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




                       FULL COMMITTEE HEARING ON

                        THE ROLE OF CREDIT CARDS

                      IN SMALL BUSINESS FINANCING

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 3, 2008

                               __________

                          Serial Number 110-81

                               __________

         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

                                 ______

                         STANDING SUBCOMMITTEES

                    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

                                 ______

               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

                                 ______

            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              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              MARY FALLIN, Oklahoma, 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

Spearman, Mr. Bill, President and CEO, Mid-Hudson Valley Federal 
  Credit Union, Kingston, NY, On behalf of the National 
  Association of Federal Credit Unions...........................     3
Rosacker, Mr. William C., President, United Bankers' Bank, 
  Bloomington, MN, On behalf of the Independent Community Bankers 
  of America.....................................................     5
Gatewood, Mr. Wayne M., USMC (Ret), President and Chief Executive 
  Officer, Quality Support, Inc., Landover, MD...................     7
Walker, Mr. David A., John A. Largay Professor, Georgetown 
  University, McDonough School of Business, Washington, DC.......     9
Lahm, Jr., Dr. Robert J., Assistant Professor of 
  Entrepreneurship, Jones College of Business, Middle Tennessee 
  State University, Murfreesboro, TN.............................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    33
Chabot, Hon. Steve...............................................    35
Altmire, Hon. Jason..............................................    36
Spearman, Mr. Bill, President and CEO, Mid-Hudson Valley Federal 
  Credit Union, Kingston, NY, On behalf of the National 
  Association of Federal Credit Unions...........................    37
Rosacker, Mr. William C., President, United Bankers' Bank, 
  Bloomington, MN, On behalf of the Independent Community Bankers 
  of America.....................................................    54
Gatewood, Mr. Wayne M., USMC (Ret), President and Chief Executive 
  Officer, Quality Support, Inc., Landover, MD...................    63
Walker, Mr. David A., John A. Largay Professor, Georgetown 
  University, McDonough School of Business, Washington, DC.......    70
Lahm, Jr., Dr. Robert J., Assistant Professor of 
  Entrepreneurship, Jones College of Business, Middle Tennessee 
  State University, Murfreesboro, TN.............................    92

Statements for the Record:
American Bankers Association.....................................   118

                                  (v)



 
                   FULL COMMITTEE HEARING ON THE ROLE
                   OF CREDIT CARDS IN SMALL BUSINESS
                               FINANCING

                              ----------                              


                        Thursday, April 3, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
1539 Longworth House Office Building, Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Gonzalez, Cuellar, 
Ellsworth, Johnson, Sestak, Chabot, and Akin.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I call this hearing to 
order. Today the Committee will examine the increasing role 
played by credit cards in financing our nation's small 
businesses.
    In the past, 60 percent of small firms made use of private 
and federally guaranteed loans. In comparison, during that same 
period, 77 percent of entrepreneurs opted to buy new equipment 
and pay for other businesses using a credit card.
    The reason is simple. Credit cards give small businesses 
access to capital they need to grow. That fact is especially 
crucial given the current economic climate in which small firms 
are finding it difficult to secure traditional forms of 
financing. Not surprisingly, the rate at which purchases are 
charged continues to rise up to 14 percent over the last 5 
years. Today we will delve into what that means for small 
firms.
    Credit cards have always been a convenient means of 
payment. They expedite transactions while allowing for 
considerable ease and security. Just as importantly, since 70 
percent of small business owners pay their balances in full 
each month, they're gaining the equivalent of a 30-day 
interest-free loan.
    While credit card use is on the up swing, many federal 
programs specifically designed to offer small firms access to 
capital are falling short of this goal. That is holding small 
businesses back and denying the economic contributions from 
entrepreneurs precisely when they matter most.
    In the past months, members of this Committee have heard 
testimony from the Federal Reserve, the Small Business 
Administration, and a host of experts on small business lending 
programs. Their testimony points to the considerable gap that 
remains in financing.
    The witnesses have also shed light on how the current 
economic downturn, rising foreclosure rates, and a plummeting 
housing market are compounding these capital challenges. In 
fact, just when our small businesses' economy will benefit 
tremendously from an infusion of capital, financial 
institutions are pulling back on credit.
    As the availability of capital diminishes, more businesses 
are delaying important purchases, halting expansion, foregoing 
the creation of new jobs, laying off current employees 
altogether. Ironically this keeps small firms from doing what 
they do best: fueling the nation's economic growth.
    In such an environment, it will make sense for the SBA's 
lending and investment program to step in. Sadly, the agency's 
largest lending initiative, the 7(a) program, is doing the 
exact opposite.
    The SBA's mission is to raise fees and erecting new 
barriers to small business loans. As a result, 7(a) lending 
volume is down 14 percent and lending to minority-owned 
businesses has decreased by nearly 9 percent. Clearly this all 
runs counter to the program's mission.
    Given these realities examining the role of credit cards in 
the financing of small businesses just makes sense. With the 
nation facing the prospect of a recession, it is also important 
to remember that entrepreneurs have always led the way back to 
economic recovery. This Committee will continue to work to 
ensure they have the tools to do so again. And I know my 
colleagues will join with me in strengthening what is working 
in the current system while correcting what is not.
    I want to thank all of the witnesses for being here today 
and for offering their insights on these crucial issues. With 
that, I recognize Ranking Member Chabot for his opening 
statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you, Madam Chairman, for holding this 
hearing on small businesses and credit cards. I also want to 
thank our distinguished panel of witnesses here. I know we all 
look forward to hearing your testimony.
    The financial services market in the United States is the 
most competitive, innovative, and robust in the world. This 
vibrant market has helped individuals, businesses, including 
small businesses, to meet their daily needs and achieve their 
dreams.
    Cash management is an absolutely critical matter for small 
companies. Careful management of cash and credit may mean the 
difference between whether a business expands or doesn't or 
whether it succeeds or fails.
    According to the Government Accountability Office, the 
prevalence and use of credit cards in the United States has 
grown dramatically over the past 25 years. In 2005, consumer 
held more than 691 million credit cards. And the total value of 
transactions in which these cards were used exceeded $1.8 
trillion.
    More than half of small firms rely on credit cards to help 
fund their operations, according to a financial services trade 
association. Credit cards can allow a small company to finance 
a purchase over time that they would otherwise not be able to 
make. They can be a source of short-term interest-free loans to 
enable a business to operate.
    Credit cards can also help a company to manage cash flow or 
track and manage employee purchases and expenses. In addition, 
credit cards allow small companies to earn airline, hotel, 
retail, or cash-back rewards to enhance the business.
    Whether a small business is well-established or just 
beginning, these tools can have a positive impact on business 
operations. They can enable a small business to weather minor 
disruptions to cash flow. For a newly established business, 
credit cards provide the opportunity to build business credit.
    Especially in a time of economic uncertainty, when credit 
can be even more difficult to access, credit cards can make 
available the capital needed to maintain a company's position 
or expand, create jobs, and add significant value to our 
economy.
    Like any borrower or credit card customer, small businesses 
must use credit responsibly and be vigilant about managing the 
debt. Credit is extremely valuable and is a tremendous asset 
when used wisely.
    Again I thank the Chairwoman for holding this hearing. I 
look forward to hearing this testimony from our witnesses very 
shortly here. And I yield back the balance of my time.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    And now I welcome Mr. Bill Spearman. Mr. Spearman is the 
President and CEO of the Mid-Hudson Valley Federal Credit 
Union, which draws its field of membership from Ulster, 
Dutchess and Orleans Counties, New York. He is testifying today 
on behalf of the National Association of Federal Credit Unions, 
a well-respected trade association that exclusively represents 
the interests of federal credit unions.
    Mr. Spearman, you have five minutes to make your 
presentation. Thank you. Welcome.

