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



=======================================================================
 
                    SUBCOMMITTEE ON FINANCE AND TAX
                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 30, 2008

                               __________

                          Serial Number 110-89

                               __________

         Printed for the use of the Committee on Small Business


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



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                   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                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


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

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

                                  (ii)




                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Bean, Hon. Melissa...............................................     1
Buchanan, Hon. Vern..............................................     2

                               WITNESSES


PANEL I:
Eckstein, Mr. Scott, James Scott Custom Builders, Naperville, IL, 
  On behalf of the National Association of Home Builders.........     3
Schroeder, Mr. David G., President, American Enterprise Bank, 
  Buffalo Grove, IL, On behalf of the Independent Community 
  Bankers Association............................................     5
Sorgatz, Mr. Carl, President, Hawthorne Credit Union, Naperville, 
  IL, On behalf of the Credit Union National Association.........     6
Hollingsworth, Ms. Lawrie, E.E., President, Asset Recovery 
  Technologies, Inc., Annapolis, MD, On behalf of the U.S. 
  Women's Chamber of Commerce....................................     9
Baugh, Ms. Vanessa, President, Vanessa Fine Jewelry, Lakewood 
  Ranch, FL......................................................    11

                                APPENDIX


Prepared Statements:
Bean, Hon. Melissa...............................................    26
Buchanan, Hon Vern...............................................    28
Eckstein, Mr. Scott, James Scott Custom Builders, Naperville, IL, 
  On behalf of the National Association of Home Builders.........    29
Schroeder, Mr. David G., President, American Enterprise Bank, 
  Buffalo Grove, IL, On behalf of the Independent Community 
  Bankers Association............................................    39
Sorgatz, Mr. Carl, President, Hawthorne Credit Union, Naperville, 
  IL, On behalf of the Credit Union National Association.........    52
Hollingsworth, Ms. Lawrie, E.E., President, Asset Recovery 
  Technologies, Inc., Annapolis, MD, On behalf of the U.S. 
  Women's Chamber of Commerce....................................    57
Baugh, Ms. Vanessa, President, Vanessa Fine Jewelry, Lakewood 
  Ranch, FL......................................................    63

                                 (iii)




                      SUBCOMMITTEE HEARING ON THE



                      EFFECT OF THE CREDIT CRUNCH



                      ON SMALL BUSINESS ACCESS TO



                                CAPITAL

                              ----------                              


                       Wednesday, April 30, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1539 Longworth House Office Building, Hon. Melissa Bean 
[chairman of the Subcommittee] presiding.
    Present: Representatives Bean, Sestak, and Buchanan.

              OPENING STATEMENT OF CHAIRWOMAN BEAN

    Chairwoman Bean. I call to order this meeting examining how 
current economic conditions are impacting small business access 
to capital. In August of last year, the U.S. financial markets 
experienced widespread losses stemming primarily from sub-prime 
mortgages. The impact spread throughout the lending market and 
is now being felt in other parts of our economy. That includes 
the nation's small business sector which is our primary source 
of economic activity and historically led the way to financial 
recovery and job creation following downturns.
    As banks and other institutions struggle to recover from 
losses on Wall Street they are also pulling back from lending 
on Main Street. The result is that credit is now harder than 
ever for small businesses to access. Not surprisingly last 
month's small business confidence gauge which is compiled by 
NFIB, the National Federation of Independent Business owners 
shows it lowest level since th survey was started in 1986. 
Furthermore, a joint survey conducted by Duke University and 
CFO Magazine notes that about one-third of small business 
owners are finding credit more costly, less available or both.
    As capital availability tightens, many small businesses are 
forced to delay important purchases, halt planned expansions or 
forgo the creation of new jobs. And all of these choices hinder 
their ability to fuel economic expansion. In such an 
environment, the SBA's lending programs could play a pivotal 
role by bridging capital availability gaps.
    Unfortunately, the SBA's largest lending program, the 7(a) 
Initiative, has not risen to that task. Instead in some ways 
it's exacerbating contractions in the conventional credit 
markets. Through the first half of 2008, the number of 7(a) 
loans was down over 17 percent in comparison to the same period 
last year. The gross dollar amount of loans was also declining. 
To make matters worse, new fees and program mismanagement are 
keeping financial institutions from even participating in the 
program.
    There are clear solutions the these challenges and last 
year the House took action to address many of them. We passed 
H.R. 1332, The Small Business Lending Improvements Act, which I 
authored.
    The Bill lowers borrower costs, expands lender 
participation and streamlines the 7(a) application process. 
This legislation would move us in t he right direction. 
However, the Senate has not taken action on it at this time.
    As Congress continues to address the current challenges 
facing the economy, we must be sure to explore every avenue of 
small business financing. After all, with credit availability 
narrowing, it is more important than ever to insure 
entrepreneurs have access to the tools they need to operate 
their businesses and grow the economy. I want to thank our 
witnesses in advance for joining us here today and for the 
valuable insights offered in their testimony and I now 
recognize a ranking member for his opening statement.

               OPENING STATEMENT OF MR. BUCHANAN

    Mr. Buchanan. Is that on? Okay. I want to thank the Chair 
for yielding and calling this important hearing on the effects 
of the credit crunch on small business access to capital. I'd 
also like to extend my thanks to our witnesses today because I 
know their busy with their schedules to provide testimony in 
today's hearing. There's no question in my mind that there's 
nothing more personal than the entrepreneur having the American 
Dream. I've lived that dream and I know the risk and the 
rewards. I know its pains and successes.
    I've seen it from the bottom up starting a small business 
and from the top down as Chairman of the Florida Chamber. I 
also know for someone that's done a lot of planning in my 
businesses over a lot of years that there's certain internal 
factors we can control small business and external factors that 
we can't control. And there's a lot of these external factors 
that are effecting a lot of people. The other thing as the 
Chairman of the Florida Chamber, I also realize that 99 percent 
of businesses in Florida and probably the country, are small 
businesses which create 70, 80 percent of the jobs.
    And right now the view in terms of small business in 
Florida and I'm sure throughout the country is not pretty. 
Working families across the country are facing record 
foreclosures, rising gas prices, double digit layoffs and 
consumer confidence is at an all-time low. For small business 
their very survival is at stake. The inability to secure 
financing and credit can imperil their very existence.
    Today this Committee is not simply sitting on the sideline 
observing the challenge and I thank Madam Chairwoman to take 
this leadership. We'll be hearing from people that are involved 
and effected by a capital meltdown, effecting lenders and 
borrowers as well. I hope to come together and find real 
solutions that can make it easier for small business to secure 
the financing they need at a price that makes sense.
    Also, being on bank boards for 20 years or so, I realize 
that a lot of these entities are heavily leveraged themselves, 
four or five percent capital, so what happens if you look back 
in `90, `92 when S&L banks were under crisis. Their capital 
gets under crisis and even good companies, good small 
businesses that have fairly good balance sheets and good income 
they can't get loans. So that's critical for someone that's 
been there.
    As I was working on my way up, I never asked for a 
government handout. I only asked that we never by shut out. 
Owning a business was my dream and it's a dream of millions of 
Americans as well. It's my duty here in Congress to construct 
and maintain a system in which these entrepreneurs have the 
ability to start and run their business successfully.
    Again, I want to thank the Chairwoman for this hearing. I 
look forward to hearing the testimony from our witnesses today. 
Thank you for coming. I yield back.
    Chairwoman Bean. Thank you for your comments. Now, we'd 
like to move to testimony from our witnesses. I'd like to thank 
you for taking your time and sharing your expertise with us 
today. Witnesses will have five minutes to deliver their 
prepared statements. The timer begins when the green light is 
illuminated. When one minute of time remains. The light will 
turn yellow. The red light will come on when time is up.
    And our first witness is Mr. Scott Eckstein, who is a home 
builder for James Scott Custom Builders in Naperville, Illinois 
where he also serves as President of the Home Builders 
Association. He's testifying on behalf of the National 
Associations of Homebuilders, the trade association that helps 
promote the policies that make housing a national priority. 
Since 1942, NAHB has been serving its members, the housing 
industry, and the public at large.
    Thank you for being here.

