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




 
                   FULL COMMITTEE LEGISLATIVE HEARING
                         ON THE SBA'S MICROLOAN
                           AND TRADE PROGRAMS

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 12, 2007

                               __________

                          Serial Number 110-35

                               __________

         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


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

                  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


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

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

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     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

Hager, Michael, U.S. Small Business Administration...............     4
Darien, Kristie, National Association of the Self-Employed.......     5
Kelly, Kevin, Association for Enterprise Opportunity.............     7
Cordero-Guzman, Dr. Hector, City University of New York..........     9
Morrison, Dr. James, Small Business Exporters Association of the 
  United States..................................................    11
Gaskin, William E., Precision Metalforming Association...........    13

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    32
Chabot, Hon. Steve...............................................    34
Altmire, Hon. Jason..............................................    36
Hager, Michael, U.S. Small Business Administration...............    37
Darien, Kristie, National Association of the Self-Employed.......    44
Kelly, Kevin, Association for Enterprise Opportunity.............    52
Cordero-Guzman, Dr. Hector, City University of New York..........    55
Morrison, Dr. James, Small Business Exporters Association of the 
  United States..................................................    69
Gaskin, William E., Precision Metalforming Association...........    81

                                  (v)

                   FULL COMMITTEE LEGISLATIVE HEARING
                    ON THE SBA'S MICROLOAN AND TRADE
                                PROGRAMS

                              ----------                              


                        THURSDAY, JULY 12, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:06 a.m., inRoom 
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez 
[Chairwoman of the Committee] Presiding.
    Present: Representatives Velazquez, Shuler, Gonzalez, 
Cuellar, Ellsworth, Sestak, Chabot and Heller.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I am very pleased to 
call to order this morning's hearing on proposals to 
reauthorize Small Business Administration's microenterprise and 
international trade programs. As we examine these measures to 
update the SBA policies, I believe there are two important 
facts to consider. First, the economy has drastically changed 
over the past decade. Most notably, we have seen a broadening 
of the entrepreneurial base to now include a greater number of 
women and minorities. At the same time, the U.S. economy has 
become significantly integrated with those of countries across 
the globe, providing new opportunities, but also increased 
competition.
    However, while many are doing well in these business 
conditions, some are being left behind. Microenterprises, the 
smallest businesses in terms of required startup capital and 
employees, face competition without the resources to enjoy an 
equal playing field in the market. Global integration poses an 
additional challenge, leaving many small businesses without the 
capacity to export their goods abroad or thrive in domestic 
markets. Together these developments are challenging small 
firms' abilities to remain competitive.
    For small firms to thrive in this new environment, it is 
important they compete on a level playing field. The two 
legislative measures we are discussing today will help 
accomplish this by expanding and modernizing the tools that SBA 
can offer. This proposal will help ensure small businesses can 
succeed in a dynamic and challenging economy.
    In order to support growth in the country's smallest 
commercial enterprises, the Committee will hear comments from 
the Microloan Amendment and Modernization Act which will be 
introduced by Mr. Chabot today. This proposal strengthens and 
broadens the reach of SBA's microlending activities. The 
measure requires the agency to transmit credit history 
information to major credit reporting bureaus, which will help 
borrowers improve their credit scores.
    In response to the evolving needs of entrepreneurs, the 
legislation permits borrowers to draw on longer-term loans, 
providing them with greater financial stability. Microlenders 
are also given greater control of their resources, and as a 
result will be able to direct technical assistance where it is 
needed most.
    If enacted, this legislation will bolster microlending 
efforts in the United States, and this will occur during a time 
when such initiatives are being championed around the globe. 
While some of these global developments are welcome, others 
have created challenges for small firms to compete in the 
international marketplace.
    To help overcome the these barriers, Representatives Holt 
and Sestak introduced H.R. 2992, the SBA Trade Programs Act of 
2007. This legislation focuses the agency's efforts on the 
trade concerns of small businesses and will help firms 
dislocated due to globalization better access to the assistance 
they need. As trade policies are developed, the measure 
requires the agency to work with Federal and international 
organizations to represent small business interests. Finally, 
it requires an annual trade strategy outlining the agency's 
effort to boost small business' share in domestic and foreign 
markets. Through this trade legislation, the SBA will be more 
prepared to assist the business community in the international 
marketplace.
    The economic changes we are experiencing today present real 
challenges to the SBA and its programs, whether it is the 
changing demographics of entrepreneurs or the reduction of 
trade barriers. The fact is that businesses require assistance 
regarding challenges that were not envisioned when many of the 
agency's programs were created. Going forward, Congress will 
seek to modernize the agency's resources so that they remain 
relevant in an entrepreneurial economy that continues to 
evolve. Small firms' innovation and flexibility provide them 
with a natural ability to remain at the cutting edge of their 
industry. With adequate assistance and access to tools to 
realize their full potential, I believe the two proposed 
legislative measures will ensure their ability to succeed even 
in a challenging environment.
    To conclude, I would like to extend my appreciation to all 
the witnesses that are before us today. Thank you for coming, 
for taking time out of your busy schedule. And I would like to 
also recognize the Ranking Member Mr. Chabot for his opening 
statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you very much, Madam Chair. I want to 
thank you for holding this hearing to review legislation to 
improve the operation of the Small Business Administration's 
microloan and international trade programs, and we want to 
thank the witnesses all for being here this morning as well.
    A reexamination of these two programs is long overdue, and 
I am interested in hearing from the witnesses on any 
suggestions that they might have as we prepare for a markup on 
these two bills next week. The Committee already has heard 
about the efficacy of microloans to generate economic growth 
and redevelopment for individuals in areas that are frequently 
overlooked by commercial lenders and the SBA's guaranteed loan 
programs. I know that parts of my community, for example in 
Cincinnati, have areas in which a greater spark of 
entrepreneurship would lead to increased economic 
revitalization. I believe that improvements to the Microloan 
Program can generate that spark; however, those improvements 
must come within the context of budget constraints.
    I look forward to the witnesses' testimony and suggestions 
for enhancing the Microloan Program. Some suggestions we have 
heard include increasing the number of loans that 
intermediaries can make to be eligible for participation in the 
SBA program, eliminating the cap on interest rates that 
microlenders may charge to borrowers, requiring that some 
microloan organizations focus on educational services and 
others on lending, and centralizing certain back-office 
operations.
    The other program that we are examining today is the SBA's 
assistance provided to small businesses engaged in 
international trade. Although there are a number of general 
entrepreneurial development programs that can provide some 
assistance in this area to small businesses, the area is 
fraught with regulatory issues that require an extensive 
specialized knowledge that may not be available from the SBA's 
entrepreneurial partners. Thus, it is not surprising to find 
that the SBA created other programs to meet the needs of small 
business exporters.
    Since 1992, small businesses' participation in 
international trade has expanded quite dramatically. According 
to the most recent statistics available from the Department of 
Commerce, there are about a quarter of a million small 
businesses that export. Revenue increased from $102.8 billion 
to $203 billion back in 2004.
    There is no doubt that small businesses are playing a vital 
role in reducing America's trade deficit. Continuation of this 
success and even greater impetus on small business exporting 
will benefit the entire American economy. The question becomes 
how to do this in a manner that fits within the current budget 
situation.
    I look forward to the witnesses providing us with detailed 
assessments of the current state of SBA international trade 
assistance and their suggestions for improvement. These might 
include greater coordination within the SBA, better interaction 
with other Federal agencies, and increased technical 
assistance. Of course, those suggestions that can be 
accomplished without additional expenditure of resources will 
be most seriously considered by the Committee. On the other 
hand, simply moving boxes around on an organizational chart 
without more, without costing anything may not provide the 
services needed by America's small businesses that currently 
provide exports or want to go global.
    Again, I want to thank the Chairwoman for holding this 
important hearing this morning, and I yield back the balance of 
my time.
    Chairwoman Velazquez. Thank you, Mr. Chabot.

    Chairwoman Velazquez. Our first witness is Mr. Michael 
Hager. Mr. Hager is the Associate Administrator for Capital 
Access at the U.S. Small Business Administration. He manages 
and oversees all of the agency's programs and operations 
concerning financial assistance by way of loans and investment, 
including international trade initiatives. Welcome.

