small businesses in 
the 7(a), 504, and SBIC programs. As I have already described, 
these are highly successful programs. None receive 
appropriations to subsidize its loans.
    Now the administration proposes to increase fees on small 
businesses to raise $7 million in revenue, which will be used 
for SBA's administrative costs. Increasing fees paid by small 
businesses is not the way in which to reduce the budget. These 
small businesses are already paying fees and taxes to fund the 
agency. Let us not make it more costly for them to access 
financing.
    I believe that the Congress must do everything possible to 
sustain economic growth and job creation. The American economy 
requires a strong and vibrant Small Business Administration. 
Toward that end, this Committee is here to help the 
Administrator and the agency to improve SBA's programs in any 
conceivable and possible way.
    Finally, while today's hearing is dedicated to the 
entrepreneurial development and finance programs, rather than 
the disaster program, I still remain deeply troubled by the 
SBA's Gulf Coast recovery efforts. I am particularly concerned 
as to whether or not the SBA has adequately planned for a new 
hurricane season, which begins in just a month.
    I strongly urge the SBA and all Federal employees to work 
to rebuild the area, to redouble their efforts, and obviously, 
we will make an assessment of the progress that has been made 
to date and what has been done, what further needs to be done, 
and also whether or not the agency has a comprehensive approach 
to address any future disaster response.
    [The prepared statement of Senator Snowe follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.035
    
    [GRAPHIC] [TIFF OMITTED] T8334.036
    
    [GRAPHIC] [TIFF OMITTED] T8334.037
    
    [GRAPHIC] [TIFF OMITTED] T8334.038
    
    [GRAPHIC] [TIFF OMITTED] T8334.039
    
    [GRAPHIC] [TIFF OMITTED] T8334.040
    
    With that, I will recognize Senator Levin.

 OPENING STATEMENT OF HON. CARL LEVIN, A UNITED STATES SENATOR 
                         FROM MICHIGAN

    Senator Levin. Madam Chair, thank you for calling this 
hearing, and thank you for your ongoing strong commitment to 
the SBA and its programs and your determination that we build 
on those programs and that we resist efforts to cut back those 
programs or to weaken those programs.
    I want to focus, Madam Chair, on just one program today, 
given the time restraints that we have. Basically, I want to 
urge the SBA to work with you and our Ranking Member and other 
Members of this Committee to revive the SBIC Participating 
Securities Program, which has been, unfortunately, dropped, and 
which has provided so many important investments to small 
businesses across this country that would otherwise not have 
been available to them.
    This program provides small businesses with venture capital 
by investing in promising small companies in exchange for stock 
in those companies. This type of venture capital or equity 
investment is known as ``patient capital.'' It gives companies 
the time, typically 5 years or more, to get established before 
having to give investors a return on their investment.
    This program, this SBA Participating Securities Program, 
fills some important needs that are not met by other venture 
capital funds. The SBIC Participating Securities Program makes 
equity investments in smaller amounts, between $1 million to $5 
million, a size geared more to small business needs. It makes 
investments in areas of the country that are less likely to be 
served by non-SBIC venture funds. It serves a more diverse 
segment of small businesses than non-SBIC venture funds, 
including investing in manufacturing sectors.
    Unfortunately, this very wonderful program has been shut 
down for the past 18 months since the administration ruled that 
under the Federal Credit Reform Act that it must be considered 
as equity by OMB and, therefore, requires an annual 
appropriation.
    Now, workable solutions have been identified to modify the 
program so it can be scored at a zero subsidy. So far, the 
administration has not been willing to accept these solutions 
and has instead said that the program is not necessary.
    Well, I hope that the administration will reconsider their 
position and make a serious effort to find a workable solution 
to restart the Participating Securities SBIC Program so that 
important venture capital investments can flow again to the 
small businesses that depend upon them for growth, expansion, 
and job creation.
    Finally, I also would hope that an amendment of mine that 
previously passed the Senate to create the Small Business 
Intermediary Lending Pilot Program will be included in our 
authorization bill for the SBA again, Madam Chair, and would 
ask relative to my major point here that the following 
documents be included in the hearing record--the Participating 
Securities SBIC portfolio companies in Michigan and their 
investments.
    Chair Snowe. Without objection, so ordered.
    [The documents follow:]

    [GRAPHIC] [TIFF OMITTED] T8334.041
    
    [GRAPHIC] [TIFF OMITTED] T8334.042
    
    Senator Levin. Again, I thank you for convening this 
hearing and for your tenacity in support of SBA and its 
programs. I join you in welcoming the administrator, Mr. 
Barreto, and thanking him for his, I guess, almost record-
setting tenure at SBA. I guess you are No. 2 and try harder.
    [Laughter.]
    Senator Levin. Thank you.
    Chair Snowe. Thank you, Senator Levin.
    [The prepared statement of Senator Levin follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.043
    
    [GRAPHIC] [TIFF OMITTED] T8334.044
    
    Senator Isakson, do you have any comments?

  OPENING STATEMENT OF THE HONORABLE JOHNNY ISAKSON, A UNITED 
                  STATES SENATOR FROM GEORGIA

    Senator Isakson. Thank you, Madam Chairman.
    I will waive any opening statement, except to thank you for 
your leadership and to thank Administrator Barreto for his 
service at the SBA. I understand he will be going to greener 
pastures or other pastures. Being a small businessman, they 
look green, but they aren't always green. I remember that.
    Thank you for all you have done. I appreciate your 
leadership at the SBA and I look forward to your testimony.
    Chair Snowe. Thank you.
    You may proceed. Thank you.

 STATEMENT OF THE HONORABLE HECTOR V. BARRETO, ADMINISTRATOR, 
          UNITED STATES SMALL BUSINESS ADMINISTRATION

    Mr. Barreto. Thank you very much.
    First, let me start by saying I am truly grateful for the 
comments that have been made, and I appreciate very much the 
support that I have received from the Chair and from this 
Committee.
    Chair Snowe and Senator Isakson, thank you for inviting me 
to testify on reauthorization of the Small Business 
Administration and its program. Over the past 4 years, SBA has 
dramatically increased its services to the small business 
community, providing billions in funding for small business and 
increasing Government contract amounts awarded to small 
businesses to an all-time high. Those are examples of what the 
SBA has accomplished while, at the same time, showing fiscal 
restraint and responsibility.
    Our reauthorization proposal reflects our commitment to 
continuing that success. In general, the administration 
proposes a few technical changes, the repeal of duplicative or 
unused programs, and a 3-year reauthorization of SBA programs. 
Legislation has been proposed to improve oversight and 
penalties to harmonize the status for clarity.
    However, SBA has proposed several significant items that I 
will discuss in detail. First, the administrative fees for 
loans over a million dollars. SBA has proposed an 
administrative fee for loans over $1 million, which would 
affect only a small percentage of loans, and that would offset 
$7 million in the loan-making costs. The fee proposal would 
apply to the 7(a), the 504, and the SBIC debenture programs.
    With regards to the secondary market fee, SBA has proposed 
the authority to impose a secondary market fee to cover future 
costs of the ``prompt payment'' guaranty under Section 5(g) of 
the Small Business Act. SBA does not anticipate charging this 
fee in either fiscal years 2007 or 2008. However, this 
authority will enable SBA to cover the future subsidy cost of 
the guaranty.
    With regards to the CDC review fee and the 504 program, SBA 
has proposed a conforming change for the 504 program, 
authorizing a fee to offset the cost of examinations and 
oversight. This same authority already exists in the 7(a) 
program.
    With regards to disaster loans, as I testified several 
weeks ago, SBA is proposing a change in disaster loans. Absent 
legislative action, the cost of disaster loans will rise 20 
percent in fiscal year 2007. This is largely due to the rising 
interest rates, a factor that SBA cannot control.
    The proposal would continue to offer deeply subsidized 
interest rate for the first 5 years of a disaster loan and then 
adjust the rate to a Treasury security-based rate, still well 
below a market rate.
    SBA is also exploring changes to our delivery system. The 
Office of Disaster Assistance has done an outstanding job 
approving nearly $9 billion in loans and processing over 
300,000 applications.
    Nevertheless, we can always strive to do better. We must do 
better.
    SBA issued a request for information to solicit suggestions 
from the private sector on how the SBA can better respond, 
particularly in extraordinary disasters like Hurricane Katrina.
    With regards to legislative proposals, Madam Chair, SBA has 
reviewed certain pending Senate legislation. Unfortunately, we 
have not had a chance to review all of the bills. I would like 
to summarize our comments about several of the bills. Of 
course, we will be happy to work with this Committee on the 
details.
    With regards to S. 1603, 7(a), SBA has reviewed your bill, 
Madam Chair, and we have the following comments. SBA supports 
the proposed National Preferred Lenders Program. We have been 
working on a similar model through administrative efforts. This 
will relieve our lending partners, who often operate in several 
States, of the burden of duplicative applications.
    SBA also has no significant objection to an increase in the 
authorization level of the 7(a) program. With zero subsidy, the 
program has the potential for growth, and such an increase may 
be prudent.
    SBA also has no opposition to applying the alternative size 
standard to 7(a) loans, as proposed in S. 1603. This has been 
used successfully in the 504 and SBIC program for several 
years.
    SBA has some concerns regarding the proposal to increase 
the gross loan amount to $3 million. The administration has 
striven to expand the use of the 7(a) program by smaller 
borrowers, increasing our loans under $200,000 dramatically. At 
the same time, while loans over $1 million are a small 
percentage of the 7(a) portfolio, roughly about 3 percent, they 
represent 20 percent of the dollar volume.
    Some argue that lower loan sizes have a negative effect on 
recovery rates and reduced fee income. That argument cuts both 
ways. An increase in large loans creates an equivalent 
potential for a negative effect. It requires far fewer larger 
defaults to create a significant increase in our losses.
    SBA still has only limited information on the performance 
of larger loans in our portfolio. More study and analysis 
should be done. With more experience with the performance of 
large loans, we can determine the feasibility of increasing the 
gross loan amount.
    With regards to S. 2162 with the CDCs, SBA is generally 
supportive of S. 2162 and its goals. It provides a helpful 
definition of certified development companies, or the CDC's, 
and clarification of the local development aspect of the 
program.
    SBA supports authorizing CDCs to liquidate loans or to use 
an approved contractor. This will provide more efficient 
liquidation actions and assist SBA in portfolio management. We 
look forward to working with the Committee to clarify and 
define some of the details.
    However, SBA is concerned with permitting persons to hold 
directorships on the boards of CDCs in different areas. As S. 
2162 emphasizes, this is a local development program, and SBA 
believes that CDC directors should participate locally. SBA 
would also like a clarification on the application of Section 7 
regarding public policy goals.
    Finally, SBA has reservations about the provision 
permitting refinancing. SBA is concerned that refinancing of 
existing SBA loans with new SBA loans, which is currently 
prohibited, would be allowed under this provision.
    S. 1923, the SBICs, SBA has also reviewed S. 1923. We agree 
with the Congressional Budget Office that this legislation 
would be a debt program under Federal Credit Reform Act. We 
also agree with the CBO that it would have a significant 
subsidy rate. SBA has not created a subsidy model for the 
proposed program, but we believe the CBO estimated rate of 20 
percent to 25 percent is reasonable.
    In order to achieve the zero subsidy rate specified in the 
legislation, the program would require significant upfront 
fees. Restricting the program to one tier of leverage would 
reduce the subsidy rate, but we cannot accurately estimate that 
effect.
    Finally, the administration believes that there is a 
significant amount of private sector equity financing 
available. For example, VentureExpert reports that in 2003 
through 2005 over $9.5 billion was placed in investments for 
fiscal year 2003 through 2005 in that $500,000 to $5 million 
range.
    Madam Chair, thank you again for inviting me to testify. 
Obviously, SBA's reauthorization covers the full spectrum of 
our many responsibilities, and I have only touched on a few 
points. I look forward to your questions. Again, thank you very 
much for your support and your passionate advocacy on behalf of 
small business.
    [The prepared statement of Mr. Barreto follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.001
    