STATEMENTS OF MR. SCOTT ECKSTEIN, JAMES SCOTT CUSTOM BUILDERS, 
   NAPERVILLE, IL, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                          HOMEBUILDERS

    Mr. Eckstein. Thank you, Chairwoman Bean, Ranking Member 
Buchanan and distinguished members of the Committee. My name is 
Scott Eckstein. I am President of James Scott Custom Builders, 
member of the National Association of Homebuilders and the 
current President of the Homebuilders Association of Illinois. 
Thank you for the opportunity to be here today to talk about 
the impacts of the credit crunch on small builder businesses 
and potential solutions for Congress to consider.
    A pricing induced downturn that began in 2005 has been made 
worse by the credit crunch that started in mid-2007. This will 
continue to be the most significant factor effecting the 
homebuilding industry into the foreseeable future. That means 
depressed home prices, sharply reduce credit availability, and 
much tighter mortgage lending standards for those who can still 
qualify.
    Homebuilders all over the country are experienced a 
negative shift in terms of availability of residential 
construction loans. In addition, builders with outstanding 
construction loans are facing challenges as lenders receive 
appraisals reflecting lower values on lots and homes. In fact, 
declining valuations are sometimes at or below the cost of 
building a home or below the attainable market value. Lenders 
are asking builders to fully or partially pay down outstanding 
loans while in extreme cases denying requests for loan 
extensions. Most small homebuilding companies don't have the 
resources to survive in such an environment for any extended 
period of time. My personal experience has been that banks are 
refusing to lend to builders on either pre-sold or spec homes 
in the current environment, regardless of credit worthiness.
    There is a current dislocation in the housing market where 
entry level home buyers cannot access mortgage credit to 
purchase a home. In turn homeowners higher up the ladder cannot 
sell their current home in order to make the next home 
purchase. Thus, the credit crunch shuts down the normal 
progression of home selling and home buying. When the credit 
markets break down in the midst of a housing dislocation, 
homebuilders' financing is extremely difficult to maintain. For 
me and many homebuilders the housing market downturn began two 
years ago and the credit crunch we now experience is a 
significant additional problem.
    I have exhausted my company's resources and am forced to 
take more extreme measures to keep afloat. Recently, I had to 
withdraw all my personal 401(k) funds receiving a benefit of 
less than 50 cents on the dollar to help my struggling 
business. I paid a severe penalty and I've turned to Consumer 
Credit to provide operating capital to pay for my loans and 
make my payroll. Avoiding excessive regulatory restrictions on 
federally insured banks which are current the dominant source 
for construction loans is an urgent priority. However, the 
difficulty for builders in obtaining housing production 
financing during this time also vividly highlights the need to 
develop additional sources of construction credit.
    My written statement includes a number of specific 
recommendations for increasing the range of suppliers of 
housing production credit. Congress has taken several steps to 
ease the financial losses that homebuilders like many small 
businesses are facing during this economic downturn. I cannot 
overstate how important it is for the business owners to have 
the ability to claim and carry-back net operating losses for 
years when significant taxes were being paid.
    NAHB applauds Chairwoman Bean for her leadership in 
advancing the expended NOL carry-back as part of the GROW Act 
of 2008. As Congress continues to look for additional ways to 
ease the credit crunch on small businesses, it should strongly 
consider policies that stimulate home purchases in the 
immediate future. A temporary home-buyer tax credit would 
reduce excess inventory and relieve pressure on falling home 
prices by ending the waiting strategy for some potential 
buyers. An effective home-buyer tax credit would restore 
confidence in the housing market for homeowners, home-buyers 
and financial institutions mitigating some of the factors 
responsible for the current credit crunch.
    NAHB appreciates the efforts of Congress to address the 
problems related to the small businesses and the credit crunch 
and we look forward to working with the legislators on the most 
effective way to help America's small businesses during this 
time. Thank you for the opportunity to testify today.
    [The prepared statement of Mr. Eckstein may be found in the 
Appendix on page 29.]

    Chairwoman Bean. Thank you for your comments.
    Our next testimony is going to come from David Schroeder, 
who is the President of the American Enterprises Bank in 
Neighborville, Illinois. He's testifying on behalf of 
Independence Community Bankers Association or ICBA, the leading 
association for community banks representing over 5,000 
community banks of all sizes and charter types throughout the 
U.S.
    The ICBA is dedicated exclusively to representing the 
interests of the community banking industry and the communities 
and customers that they serve. Thank you for being here.

     STATEMENT OF MR. DAVID SCHROEDER, PRESIDENT, AMERICAN 
     ENTERPRISE BANK, BUFFALO GROVE, IL, ON BEHALF OF THE 
           INDEPENDENT COMMUNITY BANKERS ASSOCIATION

    Mr. Schroeder. Good morning. My name is David Schroeder. I 
am President of American Enterprise Bank in Buffalo Grove, 
Illinois. Chairwoman Bean and members of the Committee, I am 
pleased to be testifying today on the credit markets and small 
business access to capital. I am proud to testify on behalf of 
the Independent Community Bankers of American. ICBA represents 
5,000 community banks throughout the country with 301 community 
bank members in Illinois alone.
    American Enterprise is a locally owned community oriented 
bank with locations in Buffalo Grove, Highland Park and 
Schaumburg, Illinois. Since 1995 we have grown to more than 
$360 million in assets. We pride ourselves on small business 
relationship banking and actively participate in the SBA 
lending programs. In 2007 American Enterprise Bank made 62.6 
million in SBA 7(a) loans and 15.5 million in SBA 504 loans.
    Credit fuels our economy and the broad credit markets are 
still sorting out many problems. Some of the nation's largest 
lenders and money center banks have tripped up on aggressive 
sub-prime lending and toxic investments. As a result many of 
the biggest financial institutions have been forced to pull in 
their lending, recognizing huge losses and rebuilding capital. 
The current turmoil in our economic and financial markets 
jeopardizes the availability of credit for small businesses. 
However, community banks remain common sense lenders and 
largely avoided the sub-prime debacle. We have solid capital 
positions and we have money to lend to small businesses.
    As Congress continues to address the problems in the 
housing and finance sectors, policymakers must also focus on 
the small business sector during this economic slow-down. At a 
time when the economy is faltering, a sharp decline in SBA 
loans is unacceptable. The SBA loan program should bolster 
small business credit in economic slow-downs. Instead, as 
Chairwoman Bean mentioned, the number of SBA loans being made 
is plummeting.
    In order to address the ongoing credit crunch and assure 
small business lenders and borrowers have an uninterrupted 
supply of capital, ICBA respectfully advanced several policy 
recommendations, including 1) strengthening the SBA loan 
programs by boosting the SBA budget, lowering steep fees on 
lenders and borrowers and reducing excessive regulation.
    2) Next, enacting the Small Business Lending 
Reauthorization Act introduced by Chairwoman Bean. 3) Also 
enact the ICBA stimulus plan recommendations included the 
first-time home-buyer's tax credit and 4) enact the provisions 
of the Community First Act advanced by Chairwoman Nydia 
Velazquez. The ICBA believes these measures would help small 
businesses better access credit, create jobs and boost our 
economy. Chairwoman Bean, community bankers represent the other 
side of the credit market story. The community bank model is 
based on relationship banking not relationship with investment 
banks and hedge funds. Community banks stick with their 
business customers in good times and in bad. Unfortunately, we 
see the missteps of several large financial players fostering 
costly new regulation on all financial institutions. This will 
likely cause banks to further tighten credit standards and only 
increase transaction costs. Therefore, I urge Congress to 
strongly avoid a one-size fits all regulatory approach. 
Increased regulatory burden should not be a wet blanket that 
smothers community banks that had little to do with the recent 
turmoil.
    ICBA also believes additional economic stimulus is needed. 
Notably 45 percent of small business loan outstandings are 
collateralized by some form of real estate. Therefore, the 
ongoing sharp decline in real estate values must be further 
addressed before stability can be achieved in the broad credit 
markets and the economy.
    The ICBA Economic Stimulus Plan recommends a $5,000.00 
first-time home buyer credit for one year in order to jump 
start home sales, reduce unsold inventories and stabilize home 
prices and foreclosures. We are pleased to see the home-buyer 
tax credit advancing in both the House and the Senate as part 
of a second stimulus effort.
    In conclusion small businesses are facing difficult 
economic times and small business credit needs should be front 
and center. Community Banks like American Enterprise are well-
positioned and prepared to help. We believe strengthening the 
SBA programs, enacting the provisions of the Community First 
Act and ICBA stimulus recommendations would go a long way in 
helping small business. I truly appreciate the opportunity to 
testify today on behalf of the Independent Community Bankers of 
America. Thank you.
    [The prepared statement of Mr. Schroeder may be found in 
the Appendix on page 39.]