STATEMENT OF MICHAEL HAGER, ASSOCIATE ADMINISTRATOR FOR CAPITAL 
           ACCESS, U.S. SMALL BUSINESS ADMINISTRATION

    Mr. Hager. Good morning, Chairwoman Velazquez and Ranking 
Member Chabot, distinguished members of the Committee. And I 
want to thank you for inviting me to discuss legislative 
proposals affecting the microprogram and international trade 
programs of the SBA. I would like to begin by asking for the 
opportunity to submit for the record at a later date a revised 
version of our written testimony due to the late receipt of the 
document from your office yesterday, if we could.
    Chairwoman Velazquez. Without objection.
    Mr. Hager. I will begin my remarks by addressing the 
Microloan Program. My Deputy Janet Tasker testified on SBA's 
positions in the microprogram and included in the fiscal year 
2008 leg package, and I would like to point out that the 
Microloan Program as currently structured is costly to the 
taxpayer. 2006, it cost 85 cents to the government for each 
dollar loaned to the microloan intermediary. That is compared 
to about 3 cents for the 7(a) program.
    SBA commends the Committee's interest in making sure that 
microborrowers who make timely payments on their loans are able 
to establish positive credit history, and the administration is 
interested in finding a workable solution to provide this data 
to credit reporting agencies.
    We believe that the technical assistance provisions in the 
bill fall short of what is prudent to ensure that counseling 
and training is provided to entrepreneurs and contributes to 
their success.
    With regard to the Committee's proposal to move the PRIME 
program to the Small Business Act, the SBA does not support 
reauthorization of the PRIME program. We continue to object to 
the overlapping programs focused in this area of technical 
assistance.
    I would like now to return to the international trade 
legislative issues, and as you have indicated, international 
trade is rapidly increasing in importance to the U.S. economy, 
and it is clear that the exporting of the new growth market for 
small business is apparent. The SBA helps exporters carry out 
their export transactions through the Export Working Capital 
Program, the International Trade Program for long-term 
financing and Export Express.
    In fiscal year 2006, the SBA experienced record export 
lending, supporting over $2 billion in export sales.
    On the policy side of our mission, the Office of 
International Trade influences the overall international trade 
environment, which can affect the prospects of each business 
beyond what the SBA could ever do for businesses on an 
individual basis.
    And now for the legislative proposals. I am pleased to have 
the opportunity to comment on the Committee's international 
trade legislation. However, we do have serious concerns about 
the Committee's proposals to expand SBA's roles and its 
responsibilities in international trade policy and promotion. 
We believe that the Committee's legislation would create 
extensive duplication of existing programs and roles under the 
statutory authority of other U.S. trade and investment 
agencies, namely Commerce, USTR and Ex-Im.
    With regard to the legislative language in section 301, 
USTR informs us that our trading partners may find that many of 
the conditions specific to the proposed loan may be prohibited 
export subsidies as defined under the WTO Agreement on 
Subsidies and Countervailing Measures. This section creates a 
potential new definition of dumping by making the loans 
dependent upon the influence or the influx of imports below 
U.S. average production costs. The provision could be 
interpreted as a double remedy for dumping that would be 
inconsistent with our international obligations under WTO.
    With regard to the trade compliance provisions, Congress 
has established the SBA's roles as a financial and technical 
assistance agency. And the SBA does not have the expertise to 
deal with trade compliance issues and other issues of 
complexity. The SBA works regularly with Commerce, USTR and 
other agencies on these issues and agencies that are well 
equipped with those specific compliance and enforcement roles.
    In conclusion, the administration is concerned that the 
Committee's legislative package is inconsistent with our 
international obligations and the scope of SBA's role. We 
appreciate your commitment to the increased opportunities for 
America's small business in the international marketplace and 
ask to work with you on alternative ways to accomplish our 
mutual goals.
    Chairwoman Velazquez, that concludes my testimony, and I 
will look forward to any comments or suggestions.
    Chairwoman Velazquez. Thank you.
    [The prepared statement of Mr. Hager may be found in the 
Appendix on page 37.]

    Chairwoman Velazquez. Our next witness is Ms. Kristie 
Darien. Ms. Darien is the executive director of the legislative 
offices of the National Association for the Self-Employed. NASE 
is the Nation's leading resource for the self-employed and 
microbusinesses, providing a broad range of benefits and 
support to help the smallest businesses succeed. Founded in 
1981, the NASE is made up of hundreds of thousands of 
microbusinesses, and it is the largest nonprofit nonpartisan 
association of its kind in the United States.
    Welcome. You have 5 minutes.

 STATEMENT OF KRISTIE DARIEN, EXECUTIVE DIRECTOR, LEGISLATIVE 
       OFFICES, NATIONAL ASSOCIATION OF THE SELF-EMPLOYED

    Ms. Darien. Thank you. Nice to see you all again. On behalf 
of the National Association for the Self-Employed and our 
250,000 microbusiness members nationwide, I would like to thank 
the Committee on Small Business for allowing me to speak here 
today regarding the Small Business Administration's Microloan 
Program and how it assists the access-to-capital needs of self-
employed and microbusinesses within our Nation.
    Shonda Parker is a NASE member in Louisiana. She owns 
Naturally Healthy, a family business which is a medical and 
birthing supplies company. A few years ago Ms. Parker was 
looking to expand her operation. In efforts to find financing, 
she went to various financing banking institutions in her area 
to apply for a loan. She indicated to me that the loan officers 
there she met with either turned her down right away, were 
concerned about the risk of funding her business, or were 
uninterested due to the small loan amount she needed.
    Shonda, encouraged by a friend, applied and received an SBA 
loan at an affordable interest rate and thus was able to grow 
her business. She believes the SBA backing and guarantee of the 
loan made all the difference in her ability to get funding.
    Shonda's story is representative of the experience of many 
of NASE's microbusiness members. The lack of access to funding 
is a large hurdle negatively affecting the startup and 
continued growth of microbusiness. Sixty-one percent of NASE 
members feel that there are not adequate funding resources for 
this important business demographic.
    Traditional lending institutions, such as banks and 
investors, are unlikely to offer loans and investment capital 
to microfirms due to a variety of reasons. One barrier to 
microlending is a concern that startups and smaller enterprises 
are risky investments since growing businesses typically 
exhibit erratic bursts of growth and downturn. The perceived 
risk of these types of companies reduces the chances of a 
microbusiness to obtain financing.
    Another issue is that microbusinesses by and large require 
smaller amounts of capital, and thus banks or investment 
companies often believe that it is not efficient use of their 
time or resources, nor will they receive a substantive return 
on investment from such a small loan amount.
    With this in mind, you may ask, how are microbusiness loan 
owners currently funding their business? According to a March 
2007 NASE survey, approximately 58 percent of our members use 
their personal savings to start their business. A little over 9 
percent use a home equity loan to start up their business. As 
microbusiness owners look for ongoing financing in order to 
maintain and expand their business, 36 percent continue to use 
their personal savings, while over 21 percent turn to credit 
cards. Both of these avenues do not promote long-term stability 
for the owner or the company. The use of personal savings puts 
a microbusiness owner in a precarious position in which he or 
she would be unable to recover financially should an unexpected 
and costly personal or business expense occur. The usage of 
credit cards and personal lines of credit with their high and 
fluctuating interest rates can increase debt and make it 
difficult for a business owner to pay back borrowed money. This 
in turn can negatively affect a microbusiness owner's credit 
score.
    Credit scores are a central component to our financial 
system. The reliance on FICO credit scoring by traditional 
lending resources to examine potential borrowers is a critical 
hurdle faced by microbusinesses. In fact, 26 percent of our 
members believe their credit score is their biggest barrier to 
obtaining financing.
    With all that said, one beacon of opportunity for a 
microbusiness owner in the challenging realm of business 
financing is the Small Business Administration's loan programs, 
particularly the Microloan Program. The Microloan Program 
addresses all of the above barriers that affect access to 
capital for microbusinesses. While banks are an important 
component to the program due to their work with microlending 
intermediaries, microbusiness owners applying for financing 
through the Microloan Program are not subject to the same 
biases or barriers found in traditional lending. They are able 
to obtain small loan amounts via community-based nonprofit 
intermediaries whose sole focus is to assist them in their 
endeavor of starting a microbusiness. Most importantly, these 
intermediaries have essential expertise on the needs of this 
key demographic.
    The technical assistance component to the Microloan Program 
is a crucial element which enables intermediaries to assist 
microbusiness owners step by step through their development and 
growth. The training and assistance not only increases the 
likelihood of full repayment of the loan, but augments business 
survival and success.
    The NASE strongly supports the Microloan Program. We have 
consistently advocated for increased funding, lower lender and 
borrower fees, and administrative improvements upon SBA loan 
programs. Based on our initial review, the NASE is supportive 
of the Committee's impending legislation to improve upon the 
SBA Microloan Program. In particular, we are pleased to see 
provisions including a way to facilitate the transmission of 
credit reporting information about the borrowers from 
intermediaries to major credit reporting agencies. This would 
go a long way to help some of our members grow and better their 
credit history.
    In conclusion, I encourage you to continue to support the 
SBA loan programs, particularly the Microloan Program, and 
ensure their viability and success by pushing for increased 
funding and improvements. Thank you.
    Chairwoman Velazquez. Thank you, Ms. Darien.
    [The prepared statement of Ms. Darien may be found in the 
Appendix on page 44.]

    Chairwoman Velazquez. Our next witness is Mr. Kevin Kelly. 
Mr. Kelly is the managing director for policy and advocacy of 
the Association for Enterprise Opportunity. AEO is the national 
association of community-based organizations that provide 
entrepreneurial education, access to capital and support to 
aspiring and active low-income entrepreneurs. Its members 
provide most of the loans and technical assistance that are 
allocated on the Microloan Program.
    Welcome, sir. You have 5 minutes.