    [GRAPHIC] [TIFF OMITTED] T8334.002
    
    [GRAPHIC] [TIFF OMITTED] T8334.003
    
    [GRAPHIC] [TIFF OMITTED] T8334.004
    
    Chair Snowe. Thank you, Administrator Barreto, and I 
appreciate your testimony here this morning.
    First, on the disaster situation, because I know that there 
are several issues that are pending. One of which, of course, 
is the necessity of having additional funding through the 
supplemental. I understand that the disaster loans would 
basically be gone by the date May 19th. Is that true?
    Mr. Barreto. Well, we are looking at that very closely. We 
had a meeting on this yesterday, and we are fine right now. 
Obviously, we want to work with the Committees to get that 
supplemental approved. We think that that is very important. It 
is important for a lot of reasons. We are measuring this every 
single day.
    You know, the number, the date, the actual date could 
change a little bit depending on the size of the loans that we 
are seeing right now. As you know, we have processed now well 
over in excess--I want to say 93 percent--of all of the 
applications. I think we are down to about 25,000 applications. 
Of course, we have had some stragglers come in because of the 
extensions of the due date.
    We believe that we are going to be good until probably the 
third week, maybe the last few days of May. It is critically 
important for us to get that supplemental approved. Obviously, 
we will be reporting back to this Committee on a daily basis as 
to where we are on that.
    Chair Snowe. Well, I appreciate it because that will be an 
ambitious schedule, given the standards of Congress with 
respect to supplementals.
    Mr. Barreto. Sure.
    Chair Snowe. We are beginning that debate, obviously, this 
week here in the U.S. Senate. Do you have a plan in the event 
this is not passed by the end of May for any----
    Mr. Barreto. Sure.
    Chair Snowe. You know, because that is going to be critical 
in the final analysis if all of the funding has been depleted.
    Mr. Barreto. Right now, we are estimating--and again, this 
number could go up. We are estimating that we have 25 days of 
lending left, 25 days of lending ability left. Of course, that 
depends on the activity.
    One of the things that we have mentioned is we are not 
going to stop processing these loans. We are going to be 
underwriting these loans. We are going to be processing these 
loans. We will not stop.
    The key issue here is that if on the 27th day we get the 
supplemental, or the 28th day, and we have been processing 
those loans, we can fund those loans immediately. Of course, we 
will continue to be in very close coordination and 
communication not only with this Committee, but with our 
Appropriations Committee to make sure that we can get that done 
as soon as possible.
    Chair Snowe. You mentioned that 93 percent of the 
applications have been processed. Yet only about 13 percent of 
the money has been disbursed. Why the disparity?
    Mr. Barreto. Well, in actuality, we have partially or fully 
disbursed approximately 40 percent of the loans that have been 
approved. When you talk about the net dollars that have been 
disbursed there are two reasons for the disparity.
    One is, as you know, that most of these loans are 
construction loans. Those loans are drawn down as construction 
is completed. We believe that a very important number to us is 
the number of loans that have been approved and that have been 
partially or fully disbursed, and I have said that number is 
closer to 40 percent.
    The other thing is, and you have probably seen some of this 
in the media, there are folks now that have been approved for 
loans that still have not made a final determination of whether 
they are going to take that loan. There are still--and we have 
all talked about this for many months now--a lot of very 
difficult conditions on the ground of whether or not certain 
areas will be rebuilt and whether businesses can make a go of 
it with as much as 50 percent of the population still gone, 
difficulty in finding workers for their businesses, difficulty 
in finding contractors and building materials for these 
businesses.
    There are a lot of decisions that are still in flux. One of 
the biggest challenges is, as we have said before, is that we 
still have many of these folks that have been approved for 
loans spread out over 40 different States. They are still 
determining if they take the loan, how do they come back? Do 
they come back just with one of the family members while the 
rest of the family stays behind?
    A lot of very challenging decisions. We are doing 
everything that we can from our standpoint to get that money 
out as soon as possible. We are in constant contact with those 
borrowers who have been approved about what they want to do. Of 
course, you know that we also give them, once they are 
approved, 60 days to make a determination.
    Chair Snowe. Do you have enough personnel----
    Mr. Barreto. We do.
    Chair Snowe [continuing]. For verification offices?
    Mr. Barreto. I have re-allocated some of the folks that we 
had, you know? As we have gone through this process--you know, 
the processing, the underwriting, the inspection--wherever 
possible, we have moved more people into the closing aspect. We 
are continually bringing on more people with the specialization 
for doing closing types of activities.
    Chair Snowe. OK. With respect to the Small Business 
Investment Company Program, the SBICs, and I know you referred 
to it and the concerns about maintaining zero subsidy. You 
know, the administration back in 2005 had provided a $4 billion 
authorization for this program, and now we are down to not even 
agreeing to any authorization.
    How do we go from $4 billion to $0 and say that the 
participating securities dimension of the SBICs is non-
essential, when, frankly, I find it of value because it really 
does help in many instances to bolster the manufacturing sector 
of our economy, which we desperately need. Otherwise, this 
capital would otherwise not be available to so many industries. 
It plays a pivotal role.
    I understand about the problems of the past and the years 
in which they experienced losses because of the downturn in the 
stock market. You obviously have to lessen the risk. That is 
why my legislation moved toward a zero subsidy, which, in that 
case, obviously it doesn't represent a cost to the Government, 
but also provides the available capital that is essential that 
I think we need.
    Mr. Barreto. Well, first of all, let me say that we agree 
with you wholeheartedly that the SBIC program has been an 
important program to small business. It has accomplished some 
great things. I am not sure that we have ever said that it was 
unnecessary or unimportant because we believe that it is. Of 
course, we are very proud of some of the incredible success 
stories.
    Of course, we also want to state emphatically that we still 
have a venture capital program. It is the debenture program 
that we have, and we are still honoring all of the commitments 
that we have made on the Participating Securities Program.
    Our challenge has been and remains how can we get to a 
completely self-sustaining program? This is a challenge that we 
still have with the losses that the program has taken. We know 
right now that we have experienced $2.4 billion in losses. We 
also know that we have $3.6 billion in potential exposure. We 
know that some of that is going to turn into losses.
    One of our biggest responsibilities that we have is to make 
sure that we balance the program, that we manage the program, 
that we try to minimize any additional losses in the future. 
One of the things that we are concerned about, is the fact that 
if we are not able to get the zero subsidy, this program is not 
going to be competitive.
    The upfront fees that would be required--as you know, the 
CBO has already come back and said that they believe that the 
cost of the program will be anywhere from 20 percent to 25 
percent. We believe that that is probably an accurate figure 
from the experience that we have had before.
    What we want to continue doing, what we will do is continue 
working with you and the industry to come up with a solution. 