    Chairwoman Bean. Thank you for your testimony.
    Next, we're going to be hearing from Mr. Carl Sorgatz, who 
is over 31 years of financial and operational experience and 
has served as the President of the Hawthorne Credit Union since 
1987. Mr. Sorgatz is testifying on behalf of the Credit Union 
National Association or CUNA, the premier national trade 
association serving America's credit unions. Thank you for 
being here today.

  STATEMENT OF MR. CARL SORGATZ, PRESIDENT, HAWTHORNE CREDIT 
 UNION, NAPERVILLE, IL, ON BEHALF OF THE CREDIT UNION NATIONAL 
                          ASSOCIATION

    Mr. Sorgatz. Thank you, Chairwoman Bean, Ranking Member 
Buchanan and members of the Subcommittee, I am Carl Sorgatz, 
President of Hawthorne Credit Union in Naperville, Illinois. 
And I appreciate this opportunity to appear before the 
Committee on behalf of the Credit Union National Association, 
CUNA, and to express our support for increased access to 
capital for small businesses, particularly in light of the 
current credit crunch.
    CUNA is the largest credit union advocacy organization 
representing over 90 percent of our nation's approximately 8400 
state and federal credit unions, their state and credit union 
leagues and their nearly 90 million members. Hawthorne Credit 
Union has offices in Naperville, Bolingbrook and at Lucent 
Technologies and provides financial services to employees of 
over 125 companies and to people who live or work in Cook, 
DuPage, Will, Kane and Kendall Counties.
    Through our Credit Union Service Organization or CUSO, 
Hawthorne Credit Union provides member business loans to our 
members. Four of the Chicago area credit unions are also 
members of that CUSO. Small businesses are the life blood of 
the economy. For nearly a century, credit unions have been 
there to serve the business lending needs of their members. Our 
member business loans reflect the diverse background and 
expertise of our members and for example, in recent years, the 
credit unions in our CUSO were able to help their members 
achieve success with a landscaping business, a restaurant and 
sports bar, an environmental services company and a long-haul 
trucking business.
    Credit union member business loans are relatively small 
loans. In 2007, the average credit union MBO was $181,000.00. 
Nationally, credit union business lending represents less than 
one percent, .89 percent of the depository institution of 
business lending market and credit unions have about 28 billion 
in outstanding business loans compared to 3.1 trillion for 
banking institutions.
    In general, credit unions are not financing skyscrapers or 
sports arenas. Credit unions are making loans to credit union 
members who own and operate small businesses. And despite the 
apparent credit crunch with respect to small business and other 
lending. The chief obstacle for credit union business lending 
is not the availability of capital. Credit unions are, in 
general, very well capitalized. Rather the chief obstacle for 
credit unions is the arbitrary statutory lending limits imposed 
by Congress in 1998.
    Under the current law, credit unions are restricted from 
member business lending in excess of 12-1/4 percent of their 
total assets. This cap severely restricts the ability of credit 
unions to provide small loans for small businesses. This is at 
a time when small businesses are finding it increasingly 
difficult to obtain credit from other types of financial 
institutions, especially larger banks. The cap increasingly 
restricts credit unions engaging in business lending as they 
approach their limit.
    The cap also severely hampers credit unions who would like 
to enter the business lending market because of the start-up 
costs and the requirements. The most significant cost is hiring 
staff with business lending experience. Credit unions 
approaching the cap face the dilemma of having to turn away 
members who are unable to secure business loans from other 
financial institutions.
    Congress can help by enacting several bills currently 
pending that would help promote greater credit union 
participation in small business lending. Credit unions support 
the provisions of HR 1537, the Credit Union Regulatory 
Improvements Act, CURIA, which would increase the current limit 
on credit union MBLs from 12-1/4 percent to 20 percent of total 
assets and permit the National Credit Union Administration to 
increase the threshold for defining a member business loan from 
50,000 to $100,000.00.
    A second piece of legislation that would facilitate credit 
union participation in small business lending is HR 5519, the 
Credit Union Regulatory Relief Act which includes provisions 
that would clarify existing law that permits credit unions to 
participate in loan programs secured by the insurance 
guarantees or commitments of state and Federal Government. 
Exempt member business loans made in under-served communities 
from the MBL cap and exclude loans or loan participations by 
federal credit unions to not-for-profit religious organizations 
from the member business loan limits contained in the Federal 
Credit Union Act.
    Another helpful bill is the Credit Union Small Business 
Lending Act, HR 1849, introduced by Chairwoman Velazquez. HR 
1849 recognizes the need to enhance credit union business 
lending through SBA programs and is intended to improve small 
business lending and cooperation between the NCUA and SBA by 
excluding from the Federal Credit Union Acts definition of MBLs 
from any loan made in cooperation with the SBA under Section 
7(a) of the Small Business Act.
    We also strongly support legislative initiatives that 
permit the SBA to reduce borrower and lender fees for the 7(a) 
lending program to the greatest extent possible. My written 
statement goes into further detail about what I've discussed 
today, Madam Chairwoman. In summary, I want to thank you and 
the Committee for providing CUNA with an opportunity to express 
its support for further access to capital, to small businesses. 
We urge Congress to enable credit unions to serve member 
business lending needs by enacting the important legislation 
discussed today. Thank you.
    [The prepared statement of Mr. Sorgatz may be found in the 
Appendix on page 52.]

    Chairwoman Bean. Thank you for your comments.
    And now we're going to move to Ms. Lawrie Hollingsworth, 
who will provide her testimony as President of Asset Recovery 
Technologies, a disaster assistance and response business 
headquartered in Elk Grove Village. Ms. Hollingsworth has 30 
years of experiences in the electronic and computer industry. 
She's also an author of a number of articles on disaster 
recovery planning and management. She testifies today on behalf 
of the U.S. Women's Chamber of Commerce which provides 
political and legal advocacy as well as education assistance 
and outreach services for our nation's women entrepreneurs. 
Thank you so much for being here.

 STATEMENT OF MS. LAWRIE HOLLINGSWORTH, E.E., PRESIDENT, ASSET 
 RECOVERY TECHNOLOGIES, INC., ANNAPOLIS, MD, ON BEHALF OF THE 
                U.S. WOMEN'S CHAMBER OF COMMERCE

    Ms. Hollingsworth. Good morning, Chairwoman Bean and 
Ranking Member Buchanan, staff. My name is Lawrie Hollingsworth 
and I am an electrical engineer and certified disaster recovery 
planner. I am the CEO and founder of two engineering firms, the 
Price Hollingsworth Company and Asset Recovery Technologies. We 
are headquartered in suburban Chicago area of Elk Grove Village 
and both firms work nationwide with insurance companies and 
businesses after a disaster or property insurance loss.
    PHC employees four people including three engineers and ART 
employs eight people. We have part time and temporary help as 
needed up to another 20 people. In addition, we have a 
certified pool of approximately 200 technicians nationwide. 
Both firms are 100 percent owned and founded by me and are 
certified women's business enterprises. I founded PHC in 1987 
and ART in 1994. I've never asked for nor received government 
handouts. I started my businesses on a shoe string and funded 
them by reinvestment of profits and conventional bank loans.
    In addition to being a responder to 9/ll we were also 
active on the response -- disaster response to Hurricane 
Katrina. Both businesses are typical small businesses. We 
utilize bank loans, line of credit loans and credit cards to 
fund out business. In addition to reinvestment of profits. My 
employees are very hard-working, decent, honest Americans with 
families to support. Like all small and large businesses, this 
credit crunch effects us substantially. Money is simply less 
available. When it is available it is at a new premium cost for 
less money and more restrictive lending covenants.
    In 2007 our sales declined by approximately 50 percent over 
2006. Most others in my industry, the disaster recovery 
industry, have reported similar dramatic drops across the 
board. While fluctuation is the norm in the disaster recovery 
business, in part due to weather patterns, I believe this drop 
in revenue was due in part to soaring interest rates and lack 
of credit. This is particularly likely as weather patterns for 
both years were similar.
    Something has to account for such a precipitous decline. 
When businesses are already operating on thin and vanishing 
profit margins, any sort of disaster will put them under. As 
will be discussed further in my testimony, businesses seeking 
working capital and equipment loans from a bank to rebuild 
after a disaster may simply find credit unavailable 
insufficient or just too expensive.
    Faced with looming business failures, most businesses opt 
to take the money and run and close their doors. They do not 
reinvest these insurance proceeds back into the business. This 
is one more sale of services I do not make and one more 
business failure in America. Alternately, businesses may have 
chosen to substantially under-insure themselves to save costs 
currently, a measure almost guaranteeing their eventual failure 
in the face of disaster, by the way.
    Thus there's not enough money for rebuilding after disaster 
which requires hiring a firm like us and we also lose revenue. 
I also believe that the current credit crunch presents a 
significant drawback to available money for startups. We are 
focusing today on the impact of currently existing small 
business to some degree but I believe there's a second 
substantial and somewhat obscured impact of the tightened 
credit market. This hidden danger is a lost opportunity for 
small business start-ups.
    Small business is the largest private sector employer in 
the U.S. The heart of small business and this is my opinion the 
American dream is the business start-up. For the mom and pop 
endeavors to the technology firms, these are the life blood of 
our nation. Start-ups are funded by savings, 401(k)s, gifts and 
loans from friends and relatives and the occasional 
governmental source. Home equity loans, equipment loans, 
collateral based working capital, bank loans and credit card 
debt.
    The statistics on small business failure in general are 
already severe. Failure rates of over 50 percent in the first 
two years are often cited. Already started on a shoe string and 
usually under-funded, these small businesses depend on debt and 
credit to open their doors and thrive. What is happening now is 
that debt funding for new ventures is simply disappearing. This 
is in no small part due to the sub-prime mortgage collapse. 
Lenders are very nervous about home equity lending, often 
substantially reducing available loan size.
    I'd like to touch quickly on a second disaster, I believe, 
that's being exacerbated by the tight credit markets and that 
is rebuilding after any type of disaster, notably things like 
Hurricane Katrina. The U.S. Department of Labor estimates over 
40 percent of businesses never reopen following a disaster. Of 
the remaining, 25 percent will close their doors within 2 
years. Over 60 percent of all businesses confronted by a major 
disaster will close within two years.
    How much will these statistics worsen? I believe this 
credit crunch is greatly impacting the ability of business to 
rebuild and re-establish themselves after Katrina. I'm a native 
Floridian and University of Florida graduate, so near and dear 
to my heart is the rebuilding of Florida businesses. I have 
seen many, many areas in disaster after hurricanes and so 
forth, and I believe the credit crunch is significantly 
impacting the ability for businesses to rebuild after Hurricane 
Katrina all impact areas such as Florida for small business to 
re-establish themselves.
    This concludes my testimony, thank you.
    [The prepared statement of Ms. Hollingsworth may be found 
in the Appendix on page 57.]