 STATEMENT OF MR. BILL SPEARMAN, PRESIDENT AND CEO, MID-HUDSON 
    VALLEY FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL 
              ASSOCIATION OF FEDERAL CREDIT UNIONS

    Mr. Spearman. Good morning. And good morning, Chairwoman 
Velazquez, Ranking Member Chabot, and members of the Committee. 
My name again is Bill Spearman. I am here today to testify on 
behalf of the National Association of Federal Credit Unions. I 
serve as President and CEO of the Mid-Hudson Valley Federal 
Credit Union, headquartered in Kingston, New York.
    Mid-Hudson Valley is a community chartered credit union 
serving nearly 50,000 members and with assets of $590 million. 
MHVFCU and the entire credit union community participate this 
opportunity to participate in this hearing regarding credit 
card and small business lending.
    Credit unions are not-for-profit financial cooperatives 
governed by a volunteer board of directors, who are elected by 
their members. At Mid-Hudson Valley, as with many credit 
unions, our membership includes small business owners and some 
of the businesses themselves.
    Cooperative structure gives credit unions unique ability to 
design services to meet the needs of the membership. It also 
enhances the relationship that the credit unions have with 
their member owners, giving them a unique working knowledge of 
the way the business is run.
    This unique relationship leads to better lending decisions 
and mitigate risk for the credit union and also for the small 
business. Even though credit unions have been able to grow in 
their ability to help small businesses, many want to do more.
    At Mid-Hudson Valley, we are an approved SBA lender. 
However, some of the cumbersome aspects of the SBA process 
constrain our efforts to take a more active role in the SBA 
7(a) and 504 lending programs.
    Moreover, the arbitrary member business lending cap that 
was established 1998 as part of the Credit Union Membership 
Access Act has also hindered the credit unions' ability to help 
small business. The Credit Union Regulatory Improvements Act, 
H.R. 1537, and the Credit Union Small Business Lending Act, 
H.R. 1849, would help to provide relief to credit unions from 
this arbitrary cap and ease the SBA process for credit unions.
    Even though the credit union has been able to grow and help 
small businesses, business lending to our members is a very 
important part of the Mid-Hudson Valley Federal Credit Union. 
During the early 1990s, the Mid-Hudson Valley area was left 
reeling with the closure of the IBM Kingston plant that 
employed over 7,000 employees.
    As a federal credit union for that IBM plant, we help many 
former IBM employees establish their own small business 
ventures. Some of the bigger financial institutions in the area 
were unwilling to lend to these entrepreneurs. As a result, 
Mid-Hudson Valley stepped in and filled this void.
    Today Mid-Hudson continues to help fuel small business 
growth in our region. Credit card lending plays an integral 
role in providing much needed capital for our small business 
members. Currently 61 of our business members have credit card 
accounts with the credit union. These small business members 
pay their bills on time. And many do not carry balances and, 
thus, do not generate a large amount of interest income for the 
credit union.
    Absent this capital provided by the credit cards, these 
businesses surely would not be as successful as they are today. 
Credit cards offer a convenient form of payment and an easy way 
to track expenses.
    Many small companies often utilize credit cards as a main 
source of credit. Federal credit unions are the only federal 
financial institution with a statutory usury ceiling, currently 
at 18 percent. This helps ensure that small businesses using 
credit cards from their credit unions do not face predatory 
interest rates.
    Federal credit unions have traditionally been responsible 
lenders and have not participated in some of the predatory 
practices that are engaged in today. Thankfully, double cycle 
billing, universal default, and hair trigger repricing are not 
a part of the credit union vocabulary. At
    At Mid-Hudson Valley, we tend to hear the same reasons over 
and over again as to why our members, small businesses, prefer 
credit cards to assist them with their business. The ease of 
obtaining credit, the ability to monitor cash flow with their 
monthly statements, efficiency, fair rates, and overall 
convenience are the main reasons why our small business owners 
utilize credit cards.
    Knowing our members helps us put them in the proper loan 
products for their business needs. For example, if they needed 
to purchase a copier for $5,000, we would not put them in a 
credit card but, rather, suggest a term loan for those 
purposes.
    MHVFCU believes that any effort to restrict credit card 
practices should be carefully crafted to ensure that smaller 
financial institutions are not burdened by unnecessary 
regulation and unintentionally harmed.
    In conclusion, federal credit union small business lending 
is strong and continues to grow. However, the current 
regulatory framework prevents federal credit unions from doing 
more for America's businesses. Legislative proposals such as 
the Credit Unions Small Business Lending Act and the Credit 
Union Regulatory Improvements Act would go a long way to 
helping credit unions to bolster small business growth in 
America.
    Furthermore, credit card lending plays a pivotal role in 
helping federal credit union business members start and grow 
small businesses. NAFCU urges caution and careful consideration 
of any legislation proposals that could simultaneously hurt 
credit union lending and small business development.
    I thank you for your time. And I am happy to answer any 
questions that the Committee members may have.
    [The prepared statement of Mr. Spearman may be found in the 
Appendix on page 37.]