We haven't been able to come up with something that we feel is 
workable to make this program completely self-sustaining, to 
make it competitive in the marketplace, and to deal not only 
with the losses that we have already experienced, but with the 
losses that we know that we may have in the future.
    Chair Snowe. Well, do you think this program is necessary? 
If you do, what would you propose as another means of providing 
this particular part of it?
    Mr. Barreto. Sure. Well, a couple of things. One is, as I 
mentioned, that we do have a venture capital program. We still 
have an SBIC program. We are still making venture capital 
investments through our debenture venture capital program.
    The other thing that we mentioned is--and it wasn't always 
this way--we now know that there are other participants in the 
marketplace. I mentioned a statistic that there was $10 billion 
that went to these kinds of venture capital investments to 
companies between that $500,000 and $5 million investment 
range.
    I guess what I am saying is that before it may not have 
been this way. There is capital available in the marketplace 
for small businesses that are interested in that kind of 
investment.
    Again, from our standpoint, we just want to make sure--you 
know, it has always been presented as a self-sustaining 
program, a zero subsidy program, which wasn't going to cost the 
taxpayers anything. Well, it has already cost the taxpayers 
$2.4 billion. We have got $3.6 billion still sitting out there.
    I think it would be irresponsible for us to come if we 
didn't have a good solution. We haven't given up on this. We 
want to continue working toward that end. We just haven't been 
able to figure a way to get there.
    Chair Snowe. Well, the Tuck School of Business at Dartmouth 
last year conducted a study on the SBIC program and indicated 
that it really did serve a very important niche in the 
marketplace. Especially in several ways, one of which was to 
address capital financing in underserved areas. I do think it 
is crucial that we work through this.
    Mr. Barreto. Sure.
    Chair Snowe. To make sure that it is there, especially for 
the small manufacturer that we are losing. Those are basically 
the sort of mom and pop operations in rural America. I know 
that is true in my State.
    Mr. Barreto. Sure.
    Chair Snowe. We are losing so many important industries. 
Are we going to see a retrenchment of rural areas and 
underserved areas in America because we are unwilling to take 
those risks so that they have the available capital to succeed? 
And they very well could.
    I have seen a lot of small industries in my State right 
now, what they are doing in the global marketplace on a small 
basis is creating a niche. We need to help them.
    We want to go to a zero subsidy on this question, but I 
think we have got to figure it out. I hope that you will share 
your analysis to suggest whether this program isn't necessary 
or what we can do to get to the zero subsidy in a way that 
gives a comfort level to the administration.
    Mr. Barreto. OK.
    Chair Snowe. Senator Isakson.
    Senator Isakson. Thank you, Madam Chair.
    In your testimony, I think I heard you say that the agency 
had approved $9 billion in disaster loans in applicants from 40 
States?
    Mr. Barreto. No. Well, yes. I want to preface this. We are 
responding to--those $9 billion and most of that is Katrina-
related. You are talking about Louisiana, Mississippi, Alabama. 
Most of it is in Louisiana.
    What I said is a lot of the residents, former residents of 
Louisiana, are spread over 40 different States. That is one of 
the things that has been really challenging for us, trying to 
close these loans and set up appointments with folks that 
aren't in the State anymore.
    It is one of the things the Chair asked me--what one of the 
challenges are in making sure that these monies are disbursed. 
Because we have approved the money. It is available immediately 
subject to closing. We haven't disbursed all of it. We have 
disbursed about 40 percent of the loans that we have approved, 
partially or fully. There are a lot of folks spread all across 
the country that still haven't decided what to do.
    Senator Isakson. Yes. A lot of them are in Georgia, which 
begs the question now to justify my ignorance on the subject. 
Of the disaster loans that you are approving that are Katrina-
related, are they limited to investments in Alabama, 
Mississippi, and Louisiana?
    Mr. Barreto. That is a very good question, Senator. 
Sometimes, and we do this kind of on a case-by-case basis, 
somebody who is approved for--remember, what started it was 
they had a business or a home in the affected disaster area. 
OK, that is the first requirement. You have got to be in the 
declared disaster area.
    Once they go through that process, some of the times they 
will come back to us and say, ``You know what, I am not going 
to be able to rebuild in my area.'' They have decided that they 
are not rebuilding in that area or, ``My business isn't 
sustainable anymore. I depended on a large traffic flow. Fifty 
percent of the people are gone. What I would like to do is take 
that money and invest it in a different area.''
    In the past, that has also been problematic because 
sometimes local officials will say, ``Look, we don't want any 
money that is approved for businesses or homes in our area 
going anywhere else.'' Sometimes there have been prohibitions 
from doing that. We look at that on a case-by-case basis.
    I don't believe that we have received a lot of those 
requests so far, but I would be happy to investigate that.
    Senator Isakson. Well, I may be totally off here, but I 
think sometime in the past, we also had some fraud problems 
when people applied for the deeply discounted disaster loans 
based on a disaster that they ended up really not being hurt 
in. They were just trying to take advantage of the program. Is 
that not correct?
    Mr. Barreto. Yes. That is absolutely correct. There has 
been some writing about this. The New York Times has written a 
story about this, and there has been some other writing.
    We have found instances of that. Not to assume any mal 
intent, but sometimes what will happen is people don't know 
what a declared disaster area is. They will apply for a loan, 
and then we will go back to them and say, ``You know what, your 
property is not in the declared disaster area. You are not 
eligible for a loan.''
    We have had instances like that already. Those loans are 
immediately withdrawn. That is part of that whole, when you 
look at the funnel, 400,000 applications at the top, that is 
what came in. So far, what has been approved is about 130,000 
of them.
    There are a lot of reasons why the rest of the folks didn't 
get approved. Sometimes because of what you just said. 
Sometimes it is because they didn't want a loan in the first 
place. They actually wanted a FEMA grant, and they had to go 
through our process and get turned down before they could go to 
FEMA for the grant.
    Senator Isakson. Last question on that subject. If an 
applicant is approved, and they determine they are not going 
back to Louisiana or Mississippi because of a drop in 
population or not rebuilding the area or whatever, is it going 
to be a case-by-case basis as to whether or not the money can 
go with them somewhere else?
    Mr. Barreto. That has been our practice. A case-by-case 
basis unless something happens to change our authority. That 
has happened in the past, where a legislator from a particular 
State will say, ``I don't want any disaster money leaving my 
State.''
    By the way, we saw this a little bit in New York after 9/
11, where a lot of the elected officials were very concerned 
not about them necessarily leaving the State, but just leaving 
the area. In other words you were a business that was by the 
World Trade Center. You had 100,000 people walking past your 
front door. They are not there anymore. So you decide to move 
to one of the other boroughs. We saw that after 9/11.
    So, yes, right now, on a case-by-case basis unless anything 
has changed to our authority.
    Senator Isakson. Thank you.
    Chair Snowe. Senator Thune.

