[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                     FULL COMMITTEE HEARING ON THE 
                    SMALL BUSINESS ADMINISTRATION'S 
                           MICROLOAN PROGRAM 

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 14, 2007

                               __________

                          Serial Number 110-30

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


WILLIAM JEFFERSON, Louisiana         STEVE CHABOT, Ohio, Ranking Member
HEATH SHULER, North Carolina         ROSCOE BARTLETT, Maryland
CHARLIE GONZALEZ, Texas              SAM GRAVES, Missouri
RICK LARSEN, Washington              TODD AKIN, Missouri
RAUL GRIJALVA, Arizona               BILL SHUSTER, Pennsylvania
MICHAEL MICHAUD, Maine               MARILYN MUSGRAVE, Colorado
MELISSA BEAN, Illinois               STEVE KING, Iowa
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia
GWEN MOORE, Wisconsin                LOUIE GOHMERT, Texas
JASON ALTMIRE, Pennsylvania          DEAN HELLER, Nevada
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
JOE SESTAK, Pennsylvania

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


WILLIAM JEFFERSON, Louisiana         DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas                 ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin                SAM GRAVES, Missouri
YVETTE CLARKE, New York              TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  


           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


WILLIAM JEFFERSON, Louisiana         LYNN WESTMORELAND, Georgia, 
RICK LARSEN, Washington              Ranking
DAN LIPINSKI, Illinois               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               STEVE KING, Iowa
GWEN MOORE, Wisconsin                MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Tasker, Janet, United States Small Business Administration.......     4
Betancourt, Daniel, Association for Enterprise Opportunity.......     5
Hall, Edward, Champ Hall's Barber Shop and Barber College........     8
Servon, Lisa J., Milano the New School for Management and Urban 
  Policy.........................................................     9
Edgcomb, Elaine, The Aspen Institute.............................    12

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    28
Chabot, Hon. Steve...............................................    30
Tasker, Janet, United States Small Business Administration.......    31
Betancourt, Daniel, Association for Enterprise Opportunity.......    36
Hall, Edward, Champ Hall's Barber Shop and Barber College........    40
Servon, Lisa J., Milano the New School for Management and Urban 
  Policy.........................................................    43
Edgcomb, Elaine, The Aspen Institute.............................    49

                                  (v)

  


                     FULL COMMITTEE HEARING ON THE
                    SMALL BUSINESS ADMINISTRATION'S
                           MICROLOAN PROGRAM

                              ----------                              


                        THURSDAY, JUNE 14, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:04 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Shuler, Cuellar, 
Braley, Clarke, Ellsworth, Chabot, Akin, and Musgrave.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    ChairwomanVelazquez. Good morning. I call this hearing to 
order. Today's hearing will focus on the reauthorization of the 
Small Business Administration's Microloan and PRIME Programs 
that are very important to the smallest businesses. One of our 
most basic rights is the freedom to pursue our dreams as far as 
our imagination and ability allows. According to a study by the 
Office of Advocacy, about 700,000 entrepreneurs realize their 
dreams each year and start up a new business. As a result at 
least 20 million firms operating in this country are very small 
with fewer than five employees.
    Over 50 percent are home-based. Helping these businesses 
start and grow provides a significant benefit for our local 
economies. There is a simple model called microcredit that has 
drawn on being copied worldwide and is designed to nurture 
budding entrepreneurs. Microcredit programs combine loans, 
technical assistance and peer involvement. This has been 
remarkably successful in bringing opportunity to individuals 
that were never given a choice or a chance. Communities soon 
learn that these home-grown investments provide economic 
benefits and increased employment in return.
    In 1992, Congress embraced ideas, started a Microloan 
Program and shortly after that, the PRIME Program. SBA 
Microloan Program makes funds available to nonprofit community-
based lenders. In turn, these lenders make small loans to 
eligible borrowers who are often fledgling entrepreneurs that 
live in the same community where they work. This program 
reaches many who otherwise would not be served by the private 
sector or even the SBA's 7(a) loan program. For example, 
microloan borrowers may be unable to get a traditional loan 
from those sources due to poor credit history or a lack of 
business experience. It has provided an important source of 
capital for low-income women business owners and minority 
borrowers. Finally, the loans tend to be geographically diverse 
as roughly 1/3 of the microloans are made in rural America. 
Over the years, over $328 million was lent through this 
initiative. SBA had told us that there have been a total of two 
defaults, two defaults by intermediaries in the program's 
history and that 98.6 percent of the business loans are repaid, 
a remarkable record.
    The Federal Government has shown its face in this simple 
rectifiable system by contributing millions of dollars in 
foreign aid to microloan programs overseas. Even in Iraq. After 
the fall of Saddam Hussein, our coalition provisional authority 
appointed by the President set up a $17 million direct 
microloan fund specifically for Iraq citizens that continues 
today.
    So it is hard to understand why the administration is now 
recommending that we raise the fees that intermediaries pay to 
borrow funds and eliminate specialized assistance that supports 
the program here at home. Administrator Preston stated recently 
that he expected the high fees will reduce the usage of these 
loans. It is unclear why we will cripple a program where such a 
small investment generates economic activity and create jobs 
simply by making loans to deserving individuals who otherwise 
would not get a chance. Our local businesses are not less 
deserving than those we fund overseas. Given the success of 
this program, we will be building it up, using what we have 
learned to improve it and replicating it in as many ways as 
possible.
    It is important that we strengthen the Microloan Program so 
that we can ensure that all will-be entrepreneurs have the 
opportunity to realize their dreams. We look forward to hearing 
our witnesses' opinions on the program, their suggestion for 
improvements and reaction to recent funding recommendations. I 
would like to take this opportunity to welcome all the 
witnesses, and to thank them in advance for their testimony. 
And I now yield to Ranking Member Chabot for his opening 
statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr.Chabot. Thank you, Madam Chair Velazquez. And we want to 
also thank the witness panel here this morning and thank you 
for holding this important hearing on the Small Business 
Administration's Microloan Program. The program needs to be 
reauthorized, and this is the first hearing to address this 
important subject in a number of years in this committee. 
According to Dr. Muhammad Yunus, whom I actually had the 
opportunity to have lunch with a couple of months ago in 
Bangladesh, the day before he announced that he was going to 
form a party and run for president, but apparently he 
ultimately didn't do that.
    There is some turmoil going on in Bangladesh right now and 
there is a caretaker government, very interesting topic but not 
the topic of this hearing, I digress. He was the 2006 Nobel 
laureate and peace and founder of the Grameen Bank. 
"microcredit views each person as a potential entrepreneur, and 
turns on the tiny economic engines of a rejected portion of a 
society" is the quote. Unlike Bangladesh or other countries 
that have emulated the Grameen Bank, microcredit in the United 
States is not aimed at a rejected portion of society, but 
rather at those individuals who do not have access to 
commercial financial institutions and the technical resources 
to manage those funds. Despite the different target audiences, 
microlending in the United States represents a variation of the 
concept developed by Dr. Yunus.
    Although there are no completely accurate statistics, there 
are approximately 550 organizations providing some type of 
microcredit in the United States. This hearing focuses on the 
approximately 170 lenders that operate as intermediaries under 
the Small Business Administration's Microloan Program. The SBA 
does not provide microcredit directly to entrepreneurs. 
Instead, the SBA provides below market rate loans to nonprofit 
intermediaries. These institutions then make loans to the 
entrepreneurs.
    As with other SBA financing programs, the SBA does not 
provide all the funds for financing. Intermediaries must 
contribute 15 percent of the value of loans in non-Federal 
funds. But the key to the success of microlending is not the 
loans. Rather, it is the education and counseling that the 
intermediaries provide to their borrowers. With this knowledge, 
these entrepreneurs are able to manage their financial 
resources and ensure repayment of loans. This success is 
demonstrated by the very low number of defaults in the program. 
And I believe that the chairwoman referred to these figures, 
but I think to some degree, we should refer to them again.
    According to the SBA's statistics, only 17 loans to 
borrowers defaulted between fiscal years 1992 and 2006. Another 
38 were liquidated over the same period. To put that in 
context, intermediaries make about 2,500 loans a year, and 
there were only 7,700 loans to borrowers outstanding at the end 
of fiscal year 2006. Thus, the default rate was negligible. 
Despite its success, it is important to examine ways to improve 
the Microloan Program. Tight budgetary times call for efficient 
delivery of government programs no matter how valuable or 
useful they have been in the past. I am very interested in 
listening to the testimony of the witnesses that we have here 
this morning to see what improvements can be made in the 
program to maintain its success while recognizing the need to 
spend the taxpayers' dollars in the most responsible manner. 
Again, I want to thank Chairwoman Velazquez for holding this 
hearing this morning, and thank you to the panel of witnesses 
who will be testifying when we stop talking, and I would yield 
back the balance of my time.
    ChairwomanVelazquez. Thank you, Mr. Chabot. Our first 
witness is Ms. Janet Tasker. Ms. Tasker is the deputy associate 
administrator for Capital Access at the Small Business 
Administration. The associate administrator for Capital Access 
reports directly to Administrator Preston. Her office oversees 
and manages the SBA offices of lender oversight, international 
trade, financial assistance and investment division, which 
includes the SBDC program. Prior to becoming deputy director, 
Ms. Tasker headed a lender oversight office during the 
implementation of new lender money foreign system. Ms. Tasker, 
welcome.