    Chairwoman Bean. Thank you so much for your testimony and 
now I'm going to defer to Ranking Member Buchanan who will 
introduce our next witness who also hails from the Sunshine 
State of Florida.
    [Off the record comments]
    Mr. Buchanan. I want to thank the Madam Chair. It's a 
pleasure to have Vanessa Baugh with us today. She's ran a 
successful jewelry business for a lot of years. She had a 
couple, three facilities, had to close one because of tight 
access to capital and also because of the tightening economy in 
our area. She also chairs, which I was Chairman for two years, 
the Sarasota Chamber of Commerce. We have about 2400 primarily 
small businesses in that area, but she chairs the Small 
Business Council for that organization, which has done an 
outstanding job. I appreciate your effort there.
    Thanks for taking the time out and coming today. We're just 
glad to have you up on the Hill and hopefully we'll get a 
chance to visit a little bit more later today. Thanks for 
coming. Thank you.

    STATEMENT OF MS. VANESSA BAUGH, PRESIDENT, VANESSA FINE 
                  JEWELRY, LAKEWOOD RANCH, FL

    Ms. Baugh. Thank you, Congressman Buchanan and Madam Chair 
Bean thank you for having me here today. The effect of the 
credit crunch on small business is extremely difficult. As 
Congressman Buchanan said, I have a jewelry store. It's been 
open for nine years. It's in the heart of the County of 
Sarasota in southwest Florida. And I'm here today thanks to the 
Greater Sarasota Chamber of Commerce where I also serve on the 
Board of the Directors.
    Sarasota, Florida was named last month by the Fortune Small 
Business Magazine as one of the 100 best places in America to 
live and launch a small business. The Greater Sarasota Chamber 
of Commerce, which does represent 2400 businesses, 85 percent 
of those have 10 or fewer employees. It is one of the top local 
chambers in the state and nation and our healthcare and 
educational systems are among the finest and of course, we're 
known for our pristine beaches.
    I, like many other small business owners, have been 
watching as the real estate market crashes. Just last week we 
were named as number 15th in the nation for foreclosures. We 
are losing jobs daily and many small businesses are closing 
their doors. Part of the problem is that many of us small 
businesses have what the call soft collateral. We cannot get 
bank loans like most small business.
    They will not loan us money generally, even when the money 
is good. Because of this, most small businesses have to rely on 
their equity in the real estate that they own. I am one of 
these people. We are accustomed to this. However, with the real 
estate market decreasing so dramatically, many of us have lost 
this ability because of no equity or because we cannot qualify 
for the home equity loan because our revenues are down.
    In other words, some of us have nowhere to turn for relief. 
So what do we do? Some of us can use our retirement plans but 
how many small business owners truly have a retirement plan. We 
can use our credit cards but either way it's deadly for us. The 
crunch is especially painful in Sarasota which along with many 
other areas in Florida is facing an economic downturn because 
of its primary market real estate.
    In our residential real estate sector, we have an inventory 
in excess of 18 months and prices have dropped 25 percent from 
a year ago. Needless to say, jobs have plummeted. Sarasota 
itself overall has lost over 13,000 jobs in our immediate area. 
Our unemployment rate is far worse than the rest of the state 
and is approaching 6 percent. Forecast call for Florida's 
unemployment numbers to continue a downward trend through 2009. 
From all the indications Sarasota seems destined to continue to 
lead in this way until the tables turn.
    Another problem that small businesses have is that their 
vendors, who they get their inventory from, are also feeling 
the credit crunch. So their terms to us are not as good as they 
used to be. All the while our operating costs are going up, the 
cost of healthcare and just overall operating cost keep going 
up, up and up. In Florida, we have 45 business owners and 
employees that are now uninsured. They have no healthcare 
because they simply cannot afford the monthly fees involved.
    In Sarasota, another key industry is tourism. We are made 
up chiefly of small businesses with seasonal cash flow and 
credit needs. Our chamber works hard with other local players 
to try to attract visitors, domestic and international. So what 
do we want and need and expect from our representatives here in 
our nation's capital to try and overcome these problems?
    Please give priority to meaningful tax reform and hold the 
line on tax increases in income, capital gains and estate taxes 
while the reform debate ensues to allow small business owners 
and opportunity to grow our businesses, and hopefully that will 
help stimulate our sluggish economy. At the same time, please 
enact business friendly incentives such as tax incentives for 
business who want physical and job expansion. SBA loans are 
important, but the program does not provide near the solution 
we need.
    Please consider tax incentives to banks to expedite small 
business loans to relieve the pressure on our free market 
economy. The revenue might be lost in creating such incentives 
but it would more be offset by positive impact that it would 
create that it would create in taxable income revenue generated 
by businesses who succeed rather than fail.
    Thank you for having me here today.
    [The prepared statement of Ms. Baugh may be found in the 
Appendix on page 63.]