        OPENING STATEMENT OF THE HONORABLE JOHN THUNE, 
           A UNITED STATES SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Madam Chair.
    I commend you for holding this hearing on SBA's financing 
programs. With the reauthorization upon us, it is fitting that 
as committee of jurisdiction that we review the programs that 
strengthen our Nation's small businesses.
    I would also like to take this opportunity to congratulate 
and thank Administrator Barreto for his service at the SBA.
    Mr. Barreto. Thank you very much, Senator.
    Senator Thune. You have served as administrator since 
President Bush took office. During that time, America's small 
businesses have had a strong and faithful advocate. Thanks to 
your leadership, our small businesses have better access to 
capital, and improved Federal procurement opportunities. Your 
presence at the agency will be sorely missed.
    I want to wish you all the best in your future endeavors 
and thank you again for your service to our country and to 
America's small businesses.
    Mr. Barreto. Thank you very much, Senator.
    Senator Thune. I would like to address my brief remarks 
this morning to one of the major issues confronting the 
Committee, and that is whether SBA's equity financing program 
should continue.
    In 1994, Congress rightly determined the financing needs of 
startup or early stage companies in States like South Dakota 
were simply not being met by traditional venture capital firms. 
Accordingly, the Congress enacted the Participating Security 
Program within the Small Business Investment Corporation. This 
program is designed to provide patient risk capital to main 
street manufacturing and other underserved businesses.
    Since that time, over $10 billion has been invested in 
these types of companies and with the deal sizes ranging from 
about half a million dollars to $3 million.
    Now, while traditional venture capital firms are flush with 
cash to invest, they continue to focus on deals over $10 
million and with more mature, sophisticated companies. The 
Participating Security Program has helped to fill that gap. 
Unfortunately, the program has suffered like the rest of the 
economy after the effects of the dot.com bubble burst and the 
attacks of 9/11. Some now believe that it would be best to 
abandon the program.
    For the past 18 months, no new licenses have been granted 
in the Participating Security Program. This hiatus is 
unacceptable and could have negative economic consequences down 
the road, which is why I am pleased to co-sponsor Senate bill 
1923, a bill to revive and restructure the Participating 
Security Program.
    I am concerned that if we fail to act on S. 1923, a vital 
source of venture capital to smaller firms will be lost. 
Companies like Bright Planet Corporation, located in Sioux 
Falls, South Dakota, a leader of deep Web research, and J.M. 
Precision, Inc., a manufacturing company located in Madison, 
South Dakota, have both received SBIC investments slightly over 
a million dollars. Thanks to this program, an infusion of 
capital has come into South Dakota, resulting in economic 
growth and job creation.
    It is my hope that the Administration can work with the 
Committee and find a workable compromise that meets the needs 
of private investors and protects the interests of the 
taxpayers. I believe this can be achieved if realistic economic 
assumptions are used when calculating the program subsidy rate.
    In summary, the imperfections in the venture capital 
markets that caused Congress to act on 10 years ago continue to 
persist, especially in the middle of the country. We must not 
let this public/private partnership that has provided billions 
of dollars in equity investments in small businesses wither 
away.
    I look forward to working with the Chair and other 
Committee Members to enact legislation that reduces SBA's risks 
and maintains the needed incentives to attract private 
investors.
    Administrator Barreto, I would, as I mentioned earlier, I 
want to follow up with just a question, if I could?
    Mr. Barreto. Yes, sir.
    Senator Thune. I believe that this is a program that we 
need to keep functioning in some form. You mentioned in your 
testimony that you believe there is a good chance the reform 
program would require a subsidy even though the legislation 
aims for it not to have one.
    I guess my question is, do you believe there is a 
compromise out there that is more likely to carry a zero 
subsidy, and would the administration support that sort of a 
compromise?
    Mr. Barreto. Well, as I mentioned before, we are very open 
and interested in finding a solution. If we can find that 
solution--and I have to be very frank with you. We haven't seen 
a proposal yet that gets us to completely zero subsidy without 
any cost to the taxpayers, or a program that would be 
attractive to future participants in the SBIC program because 
of what would probably be required--some very, very large 
upfront fees.
    In fact, in conversations that we have had with folks 
trying to encourage them to be more involved in the venture 
capital program in the past, many times folks said to us, 
``Look, if the fees go up too high or if you are going to tack 
on a big subsidy rate onto this that is going to affect us, 
there is no way that we can participate in this program.''
    Our job really is to balance both of those concerns. How 
are you able to have a Participating Securities Program that 
functions well, that does not experience the kind of losses 
that we have had for most of the program's existence, and that 
it protects the American taxpayer going forward?
    We can't do anything about all of the investments that 
didn't work out for us before the $2.4 billion that we already 
have on the books and the exposure that we have on $3.6 billion 
more. Can't do anything about that.
    We need to be able to continue managing the program that we 
have. Obviously, we are honoring the commitments that we have 
made. Those participating securities funds that we currently 
have can still draw down on capital. We are going to honor all 
of those.
    Our big challenge is going forward. We haven't come up with 
a formula to do that, and we are more than willing to continue 
working with you, the Chair, this Committee, the industry, to 
keep working on that. We will be the first ones to take that 
proposal, a workable proposal and go back and really enroll the 
administration to it.
    Nobody has said that the program is unnecessary or that it 
should go away or that it hasn't done good things. Our 
challenge is just to find a way for us to be responsible with 
both of our responsibilities not only to the small businesses 
that need this capital, but also to the American taxpayer who 
funds these programs.
    Senator Thune. I appreciate that. Madam Chair, look forward 
to working with you and Members of the Committee and with the 
agency.
    There are those out there, I think, who are involved in 
this area. Regarding the debt financing piece of this, the SBA 
has done a terrific job filling that. I also believe that 
there, as I mentioned, companies like some of these small 
companies in my State that have benefited from the equity 
investment that has come to the program. I understand and hear 
what you are saying about making sure we do this in a fiscally 
responsible way, but I hope that we can continue the dialog and 
work constructively to try and find that solution.
    It does seem, I think, that much of what is fueling the 
growth in the economy are these types of small businesses, and 
I realize that there have been some experiences after 9/11 and 
with the dot-com bubble bursting that have created some issues 
out there. It certainly seems that this is something that we 
ought to try to figure out a way to continue to maintain as a 
resource that is available to small businesses in this country.
    I thank you for your testimony again, for your great 
service to the agency, to the small businesses in this country. 
Thank you.
    Mr. Barreto. Thank you very much, Senator.
    Chair Snowe. Thank you, Senator Thune. I'm looking forward 
to working with you on that particular question.
    Hopefully, the administration can share with us some 
financial data to help us to examine some of these issues so 
that we can get to a point of solving this problem with the 
SBICs because it does provide significant venture capital to 
areas that otherwise would just--companies and areas that 
otherwise would not be served with access to this type of 
funding.
    It really is important to support our economic base in 
underserved and rural areas similar to what Senator Thune is 
speaking of in his State of South Dakota, similar to Maine. 
These areas are part of the country that need that access to 
$500,000 to $5 million, whatever. It really is absolutely 
vital. It is a lifeline.
    Mr. Barreto. We completely agree, and I mean this 
sincerely. We will work in earnest with this Committee to come 
up with viable solutions.
    I did want to mention one thing, that we have been working 
on a Rural Business Investment Company Program. That was 
something that was part of the Farm Bill. It is a Department of 
Agriculture program, but we have been asked to put that program 
together because of our prior expertise.
    That is exactly what those funds will be used for--for 
small businesses in rural areas. And I am not saying that that 
will solve all of the necessity for venture capital. I just 
want to say that that is another tool that we may be able to 
depend on in the future.
    Chair Snowe. Well, it just seems to me, though, that under 
the SBA, wouldn't it be better to consolidate these issues? It 
creates a lot of confusion.
    It seems to me it is simpler, more streamlined to 
incorporate, build upon the programs that have already been 
working to some extent. I understand the losses that have 
occurred. We obviously have to address those risks, but somehow 
try to maintain the zero subsidy feature of this important 
dimension to the SBICs.
    I think that is what essentially it is all about. We have 
got to strive to do that because, otherwise, I just think it 
serves to create a lot of confusion. It is great to have 
another program, but I think we ought to build on this program 
if it is at all possible. We need to just work it through if we 
can.
    Mr. Barreto. OK.
    Chair Snowe. Just a couple of more issues here. On the fees 
for the 7(a), the 504, for example, and as well as the SBIC, of 
course, you are recommending additional fees for these 
programs. They are already zero subsidy programs. Now the 
administration is proposing new fees for any loans more than a 
million dollars.
    That is going to create, I think, some financial 
difficulties for companies who are trying to have access to 
this capital. Now we are charging them fees for a zero subsidy 
program, and there is a wide variance in the fees.
    There is 7(a), where the increase would be $623 per loan, 
to the 504, it would be up to $11,000 for a loan of the maximum 
$10 million allowed under the program. Then, under the SBIC, as 
you mentioned, an average of $45,360.
    They are already paying for the loan guaranty costs. Now we 
find we are going to add additional costs. Exactly what is the 
purpose?
    I know you are saying to cover the administrative fees. I 
think that, ultimately, you are going to reduce--we are already 
talking about an industry that already is sensitive. Otherwise, 
they are not going through the conventional lending process. 
They are going through SBA.
    Now you are adding additional fees. It just creates an 
element of risk for their economic future survival.
    Mr. Barreto. Yes. I believe that we might have referenced 
this in our prior testimony on the budget. I want to first 
state that we are talking about 3 percent of the portfolio 
right now. That is the only loans that we are doing over a 
million dollars in the 7(a) portfolio.
    The other thing is, is that as we have looked at it, the 
differential in the payment here is pretty negligible. You are 
talking about something like $14 a month difference on the 7(a) 
side. I think $31 difference on the 504 side on the million 
dollar-plus loans.
    This is something to help offset some of the administrative 
costs, some of the additional costs on us to provide these 
loans. I mentioned also that these loans also take up more than 
20 percent of the dollars of the portfolio.
    When we have talked to our lenders and when we have talked 
to small businesses, their key priority is that there be enough 
lending authority in the program. Of course, we have good news 
about that. Next year, we will have a total of $25 billion of 
lending authority should our budget proposal pass.
    They also want to make sure that there are no caps on the 
loans. We have had to put caps on the loans in the past. Now 
that we are at zero subsidy, we don't have to do that anymore 
because we are not subject to the appropriation, and we don't 
run out of funds the way that we used to.
    The lenders are saying to us, ``Look, we need a continuous 
program. That program can't even be shut down for one day 
because we dedicate millions of dollars to SBA lending, and we 
have thousands of employees.'' That is what they have told us 
are their main priorities.
    This differential in the payment is not significant enough 
to prevent these kinds of loans being made. The other thing is 
that many of the small businesses that are able to get million 
dollar loans have more capacity. They have other options. Small 
business people are very discerning purchasers. If they feel 
that a loan program doesn't serve them, they have other 
options. They have other opportunities, especially at that 
million-dollar range.
    We have asked for this slight increase in fee to offset 
what is becoming increasing administrative costs for us to 
provide the loan, and we think that it is a fair compromise, if 