 STATEMENT OF JANET TASKER, DEPUTY ASSOCIATE ADMINISTRATOR FOR 
  CAPITAL ACCESS, UNITED STATES SMALL BUSINESS ADMINISTRATION

    Ms.Tasker. Thank you. Chairwoman Velazquez, Ranking Member 
Chabot and members of the committee, thank you for inviting me 
to testify about SBA's Microloan Program. As you noted, I am 
Janet Tasker, the deputy associate administrator for Capital 
Access. In its current design, SBA's Microloan Program combines 
the resources of the U.S. Small Business Administration with 
those of locally based nonprofit organizations acting as 
intermediary lenders to provide loan and technical assistance 
to small businesses.
    ChairwomanVelazquez. Ms. Tasker, would you please bring 
your microphone closer to you? Thank you.
    Ms.Tasker. Is that better?
    ChairwomanVelazquez. Yes.
    Ms.Tasker. In its current design SBA's Microloan Program 
combines the resources of the U.S. Small Business 
Administration with those of locally based nonprofit 
organizations acting as intermediary lenders to provide loan 
and technical assistance to small businesses. Under this 
program, SBA makes funds available to intermediaries which, in 
turn, make loans of up to $35,000 to eligible borrowers. In 
fiscal year 2006, SBA made 39 loans to intermediaries totaling 
$17.8 million and in turn, intermediary lenders made 2,542 
microloans totaling $32.8 million to small business borrowers.
    It is important to note that we approved almost 43,000 
loans under $35,000 in our 7(a) loan program, which accounted 
for 44 percent of all loans made in the 7(a) program. Coupled 
with the approximately 2,500 loans made through the Microloan 
Program, SBA did close to 50,000 microloan activities in fiscal 
year 2006. SBA's Microloan Program can be an important and 
useful tool for those who are unable to obtain capital through 
traditional lenders, many of whom are in underserved markets. 
Reaching out to entrepreneurs in our underserved markets has 
been a top priority for Administrator Preston ever since he 
took office, and therefore, we support the continuation of the 
Microloan Program with some important reforms.
    We are aware that the number of microloans has remained 
stagnant at 2,500 per year. We share the committee's goals of 
providing effective and efficient assistance to underserved 
markets. In order to accomplish this, it is crucial that SBA 
and this committee work together when drafting microloan 
reauthorization legislation to create a comprehensive and 
effective plan to help our underserved markets. We look forward 
to working with this committee on the reauthorizing legislation 
in the coming weeks to achieve our mutual goals. An important 
aspect of the Microloan Program provides technical assistance 
to small borrowers. Technical assistance for small businesses 
and entrepreneurs is a crucial tool. And as partners with SBA, 
intermediaries are required to provide business-based training 
and technical assistance to its microborrowers. SBA recognizes 
that these borrowers need more help with business planning and 
development than the average entrepreneur, and that is why it 
is important to ensure that resources are properly being used 
to serve the needs of the microborrowers.
    Currently SBA supports the work of intermediaries by 
providing technical assistance grants intended to ensure 
microborrowers' success. In fiscal year 2006, SBA spent $11.7 
million to provide 125 grants to nonprofit intermediaries for 
training and counseling to microenterprises. In the same year, 
over $100 million was provided for technical assistance through 
SBA's network of training and development resources. We believe 
the valuable experience of our existing resource partners can 
be helpful to microborrowers, particularly since 94 percent are 
located within 20 miles of an SBDC, a women's business center 
or SCORE partner. To ensure the success of the technical 
assistance programs, accountability and the use of technical 
assistance funds is important to SBA. This past Monday on June 
11, the House Appropriations Committee approved a budget for 
SBA for fiscal year 2008 in which $17 million was provided for 
microloan subsidy and technical assistance.
    By providing such resources we recognize that Congress 
views technical assistance programs as a crucial tool to the 
small business community. SBA also recognizes the importance of 
this program as well as ensuring that the resources provided to 
technical assistance providers are properly used to assist 
microborrowers, develop successful business plans. Again, we 
would appreciate the opportunity to work with the committee to 
achieve our shared goals of improved accountability and 
effectiveness of the Microloan Technical Assistance Grant 
Program.
    In conclusion, I would like to thank the members of this 
committee for the opportunity to speak on behalf of SBA's 
Microloan Program. I appreciate your time and I value any 
questions you may have.
    [The statement of Ms. Tasker may be found in the Appendix 
on page 31.]

    ChairwomanVelazquez. Thank you, Ms. Tasker. Our next 
witness is Mr. Daniel Betancourt. Mr. Betancourt is the 
president and CEO of the Community First Fund in Lancaster, 
Pennsylvania. His group has been an intermediary offering 
microloans and technical assistance since the inception of the 
SBA Microloan Program in 1992. The Fund serves 13 counties in 
central Pennsylvania. Mr. Betancourt is also the board chairman 
of the Association For Enterprise Opportunity, the national 
leadership organization for microenterprise development 
organizations across the country.
    Mr. Betancourt, you have 5 minutes to make your 
presentation and the entire testimony of every witness will be 
entered into the record without objection.

 STATEMENT OF DANIEL BETANCOURT, CEO OF COMMUNITY FIRST FUND, 
   LANCASTER, PENNSYLVANIA, ON BEHALF OF THE ASSOCIATION FOR 
                     ENTERPRISE OPPORTUNITY

    Mr.Betancourt. Thank you. Thank you for allowing us to 
speak before you, Chairwoman Velazquez and Ranking Member 
Chabot. We appreciate your time and other members as well. As 
you said, I am here to talk to you as a practitioner, one of 
those 70 intermediaries across the country. You already 
mentioned that we provide microlending across Pennsylvania, 
about a third of the State just north of here, and I am also 
the chairperson of the National Association for Enterprise 
Opportunity, and we have about 600 members, many of which are 
intermediaries here. So I am also talking on behalf of the 
microlenders. But I want to talk to you today about the 
Microloan Program, we are a very successful program.
    I was really glad to hear Ranking Member Chabot mention Dr. 
Yunus, because I actually met him just about a month ago in 
Kansas City, and we were able to ask him a question. What was 
the key element to making microenterprise work? And he actually 
mentioned creating financial institutions which I found really 
interesting because this is what we are here to talk about 
today, to really enhance what we are doing.
    As you know, this program, SBA Microloan Program has been 
compared to the 7(a) program. The last time I spoke before your 
committee, Chairwoman, we were just a microlender. Today we 
also have the 7(a) program. So I can talk to you both as a 7(a) 
lender. By the way, we were approved back in the fall. And they 
are really different clients. We find that we have been unable 
to approve any of our clients in the 7(a) program, so this is a 
program that is very unique, of all of the programs that are 
available at the SBA. We all know it is unique because it 
provides technical assistance, all that training, and there is 
a reason why people pay back.
    You just don't give money to folks and expect it to come 
back. You really do have to provide that training, technical 
assistance that we all understand. Really what we are talking 
about is providing access to capital. Many of these clients, 
aspiring entrepreneurs, do get the training. They really have a 
lot of experience. They know what they are doing. They might 
have worked in the pizza shop and now they want to buy it. They 
really understand the business, they understand the training we 
provide to them, and what they really need is access to 
capital. When you don't have a history, financial history, you 
are unable to get bank financing, including 7(a). You just 
don't qualify for that.
    This program as you know also provides low cost capital to 
intermediaries. And one of the initiatives that is being 
proposed here is to increase that capital. I want to talk a bit 
more about the impact of that on our program. As you mentioned, 
both the ranking member and chairwoman, the default rate here 
is 1 to 2 percent. It is extremely low. And one of the reasons 
for that again is the technical assistance. I do want to just 
introduce a gentleman that you are going to be hearing from in 
a few minutes, Edward "Champ" Hall, one of our borrowers. He 
has received three microloans from us over the past 5 years. He 
has a very successful barber school. You are going to hear a 
lot about that. He spinned off a lot of barber shops in the 
neighborhood and created many, many jobs. We have also provided 
business counseling.
    He has a very interesting story about how he came to our 
organization, challenged us. We said no to him a few times. He 
kept coming back, kept working with us. And because of his 
labor and his love and the passion for his work, you will see a 
very interesting success story. He will talk more about that. 
He is kind of shy so we will have to get him going here as 
well.
    Again, we obviously oppose the President's recommendation 
to eliminate the technical assistance. Interestingly enough, 
this is the first time in 4 years that there is not a proposal 
to eliminate the program in its entirety, which is, I think, an 
acknowledgement that this program is working, although there is 
some tweaking going on here. We are not sure why. The interest 
rate--what I heard is being recommended to increase, is really 
going to impact our program, and I am a banker, former banker, 
worked at a very large commercial institution, and I want to 
tell you--I won't get into the technical aspects of this. But 
let's just say the interest rate that we get is about 2 
percent, and one of the reasons why the default rate is so low 
is that we are taking the losses. You heard Ranking Member 
Chabot mention that we are putting 15 percent reserve away for 
any losses.
    And so if we are putting--let's just say that we put away 5 
percent even though we locked away 15, and if we are getting a 
2 percent rate, and we put a 5 percent reserve rate which is a 
requirement of our auditors, and then we are trying to recover 
some of our costs, let's say 2 percent above that, already you 
are talking about a 9 percent rate. The maximum rate, I 
believe, is 9.3 or something like that. If you increase that 
rate even by 2 percent, you are talking about increasing these 
rates substantially for borrowers. And then if you eliminate 
the technical assistance, my reserve rates are going to have to 
go up. So quite frankly, this program would not work for us. We 
wouldn't even be able to borrow from this program. And I don't 
say that lightly because this is a fantastic program. We have 
used--we will talk a little bit more about our activity. But I 
am not trying to get too technical. But I want to you to 
understand the impact of a rate increase on an organization 
like ours. So as I said, the elimination of the technical 
assistance doesn't make sense with the low default rate. There 
is a proposal to have other technical assistance intermediaries 
provide technical assistance to our clients. In other words, 
and we love--we work with the SBDCs and the SCOREs. We think 
they do a fantastic job. But I want to tell you, what is the 
incentive of a technical assistance organization to collect my 
loans?
    ChairwomanVelazquez. Mr. Betancourt, your time is expired. 
So if you please--
    Mr.Betancourt. I will summarize. I see 44 seconds there. 
But I will summarize.
    I also want to just talk about the PRIME Program. You know 
that is a program that works with very low income 
entrepreneurs. It is one of the few in the Federal Government 
that is there. To date, it is only working in a few States. It 
does not include Pennsylvania. We really ask that you will 
expand that program. And finally, I just want to thank you for 
the opportunity to speak in front of you today. Thank you.
    ChairwomanVelazquez. Thank you.
    [The statement of Mr. Betancourt may be found in the 
Appendix on page 36.]