 STATEMENT OF KEVIN S. KELLY, MANAGING DIRECTOR FOR POLICY AND 
        ADVOCACY, ASSOCIATION FOR ENTERPRISE OPPORTUNITY

    Mr. Kelly. Thank you, Chairwoman Velazquez, and thank you 
also to Ranking Member Chabot and to the members of the Small 
Business Committee.
    I am pleased to be here today to discuss the 
reauthorization of some of the programs at the SBA, 
specifically the Microloan Program, PRIME, and also the Women's 
Business Center program, I will just mention, is also a program 
that is of interest to our members. These small programs, 
relatively speaking, in the Federal budget, these programs are 
absolutely essential to our members around the country, groups 
that do the microenterprise development work. I work with the 
actual entrepreneurs, and they see how beneficial these are on 
the ground in their communities.
    I want to mention that these programs are, in fact, 
complementary; that they are not duplicative; that they serve 
different entrepreneurs. It is basically like a spectrum. They 
do different things for different people. It is not the same 
thing.
    I also wanted to comment on the administration's proposal 
to change the Microloan Program so that it would eliminate the 
subsidy rate and increase the interest rate on the loan 
portion, and to defund the technical assistance part of the 
program and have other entities pick up the technical 
assistance work, such as SBDCs and so forth. Our members know 
that this is not a workable proposition; that this program has, 
in fact, been very successful, less than 1 percent default rate 
in the history of the program. And this is due to this 
combination of the lending and the technical assistance being 
provided by the very same organization. When there is problems 
that pop up, the group is able to discover them and help the 
entrepreneur work through them immediately. They have a self-
interest in the loan being paid back, obviously, since they 
lent the money. Somebody else would not have that same level of 
self-interest.
    The cost of the program is also, in fact, very low if you 
look at how much is spent versus jobs that are created and 
retained. Fiscal year 2006, 9,955 jobs were created or retained 
through the Microloan Program. If you look at the technical 
assistance dollars that were appropriated for last year, $13 
million, those are really the dollars that are being spent. The 
loan money is going out, but it is also coming back in. Like I 
said, there is less than a 1 percent default rate. So if you 
really just take the TA money and look at how much it has 
created in the way of jobs, or retained in the way of jobs, 
during that time, it works out to be very little. If you do the 
division $13 million by 9,955, I would say it is a better job 
creation per dollar of the Federal budget than most of the 
programs that are out there right now. That is a different way 
of looking at it than you usually hear.
    There are some changes that we have proposed to the 
Microloan Program. Most of them are changes that would make the 
practice consistent with what the SBA is already doing or to 
give some added flexibility to the microenterprise development 
organizations who are working at the local level. And over time 
we have found there is a couple of impediments to what they are 
doing. They are fairly minor changes. We have been pleased to 
see that they have been incorporated in the draft I saw 
earlier.
    I do want to mention something about PRIME. PRIME is 
different than Microloan. The Microloan Program is for people 
who want to have a loan and need the technical assistance 
connected with the loan either before they get it and after 
they get it, whereas PRIME is for people who they are not ready 
for a loan yet. In some cases they may not need that capital. 
They have a kind of business that they don't need a lot of 
capital, so they really just need the technical assistance. 
They can't access the Microloan Program because the TA is 
really connected with the loan itself, and there are not other 
programs like PRIME out there that really deal with this 
constituency. There is also a requirement that 50 percent of 
the funding go to low-income people, which is different than 
other programs as well.
    And on a further note about PRIME, it was once a national 
program. It has been cut down to where currently only 15 States 
and the District of Columbia are even eligible to apply for the 
program. And currently only 12 of the States are actually 
getting any dollars, and it is only funded at $2 million. So it 
has really dropped down to what it once was. We would like to 
see it get back on.
    It is true that there are other Federal sources, like the 
Community Development Block Grant program, CDFI fund and some 
others that do fund microenterprise organizations, but they are 
not set up specifically for that purpose, and microenterprise 
programs are one of many that are eligible. So that is why 
these programs we are talking about today are so important, 
because they are really microenterprise specific.
    My final point is that the field of microenterprise got a 
lot of attention last year with the Nobel Peace Prize going to 
Muhammad Yunus and Grameen Bank. A lot of people know about the 
international work around microenterprise, but fewer know that 
we really have a vibrant, healthy microenterprise industry here 
in the United States, and that reauthorizing the SBA and these 
programs would go a long way to supporting that vibrant field, 
and I want to encourage you to do that.
    Thank you for allowing me to speak today.
    Chairwoman Velazquez. Thank you, Mr. Kelly.
    [The prepared statement of Mr. Kelly may be found in the 
Appendix on page 52.]

    Chairwoman Velazquez. Our next witness is Dr. Hector 
Cordero-Guzman. Dr. Cordero-Guzman is an associate professor 
and chair of the Black and Hispanic Studies Department at 
Baruch College of the City University of New York and a member 
of the faculty in the Ph.D. programs in sociology and urban 
education at the CUNY Graduate Center. Dr. Cordero-Guzman is 
also research associate at the Community Development Research 
Center and is senior consultant to the Fundacion Chana 
Goldstein and Samuel Levis.
    Welcome. You have 5 minutes.

 STATEMENT OF DR. HECTOR CORDERO-GUZMAN, BARUCH COLLEGE, CITY 
                     UNIVERSITY OF NEW YORK

    Mr. Cordero-Guzman. Good morning, Honorable Chairwoman 
Velazquez, Ranking Member Chabot, distinguished members of the 
House Committee on Small Business. I apologize. I am a little 
bit under the weather. I usually sound even more annoying.
    Thank you for inviting me to testify about the SBA 
Microloan Program. I am Dr. Cordero-Guzman, professor and the 
chair of the Black and Hispanic Studies at Baruch College. 
Baruch College is the business school of the City University of 
New York and one of the largest in the country. We have over 
15,000 students, 80 percent of them majoring in business, and 
one of the most beautiful scenes you can see is in front of 
Madison Square Garden at the end of every academic year, you 
see thousands of students of all colors, shapes and sizes, 
grandmothers graduating from the City University.
    For the last 6 years, I have served on the board of 
directors of ACCION New York. ACCIONis the largest microlending 
organization in the United States with over 2,300 loans and $18 
million in the portfolio and over 40 staff members.
    I am here to provide some testimony on the proposed changes 
to the SBA microlending program based on my research and my 
experience in the management of the microlending programs. 
Small, medium and large businesses utilize debt financing for a 
range of reasons, from securing working capital to making long-
term investments. For microbusinesses, small entities with less 
than five employees, this is no less true, yet due to a 
combination of factors, including a smaller scale of 
operations, the product and demographic markets they serve, 
their often semiformal nature, their lower borrowing needs and 
the reluctance of formal lenders and financial institutions to 
work in these markets, microbusinesses do not have access to 
traditional sources of business financing.
    In the United States two broad and differing perspectives 
characterize the debate over microfinance. On the one side, one 
side argues there is a potential profit to be made from 
microlending, but for various reasons formal financial 
institutions do not see or seek out these opportunities, 
particularly in low-income and predominantly ethnic minority 
communities. The other side argues that due to the high cost of 
information, high risk of the loans, low returns on investment 
and unrelated resources, there is no money to be made on most 
of these types of small loans, and that microfinance will 
always need some form of State subsidy that should be justified 
on social equity, public benefit, cost-effectiveness or other 
grounds.
    Any progress towards a potential resolution on this debate 
depends on a better understanding of the actual cost of 
microfinance, a better assessment of the profiles of borrowers 
and the risks involved, and a development of a lending model 
with concrete parameters that can be adjusted and calibrated to 
local conditions and borrower characteristics and risk 
profiles. Once we have a realistic estimate of the transaction 
cost of microfinance and the interest rates that may need to be 
charged to cover its cost, we can be in a better position to 
understand their effectiveness, evaluate their needs and the 
levels of public and private subsidy, and analyze why private 
banks and related financial actors have or have not entered 
these markets.
    And the bulk of my testimony comes from a research paper 
that was published in January in the Journal of Small Business 
Management where myself and a theoretical physicist and another 
colleague, vice president at the time of ACCION, endeavored to 
try to estimate the actual cost of microfinance and compare the 
costs with what the industry was, in fact, charging. We used a 
model to calculate a value-neutral APR over the funding for the 
product. Very specific direct costs are taken, as outlined in 
our equation model, and then we present the model that 
basically estimates for three types of loans how much would you 
need to charge to be able to recover the cost of making a 
microloan.
    We define three characteristic products. One is a loan of 
$2,000 for a high-risk borrower, the other is a loan of $10,000 
to a medium-risk borrower, and the third is a loan of $20,000 
to a low-risk borrower. Our model estimates that in order for 
to you recover the cost of making a $2,000 loan to a high-risk 
borrower, you need to charge 34.7 percent APR to be able to 
recoup the money. For a $10,000 loan for a medium-risk 
borrower, you would need to charge 17 percent to recover the 
cost. And for a $20,000 loan for a low-risk borrower, you would 
need to charge 11.7 percent to recover the cost.
    We then looked at what microlending programs actually 
charged, and we found that it was significantly less than was 
required to cover the costs. Therefore, they have two options. 
They either close their operations because there is no money to 
be made, or they require some form of State or other subsidy to 
be able to continue their operations.
    Our paper basically concludes that in order for us to be 
able to--we conclude that the industry is significantly 
undercharging in most of the loans it makes, and it is 
foundations and governments that are picking up the difference 
between what they are actually charging and what it costs for 
them to make the loans.
    Chairwoman Velazquez. Thank you, Dr. Cordero-Guzman.
    [The prepared statement of Mr. Cordero-Guzman may be found 
in the Appendix on page 55.]

    Chairwoman Velazquez. Our next witness is Dr. James 
Morrison. Mr. Morrison is president of the Small Business 
Exporters Association of the United States, which handles 
international trade matters for the National Small Business 
Association, a federation representing 65,000 small and medium-
sized exporters. He was appointed by President George Bush to 
the Advisory Committee on Trade Policy and Negotiation, the 
U.S. Government's senior trade advisory panel, providing the 
Office of U.S. Trade Representative with advice on U.S. Trade 
policies and specific trade agreements.
    Welcome, Dr. Morrison.