    Chairwoman Bean. Thank you so much for your testimony, to 
you and to all of you today. I'm going to begin with a few 
questions and then invite other members to participate with 
their questions and then I may come back with a couple more. I 
guess I'll start with, is it Ms. Baugh? Am I pronouncing that 
properly.
    Ms. Baugh. That's right.
    Chairwoman Bean. I think you mentioned you've been in 
business for about 8 or 9 years.
    Ms. Baugh. Nine years.
    Chairwoman Bean. Okay, have you actually applied for a 7(a) 
loan at any time?
    Ms. Baugh. I actually started in business with an SBA loan.
    Chairwoman Bean. You did.
    Ms. Baugh. Nine years ago.
    Chairwoman Bean. And have you subsequently tried to get 
capital there and that has not been --
    Ms. Baugh. No, in all honesty, the reason that I've not 
looked at that is because it was quite an experience to go 
through that I've hoped, of course, over time to use other 
avenues. It took an awful long time to go through it. The 
paperwork was unbelievable. It was a difficult experience in 
all honesty but that was 9 years ago.
    Chairwoman Bean. And subsequently, there was easier credit 
for some period of time maybe that you could have gotten but 
now as it's tightened up, is it something --
    Ms. Baugh. I've tried over the past few years to get 
business loans to increase my business and open new stores. 
I've had to rely on my home equity to do that because I have 
what they call soft collateral.
    Chairwoman Bean. Right, okay. And can I ask, what the 
structure of your company is? Are you incorporated or --
    Ms. Baugh. I'm incorporated. I have five employees 
including myself.
    Chairwoman Bean. Okay, C Corp, S?
    Ms. Baugh. Yes.
    Chairwoman Bean. Okay.
    Ms. Baugh. S Corp, I'm sorry.
    Chairwoman Bean. S, okay.
    Ms. Baugh. S.
    Chairwoman Bean. One of the question I have and you may not 
know and then I would open this one up to the panel is, does 
that seem to be effecting the small businesses and their 
consideration as how they're structured? I've had some people 
suggest that they think after they became a C Corp, because of 
the requirements that they have to provide as that entity they 
have more documentation to provide when they were pursuing 
loans. Is that relevant or not relevant from your experience? 
I'll throw it out in general?
    Mr. Schroeder. As far as our bank is concerned, and we deal 
with sole proprietorships, partnerships, corporations. There is 
a set amount of paperwork that really does not differ very much 
from one form of organization, business organization, to the 
other. You obviously have very specific forms for these 
different forms of business but the paperwork is basically the 
same for all of them based on our experience.
    Chairwoman Bean. And also one other question to layer this 
in your responses, too, do you see that those who are C Corps 
are more likely to get approved maybe just because they have 
more of that information available, not that you're requiring 
more but because they have to do it already? I'm just curious.
    Mr. Schroeder. The fact that you have a C Corp versus a 
sole proprietorship in and of itself does not make a 
difference. What very well may happen is a C Corp may have 
audited financial statements. They may have monthly financial 
statements, budgets, but quite honestly, if the sole 
proprietorship has the exact same--
    Chairwoman Bean. Has the documentation?
    Mr. Schroeder. --then there is no difference as far as 
we're concerned.
    Chairwoman Bean. Mr. Sorgatz, did you want to comment?
    Mr. Sorgatz. Yeah, I would just concur with what Mr. 
Schroeder said. It really, in our case, too, doesn't make--
there's no difference in terms of the application process from 
out standpoint.
    Chairwoman Bean. Does anyone else want to weigh in on that?
    Ms. Hollingsworth. Just that I've always been S Corp with 
all four of my corporations and there are substantial tax 
breaks like a Section 179 recovery for capital investment, so 
I'm not sure why any small business would like to be a C Corp. 
They miss some very good tax breaks.
    Mr. Eckstein. I guess I have to get a new accountant. I'm a 
C Corp, which is really unusual, but, you know, the carry-back 
would be substantial for me. You know, again, when I formed my 
corporation, I assumed I had 20 profitable years ahead of me 
and I fell short by 3.
    Chairwoman Bean. Okay, all right.
    Mr. Eckstein. But the paperwork has not been any more 
cumbersome, you know, in applications or loans.
    Chairwoman Bean. All right, thank you. My other question 
for Ms. Baugh is, one of the things I don't know if I actually 
heard you say it today but I think I had read that you 
mentioned was the possibility of accessing retirement funds--
    Ms. Baugh. Right.
    Chairwoman Bean. --as a stop-gap measure. Can you share a 
little bit more about that challenge? We had done actually--in 
this Subcommittee we had done some hearings on pension parity/
equity issues and that's one that had not come up is in 
hardship being able to access those pension dollars. We did 
talk about some of the differences of employees of a larger 
corporation who have access to their tax deferred 401(k) 
dollars. Some cases small business who may have a SEP don't 
have the same access to their own tax deferred dollars and so 
we were looking at that. I'm very curious to hear more about 
that.
    Ms. Baugh. Well, I do have an IRA. The problem with that, 
of course, is when you take the money out, the tax consequences 
are terrible. I think for probably a small business owner, too, 
we don't get to invest that much money into it as perhaps the 
larger companies because obviously, we're using our money for 
operating expenses.
    The problem there is that once you take it out, and you 
lose almost 50 percent of it into taxes, you know, then are you 
ever going to be able to even put it back. So you're looking at 
possibly extending, for me, my retirement probably 20 years. 
I'm 54. I don't want to work until I'm 74.
    Chairwoman Bean. Because what you had to do is you couldn't 
withdraw from it for hardship purposes and then pay it back in 
the--
    Ms. Baugh. Exactly.
    Chairwoman Bean. --way sometimes other can from 401(k)s but 
instead had to withdraw it and take it out.
    Ms. Baugh. Exactly. I was one that opened my IRA many, many 
years ago and so for me to take the money out, it's--you know, 
it's a real problem.
    Chairwoman Bean. Okay, thank you. I'd like to ask David 
Schroeder, if I might, confirming the recent downturn we've 
seen in the economy, the Fed Reserve survey recently showed 
weaker demand and tighter lending standards for all borrowers 
and all types of loans. In most situations credit tightens in 
response to some perceived risk associated with lending. Has 
that been the case with the current pull-back that we've seen?
    Mr. Schroeder. Well, I'm happy to say that community banks 
are alive and well and community banks are lending money. Now, 
having said that, the recent mortgage melt-down, the recent 
credit crunch and liquidity crisis have all had an impact on 
our economy, and that really has been the reason why there has 
been a negative impact on our bank and a negative impact on our 
customers.
    Chairwoman Bean. Okay. And for Ms. Hollingsworth, from 2002 
to 2007 the average size of the 7(a) loan has decreased by over 
65 percent. Given the current economic situation and business 
costs increasing, does that make sense for you that the loans 
would be getting smaller?
    Ms. Hollingsworth. No, Congresswoman, it does not. I speak 
from time to time on funding small businesses for assorted 
groups and I think one of the strongest things that gives rise 
to these high statistics is small business failure in the first 
couple of years is they're usually significantly under-funded. 
So further under-funding is sort of saying the death warrant 
ahead of time.
    Chairwoman Bean. You mentioned in your testimony, you 
talked about how many of the firms you work with are under-
capitalized and also under-insured which then doesn't leave 
them with the facility to rebuild--
    Ms. Hollingsworth. Right.
    Chairwoman Bean. --when you come in. You also mentioned 
less companies are disaster recovery planning procedures in 
advance, certainly not best practices when it comes to risk 
management. And that's also due to lack of funding. Typically, 
what size companies have you worked with historically and has 
that changed over the course of your business?
    Ms. Hollingsworth. Okay, our firm is primarily disaster 
recovery as opposed to planning, meaning we go in and clean up 
computers, manufactured equipment, et cetera. We work anywhere 
from Verizon to NASA to state and Federal Governments, down to 
mom and pop Insti-Prints or 7-11s and everything in between.
    Chairwoman Bean. So you are in after the fact. You're not 
--
    Ms. Hollingsworth. We are the after the fact, but what I'm 
seeing very consistently, we're headquartered in Chicago with 
offices around the country but a lot of the small manufacturing 
companies are in the Chicago area and when they have a 
significant disaster, they're already struggling in the Rust 
Belt with the manufacturing and they face the choice of 
literally taking the insurance proceeds and running. And many, 
many of them are electing in larger numbers than ever to shut 
their doors.
    We just had a disaster in Chicago three weeks ago. A 
printed circuit board manufacturing company, he's folding up, 
going out of business.
    Chairwoman Bean. So in some ways in the same way that we're 
seeing in the residential community of people who are finding 
themselves so up side down that they're preferring to walk away 
than restructure their loans because the property values have 
dropped, you're saying many small businesses are to a greater 
degree than what you had seen in the past, are finding 
themselves literally so under water than they're not even going 
to try to recover.
    Ms. Hollingsworth. Yes, Congresswoman, and literally, as I 
was mentioning the Gulf Coast and communities in Florida and 
all along that area notably things they had had for collateral 
such as homes and so forth, they're simply gone. They have an 