     ChairwomanVelazquez. Our next witness is Mr. Edward 
"Champ" Hall. Mr. Hall is the owner of Champ's Barber Shop and 
Champ's Barber School located in Lancaster, Pennsylvania. Mr. 
Hall is a microloan recipient who built a successful barbering 
business and then opened a successful barber school in his home 
community. From that start, Champ has been able to help many 
others to find productive work or start businesses of their 
own. Welcome, sir.


 STATEMENT OF EDWARD "CHAMP" HALL, OWNER, CHAMP HALL'S BARBER 
     SHOP AND BARBER COLLEGE, LANCASTER CITY, PENNSYLVANIA

    Mr.Hall. Good morning. Chairwoman Velazquez, Ranking Member 
Chabot, members of the committee. I am very elated and humbled 
to be here to share with you my personal story on how the Small 
Business Administration Microloan Program assisted me with my 
small business.
    I want to acknowledge Dan Betancourt with Community First 
Fund for the business advice and working capital I received 
because of the Microloan Program and the Association For the 
Enterprise Opportunity, which is the national leadership 
organization for microenterprise in the United States.
    My name is Edward hall. I am the owner of Champ's Barber 
Shop and Barber School in Lancaster, Pennsylvania. The 
Microloan Program played a key role in helping me to achieve 
the level of success that I have obtained. In 2003, I called 
Dan Betancourt from Community First Fund, and I shared my idea 
of opening a barber school. I was unable to get a loan from a 
bank because of my credit history and my exact words to Mr. 
Betancourt was, "just give me a chance." before receiving the 
microloan, Community First Fund provided counseling, they 
reviewed my business plan. The loan, along with the second loan 
I received, was used to renovate my barber shop and to furnish 
my barber school. The loans were paid back in approximately 2 
years. In 2005, I won the business development award for all 
the businesses that had opened under my tutelage.
    And thus far, it has been 13 businesses that have opened, 
and several are in the process of striving to become self-
sufficient entrepreneurs. It is very gratifying to me to see 
these students who have trained in my barber school facility 
become business owners and providers to their families. And the 
entire State of Pennsylvania, there are approximately 6 barber 
schools. My school was chosen to host the State barber exam.
    Students come from different parts of the State to my 
school to take the barber test to be licensed as a professional 
barber. I am currently in the process of getting accredited to 
receive financial aid. And this will allow me to grow my 
school. I am presently in with what is called candidate status. 
There is approximately 300 customers that come into my school 
for haircuts per week. That is over a thousand a month, and the 
haircuts are at budget prices which helps assist parents with 
multiple children.
    If the Microloan Program does not receive the support and 
funding it deserves, many of the entrepreneurs throughout the 
country will find it difficult, if not impossible, to get the 
financial assistance that they need to fund their new or 
growing small businesses. Furthermore, the business assistance 
which accompanies the loans is a big help to entrepreneurs. And 
therefore, I respectfully request that the committee show its 
support for the small business in America by working to ensure 
that the SBA Microloan Program is provided with adequate funds.
    Without the SBA Microloan Program, such as Community First 
Fund, I would not be here today to share my personal story as a 
small business owner.
    In my conclusion, prior to opening my barber school, people 
told me it wouldn't work, no one is going to go in there to 
allow students to practice on them, which reminds me of the 
story of the man who went into a foreign country and he had the 
intention in mind to sell shoes. But when he got into the 
country he noticed that no one wore shoes, and so he packed his 
boxes of shoes up and he fled the country.
    Another man went into the country with the same idea in 
mind. He wanted to sell shoes, and when he got there, he 
noticed too that no one wore shoes in this country. And so he 
called back to the States and said, send me more boxes of shoes 
because he saw an opportunity, and I saw an opportunity. And so 
my school was the first school in Lancaster. I saw that 
opportunity. And I am asking you, on behalf of many aspiring 
and existing entrepreneurs who are just like myself, to give 
them an opportunity. Thank you for listening to my story.
    ChairwomanVelazquez. Thank you, Mr. Hall, for your passion 
and congratulations for your vision.
    Mr.Hall. Thank you.
    [The statement of Mr. Hall may be found in the Appendix on 
page 40.]

    ChairwomanVelazquez. Our next witness is Lisa Servon. Ms. 
Servon is a Ph.D., is the senior research fellow for the New 
York America Foundation. She is also an associate professor at 
the Milano Graduate School of Management and Urban Policy of 
the New School in New York City and acting director of the 
Community Development Resource Center located there. Ms. Servon 
has written numerous articles and papers on microenterprise 
development, including strategies for the futures of such 
programs. Her most recent articles on this subject include 
Policy Options to Support Entrepreneurship Among Low-Income 
Americans written in 2005--or published in 2005 and 
Microenterprise Development in the United States, 2004. 
Welcome.