  STATEMENT OF DR. JAMES MORRISON, PRESIDENT, SMALL BUSINESS 
           EXPORTERS ASSOCIATION OF THE UNITED STATES

    Mr. Morrison. Madam Chairwoman Velazquez, Representative 
Chabot, members of the Committee, thank you for inviting me to 
appear here today. I am James Morrison, president of the Small 
Business Exporters Association of the United States. SBEA is 
the Nation's oldest and largest organization dedicated 
exclusively to smaller American exporters. We are also the 
international trade council of the National Small Business 
Association, serving U.S. small businesses across the Nation. 
We thank the Committee for its interest in assisting small 
businesses in international trade.
    Reauthorizing SBA provides a welcome opportunity to review 
the agency's Office of International Trade, to strengthen it 
where it is succeeding, and provide it with fresh congressional 
guidance. SBEA supports the Office of International Trade. We 
think it does a good job. Perhaps its most impressive success 
is the volume of export sales underwritten by OIT's export 
finance specialists located in U.S. Export assistance centers 
across the country.
    Export finance guarantees by SBA are important. In the 
U.S., as elsewhere in the world, commercial banks will not 
accept the foreign risk inherent in export sales without 
government guarantees. In fiscal year 2006, SBA guaranteed over 
$2 billion in export sales by small companies. Many of these 
transactions were for less than $100,000. What did it take for 
SBA to pull this off? It took $4 million and 17 people in the 
field. That works out to about $500 in export sales for every 
$1 that the taxpayers invested in the program, and over $120 
million in export sales underwritten that year by each export 
finance specialist on average.
    This is a remarkable achievement. Those sales helped to 
create about 8,000 new high-paying American jobs, Main Street 
jobs. The companies that made those sales will keep on creating 
jobs at a 50 percent faster clip than other businesses, a 
recent study shows. Just the taxes paid by the new employees 
will repay the cost of the export finance specialists many 
times over.
    In SBEA's view, this program is by far the most cost-
effective export promotion effort in the entire U.S. 
Government. Like the weather, everybody talks about the trade 
deficit, but not many people are as successful as OIT at 
actually doing something about it. We are very gratified that 
the legislation being considered today at last acknowledges the 
program's remarkable success and builds on it. We hope these 
provisions pass.
    There are a number of other useful provisions in the bill 
as well. OIT will be directed to develop recommendations about 
small business for U.S. trade negotiators. This is a good idea. 
At present no one in the U.S. Government focuses on this issue 
in a full-time professional capacity. Small business needs and 
international trade ought to be addressed in a focused and 
systematic way if support for trade is to be strengthened on 
Main Street, so the Committee offers a valuable innovation 
here.
    The same can be said for the bill's trade adjustment 
assistance provisions. Restoring the national consensus for a 
vibrant international trading system depends to a significant 
degree on reassuring the public that a safety net does, in 
fact, exist for those who suffer genuine import injury. SBA has 
the existing authority to provide loans for import injury, but 
this authority is rarely utilized. SBA needs to work with its 
banks and borrowers to determine why this is so and to improve 
its products and outreach to meet the need.
    The bill would also authorize OIT to work with small 
business ministries from other countries, to develop small 
business trade statistics, to join forces with those who are 
trying to protect the intellectual property of small businesses 
in international trade, and to help small businesses navigate 
trade disputes and utilize trade remedies. Importantly, the 
bill would also raise the loan limits for at least two of OIT's 
three loan products.
    Having noted these desirable features of the bill, we would 
also draw attention to what is omitted, and that is authority 
for OIT commensurate with these new responsibilities. The 
Committee plans to take up this subject in a separate bill, and 
we certainly hope that bill squarely addresses this issue.
    Even now with OIT buried deep within SBA's hierarchy, very 
few at SBA see international trade activities as a priority. 
Adding new responsibilities to OIT will worsen the situation 
unless, that is, Congress sends a very strong signal to SBA 
that it wants this treated as a priority. And the way to do 
this is to consolidate the agency's international trade 
personnel and resources under OIT and to elevate the office 
within the agency so that it reports directly to the 
Administrator. Without such a strong backing from Congress, OIT 
will continue struggling to keep international trade on SBA's 
agenda, and it will not be able to accomplish the ambitious new 
goals that the Committee seeks.
    Again, our thanks to the Committee and its staff for this 
forward-looking bill. That concludes our testimony. We would be 
happy to accept any questions.
    Chairwoman Velazquez. Thank you, Dr. Morrison.
    [The prepared statement of Mr. Morrison may be found in the 
Appendix on page 69.]

    Chairwoman Velazquez. Our next witness is Mr. William 
Gaskin, president and secretary of the Precision Metalforming 
Association, which represents the $41 billion industry that 
produces precision metal components and assemblies found in 
autos, appliances, computers and thousands of other 
applications. He serves as president and secretary of the PHA 
Educational Foundation as well as the association's for-profit 
subsidiary.
    Welcome, sir.

 STATEMENT OF WILLIAM E. GASKIN, CAE, PRESIDENT AND SECRETARY, 
               PRECISION METALFORMING ASSOCIATION

    Mr. Gaskin. Thank you, Chairwoman Velazquez, Ranking Member 
Chabot and members of the Committee. Thank you for holding this 
hearing today. My comments will focus on aspects of the SBA 
Trade Programs Act of 2007 other than the Microloan Program, 
which many have already addressed.
    The vast majority of PHA members are small businesses. They 
make component parts for a wide variety of industries. 
Virtually all manufactured products that are exported from the 
United States have metal components. So while many small 
companies may look at international trade and exporting with 
great skepticism, it can bring tremendous opportunities.
    Whether our industrial customers are domestic or overseas, 
cost is a key factor in determining whether the metal parts or 
assemblies are bought from an American manufacturer or an 
international source. Of course, quality and delivery are 
important, but the primary driver is cost. Metalforming is 
highly automated, a high-skill industry. Our largest operating 
expense is purchasing raw materials, in our case steel, like 
flat rolled metal, which amounts to 50 to 70 percent of our 
costs.
    Over the past 4 years our members have found their foreign 
competitors often supply metal components and assemblies or 
finished products cheaper than the cost of our raw materials 
alone in the United States. This clearly puts small American 
manufacturers at a disadvantage and seriously restricts our 
export opportunity. Hopefully the SBA Trade Programs Act of 
2007 will offer some much-needed assistance.
    When we experienced 40 to 60 percent price increases in 
steel, as we did as a result of the government-imposed 201 
steel tariff in 2002 or a doubling of our steel costs in 2004, 
small businesses are placed in a squeeze. They simply do not 
have the ability to raise prices to their larger industrial 
customers like the automotive industry.
    Small manufacturers have been injured by the unintended 
consequences of our trade policies because they are not 
friendly to small companies in many cases. When the U.S. 
International Trade Commission determines whether to levy 
tariffs or taxes on imports of raw materials such as steel, 
aluminum or copper alloys, the current law bars it from 
considering the impact any decision would have on domestic 
industrial consumers of those products. The ITC's view is that 
trade cases are entirely between importers and domestic 
producers of a product. American companies who use these 
products as their raw materials do not have standing in those 
cases.
    According to the Department of Labor Statistics, there are 
more than 9 million steel-consuming jobs in this country. 
Because of our outdated trade laws, none of these companies or 
their employees are represented in hundreds of cases at the 
Department of Commerce. That is why we support H.R. 1127, 
legislation that is offered by Representatives Knollenberg and 
Kind to provide domestic industrial consumers a seat at the 
trade remedies table.
    We also need a system to track small business imports and 
exports, which would provide a better snapshot of our 
industries. Due to current classification systems, the 
government does not adequately collect and report data on 
imports and exports. For example, the products produced by 
1,700 companies, most of them small, in NAICS code 332116, 
metal stampings, which represents nearly 100,000 jobs, appear 
nowhere in the HTS codes used by Customs and the Department of 
Commerce to track imports. While the Commerce Department has a 
robust program to accurately track some products, they do not 
track ours. This lack of data and analysis hinders policymakers 
and harms businesses and employees.
    A good example of this recent--a good example is the recent 
announcement by China that they would impose an export tax on 
raw steel. Well, that is good for the steel industry in the 
U.S., and we support the steel industry, but it harms smaller 
American manufacturers who are trying to be competitive 
globally in producing parts.
    Section 402 of the SBA Trade Programs Act seeks to 
establish an annual trade strategy for small business. Big 
Business is represented in our current trade policy, Big Labor 
is represented, but where is Small Business? We applaud this 
action. Fundamental currency misalignment by China and other 
nations provides a clear subsidy and places small companies in 
America at a competitive disadvantage.
    Section 202 of the SBA Trade Programs Act would address a 
growing problem for our members, intellectual property theft 
and lax enforcement by trading partners. Minster Machine 
Company, located north of Dayton, Ohio, recently discovered 
that a Chinese company is counterfeiting its metal stamping 
presses, frustrating efforts to export high-tech, high-quality 
machines to China. Small businesses often lack the financial 
resources to defend themselves.
    In addition to IP, participating in countervailing and 
antidumping cases is difficult in large part because they are 
so prohibitively expensive. Last fall I visited the Department 
of Commerce's Imports Administration office with a member from 
Springfield, Ohio, who had lost some $2 million of their 
business to Chinese companies that were making steel pullies 
for the lawn and garden industry at a lower cost than the raw 
materials alone in the U.S. They decided not to pursue a trade 
case because the legal fees were way out of line with $2 
million of their business, and yet it hurt the company 
desperately.
    When export opportunities do exist, our members have found 
barriers erected by foreign governments impact them. Small, 
medium-sized American manufacturers can only be globally 
competitive if the U.S. Government takes a more complete 
approach to its trade policies and remedies when foreign 
governments fail to abide by trade agreements, especially for 
small companies.
    Small manufacturers stand to benefit greatly from 
exporting, but in order to take advantage of these 
opportunities, we must have a domestic environment that will 
strengthen small businesses.
    Thank you very much.
    Chairwoman Velazquez. Thank you, Mr. Gaskin.
    [The prepared statement of Mr. Gaskin may be found in the 
Appendix on page 81.]