empty lot. There's no more home equity. The mortgage may still 
be running. Their insurance did not cover for floods so they 
did not have insurance coverage, and you know, from the corner 
bakery to the Ace Hardware Store to Joe's Bait Shop, there's 
just no way for them to recover.
    Chairwoman Bean. Okay, thank you for your testimony. And 
I'm going to let our Ranking Member Buchanan speak.
    Mr. Buchanan. Thank you, Madam Chair. Let me mention, and 
this is really for the whole panel, because I think this is 
important, I'm not sure everybody understands it up here but I 
want to get your thoughts and by the way, with a C Corp, I had 
a C Corp 25 years ago, but most--a lot of accountants and stuff 
today are people I know and I'd be interested in the banks, and 
this leads into the question really, too, is most of them are 
Sub S, LLCs, partnerships or sole proprietorships because of 
the pass-through effect.
    Now, it's a little different today maybe with the dividends 
or something but because it's double taxations and if you're 
primarily the 100 percent shareholder, a lot of people go to 
that. So my question really is, is that there's a mind set in 
Washington, unfortunately, that you want to tax the people that 
make over 150 more aggressively but part of it is when you do 
that, you really tax small business because of the pass-through 
in a big way. My example, and just from friends and stuff, they 
make 500 but say, by the time they pay their taxes, a third, 
and then they've got a little extra inventory, they add a few 
extra employees, they -- you know, and sometimes they -- you 
know, write things off, but at the end of the day, they always 
figure out, where's my cash. So if we increase taxes up here on 
individuals, aren't we really effecting negatively hundred and 
hundreds or millions of small businesses and I open that up to 
the panel?
    Correct me if I'm wrong because you were both saying, 
especially the community bank and the credit union, and I'd ask 
any of the others, isn't that your understanding, so if someone 
really makes--what I'm saying is some of my show 500 at the 
bottom line they made 500, but when it gets down by the time 
they pay their taxes and other things, that they end up with 
very little liquid assets or cash at the end of the day, many 
times, and if you added another tax, it just squeezes them that 
much more. But that's what I find but I want you to give me 
your sense of it.
    Mr. Schroeder. I would agree with you, Congressman 
Buchanan. I would say, looking at our business customers, the 
overwhelming majority fall into two camps, either sub-S or 
LLCs, some LLPs, very few sole proprietorships but primarily 
within those two camps and I would wholeheartedly agree that 
that pass--
    Mr. Buchanan. Which just passes all the way through to 
their tax.
    Mr. Schroeder. Exactly, so I would wholeheartedly agree 
with you.
    Mr. Sorgatz. I would concur with that, too. With our -- you 
know, we do a lot of sole proprietorships, partnerships but we 
do have some LLC's also, so I would see that as a definite 
impact on the small business owner.
    Mr. Buchanan. So if you raise taxes, say 5 percent on 
individuals, really what you're doing is you're raising 5 
percent on 99 percent of the small businesses in the country as 
well. So that needs to be taken in to fact, when you consider 
they create 70, 80 percent of the jobs, am I right on that?
    Mr. Sorgatz. Yes.
    Mr. Buchanan. Okay, anybody else, comment or question?
    Ms. Hollingsworth. Yes, I'd like to comment. In 2007 I 
showed enormous paper profits and generated enormous six-figure 
tax burden which I painfully wrote a check out on April 14th 
and saw very little of that actual profit in my pocket. Simply 
put, higher taxes on individuals is a higher tax on sub-S 
corps, period.
    Mr. Buchanan. I think that needs to be--I'm not sure 
everybody in Washington understand that but when we decide to 
go that way, they need to understand the impact that's going to 
have on small business and I just -- does anybody have a 
different experience than that?
    Mr. Eckstein. Well, in my experience, I personally took my 
401(k) money out to help my company. Even though I'm a 
corporation, I transferred that money into my company thus 
showing a, you know, wonderful year for my income taxes and 
then had to pay that fee on top of everything else. So I've 
been extremely penalized and with no incentive to reinvest in 
the future and that's something that I think really, we should 
be encouraging small business to reinvest--invest in themselves 
first when times are tough and then give them some benefit back 
when things are--
    Mr. Buchanan. Yeah, I usually find people that end up with 
maybe 100,000 excess capital, they put it back in their 
businesses, they're never putting it in their pocket. They're 
constantly using it because they need it to grow their 
business. That's been my experience over 30 years.
    Let me--did you have something, Ms. Baugh?
    Ms. Baugh. Congressman Buchanan, I think you're absolutely 
right. As a small business owner, if you raise taxes, I'm going 
to get hit, we all are and you're right, we use any profit, not 
that we're making any right now, but in the past we turn that 
over into the business. So, please, keep--no tax increases. 
Right now it would be terrible.
    Mr. Buchanan. Ms. Hollingsworth?
    Ms. Hollingsworth. And just very quickly, not only ordinary 
income tax but capital gains dividend distribution, this is an 
opportunity as a sub-S Corp that I can take income at a lower 
tax rate, so increasing those rates also hurt the sub-S owner.
    Mr. Buchanan. Okay. Let me just mention on the home 
building, obviously, Mr. Eckstein, you had mentioned that the 
impact it's having on you in our area. We've got a lot of 
homebuilders, I hate to say it, but our businesses I've been in 
our down 10 percent of so, but homebuilders are down 70, 80 
percent. You mentioned a couple of things that you thought 
would help on behalf of the homebuilders. Any other thing that 
comes to mind or I'd like to have you jot me any of your 
additional thoughts of what we might be able to do to help, 
because really that's--you know, in Florida and all parts of 
the country, it's a big issue and usually we've got too much 
inventory so--and I can tell you, I've got--and I can tell you, 
I've been involved in partnerships and homebuilding and the 
problem is, is selling the other house, even if you could sell 
this house.
    So I know you mentioned something about carry-back on 
taxes. You mentioned something about tax credit for home-
buyers. Any other thoughts that you've come up or your 
association?
    Mr. Eckstein. Well, the Association, I mean, I think we 
feel very strongly about some kind of incentive to either--
whether it be first-time home-buyers or home-buyers in general, 
for at least a short-term basis that could begin definitively 
and soon because with conversation out there, it lingers and 
people just find more reasons to wait to take advantage of the 
interest rates that are better than ever. We'd like to see 
something happen soon that would encourage, you know, first-
time home-buyers helps the ladder effect, you know by moving 
lower end inventory and then, you know, pushing it up the 
ladder. So anything to entice people to buy right now is what 
we're--
    Mr. Buchanan. What's your thoughts on--I know in our area 
people are very environmentally sensitive. They want to cut 
energy costs. What about some incentive for homebuilders, small 
homebuilders that are building more energy efficient homes, is 
that something, again, incentive for--or would that make a 
difference in your area? Is that an area that people are 
sensitive about that or not really?
    Mr. Eckstein. Well, it's an emerging area. I mean, with the 
Green Movement and everything, it's coming into homebuilding, 
but many of us are doing it already through the new adopted 
building codes. The latest version of the residential building 
code has great energy -- you know, recovery benefits in it that 
naturally--and they cost money. I mean, they'll cost 10 to 
$15,000.00 more per unit to build but there should be some 
incentive to take advantage of these. People will save money in 
the long run.
    Mr. Buchanan. Yeah, I just find like in the auto industry, 
hybrids, a couple years ago, it was so funny, the government 
will give an incentive for a sports utility vehicle that weighs 
5,000 pounds and they just flew off the lots but, you know, 
you'd think they would do something ideally with hybrids or 
energy efficiency homes, especially when we've got our energy 
crisis that's going on.
    A lot of homebuilders have said they thought that that 
would be a good thing because there's some people, even the 
hybrid costs more, they just want to, you know, contribute in a 
small way and I just think that's something that can be 
helpful.
    Mr. Sorgatz. Just in community banks, I wanted to get back, 
this housing crisis that we're in, I mean, my sense of it is 
not to pick on Wall Street but it's something that was sub-
prime lending they claim was about 20 percent, mortgages today 
are sub-prime lending. They came up with a creative process and 
Wall Street or whatever, sold off a lot of these products and 
probably a lot of lenders might not have done from a 
conventional standpoint, sold them off, bundled the up and now 
they're international investors compared if they had, you know, 
someone's got a problem with a community banker, he can go down 
the street and talk to the banker and maybe you guys could work 
with him a little bit. Is that your mind set what's created a 
lot of these issues nationally from your standpoint or--
    Mr. Schroeder. Very definitely, and the point I would like 
to make very clearly is that community banks and community 
bankers do not put people in homes they can't afford and in 
loans that they can't afford. And the problem right now with 
the mortgage meltdown is that these holders, as you mentioned, 
are so far away from the actual origination and borrowers that 
there really is a lack of flexibility in trying to restructure 
and work with the borrowers as problems emerge.