    Chairwoman Velazquez. Thank you, Mr. Spearman.
    Our next witness is Mr. William Rosacker. He is the 
President of the United Bankers' Bank in Bloomington, 
Minnesota. He is testifying today on behalf of the Independent 
Community Bankers of America, a leading trade association 
representing over 5,000 community banks of all sizes and 
charter types throughout the United States.
    Welcome, sir.

    STATEMENT OF MR. WILLIAM C. ROSACKER, PRESIDENT, UNITED 
 BANKERS' BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS 
                           OF AMERICA

    Mr. Rosacker. Thank you, Chairwoman Velazquez and Ranking 
Member Chabot. I am Bill Rosacker, and I am President of United 
Bankers' Bank in Bloomington, Minnesota. I am pleased to be 
here today on behalf of the Independent Community Bankers of 
America.
    On behalf of ICBA's nearly 5,000 members, I want to express 
our appreciation for the opportunity to testify on the 
important role credit cards play in supporting America's small 
business.
    Access to credit and capital is vital in today's economy. 
Today I will focus on three points: first, how community banks 
are able to help local small businesses run and finance their 
operations successfully through the use of credit cards; 
second, how community banks as small businesses themselves 
benefit from the ability to offer credit card products; and, 
finally, the legislative and regulatory landscape facing 
community bankers and their small business customers.
    Community banks play a vital role in providing capital 
entrepreneurs need to succeed. In fact, community banks provide 
nearly a third of the total dollar amount of bank business 
loans under $100,000, many in the form of small business credit 
card products.
    A small business owner who chooses to do business with a 
community bank gains an important advantage of local decision-
making. Community bankers know their customers and live and 
work in their neighborhoods. Should a small business find 
itself in a tough financial situation, both the banker and the 
owner have a clear interest in making the business successful.
    A small business credit card holder gains a new source of 
capital that can help them meet their dynamic financial needs 
while establishing a sound business credit history. A credit 
card simplifies the accounting and cash flow management.
    A small business can use a credit card to finance daily 
expenditures, freeing up assets to be reinvested in the 
business to help it grow, rather than tying it up in trade 
credit receivables and payables.
    Also, it has been my experience that a large majority of 
small business credit card holders pay their statement balance 
in full at the end of each month, using it as a transaction 
account and almost provides them the same convenience as a 
regular checking account.
    A small retailer accepts credit cards, improves its 
profitability and efficiency. For example, they are protected 
against many types of fraud. They do not have to keep as much 
cash on hand. And the business receives guaranteed funds in its 
account immediately.
    Also, as we all know, consumers will spend more if they go 
to a merchant that accepts credit cards. After all, increasing 
customer transactions is the best way to develop revenue.
    If a small merchant signs with a community bank, it is 
getting a tremendous value because of the benefits of the 
electronic payments and sophisticated payments network that a 
community banker can utilize to complete the transaction 
quickly and, most importantly, securely.
    While community banks are often lumped into a broad 
category of bankers, it is important to keep in mind that a 
community bank is a small business themselves. We face our own 
unique set of challenges in a very competitive marketplace.
    Contrary to popular belief, the consumer and business 
credit cards we offer are not always the source of tremendous 
profit. The real value lies in our basic ability to offer these 
products to consumers and small businesses. Offering community 
bank-issued credit cards creates a stronger relationship with 
the customer and encourages loyalty for the long run.
    Credit cards are a very small margin product for many 
community banks, which do not issue consumer and credit cards 
at volumes near the larger issuers. For the small business 
owner, they can get the same product but with local customer 
service at a competitive and often better rates from their 
community banker.
    One unique challenge facing community banks on a daily 
basis is the burden of government regulation, which directly 
affects the ability to support small businesses. There are a 
number of legislative proposals which would greatly increase 
the cumulative regulatory burden for card-issuing community 
banks.
    The increased regular costs and burdens could be the 
tripping point that will cause community banks to discontinue 
offering credit cards products. That said, there is also an 
opportunity for Congress to enact measures to make it easier 
for small businesses and community banks to grow and succeed. 
ICBA would like to thank the Chairwoman Velazquez for 
introducing the Communities First Act, H.R. 1869, which 
provides much needed regulatory burden and tax relief for 
community banks, their customers, and their communities.
    In conclusion, even in the best of economic times, small 
businesses can struggle in the search of capital. Community 
bankers are well-positioned to meet these needs, be it through 
traditional loans or highly competitive business credit 
offerings. The support structure built on local decision-making 
and long-term relationships unique to the community bank model 
is a proven formula to help entrepreneurs succeed.
    I want to thank you for this opportunity to testify. And I 
look forward to your questions.
    [The prepared statement of Mr. Rosacker may be found in the 
Appendix on page 54.]