 STATEMENT OF LISA SERVON, ASSOCIATE PROFESSOR, MILANO THE NEW 
             SCHOOL FOR MANAGEMENT AND URBAN POLICY

    Ms.Servon. Good morning. Thank you so much for having me. 
Madam Chair Velazquez, Ranking Member Chabot and other members 
of the House Committee on Small Business, I am really glad to 
be here today. As Chair Velazquez mentioned, I am a professor. 
I am a scholar, not an advocate. So that puts me in a bit of a 
different position from some of the other people here today. In 
my work, which has spanned about 13 years looking at 
microenterprise development in the U.S., I have interviewed 
literally hundreds of entrepreneurs like Mr. Hall across the 
country as well as policymakers, bankers and other field 
experts, the people who provide these services. My research and 
analysis over those 13 years leads me to conclude that both the 
microloan and PRIME programs are incredibly important, 
particularly the training and technical assistance pieces. 
Primarily because--or one of the reasons being that as you 
mentioned talking to Mr. Yunus and other people here, the 
contexts in which entrepreneurship is done is very different in 
the U.S. than it is in the developing world.
    The fact that U.S. entrepreneurs need to--we were just 
talking about the barber exam before the proceedings started 
this morning. The regulations, the licensing and certification 
requirements, filing taxes in the U.S. makes this a very 
different environment and requires that people have much more 
sophisticated skills than they do in the developing world which 
is why these training and technical assistance subsidies are 
incredibly necessary.
    My co panelists, other witnesses here have really testified 
to the importance of the program. And so I really want to focus 
my remarks today on how we could strengthen the Microloan 
Program and make it better in the coming years. Recognizing, as 
the ranking member mentioned in his opening remarks, that the 
burden of proof is on us to demonstrate that a dollar spent on 
microenterprise development has to bring at least as much bang 
for the buck as it would be spent on anything else, and I think 
that the research that I have done as well as others in the 
room really does demonstrate that.
    So I have written about--one of the ideas that I have 
written about is the idea of separating training from lending 
in some of these programs. The training and lending functions 
of microenterprise development programs in order to make them 
field more efficient. The microloan and PRIME programs 
essentially do this, in that, the Microloan Program focuses on 
lenders and the PRIME Program focuses on training. But I think 
that they could do it better, do a better job of that by 
creating the appropriate incentive environment and rewarding 
programs that perform these functions best.
    With respect to their Microloan Program, I think one of the 
things that we need to do at this juncture--and it is great to 
do it with support coming from both sides of the aisle--is to 
recognize that conditions are different now than they were when 
these programs were created in the 1990s, and that some of the 
assumptions that guided the creation of the program might not 
be as true today as they were before. In other words, the 
program hasn't kept pace with the changes in the financial 
services environment and the regulatory environment. So having 
said that, I think that the Microloan Program should be revised 
in the four following ways:
    First, implement performance standards and data collection 
requirements that would help to sort of make sure that the 
dollars are getting into the hands of the right programs that 
are really focussing on microentrepreneurship. One of those 
performance standards I think should be raising the minimum 
number of loans that a program makes every year. The current 
number is four, and the Association For Enterprise Opportunity 
has recommended that good programs should work toward making at 
least 40 loans a year.
    If you raise that floor then what happens is that the 
dollars for the program are really going into the people's 
programs that have the mission of making a lot of loans and 
getting the dollars into the hands of entrepreneurs rather than 
making just a few loans.
    In terms of data collection, the Aspen Institute has 
implemented its MicroTest program which provides standardized 
data and performance indicators for the field. And one idea 
would be to require that participating programs in the 
Microloan Program use MicroTest, recognizing also the data 
collection costs money, and one of the reasons we don't have 
more programs doing MicroTests now is that they need the 
support to do that. So if you create the requirement, you also 
have to create the means to do it.
    Second, change the funding formula by which technical 
assistance funding is determined. Right now, I think as we all 
know, technical assistance dollars are tied to loan dollars. 
And that creates two problems. One, it fails to acknowledge the 
amount of assessment and screening and training that goes to 
people who are not ready to borrow. Sometimes a program might 
have to see 5 or 10 entrepreneurs to find one who is ready to 
borrow. And that is money that is well spent because they get 
good financial literacy education and other outcomes out of 
that money.
    The second problem is that tying TA dollars to loan dollars 
creates an incentive to cream, to take only the very best 
people who are really ready to borrow and to ignore the people 
who with a little bit extra assistance might be willing, might 
be able to step it up a little bit.
    Third, provide support to build the capacity of 
microlenders. There is a rarely used provision in the 
legislation to fund training for low income fund managers and 
other staff and the SBA should continue to invest in the field 
by supporting peer training and capacity building efforts. And 
finally, consider eliminating the interest rate cap of 8 1/4 
percent, allowing programs to implement risk-based pricing, 
charging different rates to different types of borrowers. Now, 
I want to be clear that I don't mean that the higher interest 
rate should be required.
    I think the program should have the flexibility to decide 
to charge whatever interest rate they think is acceptable as 
long as it is done in a socially responsible way. And I also 
want to be clear that if higher interest rates are charged, it 
will not be enough to subsidize these programs and eliminate 
the training component. I realize I am slightly over time. So I 
want to say thank you very much. I look forward to questions, 
and I appreciate the ability to be here today.
    [The statement of Ms. Servon may be found in the Appendix 
on page 43.]

    ChairwomanVelazquez. Thank you, Dr. Servon. Our next 
witness is Ms. Elaine Edgcomb. Ms. Edgcomb spearheads the 
Microenterprise Fund for Innovation Effectiveness Learning and 
Dissemination known as the FIELD Project which is part of the 
Aspen Institute. FIELD focuses on microenterprise development. 
She has also served as the founder and executive director of 
the Small Enterprise Education and Promotion Network an 
association of nonprofits that supports small business and 
microenterprise in the developing world. She has written 
extensively on evaluation practice, institutional development 
and international and U.S. microenterprise strategies. Welcome.


 STATEMENT OF ELAINE EDGCOMB, DIRECTOR OF THE FIELD STUDY, THE 
                        ASPEN INSTITUTE

    Ms.Edgcomb. Thank you very much. Chairwoman Velazquez, 
Ranking Member Chabot and other members of the Committee on 
Small Business, thank you for inviting me to appear before you 
today. The purpose of my testimony is to offer a context for 
understanding the SBA Microloan Program and PRIME in the United 
States and the importance that Federal funds play in opening 
enterprise opportunity to critical groups of emerging 
entrepreneurs. While an array of economic trends prompt 
millions in America to pursue self-employment, many face 
barriers to credit, knowledge and networks that are available 
to better off entrepreneurs. We have evidence that there are 
some 10 million individuals who face these barriers, and they 
are the clients that the more than 500 microenterprise programs 
across the U.S. seek to serve with microloans, such as those 
made through the SBA Microloan Program, and with training and 
technical assistance services such as those supported by the 
PRIME Program.
    Who are these aspiring entrepreneurs? Consistently in our 
surveys of programs, we find that more than half of their 
clients are women and more than half are persons of color 
ethnic or other minorities. More than 2/3 have incomes below 80 
percent of their area's median income, and about a third have 
incomes at or below 100 percent of the Federal poverty 
guidelines. More than half of all clients come to programs 
either to learn to start a business or with businesses that are 
less than a year old.
    And finally, many are limited by limited collateral and 
constrained by poor or limited credit histories, which would 
disqualify them for business loans under credit scoring systems 
that lenders increasingly use to make small loans. The 
Association For Enterprise Opportunity reports that SBA 
microloan intermediaries work with clients that have FICO 
credit scores as low as 550, and we are aware of programs that 
make loans to borrowers with no credit score at all.
    As a contrast, AEO also notes that the 7(a) lenders usually 
serve borrowers with FICO scores of 700 and above. And in our 
research, we have found that most banks won't lend to borrowers 
with a score below 680. Despite the serious disadvantages 
experienced by these entrepreneurs, FIELD's research has found 
that those who receive assistance from microenterprise programs 
do well. Studies that track their outcomes after receiving 
services find that they start and grow businesses, their 
businesses survive at rates comparable to other small 
businesses, they create employment for their owners and others. 
Research also demonstrates that overall, the quantitative 
benefits resulting from these services in the form of increased 
employment, increases in household income and reductions in 
public assistance outweigh the costs of the services 
themselves. We have observed that microenterprise development 
programs are able to achieve these results because of three 
factors.
    First, their careful assessment of potential borrowers 
using alternative credit analysis methodologies allows them to 
look under the surface of a traditional credit score to better 
understand the character commitment and capacity of a borrower.
    Second, the training and technical assistance that they 
offer to all clients makes a critical difference in business 
success. Within the Microloan Program, the technical assistance 
is intimately connected to the loan process itself. In 
addition, the majority of clients, more than 80 percent, come 
to microenterprise programs seeking training and technical 
assistance rather than a loan. This underscores the value of 
the PRIME Program as it provides resources to assist those who 
would not be served under the Microloan Program.
    Further, our research has found that clients who 
participate in and complete training are more likely to have a 
business after receiving services or report that their business 
has grown than those who do not complete training. Finally, 
programs' attention to financial literacy and credit repair 
counseling help clients strengthen their overall financial 
position.
    Recognizing that personal and business financial matters 
are intertwined and that education and financing are equally 
important, microenterprise programs work with clients 
holistically to position them for future advancement. And when 
loans are made within this context, they are much more likely 
to succeed. Our research has shown that as Federal resources 
have become more constrained in the past few years, the 
microenterprise field has found itself increasingly challenged 
to maintain let alone expand the level of services it can 
provide to these entrepreneurs. The Federal Government, working 
in concert with the nonprofit microenterprise field has a 
critical role to play in ensuring the dreams of these 
entrepreneurs and the benefits that they provide to our 
communities. Thank you very much, and I look forward to your 
questions.
    [The statement of Ms. Edgcomb may be found in the Appendix 
on page 49.]