    Mr. Buchanan. Okay, thanks, I think--how much time do I 
have left? Are you--okay, I wanted to make sure. Just your 
thoughts--I mean you were talking about also the community 
banks in general are pretty good from and equity capital 
standpoint. Is that what you're saying today?
    Mr. Schroeder. Very definitely. Community banks are very 
well capitalized and again, we are not suffering the direct 
result of the mortgage meltdown but because of the slowdown in 
the economy, we are definitely suffering as are out customers, 
the indirect result of the mortgage meltdown. And that's 
putting pressure on us. It's putting pressure on our customers. 
It's effecting our underwriting standards, and it is making it 
more difficult to emerge from this situation.
    Mr. Buchanan. And your thoughts on a couple of things we 
could do up here to help the community banks to get more 
capital out to small business?
    Mr. Schroeder. Our bank, as I mentioned, is a very active 
SBA lender. We originated $62 million in 7(a)loans last year 
and $15 million in 504 loans. Anything that can be done to 
increase--a number of things. We can increase the guarantee 
limit, reduce the fees that are charged to bankers and 
borrowers which are significant. I think one trend that's 
evident within the SBA program right now is the concentration 
of originations with the largest banks and the sharp decline in 
the number of small community banks that are participating in 
the SBA program. So anything that can be done to increase the 
number of small community banks that participate in the program 
would be very, very helpful.
    What that does is drive the benefits of the program down 
and out in terms of geographies, in terms of census tracks and 
again, from my standpoint, concentration of power is never a 
good thing. And right now, we have a handful of the largest 
banks in the country, several of them that are originating 60 
percent of the SBA loans. I don't think that's healthy and I 
think community banks need to participate more in the program 
and whatever Congress can to do help that would be very much 
appreciated.
    Mr. Buchanan. My experience was like Ms. Baugh, it's been 
15, 20 years ago working with SBA was almost impossible. Eight 
months, 9 months, a year, finally you just give up out of 
frustration. What's been your experience and what's the time 
frame? She comes in, you know, wants to get an SBA supported 
loan. You know, what does a normal customer of a community 
bank, how long is that going to take?
    Mr. Schroeder. Because our bank is an active SBA lender, I 
am probably not the best person to ask about--
    Mr. Buchanan. But I'd like to know from your standpoint, 
being an active lender, what's possible? I mean, what's the 
average, you know, how long? She comes in. She's a small 
business in the community. How long before she gets a yes or a 
no and if she gets a yes, how long is it going to be before 
she's going to get funded?
    Mr. Schroeder. Because our bank is able to underwrite and 
approve on behalf of the SBA, as soon as we have all of the 
information and can do our underwriting, we can get an 
approval. Thirty days is not unusual.
    Mr. Buchanan. Okay.
    Chairwoman Bean. Will the Chairman yield?
    Mr. Buchanan. Yeah.
    Chairwoman Bean. If I an also ask, so then what you're 
essentially saying is it's the challenge of getting banks up to 
speed the way yours is so that they can facilitate the same 
type of experience.
    Mr. Schroeder. Right, yeah, the learning curve is steep. 
There are certain application standards, underwriting 
standards, documentation and closing standards, as well as 
ongoing servicing standards. Our bank has long since gone up on 
that learning curve and we're very efficient at it. The 
challenge is to get the smaller banks to participate and again, 
whatever Congress can do to facilitate that would be very much 
appreciated and there are several bills moving through, 
Chairwoman, that will accomplish that.
    Chairwoman Bean. Thank you. I yield back.
    Mr. Buchanan. Thank you, Mr. Sorgatz, let me ask you, you 
mentioned the 12-1/2 percent in terms of being capped. How much 
of difference would it make if Congress relooked at that or 
rethought that? And I know there's a lot of pressure from a lot 
of different groups up here on that, but I'm just curious 
because, you know, today--my mind today needs to be about 
helping people in small business and we've got to get out of 
the business of politics to the extent we can, but just what's 
your sense of how much difference would that make in the credit 
unions one way or the other?
    Mr. Sorgatz. The difference that we've calculated it would 
make if we were able to get up to the 20 percent level would be 
approximately 4 to $5 billion that would be available in the 
marketplace for small businesses. As I mentioned, earlier, you 
know, our average loan is about $181,000.00. So just that 
change alone would be able to put more money, liquidity in the 
marketplace for small business. But also I wanted to talk a 
little bit about the SBA side of it, too, from a credit union 
perspective. Being able to reduce the fees, as Mr. Schroeder 
said, reduce the--you know, the application process, make it 
more--a lot more smooth and easier for both the financial 
institution application side and for the borrower side.
    I'll mention that a smaller percentage of credit unions 
today do SBA lending mainly because of the application process 
and the fees involved. Credit unions would like to get more 
involved but we need a little help in terms of addressing what 
those fee issues are and addressing what the application 
process is, also.
    Mr. Buchanan. I thank you. I'm going to yield back and then 
I'll come back with a couple more questions.
    Chairwoman Bean. I'd like to recognize Congressman Sestak 
from Pennsylvania. He has some questions.
    Mr. Sestak. Actually, I think I only have two. Those were 
great questions. When Governor Mishkin came before us last 
November, he had stated that in the--as far as the impact on 
small businesses of credit that there seemed to be no issues 
but it was still a bit uncertain what the impact would be and 
when he went to the Senate side the other day, he made comments 
that, well, it looks now as though--and I'm sorry I wasn't here 
to listen to your testimony, but that lending standards have 
now tightened among the lenders for small businesses, and the 
rates have increased.
    In fact, for small businesses, small commercial banks and 
all, the spread is actually more now than it was previously 
between the cost of funds and the interest rates, probably 
because of the risk attendant to lending today. And so small 
banks, community banks are now only lending a 12-percent growth 
this past recent month or two rather than 20 percent you've 
been seeing.
    My question is more one of how well are we really shooting 
ahead of the rabbit? You know, the Governor was here and said 
really no issues, but it's uncertain and now we see some 
harbingers, something that's more than harbingers of impact. 
How -- can you describe to me how well--what is your monitoring 
out there in the field so to speak for the credit union, for 
the bank? How do you monitor this so there's a better sense in 
Washington of are we really shooting ahead of the rabbit early 
enough to help in some way?
    I say that because I was taken by the facts that--and this 
is what I'm curious about is, 45 percent I gather of all small 
businesses use collateralized real estate which you were 
speaking to, you know, to back them up and 15 percent of that 
is personal. Forty-seven percent of them use credit cards, and 
house finances and automobiles. What -- how do you raise to 
Washington that early enough there's such an issue that's 
impacting and if it's going to get worse? That's probably not a 
great question but I'm just curious how just a few months ago 
somebody you hope would have a lot of foresight said there 
doesn't seem to be any issues right now but it's uncertain, and 
all of a sudden now we're hearing, gee, you know, this is 
really impacting us.
    I don't think it's his fault, it's just how do you get a 
better view of this from you all?
    Mr. Schroeder. Well, things have happened incredibly 
quickly since August of last year. Just look at the decline in 
the Fed funds rate. There's been a 300 basis point reduction 
and depending upon how things go at the Fed today there may be 
an additional reduction. So things have very definitely 
happened quickly. I can say for the banking community, we --
    Mr. Sestak. They have happened quickly but the impact is 
still--it seems as though, you know, they happened last August. 
Here you are this past three months having instead of 20 
percent expanded, you know, you're down to 12 percent all of a 
sudden. Are we doing enough?
    Mr. Schroeder. Let me try to explain from our standpoint, 
underwriting standards and how we look at credit. It's not only 
internal as far as the bank but external in terms of our 
regulators. In a situation like this, where we have an economic 
downturn, we, quite honestly have restricted and tightened our 
underwriting standards. What pays back a loan is profitability 
and cash flow and when the economy is not doing well, the 
predictability of profitability and cash flow is not there.
    So there are some loans, particularly loans on the margin 
that may not get done in an economic downturn. If we're not 
doing this, our regulator is certainly going to be there making 
sure that we do in terms of monitoring our customers and 
monitoring the economy and monitoring our portfolio. So we--
maybe a different way to answer your question, you know, we 
look at all the different economic reports that come out the 
different views on the economy and see what's happening within 
our own portfolio and with our own customers and based on all 
of that information, make a decision as to how to proceed.
    Mr. Sorgatz. I think from the credit union perspective our 
consistency in the underwriting standards has been pretty 
level. When I talk to the other credit unions around the 
country and ourselves in particular, the group of five credit 
unions that work together on the commercial lending side, we 