    Chairwoman Velazquez. Thank you.
    Our next witness is Mr. Wayne Gatewood. Mr. Gatewood is the 
President and CEO of Quality Support Inc., a veteran, a 
minority-owned small business that provides a distinctive array 
of management, administrative meeting, and conference support 
services for its wide array of government and corporate 
clients.
    Welcome.

STATEMENT OF MR. WAYNE GATEWOOD, JR., USMC (RET), PRESIDENT AND 
         CHIEF EXECUTIVE OFFICER, QUALITY SUPPORT, INC.

    Mr. Gatewood. Good morning, Madam Chairwoman and Ranking 
Member Chabot and members. After 21 years in the United States 
Marine Corps, I started Quality Support in 1989, with $600 in a 
small loan from my dad.
    I initially used credit cards to pay for small corporate 
needs and personal items that would otherwise require the 
outlay of cash. To maximize my potential for success, I needed 
time. And credit cards gave me that time.
    From 1989 to 1998, because of favorable terms and 
flexibility, American Express became our preferred source of 
credit. In 1999, our company was selected to support a large 
Department of State requirement. To take on this work, we would 
need a credit line of one million dollars.
    Even with a substantial cash balance and an established 
track record, our bank turned us down flat. However, American 
Express worked with us and authorized a credit line up to one 
million dollars. By the end of our State Department contract, 
we had charged $1.1 million on our American Express cards.
    Since 1994, we have charged more than $8 million through 
American Express. For calendar year 2008 alone, we are on pace 
to charge $2.5 million through our AmEx account.
    Bank lines can be expensive and hinder business operations. 
Example, the following terms were offered us by a bank. We 
rejected the offer. No corporate cash contribution or 
distributions could be made while the agreement was in effect. 
This would be the case, whether the line of credit was used or 
not. We could not enter into any teaming agreements without 
permission from the bank, thus stunting our opportunities for 
future growth and stability.
    In addition, Quality Support guaranteeing the loan, the 
bank wanted me to personally guarantee the loan. The bank would 
put a lien on our receivables, and the bank would be paid 
directly from our clients. We would maintain a net worth of 
$1.5 million for a $500,000 credit line. If we dipped even 
slightly below the $1.5 million mark, even for a short period 
of time, the bank could immediately call in the loan.
    The bank reserved the right to call in the loan at their 
discretion any time. The credit line would be for one year 
only. And at the end of that year, all outstanding balances 
were due. And terms would only be extended at the bank's 
discretion.
    At our expense, the bank could request field audits of our 
finances or the records any time they chose and as many times 
as they chose. We would pay for the preparation of all related 
documents and be responsible for all out-of-pocket expenses 
incurred by the bank, to include their attorneys' fees. This 
would be the case, even if we never used the credit line and 
was in addition to the $2,500 annual maintenance fee. To pay 
for these expenses, the bank could debit any accounts 
maintained by Quality Support without prior consent from us.
    Although we now have two small bank lines of credit that do 
not include such harsh terms, we still prefer to use our credit 
card account with American Express. If we used a bank credit 
line for short-term credit, we would have to pay interest. If 
we used our cash, we would lose the opportunity of investing 
the money elsewhere.
    By using AmEx, we have access to the credit we need. We pay 
no interest as long as we pay within the terms of our 
agreement. And we are able to invest our cash on hand in 
interest-bearing accounts.
    AmEx is beneficial because of its simplicity. When we have 
a short term requirement, such as a large hotel bill, we make a 
phone call to Amex, explain the situation, sometimes provide 
basic financial information. In most cases American Express 
immediately increases our credit line for the short-term 
requirement. Even when we don't have a need for short-term 
credit increases, American Express offers us a healthy and 
ongoing line of credit.
    American Express ensures international purchasing capacity 
for us and credibility internationally to support our 
operations almost anywhere in the world. As a bonus, we receive 
air miles for every dollar we spend with American Express.
    Quality Support will continue using credit cards to enhance 
and sustain our corporate operations. Credit cards when used 
judiciously can provide the small business owners with the 
flexible and quicker access to credit they otherwise may be 
denied.
    Quality Support's growth and success over the past 19 years 
would not have been possible if access to credit had not been 
available to us. We thank the credit card companies, especially 
American Express OPEN, for giving us the capacity to form and 
grow our company.
    Thank you. This ends my testimony.
    [The prepared statement of Mr. Gatewood may be found in the 
Appendix on page 63.]