    ChairwomanVelazquez. Thank you, Ms. Edgcomb. Ms. Tasker, I 
would like to address my first question to you. During this 
year's hearing on SBA's fiscal year 2008 budget proposal, 
Administrator Preston came before the committee and he made 
helping underserved communities a central point in his 
testimony. And today we heard testimony about the importance of 
the microloan and PRIME programs in helping these communities.
    So I would like for to you explain to us, how does this 
continuing the microloan technical assistance and PRIME 
programs further SBA's ability to help low-income individuals?
    Ms.Tasker. Thank you, Chairwoman. We aren't eliminating 
technical assistance. We are suggesting that they are proposing 
that the technical assistance would be provided by our existing 
technical assistance providers. Approximately 94 percent of our 
existing technical assistance providers are within 20 miles of 
our microlenders, and so we believe we have an extensive 
network that would be able to continue to meet the needs of the 
underserved markets.
    ChairwomanVelazquez. Okay. In your budget request, how much 
money did you request for all these providers to be able to add 
this new responsibility?
    Ms.Tasker. I apologize. I am not sure if I know the exact 
number.
    ChairwomanVelazquez. Zero.
    Ms.Tasker. Zero. Thank you. I knew it was minimal.
    ChairwomanVelazquez. Minimum? Zero is minimum?
    Ms.Tasker. Minimal. I apologize.
    ChairwomanVelazquez. Uh-huh.
    Ms.Tasker. But the fact is, these technical assistance 
providers serve over 1 million businesses that are coming in, 
and so to add 2,500 to that number, you know, it is around less 
than 1/10 of a percent increase in terms of what we are doing.
    ChairwomanVelazquez. Let me ask you, did the SBA do an 
assessment of replacing the technical assistance component of 
the microloan and PRIME programs with SBDCs and women's 
business centers?
    Ms.Tasker. An assessment? We certainly looked at the 
numbers and looked at who was being served, yes.
    ChairwomanVelazquez. Did you do a cost, how much it would 
mean for them?
    Ms.Tasker. I would have to check on that. I am not aware of 
it, but I just don't want to--
    ChairwomanVelazquez. So it is hard for me to believe that 
you could present a request to this committee and to Congress 
for a significant change in this important program without 
preparing even a basic estimate of the costs involved to 
provide the service.
    Ms.Tasker. Chairwoman, we did provide a basic estimate. We 
looked at the numbers they are already serving and the numbers 
they would add, and we didn't believe that that would 
significantly increase the cost.
    ChairwomanVelazquez. Well, I want for you to provide the 
assessment to this committee.
    Ms.Tasker. Yes, ma'am.
    ChairwomanVelazquez. Ms. Tasker, the model of combining 
microloans with technical assistance is supported broadly by, 
as you saw, foundations, national, State, local governments, 
relief organization, the World Bank, the United Nations and the 
Nobel committee. So it is not surprising that the current 
administration funds microloan lending program for businesses 
overseas, like we are doing in Iraq. And I mentioned in my 
opening statement that we provided $17 million to provide such 
microlending in Iraq. So I want for you to explain to this 
committee, why is it good for Iraq, but it is not good here at 
home?
    Ms.Tasker. Well, we would certainly agree that it is good 
for both Iraq and for the U.S. And we do have programs and as 
we said in technical assistance.
    ChairwomanVelazquez. Wait. The difference that we are 
asking the microlenders and the borrowers here at home to 
shoulder the burden.
    Ms.Tasker. We are simply saying, Chairwoman, that we 
believe there are other avenues from which the technical 
assistance can be provided. That said, we certainly want to 
work with you. We share your concerns and want to see how we 
can come out to you know a solution that you know works for 
everybody, and provides transparency and accountability.
    ChairwomanVelazquez. I welcome that.
    Ms.Tasker. We certainly want to work with you.
    ChairwomanVelazquez. We heard that the default rate is very 
low and only less than 2 percent. And Mr. Betancourt and Mr. 
Hall, in their testimony they said that a good reason for that 
is the technical assistance portion of that. So I want to ask 
you, what will be the effect if the SBA eliminates the 
technical assistance component or moves it well outside of the 
microlending's operation?
    Ms.Tasker. First, may I just clarify one thing? The default 
rate that we are talking about that is less than 2 percent is 
the loans that SBA makes to the microintermediaries. The actual 
default rate on the microloans themselves or the borrowers 
default on is actually around 12 percent. So there are losses 
and there are losses associated with the borrowers themselves. 
That said, we do believe you know there is--
    ChairwomanVelazquez. What was it in 2006?
    Ms.Tasker. The numbers I have are about around 12 percent.
    ChairwomanVelazquez. We are going to get back to you on 
this default rate.
    Ms.Tasker. Okay. I just wanted to clarify. Because there is 
two dynamics going on here.
    ChairwomanVelazquez. Let me ask you, will you State for the 
record that defaults will not increase and that the program 
costs will not rise?
    Ms.Tasker. I can't predict the future, Chairwoman. 
Certainly any program we have in place we want to manage so 
that we can limit those to you know the least amount possible.
    ChairwomanVelazquez. Mr. Betancourt, you mentioned that you 
would like to be able to offer other variable terms in the 
microloans that you make. What sort of terms do you think will 
be most helpful that you cannot now offer?
    Mr.Betancourt. Well, right now you can't use it for a line 
of credit. You can only use it for term loans. So, for example, 
if Mr. Hall wanted a working capital line to increase his 
business--he mentioned about--he is going to be getting a 
financial aid program. In other words, his students can borrow 
money from the government to go to his school. In the meantime, 
he needs to fund his business until that happens and we don't 
have the ability through his program to do that. We gave him 
money for the equipment to renovate but not working capital to 
grow his business. So that is a limitation.
    ChairwomanVelazquez. Dr. Servon, SBA has described that 
what they are doing is preserving the program and protecting it 
in terms of the proposals and the changes that they are 
proposing.
    How will raising the costs of microloans to low-income 
borrowers and eliminating funding for the individualized 
technical assistance affect the program?
    Ms.Servon. I think there are two things that could happen. 
The default rates would go up if there is no technical 
assistance, the other is you will get this creaming effect that 
I described before, which is that if there is no technical 
assistance and the pressure is on the program, the providers to 
keep the default rates low, then they will take more qualified 
borrowers who are people who are more likely to be able to get 
say a 7(a) loan or a bank loan, and that defeats the whole 
purpose of the program to begin with. Because the purpose is to 
target people who with some help with some technical assistance 
can actually move into the ranks of entrepreneurs, and then 
move on to mainstream financial institutions.
    There is a third effect, which I just thought of which is I 
just finished doing a round of about 100 interviews with 
entrepreneurs in New York City for the economic development 
corporation. And what we see there is where there isn't 
provision, people are using loan sharks and paying it up to 740 
percent interest. So if these sources are not available, then 
that is the other place that people go, either there or credit 
cards.
    ChairwomanVelazquez. Thank you. Ms. Edgcomb. And this will 
be my last question before I turn to Mr. Chabot on this round.
    We really value your 20 years of experience in this FIELD, 
and the studies that you have conducted on the microloan 
programs' success. I would like to ask you, do the 
administration's proposal for this program jeopardize the 
successful structure of the programming review? How exactly?
    Ms.Edgcomb. I think they do jeopardize the structure of the 
program. The thing that is important to recognize about the 
technical assistance provided within the Microloan Program is 
that it is different than general business development 
technical assistance. That is provided to other entrepreneurs. 
We distinguish between two types of technical assistance that 
programs offer. Within a lending process, the kind of technical 
assistance that is offered is intimately tied from the start of 
that loan to the end of the loan.
    At the up front stage, there is a very close assessment of 
the business, and an education of the borrowers with respect to 
the financial underpinnings of the business and how credit can 
be effectively used to grow that business and how credit can be 
effectively managed.
    The program is also proactive during the course of the 
loan. So whenever a problem may arise around repayment, the 
program can intervene and provide support on operational and 
other issues. If you take that relationship and break it apart, 
another resource provider, no matter how good in many technical 
ways, will not be as intimately engaged with that borrower and 
cannot support that borrower effectively in the same way.
    ChairwomanVelazquez. Ms. Edgcomb, I know that you have been 
doing annual tracking on the set of microlenders regarding the 
default rate. And in your testimony, you say that the SBA 
Microloan Program experienced a default rate of less than 1 
percent in fiscal year 2006. You stand by that data?
    Ms.Edgcomb. Yeah. I do stand by that. I think Ms. Tasker is 
correct that that is what the program's default rate--the 
Microloan Program's default rate is to the SBA. When we look at 
overall loan loss rates and we track between 50 and 60 programs 
annually, we find that the median and average loan loss rate is 
around 7 percent and leading programs are at 3 percent and 
under. So there may be some that are higher than that. But 
overall, we find that those are where the rates are.
    ChairwomanVelazquez. Thank you. Mr. Chabot.
    Mr.Chabot. Thank you, Madam Chair. Let me begin with you, 
Ms. Tasker, if I can. I have to say our chairwoman, it is hard 
to believe she wasn't a trial attorney because she is one of 