haven't changed our underwriting standards and to be honest 
with you, we have no current delinquencies either and that's 
more of a relative factor with credit unions who have a much 
smaller delinquency rate on business lending compared to our 
banking partners. So we haven't changed how we approach the 
commercial lending side from the due diligence that we do, 
meeting the requirements of our regulators. I think the concern 
that we have and that we've tried to express early in my 
testimony is the ability to be able to continue to offer more 
services to more small businesses in the community and that 
goes back to the 12-1/4 percent issue.
    That cap level does prohibit or limit severely what credit 
unions are able to do in terms of serving the small business 
community throughout the country. And when you have the 
capability of being able to provide an additional 4 to $5 
billion in the marketplace, that's fairly substantial and can 
help at a time when the tightening standards that banks have 
had to put into place because of the issues that they've dealt 
with in terms of obviously, the sub-prime crisis issues and so 
on, we're here, we're ready to help fill that need at this 
point, but we do need some help from the congressional 
standpoint to be able to step up to the plate and be able to 
deliver those additional services in the community and we like 
to do that.
    Mr. Sestak. Thank you. That's all I have.
    Chairwoman Bean. Thank you. I wanted to just throw out one 
thing before I yield to Congressman Buchanan. Mr. Eckstein had 
mentioned the homebuilders and the lost carry-back is something 
that you're interested in. As you know, in the stimulus 
package, we'd introduced that as one of the things that didn't 
end up making the final cut. I know the Senate is still looking 
at maybe the future housing package that's still going to be 
coming out and let me yield.
    Mr. Buchanan. Thank you, Madam Chair. Ms. Baugh, I wanted 
to ask, you talked about soft collateral. Just for the audience 
and that, how do you define that in your mind, sort collateral?
    Ms. Baugh. From what I understand from many bankers, when 
you have your inventory that you sell, such as in my case or in 
a restaurant even, I sell jewelry. Well, the jewelry leaves the 
store. So even though in my store, I have $3 million worth of 
collateral to me, they will not look at it as collateral, 
because it leaves the building.
    I lease where I am. I don't own the real estate, so 
therefore, I have no collateral that the banks are willing to 
loan me a business loan on and it's not--
    Mr. Buchanan. Just out of curiosity in your industry, do 
you own that or do you pay for it as a kind of on consignment 
when you say soft collateral?
    Ms. Baugh. When you're an independent jewelry store, you 
have to buy the majority of it. There is some that's on memo, 
but the majority, you do have to purchase. And it's not even 
just the jewelry industry. There's many other businesses that--
retail businesses that are set up the same way as mine.
    Mr. Buchanan. And when you look at, you know, Sarasota or 
just that region, you know, we're talking about tight credit 
but it's a lot more than tight credit. I mean, in our case, 
we've got property insurance challenges, property taxes have 
gone up a lot over the years and haven't been adjusted. You've 
got now the cost of oil and gas and you know, everything at the 
pump.
    What do you see other than the tight credit market is the 
other big issue for you in your area, your biggest area? When 
you're talking with your customers and that, what is the 
biggest thing they're talking about today?
    Ms. Baugh. Well, more on the local level, property taxes, 
insurance, homeowner's insurance of course, gas is a big issue 
at this point. And I think that's part of the problem with the 
economy. Even though the real estate market is so terribly 
down, a lot of people that do have extra income are not 
spending it because they just don't know what's going to happen 
with the economy. So it's a no-win situation all the way 
around.
    Mr. Buchanan. Yeah, and let's say if you had access to 
additional capital, would that in this environment, in your 
case, make a difference? I mean, what would you do if you had 
it? I mean, is the market there to expand your business, for 
example?
    Ms. Baugh. Well, in all honesty, I, myself, I'm in a 
holding pattern where I'm sitting back waiting to see what is 
going to happen with the economy. Once we turn around, and I'm 
sure that we will, I mean, this happens from time to time, we 
will open another location. I hope that we weather the storm 
and we're able to do that. That is my goal.
    Right now I'm in a holding pattern. I'm sitting back hoping 
to survive in all honesty.
    Mr. Buchanan. We appreciate your comments on that. Ms. 
Hollingsworth, let me mention in terms of your business, you 
brought up, I thought predatorial lending practices are 
detrimental to the development. What did you mean by that?
    Ms. Hollingsworth. Are you referring to the credit card 
interest?
    Mr. Buchanan. Yeah, stuff like that.
    Ms. Hollingsworth. Our firm, along with probably the 
majority of small businesses utilize credit card debt for 
various things. For example, when we mobilize to a disaster 
site, I have employees in hotels for maybe months. Sometimes we 
have airfare, all that gets charged on a credit card, 
typically. So while we have a very favorable lending rate from 
our bank, and we try to pay our credit cards off as soon as 
possible, these 17, 18, 19, 20, 22 percent interest rates on 
credit cards are just unbelievable. And I think credit cards 
are a cornerstone of small business funding and cash flow 
management, and that's what I consider predatory lending.
    Mr. Buchanan. Okay. Thank you. I yield back.
    Chairwoman Bean. Thank you. I just had a few final 
questions myself, to Mr. Sorgatz and possibly Mr. Schroeder may 
want to comment as well, the SBA, as you know, recently 
implemented a portfolio monitoring system to oversee the 7(a) 
and 504 portfolios. The system is drawing criticism from a 
number of lenders in the lending community as not accurately 
providing a good measurement of portfolio risk.
    At the same time, the SBA is ready so spend more money on 
this program. So I'd like to hear your comments about how well 
this program is doing coming at particular time when the credit 
crunch is severe. Is it effecting lender participation in the 
program, number 1? And is it a good idea to spend more money if 
the tool isn't helpful?
    Mr. Schroeder. Well, from our perspective, this oversight 
is new program, again, relatively new, so in that respect we 
haven't seen all of the--all the ramifications of it, but there 
is a certain amount of overlap between what the SBA is doing 
and what our primary regulator is doing, namely the FDIC, and 
we're a state-chartered bank. So there is a certain degree of 
overlap there.
    Chairwoman Bean. Which become burdensome then.
    Mr. Schroeder. Which is an added burden for us. So to the 
extent, and again I think this will take a little more time to 
really, you know, flesh out and flush out all of the different 
issues, but at least right now my initial observation is 
there's an overlap between our primary regulator and what the 
SBA is doing.
    Chairwoman Bean. So it mostly presents and obstacle to 
lenders who otherwise might participate in the program, but 
might decide not to as a result.
    Mr. Schroeder. Yeah, definitely.
    Chairwoman Bean. Mr. Sorgatz, did you have any additional 
comments?
    Mr. Sorgatz. Well, we currently don't do SBA lending but I 
would concur with Mr. Schroeder, with our federal regulator 
having the oversight on our underwriting standards and lending 
guidelines and so on. I would agree it would probably dovetail 
into additional duplication of the process.
    Chairwoman Bean. The other question I had and thank you for 
that, is on the SBA Express Program. Over the last several 
years, the SBA has become very heavily reliant on that program 
because it carries only the 50 percent guarantee. What is the 
effect of the current credit crunch on the SBA Express Program 
from your perspective?
    Mr. Schroeder. We tend to a smaller number of larger SBA 
loans so we do not use the Express Program.
    Chairwoman Bean. You're not using it.
    Mr. Schroeder. We're not an active user of that program, 
no.
    Chairwoman Bean. Do you think the fact that the SBA is 
relying so heavily on it and emphasizing it is one of the 
reasons we've seen participation go down?
    Mr. Schroeder. SBA loans, by their very nature, are riskier 
than conventional loans, and to the extent that you reduce the 
guarantee fee, or the--I'm sorry, reduce the guarantee 
percentage, you will very definitely have a negative impact on 
banks that participate in the program from my perspective, 
yeah.
    Chairwoman Bean. All right, I thank you very much for your 
testimony. Did you have any additional?
    Mr. Buchanan. The only thing I'd like to comment, just 
thank all our witnesses for taking your time and all of you are 
busy and could be doing other things, but it does help us. I 
know the Chairman of the Committee and myself, it helps us up 
here to hopefully come up with better policies and things that 
we can do to help make a difference for you. So I appreciate 
you coming up. Appreciate you taking your time. It's helpful to 
me and I know to the Chairwoman, too.
    Chairwoman Bean. Thank you so much, and know that obviously 
we're both here and on a bipartisan basis recommitted to 
working together to address what you've raised. I particularly 
like the questions that both of you raised about having to 
access your own pension monies and certainly we want to do that 
in a way that allows you to reinvest your own money in your 
business and we're going to look at that closely. Thank you so 
much.
    I do ask unanimous consent that members will have five days 
to submit statements and supporting materials for the record. 
Without objection, so ordered. The meeting is adjourned.
    [Whereupon, at 11:17 a.m., the Committee was adjourned.]
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