    Chairwoman Velazquez. Mr. Hager, I would like to start my 
questions with you.
    The agency has demonstrated a declining interest in 
expanding its trade-related services. Loans from the 
international trade program dropped last year, and the number 
of specialists at U.S. export assistance centers fell by nearly 
30 percent over the last 5 years. The agency has also focused 
largely on export assistance, neglecting the needs of the rest 
of small businesses negatively impacted by trade. At the same 
time it has become critical that small firms incorporate trade 
into their business strategy.
    How can you come before this Committee and tell us to stay 
the course when we have so many communities suffering job 
losses due to overseas competition?
    Mr. Hager. Madam Chairwoman, the initiative for 
international at the SBA, as a matter of fact, in the field 
staff, we are back up to staff that certainly since I have been 
there, we are back to those levels. We are committed to this 
cause. We spend a great deal of time in international 
operations. We support many conferences, attendance to 
development of the program. We are not taking our eyes off this 
initiative. We are largely in support of many of the issues 
that have been proposed today. We are anxious to work with you 
with a breakout of Subcommittee staff members from this 
Committee as well as the SBA to engage in meaningful discussion 
how can we come to agreement on many of these key initiatives.
    Chairwoman Velazquez. Dr. Morrison, do you think that the 
current efforts by SBA are sufficient to help small businesses 
prepare for this globalized economy?
    Mr. Morrison. What SBA is doing so far is good and, as I 
indicated in my testimony, has been very beneficial. But as was 
noted, I think, in Mr. Hager's statement, there are close to a 
quarter million small business exporters in the United States, 
and the SBA is touching on a very, very small fraction of them.
    Even in terms of the need for export finance, I think there 
would be general agreement amongst those who know the field 
that SBA is doing a very, very minor fraction of what it could 
be doing in this area where the demand enormously exceeds the 
supply.
    Chairwoman Velazquez. Mr. Gaskin, or even Dr. Morrison, you 
know, I am a teacher, so let us grade them in terms of 
assistance to small businesses regarding trade.
    Mr. Morrison. I guess I would break it into two categories. 
I would give them something like an A minus for effort, and I 
would give them something like a gentleman's C minus for 
resources devoted to the cause.
    Chairwoman Velazquez. Thank you.
    Mr. Hager, the country's trade deficit has reached $800 
billion annually, and China-U.S. surplus is up 84 percent since 
last year. This has resulted in the loss of many small U.S. 
firms in the manufacturing industry and increasingly in 
services and agriculture sectors. Entrepreneurs, however, could 
play a critical role in lowering the trade deficit. The trade 
deficit is a national crisis, and everybody should play a part 
in reducing it. You say USTR, UCA, the Department of Commerce, 
USDA, it is everybody's responsibility but SBA. The current 
administration always talks about the importance of personal 
responsibility. When is the agency going to take responsibility 
for the current poor trade performance?
    Mr. Hager. I would like to point out that 2005 the agency 
was responsible for and helped support almost 3,000 loans, 
2,950 loans. In 2006, that number rose to 3,304. Is that taking 
care of the world? Absolutely not. But when we have other 
departments and functions in the government, it behooves all of 
us to work closely together.
    Chairwoman Velazquez. So let me give you your own facts. 
Over the last 5 years the agency has drastically cut UCA staff 
and eliminated its budget. Tell me, how is that taking 
responsibility?
    Mr. Hager. The budget since I have been there, the number of 
USEAC members in the field is currently at 16. I don't think at 
any time--I have been there 2 years. I don't think at any time 
I have been there that number has been greater than 16.
    Chairwoman Velazquez. So let me ask you this other question. 
Since 2003, there have been vacancies in SBA trade finance 
specialists assigned to U.S. export assistance centers located 
in New York City and New Orleans. New York City and New 
Orleans, these are both significant ports. While the latter is 
clearly in need of economic assistance as a result of the 
Katrina disaster, can you explain why the agency will neglect 
to fill such critical positions?
    Mr. Hager. We feel that the coverage throughout the country 
in total is being covered by the 16 USEAC members we have 
today.
    Chairwoman Velazquez. Sixteen for the entire country.
    Mr. Hager. We have in addition to that 68 district offices 
throughout the United States with numerous members in each 
office to assist and help us in this initiative.
    Chairwoman Velazquez. Do you agree with me, New York City 
and New Orleans, two critical ports, and then New Orleans, this 
is the administration's commitment to help the victims of 
Katrina to recover?
    Mr. Hager. Let me break out. I have been to New Orleans a 
number of times.
    Chairwoman Velazquez. No. This is not about New Orleans.
    Mr. Hager. May I answer your question? The answer that I 
would like to subscribe to and present to you is that in New 
Orleans we are taking goods and products from around the United 
States that ends up in a port for shipping. We don't believe 
that--we firmly believe that we have New Orleans covered. We do 
not believe that adding more USEAC people in New Orleans would 
help the production of goods and services throughout the 
country. It would at best help the shipping of those goods and 
services out of New Orleans.
    Chairwoman Velazquez. So let me ask Dr. Morrison, do you 
feel that one of the major problems that we have is that while 
export is increasing, small exporters are not benefiting from 
it because they don't have the financing? And you are telling 
me that two specialists that are important in two key ports are 
not necessary?
    Mr. Hager. I am saying that we--
    Chairwoman Velazquez. Dr. Morrison. Mr. Gaskin.
    Mr. Morrison. With all due respect for Mr. Hager's point of 
view on this, I am afraid I would disagree. If you look at the 
output of the export finance specialists, it comes to on 
average about $120 million in export sales underwritten per 
year. I think that $120 million would be enormously beneficial 
for New York City and New Orleans. I do not know why those 
positions have been vacant for so many years. I strongly 
believe they ought to be filled, and I think it is an important 
part of the New Orleans recovery from Katrina to do that.
    Chairwoman Velazquez. Mr. Gaskin.
    Mr. Cordero-Guzman. Thank you.
    I think that--as I mentioned in my testimony, there are 
many small companies, manufacturers who could use help, 
financial help exporting. But they also need financial help in 
the U.S. dealing with the trade bureaucracy. The SBA could be a 
remarkable advocate for small manufacturers who are trying to 
find their way through the ITC and the USTR requirements, and 
especially when it comes to the antidumping/countervailing duty 
areas, but it is prohibitively expensive for any company to do 
that. So financial help there would be very helpful.
    Chairwoman Velazquez. Thank you, Mr. Gaskin.
    Mr. Hager, you indicated that the financing sections of the 
bill may violate international dumping rules. However, SBA 
currently administers a loan program which aids small business, 
and I quote, confronting increased competition with foreign 
firms, and I quote, are injured by such competition. The 
legislation that we have before us simply builds on this 
existing initiative. We are not creating new initiatives. We 
are adding layers. We are expanding the size of the loans. So 
how could you come before the Committee and say that we are in 
violation of international dumping rules? Yes.
    Mr. Hager. Madam Chairwoman, I don't pretend to be an 
international attorney or have--please let me finish.
    Chairwoman Velazquez. Yes.
    Mr. Hager. We believe and we have been advised that it may 
be in conflict with WTO. It is up to WTO to make that final 
determination. We are raising it as an issue to be discussed. 
We are not saying it absolutely will. We have been told it may. 
And we want to bring it to the Committee's attention so it can 
properly be addressed.
    By the way, I just want to make one quick comment. New York 
is still our largest producer of loans in international trade 
for the SBA.
    Chairwoman Velazquez. Mr. Hager, I will ask you to go and 
revisit the testimony and the statement that you made regarding 
violation of WTO. Don't come here, sir, and make such 
accusations. And I have to tell you after you finished reading 
your note that I don't mind having thoughtful disagreement 
here. That is part of the deliberations that needs to take 
place here. But I do not--I really resent the fact that you 
come here and say--and make a statement that this is in 
violation, the same thing you did when we were considering the 
lending bill of Mr. Chabot and Mr. Sarbanes. You said that it 
violated the Credit Reporting Act. I presented you with a copy 
of the Credit Reporting Act, and you were unable to point to 
the accusation that you were making. So if midlevel staff is 
going to come here and not provide the facts, then I will 
request from now on to have the Administrator to come before 
the Committee.
    Mr. Hager. May I respond to you?
    Chairwoman Velazquez. Yes.
    Mr. Hager. Number one, I said in my testimony just a few 
minutes ago that it may be. I did not say--I am not an 
international attorney. I cannot absolutely tell you. I raised 
it as an issue for us to deal with, and I think we should deal 
with it. Let us investigate it and get our staffs together and 
evaluate it to determine--
    Chairwoman Velazquez. Are we creating a new lending program 
under the bill? Are we? No.
    Mr. Hager. But what I am--I am raising it as an issue. I 
thought that was the purpose of our comments.
    Chairwoman Velazquez. Thank you.
    Yes, Mr. Gaskin.
    Mr. Gaskin. If I could just add a comment. You know, the 
U.S., the administration approach seems to be in flux on the 
WTO. There is areas like this where loans maybe are ruled 
illegal against or they think they might be illegal with WTO 
rules. But why don't we let the WTO figure that out?
    Chairwoman Velazquez. Well, also let me add, Mr. Gaskin, how 
many complaints did this administration have filed before the 
WTO?
    Mr. Hager. I don't know.
    Chairwoman Velazquez. You don't know? Let me tell you: 
Three, three so far.
    Mr. Hager. Yeah.
    Chairwoman Velazquez. What about the manipulation of the--
    Mr. Hager. There have been complaints filed.
    Chairwoman Velazquez. I will go to Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair. Just a few questions. If 
you would like to pour yourself a glass of water, Mr. Hager.
    Mr. Hager. I am fine. It is not personal.
    Mr. Chabot. In any event, let me follow up on a couple of 
things. First of all, Mr. Kelly and Mr. Hager, relative to the 
Microloan program, Mr. Kelly you made the point in your opinion 
that it is complementary, not duplicative. And I think there is 
some disagreement. The Microloan program I am referring to, Mr. 
Hager's point of view and Mr. Kelly, I would be interested to 
hear a little bit of discussion from both of you on that 
particular point.
    Mr. Kelly. This is specifically the duplication between 
Microloan and PRIME?
    Mr. Chabot. Yes.
    Mr. Kelly. Is that what you are referring to? They serve 
different people. First of all, the PRIME is more targeted to 
low-income folks than Microloan is, although Microloan does 
certainly serve mostly low-income people. The difference is 
entrepreneurs who need capital versus those who don't need 
capital. And if you don't need a loan, at least right now, 
PRIME is a program that was really created to help those 
entrepreneurs.
    If you do need a loan, the Microloan program is for you. 
And then you can also get some technical assistance through 
that, but it is specifically for people who need a loan. If you 
don't need a loan, you can't go to a Microloan intermediary and 
say, give me technical assistance but not a loan. You have to 
have both together.
    If I could just give a little background, the Microloan 
program is older than PRIME. And when our industry, our field, 