you will, and will afford us the ability to be able to provide 
a healthy program for years to come.
    Chair Snowe. Do you have data that would demonstrate that 
this will not be a problem for companies? I mean that this 
would be a negligible impact? Is there any basis for making 
that because, obviously, this is going to be something that 
would be a departure and a new approach.
    Mr. Barreto. Sure. Well, some of the data that we have is 
the anecdotal data of business people and lenders telling us 
this. In other words, what they basically say is, ``Look, $14 a 
month on a million dollar loan is not going to prevent us from 
taking the loan if we need it.'' It is still competitive. In 
some cases, it makes the best sense for us.
    If they felt differently, they would probably choose 
another option. Remember, small businesses that can qualify for 
a million dollars are usually your businesses that have been 
around for a while, have a good track record, have more 
capacity and, because of that, have more options.
    Chair Snowe. Well, I know one of the witnesses in the 
second panel would say on, for example, the 504 program, that 
it raised about $300 million in excess fees.
    Mr. Barreto. Well, the 504 program, we are very happy and 
excited with the progress in that program. We have had a banner 
2 years.
    You remember that a couple of years ago, we were doing 
about $2.5 billion in those loans. Last year, we did $5 
billion. We may surpass $5 billion this year. We have budget 
authority next year for $7.5 billion. That program is up 30 
percent this year.
    I mean----
    Chair Snowe. Why do we need to raise additional fees in the 
504 then?
    Mr. Barreto. Again, what I think has happened----
    Chair Snowe. If they are already very successful and 
obviously raising $300 million more----
    Mr. Barreto. Remember what we said is that what we are 
doing here is offsetting the cost of being able to provide this 
great program slightly on the administrative side. It is not 
going to be anything that is going to affect the zero subsidy. 
One of the reasons that we feel that that program and the 7(a) 
program are successful is simply because we can offer it at a 
zero subsidy.
    Chair Snowe. The same is true with respect to the SBA's 
proposal to increase interest rates for disaster loans. Here 
again, we are changing the requirements for disaster loans. 
Instead of having a fixed rate over the 8-year period, 
whatever, they are now going to cap it after the first 5 years.
    This is going to create some serious problems for people 
who are at a very vulnerable stage in their lives and requiring 
disaster loans. Why are we changing their provisions?
    Mr. Barreto. Well, the primary reason that we are doing 
that is because--and this is not something that we have control 
over. Interest rates have been going up over the last couple of 
years. We have all seen it, and people that are refinancing 
their properties have seen it. The interest rates have gone up.
    That interest rate increase has created a $41 million 
deficit for the SBA. For us not to offer some kind of a 
solution, and I am not saying that this is a popular solution. 
What we basically have done is we have tried to again balance 
this. We have said, ``Look, for the first 5 years of a 
disaster, those are the critical years, we are going to 
continue to subsidize that interest rate, deep subsidy.''
    After 5 years, after people are back on their feet, 
businesses are going well again--values have started to come 
back--what we would like to propose is that that interest rate 
track a Treasury instrument which will still be below market 
rates.
    One of the things that we found out when we went back and 
looked at our disaster loan portfolio is that we, right now, 
have a pretty good number of people that prepay their loans in 
those first 5 years. Something like 25 percent of borrowers 
prepay those loans.
    Chair Snowe. In the first 5 years?
    Mr. Barreto. During the first 5 years.
    Chair Snowe. How many use the 8 percent or the 4 percent? 
How many in each of those categories?
    Mr. Barreto. Well, most of those loans are at the 4 
percent. We have very few of those loans that really go into 
that higher interest rate because of the credit elsewhere test. 
Most of the loans, like 90-plus percent of the loans, are in 
that lower interest rate.
    The reason that we are proposing this is, again, we know 
and we have to be responsible, especially when we are in front 
of this Committee, is to tell you what our reality is. Our 
reality is, is that we are dealing with higher interest rates 
the way that everybody else is. That the net effect of those 
interest rates will be a $41 million gap.
    The way that we propose to offset that is to present this 
proposal to allow interest rates after 5 years, after those 
first critical 5 years, to trend up with Treasury instruments, 
which, again, will be below market interest rates. It will 
still be a better situation than they could have gotten on 
their own, if they could even get a loan from----
    Chair Snowe. Well, what are you estimating that the 
Treasury rates will be at that point, do you know? What will 
you get, if you say it is going to be much below. Obviously, 
you have a basis for making that statement.
    Mr. Barreto. Well, I am saying that, as you know, interest 
rates go up and down. It could be lower than what we see today.
    Chair Snowe. Well, I know. But what are you estimating? 
Obviously, you would surmise that it is going to do better. I 
would assume that that is true generally. It may well do 
better, I don't know. How would you know, based on the 8 
percent or the 4 percent currently?
    Mr. Barreto. Remember, it is going to track with a U.S. 
Treasury instrument, which is always going to be lower than 
what a market interest rate is going to be because the market 
interest rate will add on the fees and the profit that private 
lenders have to earn.
    It will still be lower than what we are going to be seeing. 
The private sector is not going to make loans less than what 
the Treasury rate is.
    Chair Snowe. You are incorporating another element of risk 
in that point for people who are very vulnerable. You know, 
economically. They are already facing significant challenges. 
They have lost a lot, and now having to take out an additional 
loan. They have already had losses. Perhaps their insurance 
doesn't cover all of those losses.
    Now getting out to an additional loan. Now after that 5 
years, you are saying, ``Well, it is going to leave it open to 
the market,'' really, basically what the Treasury is----
    Mr. Barreto. It will track up to a Treasury instrument.
    Chair Snowe. It is just, OK, you are incurring something. 
Whether or not you decide you are going to have a variable 
interest rate on your mortgage or have a fixed rate. It is that 
whole uncertainty that you can't predict, especially for those 
disaster victims.
    We are not talking about just in general. We are talking 
about people who have already been exposed financially and are 
taking on additional debt, who may have incurred other debt, 
and that way they can't be repaid through insurance. It is a 
combination of things.
    Mr. Barreto. One of the items that will mitigate some of 
that uncertainty is the fact that at closing, they will know 
what that Treasury rate is going to be. In other words, they 
will be able to make their decision knowing what that interest 
rate would be after that 5 years.
    As we have already said, the Treasury rate is always going 
to be below the market interest rate. Again, we see this for 
any disaster. We have a lot of people, even to this day, 
saying, ``I don't want a loan. I already got a loan. I don't 
want a loan.''
    If the only chance that I have for rebuilding my home or my 
business is a long-term disaster loan from the SBA, then I at 
least want it to be better than what I could get in the private 
market, if I could get it in the private market. This will 
still accomplish that.
    Chair Snowe. OK. Finally, on the micro loans. My last 
question is I notice its the third consecutive year the SBA 
administration has proposed eliminating the Micro Loan Program. 
It has been extremely valuable to my State, but I know in other 
parts of the country as well.
    It is hard for me to understand because these are the 
startups that most certainly need to depend upon this type of 
program that has proven to be very effective and valuable. What 
is the problem with it?
    Mr. Barreto. There is no problem. Micro loans, as I go 
around the country and talk to people, the whole concept of 
micro loans, doing smaller loans. Helping startup businesses. 
Helping the emerging markets. People are very, very passionate 
about that, as I am.
    I think that we never say and we don't say here that micro 
loans are unimportant, that we shouldn't have micro loans, that 
people, those folks that are in those communities don't deserve 
to have these kinds of micro credits. We agree with that 100 
percent.
    What we are saying, and maybe we are not saying it very 
well. Obviously, I haven't said it very well the last 3 years, 
and I am not confident that I will be able to say it any better 
here. The SBA's Micro Loan Program is a very small program that 
touches very few small businesses.
    I am not saying that the small businesses that it touches 
in Maine, in rural communities, and places around the country 
aren't important. They are important. For us, it is a little 
over 2,000 of those loans every single year.
    What I am saying is that SBA has gone through a radical 
transformation over those 4 years. We now do 60,000 small 
loans, small loans like those micro loans, under $35,000. We do 
them in our flagship loan program. We do them in the 7(a) 
portfolio. A third of those loans go to minorities. Many of 
those loans go to women, and they go all around this country.
    What we have also said is that we know that SBA now is not 
the only provider of a Micro Loan Program. We know because we 
have investigated. There are 400 private sector micro lenders 
spread across the United States who offer micro loans much less 
expensively than the SBA program.
    We have also said that we don't feel that we are as 
effective or as cost efficient as we should be on that program 
because that program literally costs us about a dollar for 
every dollar that we loan out.
    What we have said is micro loans are important. There are a 
lot of micro lending going on there. SBA does small loans now 
where it never used to. When I first joined the SBA, the 
average size SBA loan was almost a quarter of a million 
dollars. Average size loan now is about mid-150's. The reason 
for that is that so many more of those small loans happen.
    Sixty percent of the SBA portfolio now is in the SBA 
Express Program. The SBA Express Program was a pilot program 
who never had that kind of traction. I want to be clear that I 
am not saying that micro loans are bad. I think micro loans are 
good. I am just saying that SBA's Micro Loan Program really 
doesn't have the reach or the breadth that it would need to to 
be an effective national program.
    I know that this Committee has disagreed with that, and we 
respect this Committee's decision over the last couple of 
years. We continue to implement the Micro Loan Program. If 
Congress decides that we will implement this program next year, 
we will. We shall.
    Chair Snowe. Well, I appreciate that because, obviously, 
there is a lot of support, including I think many Members of 
this Committee, most certainly. In fact, it has demonstrated 
its effectiveness and success. I know I can speak in Maine, 
where more than 90 loans have been made. Otherwise, companies 
who have no previous history cannot have access to this type of 
financing, and they have been very successful.
    We want to encourage startup entrepreneurs. We will 
obviously proceed, and hopefully, we can work with you. I think 
that there is no question it will be restored in the 
reauthorization. I appreciate it.
    Well, thank you, Mr. Barreto. Thank you again for your 
service.
    Mr. Barreto. Thank you very much, Chairman Snowe.
    Chair Snowe. Thank you.
    Mr. Barreto. I want you to know that I will always remain 
committed to the small business community, and if there is ever 
anything that I can do for you or for this Committee, it would 
be my honor.
    Thank you very much for the opportunity to serve.
    Chair Snowe. Well, thank you. No, thank you. Thank you for 
your service, and we wish you well in the future.
    Thank you. We applaud your leadership. Thank you.
    OK. The second panel will begin with Harry Alford. Mr. 
Alford is the present chief executive officer of the National 
Black Chamber of Commerce, a nonprofit, nonpartisan 
organization dedicated to the economic empowerment of African-
American communities.
    Secondly, we have Jim Baird from the Bay Area Development 
Company. Bay Area specializes in providing 504 financing to 
small and mid-sized companies throughout northern California.
    Next is Jim Maxwell, the manager of Granite State Economic 
Development Company/New England Small Business Finance, which 
is a certified development company. It is one of the fastest-
growing certified development companies. It has played a 
leading role in doubling SBA 504 loan assistance to Maine small 
businesses.
    Mark Morrissette, who will testify on behalf of North 
Atlantic Capital, an SBIC in Maine. Mr. Morrissette's capacity 
is managing director. He works to identify promising small 
businesses in which to invest in order to help them grow and 
prosper.
    We welcome each and every one of you. If you can summarize 
your statements in 5 minutes, and I know there may be some 
votes at 12 o'clock or so. We will proceed and get to 
questions.
    Thank you very much for being here and for your patience 
today.
    Mr. Alford, we will begin with you. Thank you.