    Chairwoman Velazquez. Thank you, Mr. Gatewood.
    Our next witness is Dr. David Walker. Dr. Walker is the 
John A. Largay Professor and Director Emeritus of the Capital 
Markets Research Center at Georgetown University, which he 
directed for 17 years. Previously Dr. Walker has served as the 
Director of Research for the Office of the Comptroller of the 
Currency.
    In his research, Dr. Walker has analyzed free credit 
availability and demand for SBA loans and has published several 
studies on the financing of small firms through venture 
capital, informal investment, and bank credit.
    Welcome.

   STATEMENT OF MR. DAVID WALKER, JOHN A. LARGAY PROFESSOR, 
      GEORGETOWN UNIVERSITY, McDONOUGH SCHOOL OF BUSINESS

    Mr. Walker. Thank you. Madam Chairwoman, Ranking Member, 
and Committee members, thank you for the opportunity to testify 
in front of the House Committee on Small Business. I know we 
have very limited time. So I would like to offer my conclusions 
to begin my discussion.
    I would like to urge the Committee to do whatever you can 
to increase the supply of funds to small firms. These firms are 
the growth engines of our economy, as I discuss in my 
testimony.
    Technically we are not in a recession. We do not have the 
data to know whether or not GDP growth has been negative for 
two consecutive quarters. For the fourth quarter of 2007, 
growth was 0.6 percent. And we do not have data for the next 
quarter.
    No matter what label we use, the economy is in extremely 
poor condition. Figure 1 on page 9 of my testimony suggests 
that the contrast between the credit card interest rate and the 
prime rate is quite similar to that during the previous 
recession, as identified by the prestigious National Bureau of 
Economic Research.
    In my opinion, the stimulus package you have already 
enacted and the current action that you and your colleagues are 
working on this week to deal with the housing crisis will 
probably enable us to avoid what we technically define as a 
recession of two negative growth quarters.
    My interest in small business originates from, one, 
experience from my family owning and operating a retail store 
in York, Pennsylvania for 93 years; two, working with the Small 
Business Administration, which this Committee oversees; and, 
three, extensive small business research and policy analysis, 
beginning 40 years ago with my Ph.D. dissertation.
    Small business and consumer credit are often 
indistinguishable. Much of the credit available to small firms 
is based on the entrepreneur's personal resources, credit card 
loans, and lines of credit, and mortgage loans and potential 
home equity loans and lines.
    In our recent study, Dr. Thomas Durkin and I argue that 
much of the consumer credit is revolving credit without a fixed 
payment schedule, often credit card loans from financial 
service firms to small business. I am pleased to submit that 
study to the Committee for your background.
    Much of today's credit crunch has been caused by what I 
consider to be irresponsible mortgage lending and the 
unreasonable assumption that there would be no finite limit to 
housing prices during the current decade.
    Consider, for example, a 2/28 subprime mortgage, where the 
loan equaled virtually 100 percent of the 2005 property 
appraisal. When the mortgage resets in 2008 at new rates for 
years 3 through 30, they reset at an interest rate that is 
generally above the market rate that you would find on an 
adjustable rate mortgage today. If the borrower has negative 
equity in 2008, the borrower will not be able to refinance at 
the market adjustable rate that he or she would otherwise find.
    The adjustable rate mortgages have allowed many legitimate 
borrowers to purchase a home. They are not to blame for the 
current credit crisis, as has been claimed sometimes. The 
problem is the high reset rate, often above market rates, when 
the reset is required and the borrower has no equity in the 
property and no alternative but to agree to a high reset rate.
    Costs of credit to small business are often very high 
compared to rates available to other sectors. And this is 
especially true during a credit crunch. Small firms relying on 
debt secured by credit cards usually pay more than twice the 
interest rate that large firms pay when borrowing at the prime.
    The difference between the cost of credit for large and 
small American firms is at least illustrated by the difference 
between the prime interest rate and the rate of interest on 
credit card balances, the difference of costs of debt for small 
and large firms.
    Figure 1 on page 9 shows the substantial difference in the 
credit card rate and the prime rate between 1994 and 2007. 
Throughout this period, the difference between the credit card 
borrowing rate and the prime rate is substantial. Small firms 
have incurred a much higher cost for external resources than 
large firms over the past 13 years.
    Thank you very much for this opportunity to meet you and 
speak with you. I would be pleased to answer any of your 
questions.
    [The prepared statement of Mr. Walker may be found in the 
Appendix on page 70.]

    Chairwoman Velazquez. Thank you, Dr. Walker.
    Our next witness is Dr. Robert J. Lahm. Dr. Lahm is 
Assistant Professor of Entrepreneurship as well as the 
Entrepreneurship Interim Program Coordinator for Middle 
Tennessee State University. Previously Dr. Lahm has founded 
private entrepreneurial ventures and has held positions as an 
employee of other small and large businesses.
    Although diverse, Dr. Lahm's research has often focused on 
topics with practical implications for the small business 
sector, particularly the issues of entrepreneurial 
bootstrapping and the use of credit cards in small businesses.
    Welcome.