in the late 1990s was polled by--we were told that the biggest 
need out there among the entrepreneurs that they were working 
with was the program that became PRIME. It was to help the 
entrepreneurs who did not at that time need a loan but they 
only needed technical assistance.
    And, in fact, what is different here in the United States 
versus Microenterprise abroad is that abroad is very lending-
focused. That is mostly what Grameen Bank does, almost all of 
it. Here, probably half of our groups don't do any lending at 
all; they only provide technical assistance to entrepreneurs.
    Mr. Chabot. Mr. Hager, did you want to comment on any of 
that?
    Mr. Hager. I don't know that there is anything I could add 
other than our whole position on PRIME has been we have 
programs of SCORE, SWBC, SDIC, the district offices. We think 
that there is some duplication that can be corrected. But I 
agree with so much that you said. TheMicro-programs certainly 
emerged before you needed the PRIME. And once it was there, 
let's take a look at PRIME to help with the number of loans and 
help those small emerging companies deal with the issues they 
have to deal with to enable them to apply to the loan and, more 
importantly, get it.
    Mr. Chabot. Let me turn to you, Ms. Darien. Again, in the 
programs that we are referring to this morning, particularly 
the Microloan program, you mentioned that a lot of folks when 
they are starting up or expanding a business, rather than 
utilize one of these loans because of the availability of them, 
they end up either going to personal savings or borrowing money 
from perhaps relatives--I don't know that you mentioned that, 
but that is something that occurs. You mentioned they use their 
credit cards. If they use their credit cards and if they pay it 
off every month, they are not paying an interest rate. But if 
they are not, they are paying anywhere from 25 percent and up.
    Could you discuss the impact that would have, and why these 
are so important to businesses starting up, or relatively small 
and expanding?
    Ms. Darien. We did a poll--in fact I included it and 
attached it to my written testimony--on financing for 
microbusinesses so you would get a good snapshot of everything 
they are using in terms of their finances. But particularly 
credit cards, personal savings, and home equity loans were 
their main source of financing to start up their business. And 
in terms of ongoing financing, it was personal savings and 
credit cards.
    And the big issue, particularly with credit cards and lines 
of credit is, again, that interest rate. What is occurring with 
credit cards is that they are paying minimum balances with 
microloans, they get affordable rates due to the subsidy, the 
backing, they get the size loan they need. It creates stability 
within their financials for their business versus credit cards, 
which puts an undue burden on their business.
    With personal savings, as mentioned, should they have an 
incident, whether there is an economic downturn--which is a 
perfect example--and all of a sudden they have liquidated their 
personal savings to go into their business. Or if there is a 
personal situation--for example, a medical illness occurs and 
they have no more personal savings, it is all invested in their 
business--these are the persons you will find filing for 
bankruptcy.
    So it is a big issue in terms of how someone is going to 
start up and finance their business. That is why the Microloan 
program is so important. It offers funding at affordable rates 
and also offers that technical assistance to teach the 
microbusiness owner how to properly apply for the loan and how 
to use that money to the best of their interest, and supports 
them throughout the whole repayment of the loan.
    Mr. Chabot. Thank you very much.
    Dr. Guzman, if I could turn to you next, you had made the 
point that in the study that you did, when you are talking 
about the smaller loans and depending on the three categories 
that the loans were in, that they cost anywhere from 11 
percent--the actual cost of the loan--to 30-some percent, and 
made the point that what that ultimately says is that it is 
being subsidized by somebody, and that is essentially the State 
or the government in some form, which is essentially the 
taxpayers that are funding that.
    Would you talk to, maybe, the overall broader either public 
good or the reason--the justification for the taxpayers or the 
government, or whatever terminology you want to use, picking up 
that thing that is necessary and what that ultimately does for 
the overall economy and employment, et cetera.
    Mr. Cordero-Guzman. There are two points:
    One on the cost of providing the loan and understanding why 
it takes 35 percent, for example, for the small loan and what 
do you need to do to be able to put that money out there, the 
amount of staff time and others. That is one end of it.
    The subsidy is picked up mostly by a combination of State, 
foundation funding, individual donations. It is up to the 
individual nonprofits that are the members of the Association 
for Enterprise Opportunity. Each of the members has a 
particular funding proportion that helps them cover the gap 
between what they are charging and what it actually costs them 
to do the work.
    It is not only the government that covers that. In the case 
of ACCION New York, for example, it receives very little 
government money and most of that is covered by foundation 
support. On the order of $700,000 per year that has to be 
raised from numerous foundations.
    The second part of the question, more about what do we get 
in return for that investment--it is not a question that in the 
paper we necessarily analyzed. The question we wanted to get at 
in the paper was, why are banks not giving out these loans? And 
we had two options: that they are very smart and they realize 
that there is no money to be made on these loans, or that they 
are very stupid and they are not taking advantage of 
opportunities.
    And what we found was that the banks in fact are relatively 
smart, because it costs them, they are paying a bank loan 
officer $100,000 to evaluate a $2,000 loan? How much does it 
cost Citibank to pay someone just to look at that piece of 
paper? We found for a $500 loan it is easier to flip a coin 
than to pay someone to begin to look at the paperwork. That is 
what we wanted to get into: Why is it that banks are not 
providing this financing? And the answer is because for the 
very small amount for the somewhat risky borrowers, it is a 
very risky thing to do.
    The second side is, is that investment worthwhile? We in 
the paper did not look at what happens to the microbusinesses 
once they received the loan. We have a lot of other evidence 
from the businesses themselves and from others that they 
benefit significantly from receiving that access to financing.
    In order for a business to survive it needs three m's: 
money, management and markets. And we believe that the small 
businesses are finding markets very well. The have to some 
extent--and the TAs are designed to give them the management 
skills they need to grow their businesses. The biggest obstacle 
that they reported is always the money and the expense it costs 
them to get that money.
    The credit cards, 25 percent. We interviewed people that 
were borrowing from loan sharks at a rate of 20 percent per 
month. The most common form of payment for the shark was to pay 
the interest rate every month until you have the money to pay 
the entire lump sum. It ended up in some cases to be 240 
percent a year.
    While we did not look at evidence of the positive social 
businesses of microlending, there seems to be plenty of 
evidence that the small businesses do create jobs for the 
owners of the business and for others around them, and do 
provide income to the family members. Whether it is worth the 
social investment is up for you who are lots smarter than I 
could ever be to decide that.
    Mr. Chabot. I agree with everything except the last point 
that you made.
    Madam Chair, rather than go to Dr. Morrison and Mr. Gaskin, 
I yield back the balance of my time to be fair to other 
members.
    Chairwoman Velazquez. Mr. Shuler.
    Mr. Shuler. Madam Chair, thank you. To Ranking Member 
Chabot, it is almost my questions exactly. I will have to come 
up with some new ones.
    Dr. Guzman, obviously, as you have indicated, a tremendous 
amount of expense that banks would have in order to be 
profitable to review these loans. And we talk about loan 
sharks. But don't you think we could agree that the SBA is not 
in a for-profit organization?
    Mr. Cordero-Guzman. Correct.
    Mr.Shuler. Not having the profit, I mean, if I look at the 
people who are looking at--we talk about 50 percent are almost 
in poverty level or below the income necessary to be able to 
qualify for some of the banks and to go get a $50,000 or 
$100,000 loan. It is much better to get a helping hand than a 
handout. And so thank you for your testimony, because I think 
it really gave us a true sense of who the people that we are 
dealing with are, that the SBA should be dealing with, and, 
probably more important than anything that you talked about, 
the loan sharks that are being substituted by the lack of work 
that the SBA has done.
    And so I want to commend you on your testimony and what you 
have been able to give us and provide us a truly inside of what 
is going on.
    And to Mr. Kelly, I would like to hear from you, or Ms. 
Darien, is talk about some people that have been turned down 
and why they have been turned down on these microloans. And 
tell me about a success story.
    Mr. Kelly. Thank you, Congressman Shuler. I can tell you 
about one. There is a woman whose name is Susan Brown in the 
Denver, Colorado area, and she had an idea. She went to a bank 
and asked for a loan to start up a business. And she didn't 
have a great credit score, I guess, and not enough collateral 
and some other issues, and they basically said, no, we are not 
interested.
    She then went to the local Micro Enterprise Development 
Group who gave her a loan, and she took the money and went to a 
trade show. And she has a product called a Boppy. Probably a 
lot of the women know about it. It is for newborns. It is a U-
shaped pillow. You know what I am talking about? That thing has 
been selected as the best baby shower present in the United 
States several years running. She has a multimillion-dollar 
company in Colorado that employs 25 people or more, and she 
couldn't get a loan from the bank. If it were not for the 
Microloan program she wouldn't exist. She would, but the 
company would not exist.
    She has said several times that she would be happy to come 
and testify. It has never worked out with her schedule to do 
that. Because if it wasn't for the Microloan program I wouldn't 
be here, I wouldn't be where I am right now.
    And there is a guy who is not that far along, Victor Valdez 
in southern Arizona. He got a loan for a plastic thing that you 
put around your trash can that helps holds your trash bag up. 
And he has a contract to sell those in the Ace Hardware Stores 
throughout the Tucson, Arizona area. If it does well, there is 
a chance for him to go statewide.
    There certainly are a lot of examples like them. Those 
companies pay a lot of taxes, employees are paying taxes, 
employing people who were unemployed, in some cases, before. So 
there is a lot of benefit coming around as a result of these. 
Some of them are small and want to remain small, but you have 
some of these big stories as well.
    Ms. Darien. In the testimony that I submitted, I will be 
glad to read a quote from our member who received an SBA loan 
and had substantial trouble getting lending from a bank due to 
lack of collateral and credit score.
    NASE member Mark Zoller, President of Zoller's Outdoors 
Odyssey's Inc. He said, and I quote, "My father started a 
white-water rafting business 34 years ago and he and the 
operation was simply tired, and at end of his tenure he had a 
great vision for how he would like the company to expand, but 
not the energy or the capital. I applied and received an SBA 
loan which enabled us to purchase and build a new facility and 
expand our offerings. In the 6 years since, we have more than 
doubled the business and now have 30 white-water guides on 
staff along with several support staff. Six years ago our 
annual revenue was $200,000. This year it looks like it is 
going to be $550,000. The SBA kept our family operation alive 
and gave us the opportunity for great achievement."