       STATEMENT OF HARRY C. ALFORD, PRESIDENT AND CEO, 
             THE NATIONAL BLACK CHAMBER OF COMMERCE

    Mr. Alford. Madam Chair, Mr. Ranking Member, and other 
distinguished Members of the Senate Committee on Small Business 
and Entrepreneurship, thank you for inviting the National Black 
Chamber of Commerce to speak before you today regarding the 
reauthorization of the Small Business Administration credit and 
counseling programs.
    We are faced with challenges in this global economy, and it 
must be emphasized that small business will continue to be the 
life blood for economic growth and job creation within this 
great Nation of ours.
    According to records for SBA lending comparing fiscal year 
2001 to fiscal year 2005, African-American participation has 
not been growing at any appreciable rate. The share of 7(a) 
loans remained constant at 3 percent. 504 loans were also 
constant at 2 percent, while the number of micro loans fell 
from 21 percent to 18 percent.
    In terms of dollar volume, 7(a) loans rose from 4 percent 
to 7 percent. 504 loans remained constant at 2 percent, while 
micro loans fell from 29 percent to 21 percent. As the black 
population in this Nation is 13 percent, the participation 
levels for the 7(a) and 504 programs are, frankly, anemic.
    With the ``low doc'' program being canceled, the future 
growth for these programs is suspect, and that should give us 
all cause for concern.
    According to the U.S. Census Bureau, the number of African-
American businesses between 1997 and 2002 grew at a rate of 45 
percent in numbers and 23 percent in volume. This is the 
fastest-growing segment in the Nation. The demand for capital 
access in the African-American community is going to surge, and 
it is important that the SBA vehicles for capital access gain 
in exposure and utilization within the targeted community.
    We are excited that this Committee has generated some bills 
to address the above predicament. S. 2595 improves the SBA 504 
loan program. One aspect is increasing the lending limits for 
businesses that are owned by veterans, minorities, and women.
    In this global economy, our Members are growing and meeting 
a new and broader customer base, which means more equipment, 
infrastructure, et cetera. We encourage the entire Senate to 
support this legislation.
    Another key bill coming out of the Committee is S. 2594, 
which improves the 7(a) lending program. One key component is 
the establishment of the Office of Minority Small Business 
Development in the SBA with an annual budget and requirements 
to monitor the outcome of SBA's programs and ensure the SBA's 
State offices have money to market to minorities.
    While this has relevance to the lending side of the SBA, it 
is established to address the need in all of SBA's programs--
i.e., credit, counseling, and contracting--to reach more 
minorities. This office needs this broader jurisdiction, 
funding to back it, and more access and autonomy than the 
current minority offices at the SBA that focus on contracting.
    The timing of S. 2594 is appropriate as African-American 
businesses grow at record numbers and are creating a great 
demand for more counseling as well as lending possibilities.
    We are very pleased that our Nation's business schools are 
starting to understand the need to teach entrepreneurship as 
opposed to readying students for the corporate world. Business 
schools, such as that of Syracuse University, require students 
to form an active business as a requirement for graduation.
    Historically Black Colleges and Universities have 
recognized the importance of entrepreneurship also. This is why 
the NBCC is quite excited about S. 2586, or the Minority 
Entrepreneurship and Innovation Pilot Program. This program is 
relevant to counseling and entrepreneurial development. It will 
fund HBCUs and other minority-populated institutions up to $1 
million each for 2 years to establish entrepreneur development 
programs, and there will be 24 awards granted.
    If this bill becomes legislation, we will partner with 
various institutions and compete for these grants. We could 
create a strong resource pool for business incubation and equip 
our future leaders with skill sets that ready them for this 
very competitive world. Such new entrepreneurs will become job 
creators with their innovation and acumen.
    The number of field workers, boots on the ground, for the 
SBA has been greatly reduced over the years. When the Federal 
marketplace was nearly half the size it is now, there were 73 
procurement center representatives. Today, there are only 58. 
Likewise, the number of commercial marketing representatives 
has been decreased to only 34.
    We need more of these representatives to provide more 
counseling to the fast-growing number of our businesses. Also 
we need more representatives who provide full-time service, not 
the sharing of additional duties. In essence, it is imperative 
that we have a very strong SBA and equipped to provide the 
demands of a fast-growing small business population.
    In sum, we support all of these efforts that will enhance 
the opportunities for lending and counseling. Our Nation is 
enjoying appreciable growth in small business creation, and 
that growth must be met with programs that will ensure 
development through improving skill sets and providing 
``fuel,'' i.e., capital, for entrepreneurs.
    Thank you, Madam.
    [The prepared statement of Mr. Alford follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.005
    
    [GRAPHIC] [TIFF OMITTED] T8334.006
    
    [GRAPHIC] [TIFF OMITTED] T8334.007
    
    Chair Snowe. Thank you, Mr. Alford.
    Mr. Baird.

STATEMENT OF JAMES BAIRD, EXECUTIVE DIRECTOR AND CEO, BAY AREA 
         DEVELOPMENT COMPANY, WALNUT CREEK, CALIFORNIA

    Mr. Baird. Thank you.
    Good morning. I am Jim Baird, the executive director of the 
Bay Area Development Company from the San Francisco Bay area. 
As one of the original CDCs in the 504 program, I am here to 
represent our CDC and to provide the perspective of an 
experienced CDC operating out in the field.
    I would like to thank the Chair and the Committee for 
giving me the opportunity to provide my remarks on the SBA 504 
program. Moreover, I would personally like to thank the 
leadership of this Committee for continually and steadfastly 
championing small business issues, including those of the 504 
program, and for introducing legislation that, for the first 
time in 25 years, would define in statute the specific 
legislative framework as to how our industry should best be 
structured and best operate.
    Bay Area Development Company was founded in 1981. In the 
last 25 years, we have provided assistance to over 1,100 
entrepreneurs, representing SBA 504 funds of over $600 million, 
which is leveraged to over $1.8 billion in total private sector 
funds and investment. That activity has resulted in our clients 
creating over 12,000 jobs during that period of time.
    In addition to our 504 economic development activities, in 
the last 5 years, our CDC has provided our communities with 
well over a quarter of a million dollars of economic 
development, sponsorships, and grants to a host of community 
development organizations. We also donate hundreds of hours 
each year serving on the boards and advising and assisting 
those organizations.
    The SBA 504 program is operating in an environment of great 
change, including the introduction of universal statewide and 
multi-state competition and nationwide centralized processing 
of 504 loans.
    The question has been asked is, is change good or bad for 
the 504 program? My opinion is that, to date, change has been 
very good.
    The year-to-year growth in the 2.5 years since these 
changes were first implemented are between 20 percent and 30 
percent in numbers of loans and dollars of program assistance, 
and that I believe it is developing 504 capacity in areas that 
are historically underserved, including regions and States that 
are now beginning to develop 504 capacity that didn't 
previously have it. The initial results, in short, are more 
loans for more businesses in more communities.
    The change also has potential pitfalls. We need to be aware 
that it could cause CDCs to do badly structured projects, which 
would result in higher losses and higher rates for businesses. 
It could cause CDCs to neglect their economic development 
responsibilities.
    Also we need to keep in mind the challenges of growth and 
success, and this includes the need to continue to maintain 
adequate staffing of the centralized processing and servicing 
centers so that we will have a workable turnaround time for our 
loan applicants, so that we can maximize recoveries on SBA 
defaulted loans, and in order for the SBA to have the resources 
to oversee a substantially larger program.
    There have been issues raised about CDCs as nonprofits, and 
there are several points I would like to make on this as I 
believe that CDCs and their nonprofit role is not well or 
widely understood.
    Basically, as nonprofit corporations, CDCs are mission 
driven, and this is critical to the role of CDCs in three 
different ways. The first is that, as nonprofit corporations, 
we are able to provide 504 at an extraordinarily low cost to 
the Nation's small businesses.
    The second is that CDCs play a critical role in balancing 
the interests of the small businesses, the Small Business 
Administration, and the community on each and every project. 
CDCs' boards, staff, loan committees, et cetera, all serve to 
provide the internal guidance and local knowledge and input 
that is necessary to operate in this manner. This is absolutely 
critical to the success of the 504 program, and my question 
would be if CDCs, as nonprofits, didn't do that, who could?
    The third point is that CDCs, as I mentioned before, 
significantly re-invest in their communities as set forth by 
the SBA and by Congress. It is basically the combination of 
these three major characteristics--being low-cost service 
providers; as being able to effectively balance the interests 
of small businesses, the SBA, and the local community needs; 
and in implementing significant non-504 economic development--
that represents the true hidden value of CDCs.
    With that, I will conclude my remarks and, again, would 
just like to thank you for the honor of being able to testify 
before you. I hope that we are able to work closely together in 
the furtherment of your legislative package.
    [The prepared statement of Mr. Baird follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.008
    
    [GRAPHIC] [TIFF OMITTED] T8334.009
    
    [GRAPHIC] [TIFF OMITTED] T8334.010
    
    [GRAPHIC] [TIFF OMITTED] T8334.011
    
    [GRAPHIC] [TIFF OMITTED] T8334.012
    
    [GRAPHIC] [TIFF OMITTED] T8334.013
    
    Chair Snowe. Thank you, Mr. Baird. Appreciate that.
    Mr. Maxwell, welcome.

         STATEMENT OF JAMES A. MAXWELL, 504 STATEMENT 
          MANAGER, GRANITE STATE ECONOMIC DEVELOPMENT 
            CORPORATION/NEW ENGLAND BUSINESS FINANCE