the most effective cross-examiners that I have ever seen. I 
would hate to have come up against her in the 15 years that I 
practiced law in a courtroom.
    ChairwomanVelazquez. I have to tell you that my father was 
so disappointed when I said to him that I will not go to law 
school when I was accepted, by the way, in New York. So I 
decided to get into the business of politics.
    Mr.Chabot. I am going to check you out and make sure you 
weren't a trial lawyer because you are much more effective than 
most lawyers that I have seen in the courtrooms. Ms. Tasker, I 
thought it would be fair to give you the opportunity if there 
were any comments you might have relative to any of the 
questions you were asked that you perhaps didn't have time to 
maybe give an answer if there was anything there you would like 
to say.
    Ms.Tasker. Thank you very much. I would very much like to 
reiterate that we are not trying to eliminate technical 
assistance. I have heard what the other witnesses have said 
about you know the various other forms of technical assistance 
that is available, and certainly that is something that we 
think is important to understand. We really would like to have 
better you know accountability and transparency around what 
technical assistance is provided, both through our larger 
network of technical assistance providers as well as on the 
microloan microintermediaries.
    We do understand that some of the technical assistance 
grants that are provided are used for overhead costs and things 
of that nature. So we would welcome the opportunity to work 
with you to get more accountability and understanding about 
what kind of technical assistance is being provided and how it 
is being provided, so we all understand you know that the 
microborrower itself is benefiting from that.
    Mr.Chabot. Thank you. Mr. Betancourt, Mr. Hall and Dr. 
Servon, let me ask all of you this question if I could.
    Relative to the technical assistance that we have referred 
to this morning, could you give us some real-world kind of 
examples of what kind of assistance that we are talking about 
here and how it would help those small businesses that are 
going to benefit from the Microloan Program that we are 
addressing here this morning? Maybe we will start with you, Mr. 
Betancourt.
    Mr.Betancourt. Yes. If I can address just for a moment my 
colleague here, Ms. Tasker, in terms of technical assistance 
that she believes could be provided somewhere else and then I 
will come home to your question if I could just for a moment. 
The profile by the SBDC, the clients that they work with by 
their own admissions to this committee, I have been at these 
committees before--they really don't work with the profile of 
clients that we work with. And from their own research they 
will tell you, they do not work with these very low monetary 
individuals and the percentages bear that out. And so to say 
that they are going to be able to take care of our clients by 
their own research, that doesn't even bear that out.
    The kind of assistance that we do, and I think Elaine 
Edgcomb said it very well--the kind of technical assistance has 
to do with the core competency of lending. And when you have a 
training or technical assistance organization try to provide 
technical assistance to my client, it is very general, it is 
very good but it doesn't deal with the core competency of 
lending. In other words, the due diligence that we have to do 
to get them through the sophistication that has been talked 
about here by both the research folks here that deals with 
zoning, deals with helping them start the business, file a 
name.
    That is very specific to lending and also the credit repair 
piece that we have to do. That is specific to lending, 
expertise in the lending field that generalists really may not 
understand those nuances. In Mr. Hall's case, yes, he may have 
worked with another organization with the business plan. We 
reviewed that, critiqued that specifically to lending. So what 
I would say is that there are other folks that provide 
technical assistance and do a fantastic job. A, their profile 
is not the same and B, it is not specifically to lending.
    One final point is--and this is experience that we have had 
in Pennsylvania, the economic development department actually 
had a program that the TA organization would provide TA for our 
loan clients. And what we found is, there was not an incentive 
for them to make sure that we got paid on our loans. It just--
it just isn't. They can go out and meet with them. But to get 
that dollar back to us, we had the incentive to get it back 
because it was obviously lent to us. So our particular 
experience it did not work out in Pennsylvania for us. The 
program went away, and we went back to us providing technical 
assistance to our borrowers.
    Mr.Chabot. Thank you. Mr. Hall, did you want to talk about 
the a technical aspects, how it benefited your business detect 
directly or what the details were?
    Mr.Hall. Yes. Thank you. If it had not been for Community 
First Fund, I would not have been able to open a barber school. 
They helped me to furnish the entire place. Not only did they 
help me, but I look at the future. They created jobs for other 
people through the help of me. As I indicated in my testimony, 
13 other businesses that have opened through my school and I 
get calls all the time for students. So as far as jobs go, it 
created many jobs in our community and outside of Lancaster 
County in terms of providing employment for the students.
    Mr.Chabot. Thank you. Dr. Servon?
    Ms.Servon. I think one of the important things to think 
about is to sort of set the context for this discussion of what 
the training offers, is that over the past, say, 15 years, the 
financial services environment has gotten incredibly complex, 
right? So particularly in the low-income neighborhoods that 
these programs target, you have on the one hand, mergers and 
consolidations in the finance industry that are bringing banks 
the traditional mainstream financial institutions farther away 
from the borrowers.
    Secondly, you have increasingly sort of technological 
technical decision processes for making loans, like the small 
business credit scoring system, that really eliminates the kind 
of relationship lending that these programs do. Third, you have 
a huge increase in the number of alternative or what I would 
call fringe financial assistance, fringe financial services 
providers like check cashiers and predatory lenders. So the 
people who are living in the neighborhoods that these 
microenterprise programs target are much more likely to walk 
outside their doors and see a check casher than to see a bank 
branch.
    So given that environment, you often have people coming 
into these programs that have, as Elaine mentioned, poor or no 
credit history, little or no collateral, and perhaps a big 
credit card debt if they were able to get a credit card because 
they really don't understand the way to use different credit 
tools. So a program like the ones that we are talking about 
would traditionally start out with some basic financial 
education, depending on where the potential borrower 
entrepreneur is at, possibly some credit repair and some of 
these programs are actually offering credit builder loans that 
help a person get a credit score or get a better credit score. 
A $500 loan they pay back quickly and it gets them a score that 
can be used to leapfrog them into the mainstream financial 
services institutions.
    That would be followed by a screening that weeds out people 
who might not be serious about starting a business or not be 
ready so that they don't take a lot of training resources away 
from other people. That is an important element that many of 
these programs already have in place. Then those that are 
screened would go into a multi-week course that would end up 
with them doing a business plan, a market analysis, presenting 
some cash flow statements that they could bring to a bank or a 
lender or get a loan at that particular lender.
    Sometimes they offer sector-specific training. So there are 
programs that look at the needs in a particular neighborhood, 
like for example, WHEDCo in the South Bronx offers home-based 
child care training and a commercial kitchen because a lot of 
the entrepreneurs in that neighborhood either provide home-
based childcare or food. So the actual hands-on business 
experience is combined with the sector specific kind of 
training. Often they provide specialized workshops in marketing 
in budgeting in other kinds of finance. And then importantly 
post-loan technical assistance so that once you graduate from 
that program and you get your loan, you learn more about what 
the next step is in terms of the kinds of credit you might 
need.
    So for example, moving from a traditional term loan to a 
line of credit and understanding the differences and how to use 
those different forms of credit. I would agree with Mr. 
Betancourt that the SBDCs and the SCORE are not really equipped 
to deal with that range of technical assistance needs that 
entrepreneurs like Mr. Hall face.
    Mr.Chabot. Thank you. And Madam Chair, if I have time I 
would like to ask one question of Ms. Edgcomb, if I could. I 
believe in your testimony you said that 50 percent of the small 
companies that are started under these are women-owned 
companies. Is that correct?
    Ms.Edgcomb. At least 50 percent are clients of 
microenterprise programs, yes.
    Mr.Chabot. Could you discuss the dynamics that are at work 
there, and do you anticipate that that would be the case in the 
future, and if there is a pattern towards what type of 
businesses they might be, that sort of thing?RPTS DEANDCMN 
HERZFELD[11:04 a.m.]
    Ms.Edgcomb. We have consistently seen over the years that 
the majority of clients served by programs are women. We assume 
that that will continue to be so in the future. In fact, AEO 
has a standard that microenterprise programs should serve at 
least the number of women in their programs that are, you know, 
proportion of our population, but we have seen microenterprise 
programs serve many more women than that.
    There are a variety, some programs totally dedicated to 
women, such as WEDCO, which Lisa just mentioned, some that 
serve both men and women, and there are more women creating 
businesses year after year.
    Right now the microenterprise program served--I think what 
I had seen was there's about 33 percent of all businesses in 
the U.S. Are women-owned, and microenterprise programs serve 