    This is a perfect example of one of our members. All of our 
members are microbusiness, 10 or less, and this is how these 
loans help. A majority of them have a lot of difficulty getting 
loans through traditional lending institutions. In fact, our 
association has gone to a whole series of national banks 
requesting to start a loan program particularly for our 
members, and they all turned us down. And we are a national 
association with 250,000 members.
    So we ourselves had to create a grant program. We currently 
have the NASE business development grant program in existence. 
We give out $200,000 a year, $5,000 grants to our members, but 
we were unable to start a loan program. Banks refused to work 
with us.
    Mr. Shuler. Thanks. The reason I ask this, Mr. Hager, is one 
simple fact: The people need help. They are asking for truly a 
helping hand, not a handout. And we can take these testimonies 
by the people here and take them back to the administration and 
truly work for the common good. I mean every time someone from 
the Small Business Administration comes in here, it is the same 
process that we go through. You want to continue to cut and 
cut, and it is truly the people who are making the differences 
in our small businesses.
    North Carolina lost 78 percent of its textile industries. 
78 percent, most which have now become small business owners. 
And we have to keep that in mind. They are not asking for a 
handout. They are asking for a helping hand.
    Chairwoman Velazquez Mr. Gonzalez.
    Mr. Hager. May I make just a comment? You know, I appreciate 
your comments. I worked in the textile industry in Alabama. The 
company now no longer exists. The one reason I am up here now--
Russell Athletic. We are in support of many of the programs to 
expand micro. I mean, there is very little we have any issues 
with at all. We applaud the efforts being made to expand this 
program.
    The export business, the same thing. There are so many 
issues, I wish we could focus more on the commonality, the 
things we agree with, as opposed to the few things we don't. 
But clearly the microlending programs, the testimonials here 
are so impressive and we again are very supportive of the 
majority of what has been proposed here today. We don't 
disagree.
    Mr. Shuler. Thank you.
    Chairwoman Velazquez Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Madam Chairwoman. I am 
going to be asking a question based on testimony by Mr. Kelly, 
and the question will be going to Mr. Hager and Dr. Cordero-
Guzman. This is the statement from Mr. Kelly--this is on the 
Microloan program.
    Raising the interest rate program on the Microloan program 
will make this program much less appealing to microenterprise 
development organizations. The value of the program is that it 
allows Microloan intermediaries to keep interest rates down to 
their borrowers. By raising the interest rate to the 
intermediaries they will be forced to raise interest rates to 
the borrowers, which will create an economic hardship for them 
and make it more difficult for them to grow their businesses. 
This strategy is counter to the original reason that Congress 
created the Microloan program.
    And of course we started off with the testimony by Mr. 
Hager as to why it is so expensive and such. But this is a very 
troubling statement made by Mr. Kelly.
    And so I would start with Mr. Hager. And do you agree or 
disagree with what Mr. Kelly believes is going to be the 
outcome of your proposed rule change?
    Mr. Hager. I respectfully disagree only from the standpoint 
if you look at the interest rates in the nonsubsidy we have in 
the traditional 7(a) program, and look at the growth that has 
doubled in the last 4 years, I believe would support the fact 
that we don't believe that we should be carrying the same 
subsidy as we are today in the Micro-program.
    Mr. Gonzalez. All right. I think Dr. Cordero-Guzman, his 
work and his paper that he prepared, I am not sure if he is 
going to agree or disagree--I will just ask. How do you view 
Mr. Kelly's testimony?
    Mr. Cordero-Guzman. The type of subsidy that is required 
depends on the borrower and the characteristics of the 
borrower. The problem I am having with the discussion is that 
we are lumping all the different types of borrowers in the same 
basket. You would want to, for a value-neutral interest rate, 
want to change the same to all borrowers. You want to break it 
down a little. And what we did not want as a result of our 
paper was to have the better borrowers subsidizing the worst 
borrowers.
    We wanted to find out what is the fair price you need to 
charge someone who is requesting $20,000 that has a good 
record, and that is 11 to 12 percent, versus someone who is 
asking for $2,000 that has not such a good record, which is 34 
percent. So the answer as to what you should charge and how 
much you should subsidize depends on who the borrower is.
    Now, if you cut the subsidy, it is going to be passed on to 
somebody. The groups that administer the programs are nonprofit 
organizations; they do not have anywhere to pull the money 
from. They would have to raise it from a foundation or local 
government or somewhere to cover the spread, or pass it down to 
the borrower. And there is a moral question as to whether you 
do or don't want to do that.
    And in the literature there are arguments that--the credit 
rationing literature--there are arguments that there are 
reasons why you don't want to set the interest rate way too 
high, because you would only attract people who can pay an 
interest rate or would want to pay an interest rate that is 
exorbitant. They are not the best-quality people. They know 
more information about themselves than you do.
    So my answer is it really depends on the borrower. What we 
don't think should happen is certain borrowers subsidizing 
other borrowers. We believe that each category of borrowers 
should get the interest rate they deserve, and the spread 
should be covered by somebody or the loan will not be made.
    Mr. Gonzalez. Which is the biggest fear. This is testimony 
from Mr. Hager--we propose eliminating the cost to the 
taxpayers for the Microloan program. Currently, the 
intermediaries pay less than the 5-year Treasury rate to SBA 
for their loans. We are proposing they pay just over 1 point 
more than that rate, still a very favorable rate. This would 
bring their interest rate to 5.99 percent in comparison to the 
average rate of 10.5 percent charged to microborrowers.
    In my way of looking at it, I think you do place a lot of 
borrowers in jeopardy because costs will be obviously passed on 
in the greater cost to the intermediary. And I think by your 
own testimony you indicated, look, I mean you have to 
subsidize. Because if you have an officer--loan officer looking 
over a $5,000 loan application as opposed to a $500,000 loan, 
good business sense would tell you that you can't spend any 
time on the 5,000. That is why we have these programs.
    I do want to get into the export business. I think it is 
very, very interesting. Mr. Hager, I don't question your good 
intentions, but this is where I am going to disagree with you 
and just about every administrator that we have had from SBA. I 
know there may be other departments and agencies that should 
have an interest in the small business exporter. But that is 
not their charge. But the Small Business Administration, it is 
your charge. And that is the difference.
    We have had someone from the United States Trade 
Representative's Office sit exactly where you are sitting today 
and I will tell you, after her testimony everyone here--I don't 
care if it is Republican or Democrat, conservative, liberal or 
whatever--had to come to the same conclusion: that they don't 
have anybody addressing the interests of the small businessman 
and -woman exporter. They just don't. And there was no 
coordination, nothing within the Department of Commerce, 
nothing within the Trade Representative's office.
    And so I keep emphasizing to the Small Business 
Administration, this is your mission. This is your goal. This 
is your charge. This is your mandate.
    You question why we are now going to do something on the 
export side and you question whether it is going to impede or 
diminish or in any way jeopardize what is going on out there 
with the World Trade Organization, the United States Trade 
Representative. I am going to tell you at this point, I am not 
sure we care. Someone has got to do it. And we are going to 
have to push you guys in that direction.
    Is there going to be conflict? I will tell you why the 
others agencies and departments are putting that bug in your 
ear, that there may be a conflict and overstepping and such. 
Because they really don't want you involved. They really don't. 
They are ignoring the situation. They don't want in any way to 
invest the resources to address this issue. It really is the 
Small Business Administration that has to initiate this. There 
is not even coordination with our Trade Representative's 
Office, and, to a great extent, the whole Department of 
Commerce.
    So I don't have a question at this time. Thank you very 
much, and I yield back.
    Chairwoman Velazquez time has expired Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Madam Chair. This is very 
informative. If Mr. Gonzalez wants my time, I would be happy to 
give to him. I have learned a lot. I don't have any questions.
    Chairwoman Velazquez Ms. Clarke.
    Ms. Clarke. Thank you very much, Madam Chair. I want to just 
sort of direct my comments to Mr. Hager as well. And you know, 
principally we do agree with the mission and what has been said 
here today. You talked about it is the small things. Let me 
just say to you that it is the small things that are the heart 
of the problem here. What it has done is created a chasm of 
economic disparity. And the SBA has become a partner in that, 
by these cuts and by not recognizing the nuances of what 
microbusiness and microenterprise is all about.
    I would want to recommend to you that you really take an 
in-depth look at Mr. Cordero-Guzman's paper, because it truly 
reflects and gives a real, real-time window into the challenges 
that our microenterprises are facing. And the value in them to 
constituencies like mine in Brooklyn, New York, where you have 
growing interests and expertise in being entrepreneurs, but 
denial of capital to get it going. We rely on those small 
entrepreneurs to be our future corporate entities, and when we 
deny them the opportunity to take that step, when we are not in 
the position to take that leap of faith with them at the United 
States of America, we are doing ourselves a disservice.
    And so I think the energy that you feel coming from the 
membership here--I am a new member and these folks got me 
going--you really should take another look at this. We need 
your assistance in getting these businesses the assistance that 
they need. I come from a constituency where immigrants are a 
big part, second generation, they are coming with 
entrepreneurial ideas. They come from an environment that 
inspires entrepreneurship. They become the employers of people 
who have been systemically unemployed in our communities for a 
very long time.
    So you are going to feel the pressure, you are going to 
feel the heat. These are individuals who also have connections 
to their homeland, so exporting business is almost a natural 
for them in terms of the things that they can create based on 
the knowledge and innovation that we have in this Nation.
    I think that Congressman Gonzalez hit on the point that I 
wanted to make with respect to the percentage point that you 
are requiring of intermediaries. I would like to recommend, 
Madam Chair, that something be submitted in the form of a 
report of how this proposal would impact small businesses, 
showing the data and how they would basically make loans more 
available. Because this is the argument that we are hearing. 
And I would like you to, prior to doing that report, read Mr. 
Cordero-Guzman's report and see if you are really on the mark.
    I don't like the fact that there is some speculation 
involved here, and we need to get to the facts so that we can 
really go to the heart of the challenges that our 
businesspeople are facing at the microlevel.
    Thank you very much, Madam Chair.
    Chairwoman Velazquez thank you.
    I would like to ask some more questions and then I will go 
to you. Congresswoman Clarke just mentioned about the fact that 
there is some speculation but there are not facts. So let me 