    Mr. Maxwell. Madame Chair, thank you for inviting me today 
to talk about the 504 program.
    My name is Jim Maxwell. I have been a hands-on 503/504 
practitioner for 25 years, starting in 1981 with the city of 
St. Louis. I have been active in CDC management and 
underwriting, loan processing, credit underwriting for that 
period of time.
    I am currently the State 504 manager for Maine. The Granite 
State Certified Development Company/New England Business 
Finance, which came in as a local expansion area, local 
economic area in 2003, and it went statewide in 2004. Has now 
become one of the region's fastest-growing certified 
development companies.
    After being started in 1982, Granite State Development 
Corporation expanded statewide in New Hampshire in 1987, and 
again, we became statewide in Maine in 2004. We are now in 
seven counties in the State of Massachusetts as a local 
expansion area.
    We have assisted 1,700 companies, providing about $600 
million of SBA 504 financing and leveraging that with about 
$975 million of bank participation. On a per capita basis, we 
are the highest per capita lender in the SBA 504 program in the 
Nation.
    We are a rural area. Most of the towns that we deal with 
are 5,000 people or less. Our debenture size is probably on the 
smaller end of the portfolio, and we have a currency rate of 
about 96.5 percent. We are, at this point with the expansions, 
doing about one of every three deals in the New England region.
    Our mission has been and we are responsible for this 
delivery of this very powerful program. The program came about 
by the formation of local development companies under the Small 
Business Act, and we believe that not only in the spirit and 
practice, we perform that duty every day. We talk to bankers, 
small businesses, chambers of commerce. We are there. We are 
kissing babies. We are doing everything that we have to do to 
get out there and talk to people about what needs to be done.
    As you know in the State of Maine, you can wake up in the 
morning to have a meeting. You can drive 8 hours and still not 
be there. As I was telling your staff before, I could have 
driven to Washington faster than I could have gone to Presque 
Isle from where I live.
    We are local, and our deals are smaller. Our companies are 
smaller. The needs of our companies are terrific, but we still 
need access to financing, and we get out and do that on a 
regular basis.
    I would just concur with what Jim had to say about the size 
of the program. I think we are doing a great job. I think that 
the changes with centralized processing have been terrific. It 
is a standardized program, a national program. We know what we 
are doing when we get there. They know what they are doing when 
they get our package. The turnaround time has been great.
    I think another important strategy has been the creation of 
local economic areas and multi-state expansions. I think that 
bringing expertise into areas, especially areas in our part of 
the country where it is very rural. When I was with the city of 
Boston, I could walk 5 minutes and make all the loans I wanted 
to. Now I have to drive 3, 4, and 5 hours. We deliver those 
into those States that are underserved.
    I will say that there are a number of things in your 
legislation that I consider to be very positive. I think the 
legislation that includes liquidation, finally bringing that 
down to the CDC level is a great thing. We have more control. I 
think we will have a higher recovery.
    I think that assistance to low-income areas is a public 
policy goal. We have had that in the State of Maine every day, 
every week. I know I was talking last week about one of the 
mills had closed. We create low-income areas when mills close, 
and we need to find ways to help those companies.
    I like the combination of the 504 and the 7(a) because some 
companies start with a 7(a), and then they need money to build 
or buy a facility. If they are maxed out on 7(a) exposure, then 
we can't help them.
    Refinancing I think is a good thing. I think that it can be 
done reasonably, and I think that it is a positive step to 
assist companies and also helps our collateral position and 
helps access funds, more funds at a lower interest rate.
    I am against any fees that are unfounded. I think as you 
were saying earlier today, I think we need to see why we need 
higher fees. I am against fees.
    Use of excess funds in the area. I think your legislation 
was right on with the proposal. I think it is terrific.
    Loan committee participation. It helps make a CDC operate 
more efficiently. Aggregate accounting is another one of those 
that just make sense proposals.
    Again, I thank you. I am proud to be from the State that 
you represent, and I will be more than happy to answer any 
questions.
    [The prepared statement of Mr. Maxwell follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.014
    
    [GRAPHIC] [TIFF OMITTED] T8334.015
    
    [GRAPHIC] [TIFF OMITTED] T8334.016
    
    [GRAPHIC] [TIFF OMITTED] T8334.017
    
    [GRAPHIC] [TIFF OMITTED] T8334.018
    
    [GRAPHIC] [TIFF OMITTED] T8334.019
    
    Chair Snowe. Thank you very much, Jim.
    Mr. Morrissette, welcome, too. Thank you.

 STATEMENT OF MARK MORRISSETTE, MANAGING DIRECTOR, 
                     NORTH ATLANTIC CAPITAL

    Mr. Morrissette. Thank you. Thank you very much, Senator 
Snowe.
    It is an honor to be here from Falmouth, Maine, today, and 
I appreciate the chance to have the opportunity to appear 
before the Committee to present our views on the issues 
pertaining to the SBIC program.
    The SBIC program has been a major success since its 1958 
inception in providing venture financing so critical to growing 
U.S. small businesses that are not likely to find financing 
from other sources. As you noted in your opening remarks, the 
program has been a model for governments around the world.
    Today, the SBIC program is at a crossroads. The decisions 
made by this Committee this year will determine the face of the 
SBIC program for years to come. The question the Committee must 
answer is will there be an SBIC program that provides equity 
capital for early stage and growth financing? My oral testimony 
will focus on that issue.
    The administration says ``no'' when asked this question. 
The administration says there is no demonstrated need for an 
equity program and that it is not aware of any studies on the 
issue. The administration says the Government guaranteed loan 
programs, among them the debenture SBIC program, are sufficient 
to meet all venture capital needs of U.S. small businesses.
    That position ignores the 2005 Tuck School of Business at 
Dartmouth College study on the equity capital gap faced by 
small businesses. It ignores the 2005 House testimony by Susan 
Preston, an expert on angel investing, and it ignores the 
testimony of Daniel O'Connell, the director of the University 
of Illinois Golder Center for Private Equity.
    It ignores the views of the National Venture Capital 
Association, whose members have no interest in a government 
program that impedes in their own areas. The only fact that the 
administration cites is data from a PriceWaterhouseCooper 
study, saying that there was $9.5 billion of investments made 
in the years 2003 through 2005 in the $500,000 to $5 million 
range.
    That is the range that is addressed by the Participating 
Securities SBIC Program. That fact is not offered as a 
statement for what the market need is. It is just a fact.
    If we explore that fact a little further, we find SBIC 
participating security investments in that range actually 
totaled $4.1 billion for the same 3-year period. That $4.1 
billion is included in the $9.5 billion. It is 43 percent of 
the investment capital in the target range during the period.
    We think it is clear that eliminating 43 percent of the 
equity financing available to small companies is something that 
will have a negative impact on the economy and on the creation 
of jobs. True, certain high-tech companies and certain buzz 
industries and certain geographies will always attract a 
certain amount of investment capital. The main street 
companies, the small manufacturing businesses, the businesses 
located in diverse geographic areas like Maine all depend on 
that 43 percent of capital that the administration believes is 
unnecessary to America's well-being.
    Whether the administration is right or wrong is what this 
Committee must decide. If you decide the administration is 
right, there is nothing more to do. The Participating Security 
Program will ramp down quickly over the next few years to zero 
equity investments.
    However, if you decide the administration is wrong, there 
is work to be done, and we stand ready to help however we can. 
S. 1923 is a good bill, and NASBIC supports it. The bill 
rebalances the interests of all stakeholders in the current 
Participating Securities Program in a manner that will ensure 
the continuation of the SBIC equity capital investments in U.S. 
small businesses at no cost to the taxpayers.
    I would like to end my testimony by speaking of costs and 
benefits. The administration continually raises the issues of 
cost when discussing the Participating Securities Program, 
claiming that its current negative cash position of 
approximately $2 billion will end up a program loss when the 
books are finally closed on the program 7 or 8 years from now.
    The fact is we don't know if that is true or not. After 
all, for the first 6 years of the program, the administration 
was running a positive cash position in the program. What we do 
know is that a lot of money was invested by the Participating 
Securities Program in the 3 years leading up to the market 
crash and recession of 2000. It is not surprising a lot of that 
money was lost.
    However, the need to support small businesses did not end 
with the crash. To the contrary, it became more important to 
the country, as always depending on the small business sector 
to lead the country out of recession.
    In that regard, the Participating Security Program was a 
shining example. During the critical early recovery years of 
2000 to 2003, all venture capital investments fell by 83 
percent. The participating securities investments fell by just 
23 percent. The Participating Security Program was more active 
and more effective when small businesses needed it most.
    In fact, the $10.8 billion in participating securities 
investments made since the program's 1994 inception have led to 
the creation of an estimated 300,000 new jobs and $51 billion 
in revenue for the small businesses that were financed.
    While no one wants to see the SBA lose money--we lose money 
when they lose money--these gains cited more than offset the 
current costs. We hope the Committee will focus on these 
positive facts when considering S. 1923. The mission has not 
changed, and the need is still there.
    We look forward to working with you to make sure the SBIC 
program continues as a program that makes a very positive 
difference for growing U.S. small businesses in search of 
scarce equity capital.
    Thank you again.
    [The prepared statement of Mr. Morrissette follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.020
    
    [GRAPHIC] [TIFF OMITTED] T8334.021
    
    [GRAPHIC] [TIFF OMITTED] T8334.022
    
    [GRAPHIC] [TIFF OMITTED] T8334.023
    
    [GRAPHIC] [TIFF OMITTED] T8334.024
    
    [GRAPHIC] [TIFF OMITTED] T8334.025
    
    [GRAPHIC] [TIFF OMITTED] T8334.026
    
    [GRAPHIC] [TIFF OMITTED] T8334.027
    
    Chair Snowe. Thank you. I want to thank you all. I 
appreciate it very much.
    First, since Senator Kerry was unable to attend this 
hearing today, I would like to include his entire statement 
without objection in the record.
    [The prepared statement of Senator Kerry follows:]