more than 50 percent of women business owners, so you can see 
that they served many more women in their position in the 
economy.
    Mr.Chabot. Thank you very much. I yield back my time, Madam 
Chair.
    ChairwomanVelazquez. Mr. Ellsworth.
    Mr.Ellsworth. Thank you, Madame Chair. I was thinking of 
what Mr. Chabot said about a trial attorney, and I was thinking 
of my former life as a detective. We would have solved a lot 
more crimes had you been on my detective squad. We are glad you 
are here, too.
    Mr.Chabot. If the gentleman would yield?
    Mr.Ellsworth. I would.
    Mr.Chabot. She wouldn't have been on your squad, you would 
have been on her squad.
    Mr.Ellsworth. I would have hated also to have to arrest her 
if that were to ever have happened.
    My first questions are for Mr. Hall. Could you tell me the 
range in price of a haircut in your shops.
    Mr.Hall. In the barber school there are budgeted haircuts, 
and it helps parents with multiple children. Five dollars, and 
we do over 1,000 people a month. In the barber shop if you make 
an appointment, it is $15; or as a walk-in, $10; if you have 
additional facial hairs it is $3.
    Mr.Ellsworth. I heard a rumor that haircuts were 
approaching $400. I am glad that is not true. There is still 
hope for guys like me out there. I appreciate that.
    What is the average barber when he graduates from the 
school salary in your area, a yearly salary?
    Mr.Hall. I would estimate anywhere from 20- to 35,000 
annually.
    Mr.Ellsworth. What about health insurance; do they then 
provide it on their own or in the school? Your employees, do 
you have a health insurance program also?
    Mr.Hall. No. Usually the individual barber would provide 
their individual health coverage.
    Mr.Ellsworth. And could you have done what you have done 
starting with that bad haircut you got when you were a young 
man that I read about over here--I didn't just guess that--
could you have done and been where you are today without this 
program?
    Mr.Hall. No, no. I would say without Community First Fund, 
I wouldn't have been able to open the school. They gave me a 
chance when I couldn't get a loan because of my credit history, 
since then I was able to clean up my credit history, but I 
wouldn't have been able to do it without Community First Fund.
    Mr.Ellsworth. Congratulations.
    Mr. Betancourt, I am really excited that sometimes we don't 
think Federal programs work very well. This seems to be at 
least one. A lot of what I have seen in the small business 
since I have been here for 6 months, a lot of our programs seem 
to work pretty well, and I am proud of that.
    With this program being successful, and the pay-back rate, 
and the training is really--can you tell through kind of a day 
in the life of the curriculum? You touched on it a little bit, 
but just go through the areas you would teach somebody from 
start to finish that brings that rate of pay back up.
    Mr.Betancourt. What is interesting is that every 
intermediary is able to see what the needs are in their 
community. So if you ask this question to 170 organizations, 
you are going to get different responses. I know there is one 
organization in Milwaukee, they primarily work with women, and 
they have a whole series of things all the way through.
    In our particular program we have an 8-week small business 
training program. If you can imagine--I went to business 
school, and I take for granted what the difference between a 
partnership is, and a sole proprietorship, and an S Corp. and C 
Corp. You know, our entrepreneurs don't even know the 
difference between that. We teach them bookkeeping. Now, 
granted this is 8 weeks, 3 nights, so it is a little fast-
paced, but I want to distinguish that between the one-on-one 
technical assistance, which is really good.
    This is the fantastic thing about the program. If someone 
is coming up short on a particular part that we are teaching in 
teaching the marketing--one of the things when he opened up his 
barber school, the first question was, what are other people 
doing, what is your price, what research have you done?
    We force them to think about what other schools are doing, 
not, hey, just because you have a great idea, put your sign up, 
and people are going to come. Yes, maybe they'll see a need, 
like he talked the shoes, in this case a barber school, but we 
challenged them to do the market research.
    So the basic of a business, the accounting side and 
marketing side, the management side and the structure side, 
those are the things they are getting. More importantly, the 
one on one, we tailor-make that one on one with each client. We 
actually have a technical assistance plan which varies with 
every entrepreneur.
    Mr.Ellsworth. Thanks to all the witnesses. I yield back 
what little time is apparently left.
    ChairwomanVelazquez. Thank you.
    Mr. Shuler.
    Mr.Shuler. Madame Chair, thank you so much for again your 
commitment to small business.
    Ms. Tasker, we heard the testimony from Administrator 
Preston. He showed us a budget, and the only increase that we 
really saw, and I may be wrong about this, was increase in 
administratively here in Washington, increasing the number of 
employees here, but yet almost every single program--and we 
have got all these witnesses here, and I just met with a group 
in my own district before I came up about them working with the 
SBA and how important--they were looking at a small company, 
that they could grow it to get it out of small business, over 
1,000 employees, possible in my district, but they need help 
and assistance.
    North Carolina alone since 2004 went from 103 loans to 58, 
103 to 58, and that is just 2004. What is it going to be--and 
that is microloans. What will it be in 2 years?
    If we increase the percentage, if we go up 2 percent on our 
interest rate, what is the number of delinquents, defaults that 
we are going to have with these loans, and what will it push 
that number to? Are we looking to totally do away with--is this 
just a way for the administration to say, this is something we 
don't want, that we will just phase this out, because we will 
say nobody is using the program anymore?
    We are certainly seeing every time the SBA comes to our--
there is nothing I have seen in a positive manner there to do 
its real job, that is to increase the amount of assistance to, 
increase the programs, not to pull back. Every single time, 
every time I see the SBA is on the panel, I say to myself, I 
can't believe they have shown up again, because it has been so 
difficult.
    Looking in my district, I want more entrepreneurs. 
Entrepreneurs must be a thing of the future because we got an 
invention entrepreneurship reality show on TV. It seems more 
people want to be self-sufficient, be their own boss; that we 
should be increasing the funding, and obviously part of that 
lies upon us, no doubt about it. But we have to have your 
vision and your direction. So feel free to elaborate as long as 
we have.
    Ms.Tasker. Thank you.
    A couple of broader things with what you said. Certainly we 
are here to support entrepreneurs, and that is what SBA is 
about. And I think we do a lot of really good work and good 
things, both whether it is the technical assistance that the 
entrepreneurial development does and promotes, and whether it 
is the loan programs that we generally do.
    We have in the past--in the past budgets actually proposed 
eliminating the microloan program. The Administrator Preston 
came in and really spent a lot of time looking at it and really 
spent a lot of time trying to see that this program served a 
different need and a different group of potential entrepreneurs 
than our other programs do. We certainly agree with that.
    He worked with us and worked with OMB to come up with a 
proposal that we felt leveraged the resources that we had, and 
to come up with a program that we would continue to meet the 
needs of the very beginning entrepreneurs, if we want to put it 
that way, in terms of who we understand the microloan program 
serves.
    So it is not an attempt to reduce and eliminate the 
program. With that said, we have budget constraints that we 
have to live within and do believe that $100 million devoted 
towards technical assistance is a significant amount in our 
broader network.
    We definitely want to work with you to come up with a 
legislation for the microloan program that works. 
Administrators are very, very committed to it and are very 
committed to using this as one of the tools we use to reach 
underserved markets. We do believe accountability around it is 
important so that we really understand what kind of assistance. 
We don't have good data about it, so understanding what kind of 
technical assistance is being provided and the effectiveness of 
it, we believe, is a key part of what we want to work with you 
to achieve as we go forward.
    Mr.Ellsworth. Madame Chair, could I--
    ChairwomanVelazquez. Sure.
    Mr.Ellsworth. If we increase the percent of loans and cut 
the assistance program, doesn't that seem we are only going to 
increase the number of delinquencies and increase the number of 
defaults on the loans if you don't have that technical 
assistance in the people that are there? You are raising the 
rate, plus you are taking away something that could actually 
help benefit--pay back these loans.
    Ms.Tasker. As I said, I can't predict what is going to 
happen. We certainly are not going into this--
    Mr.Ellsworth. But you are not predicting it. That has to be 
a part of the analysis to know if you are going to cut some 
program and increase a rate; that has to be part of the overall 
picture to realize that, hey, we are going to make two major 
changes that is going to impact the rate of which people pay 
their loans or pay off their loans or the number of defaults--I 
personally feel you take those away, increase the rate, you 
will increase the number of defaults and increase the number of 
delinquent payments.
    Ms.Tasker. Again, we--that is not our intent in terms of 
the proposal that we made. The proposal that we made we felt we 
had service--I understand what the panel is saying, but the 
intent of our program, we are spending $100 million on our 
legislative proposal on technical assistance. So we acknowledge 
that is an important key part of it.
    Again, I think really being able to link up and as we go 
forward understanding--you are saying it just makes sense, and 
I am not disagreeing. A lot of things make sense if you think 