   STATEMENT OF DR. ROBERT LAHM, JR., ASSISTANT PROFESSOR OF 
 ENTREPRENEURSHIP, JONES COLLEGE OF BUSINESS, MIDDLE TENNESSEE 
                        STATE UNIVERSITY

    Dr. Lahm. Thank you, Madam Chairwoman, Ranking Member, and 
the Committee, for allowing me to testify.
    As you will note from my bio, I am not a lifelong academic. 
I have been an entrepreneur. I have also been an 
entrepreneurial bootstrapper; that is, one who has started the 
business from scratch with little or no capital. I know how it 
feels to float with my head bobbing, sometimes beneath and 
sometimes above the surface of treacherous entrepreneurial 
waters.
    The credit card industry has in recent years been 
aggressively targeting the small business market. My research 
shows that credit cards, whether labelled or classified as 
personal accounts or as business cards, have become the 
surrogate for traditional sources of capital by bootstrappers.
    In one of my earlier papers, entitled ``Just Say Charge It: 
The Use of Credit in Entrepreneurial Start-ups,'' I estimated 
that somewhere in the vicinity of eight and a half million 
businesses with zero employees across all industry sectors were 
using personal credit cards as a source of capital in 2002. 
Usage rates as well as the total number of businesses have both 
increased since that time.
    The subject of entrepreneurial bootstrapping has thus far 
not been vigorously researched. Bootstrappers do not or cannot 
access traditional lenders, business angels who buy ownership 
in their firm, or venture capital.
    There are many reasons for this behavior. They may not want 
other owners to meddle in their businesses. They may want to 
prototype their business concept before jumping into selling 
ownership for capital or they may fear the loss of control by 
having other owners.
    There are many dangers for would-be business or consumer 
credit card holders. Most of us are aware of the game that is 
played given the credit card companies incorporate regular 
change of terms provisions in applicants' contracts. Indeed, 
language such as we may change our terms at any time for any 
reason foreshadow that they can and will do so regularly.
    The biggest problem with respect to credit card companies 
is that they can be whimsical in their treatment of credit card 
holders. I believe my use of the word ``whimsical'' is 
appropriate given that some issuers have added ``or for no 
reason'' to their change in terms disclosures.
    Another danger is that so-called business cards are no 
different from ordinary credit cards relative to personal 
liability. Whereas, many small business owners may think that 
once they form a business, they are protected, they have 
typically never heard of veil piercing.
    Credit card companies may slap an unwary borrower with high 
interest rates when payments are late, in addition to late 
fees. According to a United States Government Accountability 
Office report entitled ``Credit Cards Increase Complexity in 
Rates and Fees Heightens Need for More Effective Disclosures to 
Consumers,'' 35 percent of their credit card issuers' active 
U.S. accounts were assessed late fees and 13 percent were 
assessed over-limit fees in 2005. Even the Internal Revenue 
Service uses the postmark to signify compliance with the spirit 
of a taxpayer's filing deadline.
    Knowing that entrepreneurship is vital to the economy, we 
must start and find ways to study and support bootstrappers 
since they comprise the vast majority of all start-ups. These 
businesses may finally reach the cover of Inc, Fast Company, or 
Entrepreneur, but they are started on kitchen tables.
    As policy-makers, I would invite you to consider novel 
approaches to disseminating formal education and training to 
nascent entrepreneurs. We need better disclosure agreements. 
When other industries have produced products that may be 
hazardous to consumers' well-being, they have been forced to 
educate consumers.
    Unfortunately, personal finance has been greatly under-
served as the subject for contemporary students in high schools 
and universities. While this may fall under the purview of the 
U.S. Department of Education, this Committee could advocate for 
increased attention to addressing the societal need for 
financial literacy.
    I fear a proposal to require that the terms of credit be 
frozen at the time credit was taken would actually raise the 
cost of credit to all. On the other hand, lenders who are 
utilizing predatory lending tactics, trickery, and obviously 
disingenuous strategy to trap borrowers in a classic game of 
bait-and-switch with change in terms agreements must be stopped 
given that entrepreneurs are the lifeblood of the economy.
    I wish you well in your quest to create policies that can 
nurture those businesses that deserve the opportunity to 
succeed. If I may be of further service in the future, I will 
hope you will call upon me again.
    [The prepared statement of Dr. Lahm may be found in the 
Appendix on page 92.]