give you some facts and see what type of response you have, Mr. 
Hager.
    You heard from the witnesses that are seated next to you 
that Microloan borrowers cannot qualify for 7(a) loans and 
community express loans. Their scores, if they have, are in the 
500s, whereas the 7(a) program frequently requires 680 and 
above. Do you believe that borrowers who normally use 
microloans could qualify for 7(a) or community express loans if 
their credit scores are in the 500s?
    Mr. Hager. You know, the decisions on credit are made by the 
lenders for the most part. We don't tell the lender who 
qualifies and who does not qualify.
    Chairwoman Velazquez based on data that you have seen--
because I suppose when you come here with a proposal like that, 
that you have seen evidence and facts that will tell you that 
there is no risk of denying capital to microborrowers because 
their score will enable them to go and make a 7(a) or business 
express loan. Have you seen that data?
    Mr. Hager. A couple of things. I have seen data to say that 
moving the loan structure from 3.7 to 5.9, we did not believe, 
would make a major impact to the intermediary. The intermediary 
would then charge the borrower.
    But I want to emphasize here throughout, and if the 
Committee would please listen to me, we are the advocate of 
these programs. I can't testify what happened 10 years ago, but 
I am a public servant that is passionate about this program.
    Last year was an all-time record overall for SBA loans. We 
are advocating loans by the day to get more and more made. We 
don't fundamentally disagree with what has been proposed here 
in legislation. It is some of the fine-tuning issues that we 
are wanting to discuss with you--
    Chairwoman Velazquez it is a simple question, Mr. Hager, and 
you don't answer my question. You were a loan officer weren't 
you? You were a banker.
    Mr. Hager. I spent a lot of years--yes.
    Chairwoman Velazquez tell me, if a borrower goes to your 
bank with less than a 500 credit score, would you approve a 
loan?
    Mr. Hager. It would be based on a lot of conditions with 
that borrower. I would not as a banker say--
    Chairwoman Velazquez what is the complaint that we hear over 
and over and over from small businesses across this country? 
The problem is access to capital, and banks not taking an 
interest in their loan applications because they are too small.
    Mr. Hager. Yes, ma'am. And our loan products hit an all-time 
record in 2006. We did more loans than in the history of the 
SBA. So far, year to date, we are ahead of last year, I might 
add.
    Chairwoman Velazquez Mr. Hager, you said that the technical 
assistance part should be provided by the SBDCs and the Women's 
Business Centers; that they should be providing the technical 
assistance component to the Microloan program. Can you tell me 
what is the estimated cost to the SBA for the SBDC and Women's 
Business Centers to take on this additional duties?
    Mr. Hager. We don't believe it would require any additional 
budget. We would use the budget we have. We think it is more 
than adequate--
    Chairwoman Velazquez. You are giving more responsibility to 
the Women's Business Centers and to the SBDCs but you are not 
requesting--
    Mr. Hager. We think it is well within their capability to do 
this, yes, ma'am. Without exception.
    Chairwoman Velazquez we have the Small Business Development 
Centers come here and testify that their counseling hours 
dropped because they don't have the resources. Were you aware 
of that? Did you read the Congressional Records of the hearings 
that we conduct?
    Mr. Hager. I can just say with great confidence, without a 
doubt, that we can accomplish this training with the resources 
we have. We have a very strong budget there.
    Chairwoman Velazquez sir, the administrator and the previous 
administrator came before this Committee when--the whole 
Katrina crisis--to tell us that they were doing more with less. 
I am sure that you know that you cannot do more with less.
    Dr. Cordero-Guzman, our bill would allow more of the 
technical assistance grant money to be used for preloan 
counseling or what you referred to as the loan origination 
screening. The SBA opposes more resources for this. I ask you 
in a relation-based lending model, isn't it wise to allocate 
sufficient resources to screening in order to increase the 
success of the Microloan program, that by itself has proven to 
be a success, when you have a 1 percent default rate?
    Mr. Cordero-Guzman. What I do know is that the typical 
microlender that comes in does not have the type of paperwork 
that a banker would expect a business to have in order for a 
loan to be processed. Which means that as part of the job of 
fulfilling their duty of giving out the loan, the microlenders 
have to be--have to help the business owner get their own 
paperwork together, and that adds to the costs of providing the 
loan.
    And in our model we use the cost of providing that 
assistance and factor it into the interest rate that would need 
to be charged to recover the cost. Because we know that these 
types of businesses don't have the type of recordkeeping and 
paperwork that more formal businesses that have CFOs and 
comptrollers would have. So it is almost a condition of 
completing the application that the paperwork has to be put 
together, and that requires someone's time.
    Chairwoman Velazquez Ms. Darien, would you like to comment?
    Ms. Darien. I think it is essential to have any kind of 
assistance, particularly prior to applying for a loan through 
the entire development, particularly for our microbusiness 
members. They are an expert in their field, in their industry. 
I agree with the doctor that a lot of them don't have the 
paperwork or understand what is required to be an attractive 
borrower to a bank.
    I think, again, the credit score issue is another factor 
that would--that particular provision would greatly assist 
microbusinesses in preparing on how to be a good borrower. And 
once they got through the Microloan program, it would assist 
them down the line to being prepared if they wanted to get 
ongoing financing maybe through a traditional lending 
institution. So it is an essential component that we support.
    Chairwoman Velazquez Mr. Chabot.
    Mr. Chabot. Dr. Morrison, let me ask you: Does your trade 
association have members who export their services as well as 
their goods?
    Mr. Morrison. Yes, we have both service and product exports.
    Mr. Chabot. More goods, I would assume, but you do both.
    Mr. Morrison. Yes, we do both.
    Mr. Chabot. That being the case, is it harder for small 
businesses to access the export market in services rather than 
goods? And would the proposed legislation help those selling 
services to gain greater access to the export market?
    Mr. Morrison. Well, as to the first part of your question, I 
think it depends on the type of service that is being offered. 
Computer services, for example, find it pretty easy to get into 
the export market. Other services that require professional 
licensing abroad are more complicated.
    I think you can go to SBA as a service exporter and seek 
some assistance. The program really is designed, I think, 
originally around goods exports, but it could be made to work 
for service exports.
    Mr. Chabot. Thank you.
    And then, Mr. Gaskin, I was interested in your comment when 
you went back to 2002 and the famous steel tariff debate we had 
here in Congress that the President was pushing. And I was one 
of the Republicans that voted against it because I was 
concerned about the impact that it would have on other 
businesses, and I am more laissez faire when it comes to 
tariffs. I think we ought to keep them as low as possible.
    But could you talk about the unintended consequences when 
we act up here, and sometimes how they end up when we are 
trying to do something to protect jobs, like we were in that 
debate, and ultimately passed that legislation and the impact 
that it did have on smaller businesses like the metal folks 
that you represent?
    Mr. Gaskin. I would be happy to. The reality is that when 
the government gets involved in making decisions about which 
industries win and lose, there are consequences. And in this 
case, it was a decision by the government to add a 30 percent 
duty on imported steel, which meant that in that period I 
referenced, steel prices in the United States went crazy. They 
were increasing by 40 to 60 percent in a 4- or 5-month period. 
And middle-market companies like Our Technology in your 
district--30 employees, makes bearings for car jacks--couldn't 
go to their automotive customer and say I need a 40 percent 
increase, or a 20 percent increase, because steel was half the 
cost. Well, they tried, but they said no. So they were faced 
with losing their business.
    There are two factors. One is the direct loss of business. 
If your primary raw material of a metal forming company is in a 
market that is protected from global competition so we pay 
about the same prices here as they do in the rest of the world, 
then we are not competitive. If we don't pay the same as the 
rest of the world, we are not competitive. During that period 
we were paying about $200 a ton more for steel in the United 
States than they were in China or Europe, about $100, so we 
weren't competitive. So you lose direct jobs.
    More damaging, probably, is the indirect loss. Big 
companies make decisions to move entire products elsewhere in 
the world where they have stability of pricing in materials 
that are a big part of the product. And so that is the larger 
loss. You lose some jobs directly but others you lose 
indirectly.
    I think some of the key components of this legislation are 
in Title II, the trade compliance areas, and also Title III, 
the trade adjustment assistance for companies. I mentioned the 
trade compliance issues and it is horrendous. The trade laws 
don't work the same for small companies as I think you said, 
Chairwoman, as they do for big companies.
    Mr. Chabot. Thank you.
    Mr. Hager, we are all on a number of Committees and I am on 
Foreign Affairs, and we have folks from the State Department 
come over and we grill them on Iraq. And I am on Judiciary, and 
we just had the Attorney General over talking about all kinds 
of things that he is being challenged on and criticized about 
in Committee.
    Let me throw you a softball there. Are there any--are you 
concerned that there have been any misunderstandings or 
anything that you would like to explain a bit more fully in 
defense of the SBA or yourself or your family or anybody else 
that you know?
    Mr. Hager. Well, you are very kind, and I appreciate that 
very difficult question.
    A couple of things. And thank you, because I would like to 
respond very strongly. And that is, as a public servant who is 
here because I want to be here, who left the private sector to 
say I want to do something for this government, I want to do 
something for these small businesses, I think we are 
overlooking the fact that we are in this with you. The proposed 
legislation on micro, we are talking about some fine-tune 
issues of disagreement. For example, how you deliver technical 
assistance. We counsel several hundred thousand people a year. 
We have 1,100 SBDC locations. Can we absorb it? We believe 
strongly we can. We can provide that.
    But we don't--we are not on opposite ends on what the end 
game is. We are with you and we want to support you to get 
there.
    We want to work with the Chairwoman to set up some special 
meetings with some of your staff members.
    Chairwoman Velazquez I assure you that I am going to be 
here.
    Mr. Hager. Excellent. Well, I hope you will invite me back 
and I hope that we can get our staff members together.
    Chairwoman Velazquez if not, the administrator.
    Mr. Hager. If not, the administrator.
    But we are looking very much forward to working with you 
to, we believe, iron some of the wrinkles out that we don't see 
as significant. There are some that, yes, are significant; but 
for the most part they are not. Particularly in the Micro-
program. Thank you very much.
    Mr. Chabot. I yield back.
    Chairwoman Velazquez Ms. Clarke do you have any other 
questions?
    Ms. Clarke. No.
    Chairwoman Velazquez again, I would like to thank all the 
witnesses. Members have 5 legislative days to submit materials 
and statements for the record. The hearing is adjourned.
    [Whereupon, at 11:45 a.m., the Subcommittee was adjourned.]

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