about it, but we don't know to what degree the technical 
assistance is linked up other than just anecdotally. So we do 
believe if we are going to continue to use technical assistance 
as a key part of that, we have to have the transparency around 
what is used and the benefits associated with it so we can come 
to those firm conclusions based on empirical information as 
opposed to it makes sense to me when I say that.
    Mr.Ellsworth. I suggest we reach out to other people who 
can put this analysis together before we make such--what I 
feel--a horrible mistake. I would reach out to people that 
actually know and can actually see some of the analysis that 
could be possibly done.
    Thank you so much, Madam Chair. Thank you.
    ChairwomanVelazquez. Mr. Chabot.
    Mr.Chabot. I will be very brief, thank you, Madam Chair.
    Somewhat in response to Mr. Shuler's comments, I agree with 
him in some respects, but I think one other point that should 
be made, I am inclined to agree with my colleagues that it is 
probably not a good idea to deemphasize the technical 
assistance within the programs that we have been discussing 
here this morning and go a different route. So I agree with my 
colleagues there for the most part.
    I, however, relative to businesses on a more macro level, 
the business growth, et cetera, I would say the administration, 
the jobs that are created, businesses that have been started, 
the general welfare of the economy right now, the Small 
Business Association has a role to play in those jobs, but when 
one considers the health of the economy, that is much more 
significant in the creation of businesses than the SBA's role 
in it, when we are really fair about it. They are involved in 
some of them, but the overall health of the economy is much 
larger and more significant than businesses being created, et 
cetera.
    I think this administration's tax policies, to the extent 
in cutting marginal rates, cutting capital gains rates, 
attempting to do away with the death tax and a whole range of 
things, has had a significant impact on the economy, has 
benefited the economy, and we have seen considerable growth. We 
see unemployment right now, whereas we would like to see it 
even lower, it is at historically lower levels of 4-1/2 
percent; the stock market at or near all-time highs, although 
they have dropped, and they are heading back up, and who knows 
where they are going to be in the future. We would certainly 
like to see gas prices lower.
    Things are far from perfect, however overall I think the 
economy, due to the administration's policy's, especially tax 
cuts, that is why we have to make them permanent, have been 
helpful in the economy. So I wouldn't want to leave that out 
there that they made errors relative to small business which 
have hurt business overall in the economy.
    I am losing my voice. I yield back.
    ChairwomanVelazquez. Ms. Edgcomb or Dr. Servon, I would 
just like to ask you in terms of the population that we serve 
through microenterprise and microlending, how much effect the 
1.3 trillion tax cuts have on that population. What is the 
benefit of the tax cut for the low-income 50 percent of women 
who participate?
    Ms.Edgcomb. I am not sure I am an expert on tax policy and 
the effect of the tax cuts, but I can say that regardless of 
the macroeconomic effects, we know that there are communities 
of disadvantage that remain in the United States, communities 
of disadvantage with respect to enterprise opportunity, 
particularly women, persons of color, low-income, people living 
in disadvantaged communities, both urban and rural. Those 
people exist. We also know there are a set of economic factors 
or trends in the U.S. That, again, regardless of the 
macroeconomic policies of the government, are trends that have 
been negatively affecting a number of people, and that includes 
people who have lost jobs because of outsourcing and trends and 
globalization, people who are heavily constrained to work 
multiple jobs because of low wage rates, people who live in 
communities where industry has left. There is a set of trends 
that we also have to keep in mind, and there are people hurt 
and left behind by those trends.
    ChairwomanVelazquez. Thank you.
    Ms. Tasker, what we have seen here regarding the low 
percentage of default rate shows that both borrowers and 
lenders have been doing quite a good job at borrowing the 
money, providing the technical assistance so that this 
individual will not default, that they will pay back. And it 
has been stated here that the type of individuals who come to 
Mr. Betancourt to ask for money, to get access to capital are 
the type of individuals that do not have a credit history or 
any credit at all.
    Since they repaid, my question to you is how can we, SBA, 
help these individuals go to the next level in terms of 
building up their credit history? I know, for example, that 
most of the intermediaries have only such a small volume of 
repayment records that it makes them ineligible to report for 
the major credit reporting agencies. So I want to ask you, what 
can you do to help these individuals to build up a credit 
history or a credit record?
    Ms.Tasker. That is my understanding as well, that a lot of 
the micro intermediaries, because they don't have sufficient 
volume, can't report credit. One of the things we talked about 
doing and can certainly pursue further to see if it is feasible 
is group them together and have them report in groups so that 
we can get that information out, because it does--at the end of 
the day, it drives a lot of the long-term financing for--
getting established as a business. We can certainly do that. 
And we would certainly be willing to work with you and the 
industry to see if there are other ways to help support getting 
that information out.
    ChairwomanVelazquez. Thank you.
    Mr. Betancourt, can you tell us how much of the money you 
used for microloan costs, how much it costs you and how much it 
will cost under the administration proposals?
    Mr.Betancourt. I think under this proposal, we wouldn't 
even be able to use it, quite frankly; we just wouldn't be able 
to borrow at those rates. And so in many respects we wouldn't 
be able to lend to gentlemen like--
    ChairwomanVelazquez. Let me say that if you use it, will 
the increased costs be passed through the borrowers?
    Mr.Betancourt. Well, if we were to pass it along--we would 
have to pass it along if we were to borrow it, yes, say it that 
way.
    ChairwomanVelazquez. All right. Any other question from any 
of the Members.
    Mr.Ellsworth. I have one more.
    ChairwomanVelazquez. Sure, Mr. Ellsworth.
    Mr.Ellsworth. Ms. Tasker, the total budget of this program, 
$13 million, is that pretty close, pretty accurate.
    Ms.Tasker. Yes, sir, 13-, 14 million, yes.
    Mr.Ellsworth. And I agree with the Ranking Member that in 
tough financial times, back home they used to say I was tied 
like bark to a tree. I like to always call it thrifty or 
frugal, but that is the way they described it at home.
    When I look at successful programs like this, and we were 
talking about Iraq earlier, and they say, where will you find 
the money and the offsets? When we lose skid loads of billions 
of dollars in Iraq, not just what we are doing in business, but 
when you lose cash in the billions, that is one way you can 
offset it. When 1.6 billion a year doesn't get paid in Federal 
taxes from companies that get Federal contracts, that could 
offset a lot of years of a program like this. I am not 
specifically--I am just talking in general. I can find that 
money in about a minute and a half of where we could supplement 
this and keep a successful program like this, and I just wanted 
to get that on the record.
    ChairwomanVelazquez. Mr. Betancourt.
    Mr.Betancourt. If I could make one point, I noted we were 
talking about the technical assistance to borrowers, I wanted 
to talk about the technical assistance we provide to 
nonborrowers for a moment.
    We are all familiar with the PRIME program, the unique 
program that provides technical assistance to nonborrowers. 
This program works with extremely low-income borrowers. One of 
the best things you can do for a borrower is to let them know 
maybe they shouldn't go with a business and maybe provide that 
technical assistance you were talking about earlier. In many 
respects that program--it is the same profile that we do, but 
it does all that up-front time that we are all concerned about 
that needs to happen before they can borrow from us. 
Unfortunately this program over the past couple of years has 
been reduced to just a few States. We all know 5-plus years ago 
it worked in all the States. We really want you to think about 
that program. In Pennsylvania and other States we have a hard 
time working with nonborrowers at this profile level. And so we 
want you to consider that, the PRIME program, maybe adding to 
all 50 States and maybe increasing that appropriation.
    ChairwomanVelazquez. Mr. Betancourt, the PRIME program 
statute was authorized as part of the Gramm-Leach-Bliley Act, 
and it is not codified in the Small Business Act even though it 
is operated by SBA. Do you see a value of moving the statutory 
authority for the PRIME program to the Small Business Act.
    Mr.Betancourt. I would have to refer to my policy folks.
    Mr.Kelly. Yeah, yeah.
    ChairwomanVelazquez. You can stand up, identify your name 
for the record, and can answer the question.
    Mr.Kelly. My name is Kevin Kelly. I am with the Association 
For Enterprise Opportunity. I am the managing director for 
policy and advocacy.
    And, yes, that has been one of our recommendations that we 
have forwarded in the past year to committee staff here asking 
that that could be done so that, in fact, it is in the proper 
place. SBA had been running that program, but you are right, it 
was authorized in a different place. So to put it where it 
belongs, it should be in there.
    ChairwomanVelazquez. Thank you very much.
    Any other questions?
    Hearing none, I want to thank all the witnesses. This has 
been an important hearing today, and I would just like to 
announce the fact that in the next few months we will be 
working on the reauthorization of these programs. I want to 
thank all the witnesses for their testimony today.
    Members have 5 legislative days to submit statements or 
other material for the hearing record. And with that, the 
hearing is adjourned.
    [Whereupon, at 11:34 a.m., the committee was adjourned.]

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