    Chairwoman Velazquez. Thank you, Dr. Lahm.
    If I may, I would like to address my first question to Mr. 
Spearman. What are some practices that credit unions use to 
manage risks associated with credit, card lending to member 
businesses?
    Mr. Spearman. Well, basically what we do is we know all of 
our businesses personally. We are involved many times in 
helping them assemble a business plan. We work with them.
    Generally speaking, we work with a lot of start-up 
businesses, and we actually have them produce a business plan. 
We provide them resources to do a business plan. So when they 
come back to us, we have a pretty good idea that we are really 
a partnership in this process.
    And if it is a start-up business, we will probably start 
with a credit card, but we will start at a modest credit limit 
and work through that process. And generally speaking, the 
credit card is perhaps the first instrument that is used in the 
relationship. And soon it will be followed by other 
relationships.
    So we continue to work with them. And, really, in our 
portfolio, which is a credit card portfolio, which is rather 
small, we have about 61 accounts. We don't have any real 
delinquency or any issues with those cards. Primarily they are 
used for a payment device.
    Chairwoman Velazquez. Mr. Rosacker, would you mind to 
comment on some of the practices that your banks use to manage 
risk associated with credit card lending?
    Mr. Rosacker. I would love to. In conjunction with what Mr. 
Spearman said, we also develop this deep relationship with the 
customer. And, as I testified, you live in their same 
neighborhood. The kids play Little League together. You know 
that their goal is to succeed, and you want them to succeed.
    And I think that through the sophisticated computer systems 
that back the business credit card, you can actually monitor 
their sales, their expenses, where they're spending money, how 
they're spending money. And you can do that almost on a day-to-
day basis, where in a traditional business loan, you really 
don't do that and can't do that other than on a quarterly or 
whatever basis.
    But I think, to sum it up, it is a relationship. It is the 
fact that you have the tools computer-wise to do it. And, 
finally, I think when you look at what a community bank is and 
that small entrepreneur is, that is the time when one owner of 
one business can sit down with the owner of another business 
and solve the problem and make it a win-win situation.
    Chairwoman Velazquez. Can you comment? How would 
restricting lenders' ability to price risk affect credit 
availability for small businesses?
    Mr. Rosacker. I think that the risk and pricing for risk 
are important. And I know that there are many studies that have 
said this is tightening or this is loosening and what have you. 
But I think when you look at it, credit card pricing is 
significantly different than the traditional loan pricing. 
There are significantly different risks involved in the credit 
card from the standpoint it is unsecured credit. It is not a 
collateralized line of credit, as you would in your 
traditional.
    So you do analyze it differently. And you do look at it. 
But you have many more tools to use than you do in the 
traditional business loan.
    Chairwoman Velazquez. But will this restricting the ability 
to price for risk create additional costs that will passed on 
to--
    Mr. Rosacker. Absolutely because you are going to have to 
make up that limitation that you have on the risk in some other 
form. I mean, you can't do it for nothing.
    Chairwoman Velazquez. Mr. Gatewood, one of the reasons some 
individuals advocate for traditional loans is that their terms 
are perceived as being more fixed, thus providing businesses 
with greater sense of certainty and enabling them to 
effectively plan for the future. Do you believe that 
traditional loan terms are more fixed than credit cards or that 
they better enable businesses to plan for the future?
    Mr. Gatewood. Well, thank you, ma'am.
    Actually, I think they are fixed in favor of the banks. As 
my testimony revealed, the loan applications received from the 
banks were very restrictive. Certainly it was fixed there. So 
we knew how much we could get over time, but the risk was huge.
    And the autonomy that the bank had to call in the loan at 
any time and to require us to go through them for a number of 
our operations was just too restrictive.
    Chairwoman Velazquez. Any of the other witnesses would like 
to comment on that question?
    Mr. Gatewood. Also, ma'am, if I might, again, as I say, the 
credit card was our preferred means because if we paid on the 
terms of the credit cards, there is absolutely no finance 
charge. So our cost is minimal, if anything.
    Chairwoman Velazquez. Dr. Lahm, in contrast to traditional 
loans, most banks are willing to issue a credit card to a 
business without requiring personal guarantees, origination 
fees, or without taking a security interest in the business 
assets. What makes credit cards more open to these less 
restrictive lending terms compared to traditional loans?
    Dr. Lahm. I have found the irony in the fact that banks 
will not often provide traditional loans until a business is 
established with, for example, three years of operational 
history and a track record. But, yet, it is banks who will turn 
right around and with a signature provide a credit card loan 
for a substantial amount of money with no paperwork whatsoever 
as compared to exorbitant layers of process, accounting, and so 
forth, incurring costs for the businesses. And I think this 
explains why credit cards are so popular.
    I would say that credit card usage is very high with 
respect to personal credit cards. And those who sign both 
business and personal credit card agreements are, in fact, 
signing that they are liable for those as persons with Social 
Security numbers, with credit ratings, and so forth, which are 
subject to be damaged or, of course, enhanced positively if 
they perform in accordance with the bank's expectations and 
reporting.
    Chairwoman Velazquez. Thank you.
    Dr. Walker, in the five years since the last Federal 
Reserve survey of small business finance, credit card use by 
businesses increased by 14 percent. During the same period, the 
use of personal credit cards by consumers increased by less 
than one percent. Are there factors associated with business 
use of credit cards that have contributed to this rapid growth?
    Mr. Walker. Well, from my knowledge, business has not found 
any other alternatives at a price that they could afford. Even 
right now the prime interest rate is 5.25 percent. The typical 
credit card quotation yesterday was 13.4, more than 2 and a 
half times.
    And, yet, business cannot seem to find alternatives and 
particularly small business. That's why I drew that contrast in 
my testimony because I think it is a good indicator of what 
small business faces when they go looking for funds.
    Chairwoman Velazquez. Thank you.
    And now I will recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Spearman, I will begin with you if I can. You mentioned 
that H.R. 1537, the Credit Union Regulatory Improvements Act, 
which I support and cosponsored, would raise the business 
lending cap. Could you explain a bit more why this is 