    [GRAPHIC] [TIFF OMITTED] T8334.028
    
    [GRAPHIC] [TIFF OMITTED] T8334.029
    
    [GRAPHIC] [TIFF OMITTED] T8334.030
    
    [GRAPHIC] [TIFF OMITTED] T8334.031
    
    [GRAPHIC] [TIFF OMITTED] T8334.032
    
    [GRAPHIC] [TIFF OMITTED] T8334.033
    
    [GRAPHIC] [TIFF OMITTED] T8334.034
    
    Chair Snowe. Let me just--you heard the administrator here 
today, in some of the areas that he spoke to, and of course, on 
the SBICs, and you addressed some of those issues here today. 
What is your response to this whole question?
    Mr. Morrissette. Well, I think that the administration 
thinks that the debenture program is a venture program, and it 
is not. Debt lending is not the same thing as equity lending. I 
think that is one really key and important factor.
    The other is, as I said in my testimony, they focus a lot 
on the fact that there was a large amount of money invested in 
this small size range. Those dollars count the SBIC funds that 
were invested, and most or something like 43 percent of the 
dollars invested were from SBICs.
    I know from my own experience that the dollars that we have 
invested have brought in other venture capital funds as well. 
We have led investments that non-SBICs have come in and 
invested in, in businesses in small towns and in rural areas 
across the United States.
    The equity programs, they also seem to want to focus on the 
fact that they can't find a way to make an equity program 
profitable. We wouldn't be in business if equity programs 
couldn't be profitable. I know they can be profitable. I am 
sure there is a way, and I think that S. 1923 is a very good 
step in that direction.
    Chair Snowe. I appreciate that.
    Mr. Alford, you were talking about, excuse me, procurement 
center representatives. There used to be 73. We are now down to 
58 at a time when the market for Federal contracts has doubled, 
more than doubled in size.
    I know just from my own experience in Maine, where I have 
been working with these representatives to, for example, just 
on the ``hub zone'' program, to enhance the eligibility so that 
small businesses, especially in disadvantaged areas, can have 
more access to Federal contracts.
    We have limited capacity, and it is that kind of financing 
and assistance that becomes so useful for businesses to 
participate in the $300 billion worth of Federal contracts that 
are issued on an annual basis.
    What do you think are the implications of having fewer 
rather than more?
    Mr. Alford. You won't find a more demoralized individual 
than a PCR rep. I have interviewed some. For their stress 
levels and the amount--I was in Los Angeles, and the guy 
literally broke into tears. It appeared he was just on the 
verge of a nervous breakdown because there were so many 
opportunities out there, but there is only 24 hours in a day.
    I saw this coming back in the 1990's, when they started 
stripping it down. We need more people trained, qualified, to 
give counseling out there in the field. The SBA is just fading 
away.
    The SBIC is fading away. It is gone in the black community. 
It is gone. It is funny in New Orleans, where we are using 
French money and Belgian money and Russian money for business 
loans. We have got Israeli money servicing the black churches 
in the Gulf. That is kind of sad.
    Chair Snowe. Yes, that is a sad commentary on where we are 
standing today.
    Well, we know that SBA could have been on the front lines 
and showcasing, and it has been unfortunately all the problems 
that evolved. I appreciate what you are saying and sharing that 
sad story as well about a procurement representative having to 
feel so much stress.
    I agree there is so much need out there and demand to be 
able to connect small businesses with Federal contracts. That 
is why I included in the Senate budget resolution an amendment 
increasing them to 100, and I am urging them to continue that 
in the Appropriations Committee as well. Hopefully, it will be 
part of the next year's budget. I will certainly make sure to 
make that happen.
    I mean that is just one opportunity where you could make 
small businesses expand, create jobs, or retain the ones that 
they have and particularly in underserved areas that have been 
hard hit by closures.
    Mr. Alford. Appreciate your concern.
    Chair Snowe. Also in New Orleans, I agree. I couldn't agree 
with you more. We are going to do everything we can to get to 
the heart of that problem because it is really regrettable and 
tragic that we have had so many difficulties in distributing 
these kind of funds so that you can rebuild the local economy, 
which is almost wholly dependent on small business.
    Mr. Alford. Yes, ma'am.
    Chair Snowe. Mr. Baird and Mr. Maxwell, 504s. What do you 
think specifically the Committee should address in the 
reauthorization?
    Mr. Baird. I think that there are a number of items in the 
draft legislation or the introduced legislation that have 
already been addressed, including raising the reauthorization 
level from what the administration had proposed to a level 
proposed by the Committee that is adequate to fund the program 
at a zero subsidy over the next 3 years, I believe.
    I think also that you are exactly right in your description 
of the 504 program with a zero subsidy model. The 
administration is proposing to additionally fee the program at 
the same time that the subsidy model is estimated to be funding 
$300 million of surplus into the Treasury, and I think that 
opposition to those fees is essential and not just for the 
current proposed fees at the current level.
    Moreover, I would be concerned about what happens next year 
and the year after that and the other programs.
    I also think that the legislation has included a critical 
aspect of mandating CDC participation in liquidations. I think 
that CDCs, many of them have the resources or all of them could 
hire the resources to much more effectively deal with defaults 
and maximize recoveries, and I think those are just critical.
    Chair Snowe. Appreciate that.
    Mr. Maxwell.
    Mr. Maxwell. Well, I second many of the things that Jim 
just addressed. Again, being a practitioner, I am the guy who 
is sitting across the table from somebody when I tell them 
about a new fee or they ask me to explain what it is for. 
Sometimes I kind of get lost in the description.
    I think that this is a zero subsidy program. I think that 
the fees are high enough right now. If somebody can explain to 
me reasonably why they should be higher and I can explain it to 
them because, ultimately, it is the small business that pays 
them.
    I think access to financing to a great extent, I know that 
the administrator talked about over a million dollars. In our 
State, to have somebody invest over a million dollars, we have 
to pull them from the South some place and blindfold them to 
come up. I think that having more fees at whatever level is not 
a good thing. Especially if it is to fund some staffing-related 
issue at the SBA, it just doesn't make any sense to me.
    Additionally, I echo liquidation. Liquidation is an 
important aspect of our job. We are responsible for doing 
everything else in this program with the oversight of the SBA. 
We think we do that very well. We do it very ethically.
    On the other side, when it comes to the times when we have 
a 96.5 percent currency rate in our portfolio, we have had a 
couple of clunkers in there. It would have been a lot easier 
for us to do the liquidation than to have it go through some 
out of area process.
    Those are the couple of things that I focus on.
    Chair Snowe. I appreciate that. Well, I think, in your 
testimony you indicated that SBA had raised $300 million more 
in fees, in excess fees, as a matter of fact. I don't know why 
they would move in a direction to increase those fees or to now 
impose fees in programs that otherwise wasn't the case.
    I agree, you know? I think that it is going to have, I 
think, an adverse impact at a precarious time in our own 
economy. For those who otherwise wouldn't have access to 
financing and incurring another additional cost of doing 
business. They have overestimated, obviously, the default rate 
by charging these fees if they have raised more than $300 
million.
    We will obviously get to the heart of all that, but I think 
my intent is clear, and hopefully, we will get a majority to 
agree as well on many of these questions that I think are so 
important.
    I appreciate your testimony. I wish I could spend more time 
with you. Again, I do want to thank you for your patience. 
Also, and most especially, in working through this 
reauthorization process to make sure that we continue to get 
your input and insights as to how best to craft some of these 
provisions.
    I have laid out some markers with respect to my provisions 
and bills, but we certainly want to get your input as we move 
forward in trying to shape the best legislation possible for 
the future and making sure that it is going to suit small 
businesses and actually bolster small business at a time we 
desperately need it.
    To help, that you were mentioning Mr. Alford, down in New 
Orleans in the disaster areas, that we really need to step up 
to the plate here and get this done and get it done right. It 
should have been done a while back. We are going to continue to 
fight that effort.
    Again, I want to thank all of you for your patience and 
your time and your contributions. Thank you very much. Thank 
you.
    The record for this hearing will remain open for an 
additional 2 weeks until noon on May 10th. In addition, any 
written questions for the administrator must be submitted to 
the Committee by noon on April 28th. We will forward them to 
Mr. Barreto for written responses.
    Again, thank you for this hearing. This Committee hearing 
has adjourned.
    [Whereupon, at 12:14 p.m., the Committee was adjourned.]

                      APPENDIX MATERIAL SUBMITTED

[GRAPHIC] [TIFF OMITTED] T8334.045

[GRAPHIC] [TIFF OMITTED] T8334.046

[GRAPHIC] [TIFF OMITTED] T8334.047

[GRAPHIC] [TIFF OMITTED] T8334.048

[GRAPHIC] [TIFF OMITTED] T8334.049

[GRAPHIC] [TIFF OMITTED] T8334.050

[GRAPHIC] [TIFF OMITTED] T8334.051

[GRAPHIC] [TIFF OMITTED] T8334.052

[GRAPHIC] [TIFF OMITTED] T8334.053

[GRAPHIC] [TIFF OMITTED] T8334.054

[GRAPHIC] [TIFF OMITTED] T8334.055

[GRAPHIC] [TIFF OMITTED] T8334.073

[GRAPHIC] [TIFF OMITTED] T8334.074

[GRAPHIC] [TIFF OMITTED] T8334.075

[GRAPHIC] [TIFF OMITTED] T8334.076

[GRAPHIC] [TIFF OMITTED] T8334.077

[GRAPHIC] [TIFF OMITTED] T8334.078

[GRAPHIC] [TIFF OMITTED] T8334.079

[GRAPHIC] [TIFF OMITTED] T8334.080

[GRAPHIC] [TIFF OMITTED] T8334.081

[GRAPHIC] [TIFF OMITTED] T8334.082

[GRAPHIC] [TIFF OMITTED] T8334.083

[GRAPHIC] [TIFF OMITTED] T8334.084

[GRAPHIC] [TIFF OMITTED] T8334.085

[GRAPHIC] [TIFF OMITTED] T8334.086

[GRAPHIC] [TIFF OMITTED] T8334.087

[GRAPHIC] [TIFF OMITTED] T8334.088

[GRAPHIC] [TIFF OMITTED] T8334.089

[GRAPHIC] [TIFF OMITTED] T8334.090

[GRAPHIC] [TIFF OMITTED] T8334.091

[GRAPHIC] [TIFF OMITTED] T8334.092

[GRAPHIC] [TIFF OMITTED] T8334.093

[GRAPHIC] [TIFF OMITTED] T8334.094

[GRAPHIC] [TIFF OMITTED] T8334.095

[GRAPHIC] [TIFF OMITTED] T8334.096

[GRAPHIC] [TIFF OMITTED] T8334.097

[GRAPHIC] [TIFF OMITTED] T8334.098

[GRAPHIC] [TIFF OMITTED] T8334.056

[GRAPHIC] [TIFF OMITTED] T8334.057

[GRAPHIC] [TIFF OMITTED] T8334.058

[GRAPHIC] [TIFF OMITTED] T8334.059

[GRAPHIC] [TIFF OMITTED] T8334.060

[GRAPHIC] [TIFF OMITTED] T8334.061

[GRAPHIC] [TIFF OMITTED] T8334.062

[GRAPHIC] [TIFF OMITTED] T8334.063

[GRAPHIC] [TIFF OMITTED] T8334.064

[GRAPHIC] [TIFF OMITTED] T8334.065

[GRAPHIC] [TIFF OMITTED] T8334.066

[GRAPHIC] [TIFF OMITTED] T8334.067

[GRAPHIC] [TIFF OMITTED] T8334.068

[GRAPHIC] [TIFF OMITTED] T8334.069

[GRAPHIC] [TIFF OMITTED] T8334.070

[GRAPHIC] [TIFF OMITTED] T8334.071

[GRAPHIC] [TIFF OMITTED] T8334.072

  

                                  