important? And would lifting this cap increase credit card 
lending, do you believe, to small businesses?
    Mr. Spearman. Yes. Yes, it would. It would increase credit 
card lending and would also create additional lending to small 
businesses as well. The cap is a statutory cap that was created 
in 1998. And at this point, our credit union is dangerously 
close to that particular cap.
    And since there is not necessarily a secondary market, much 
as there is in the mortgage business, where you can sell the 
mortgages and retain the servicing, there is no such 
established process here in the credit union industry at this 
point.
    So it will create a pull-back, if you will, of financial 
institutions that are at that level not to be able to offer 
additional credit. And at this point, like I said, our 
institution is facing that particular hurdle at this point in 
time. And I know many other organizations are as well.
    So it is a limiting factor. And it would also cause issues 
on credit cards, particularly those that are larger credit 
cards, say credit cards in advance of a $50,000 to $100,000 
level.
    The way the policy works is as long as the credit limit is 
at that level, we have to account for that for the cap. Whether 
the balance is used or not, it is the limit that is counted. 
And that obviously could cause a problem, and it has caused 
some problems there.
    So we are anxious for relief and continue to work on that, 
but it is an issue that we are facing. And I know many of my 
colleagues are facing that as well.
    Mr. Chabot. Thank you.
    Mr. Rosacker, what standards do most banks use to evaluate 
the creditworthiness of prospective small business customers?
    Mr. Rosacker. Well, I think it depends, obviously, 
significantly on the type of business you are going into and 
where they are going to be doing their business. But I think 
traditionally community banks use the same criteria. You are 
looking at the capacity of the borrower, the creditworthiness 
of the borrower, their business plan and when their break-even 
point is going to be and what does their business plan look 
like, and who they are going to do business with. Are they 
going to do business with a certain segment of the economy that 
is very susceptible to big swings in the economy or big swings 
in the business?
    So there is no cut and dried criteria, but there is an 
overall review of the entire business plan. And strategic plan 
of the small business owner is very important.
    And I think that banks as a rule try to find ways to say 
yes. That community banker lives and breaths that small 
entrepreneur in this community. And, as I keep saying, it's 
that relationship that goes in.
    I think a good example of that is a young lady that 
graduated from the University of Minnesota with a degree in 
architectural design and focused primarily on landscape design. 
She had excellent credentials but no idea on how to develop a 
business plan, how to do things.
    She worked with a community banker in Minnesota. They 
developed a business plan. They got her incorporated. They did 
all of the work for her and with her and set up a line of 
credit with her. So it's a total relationship.
    Mr. Chabot. Thank you very much.
    Mr. Gatewood will be next, if I can. Your written testimony 
said that credit cards give you and have given you the 
flexibility and fund availability you need to operate, 
particularly compared to traditional lines of credit. Would you 
elaborate on that just a little bit?
    Mr. Gatewood. Yes sir. Our credit cards give us a term to 
pay or a length of time to pay from the time we borrow the 
money. In my business, which is federal government contracting, 
I have to turn around my money pretty quickly. It's sometimes 
tough getting paid from the government.
    The banks don't give us any flexibility. They have certain 
days you have to pay. And if you don't, you start incurring 
interest rates and sometimes fines and so forth and so on. And, 
of course, you risk default.
    I appreciate Mr. Rosacker talking about community banks, 
but we don't deal with community banks here in Washington, D.C. 
We deal with some of the nation's largest banks. And they are 
not warm and friendly, not at all. So they have a huge risk 
aversion. And over the lifetime of my 19 years in business, we 
have really had a hard time dealing with banks.
    The banks have a set date that that money has to be paid. 
And there is no flexibility whatsoever. So we stay away from 
them. We have gone, if I might say, in the federal government 
contracting community--and this is no kidding. As a matter of 
fact, some of you may have seen my e-mails to the Senate and 
the House. It's 444 days without getting paid by the federal 
government, 6 months oftentimes.
    I am not saying that American Express tolerates any 
tardiness or that the other credit cards we hold, Visa and 
MasterCard, tolerate any tardiness, but they have customer 
service reps that work with us that understand our business. 
And they know they are going to be paid. And that is a huge 
flexibility for small businesses supporting the federal 
government community.
    Mr. Chabot. Thank you very much.
    Dr. Walker, you have researched business start-ups all over 
the world. Is it common in other countries to use credit cards 
to begin a business and perhaps to expand business as well?
    Mr. Walker. From what I know, this is really just 
beginning, that lots of the rest of the world is observing the 
fact that so many successful small businesses in the United 
States have begun this way and people looking at it and 
thinking, gee, this may be a source of credit they never 
imagined.
    Also banks in many other countries really are just 
beginning to make loans to small business and used to depend on 
what we call informal investment, meaning other investors, 
friends of the entrepreneur as well as the entrepreneur's 
family.
    Mr. Chabot. Thank you very much.
    And, finally, Dr. Lahm, has the recent economic uncertainty 
and tightening of credit in the financial markets resulted in 
small businesses using credit cards more frequently? And do you 
anticipate that that would be true in the near term?
    Dr. Lahm. I would not have access to usage rates as of the 
last several months. Most of the data that I have utilized has 
been from earlier reports, Census reports, SBA reports, NFIB 
reports, and so forth.
    However, I am convinced that the credit card industry 
itself can tell you where you had dinner last night. They know 
exactly where you are, what you are spending, what you are 
doing, and I don't believe that there are any illusions about 
their ability to do data mining. And they could certainly 
address your question very specifically if asked.
    Mr. Chabot. Thank you.
    Let me follow up with one more question, then. You once 
wrote that there's not a lot of academic research on the use of 
credit cards by entrepreneurs, despite the fact that there is 
widespread use of financing with them. Is this still the case, 
to your knowledge?
    Dr. Lahm. I believe so. I can explain why if you are 
interested.
    Mr. Chabot. Yes. Sure.
    Dr. Lahm. I don't believe that it is very sexy to study the 
landscaper who has five persons on a work crew as compared to 
some Silicon Valley start-up. Obviously when university 
researchers, who are independent thinkers, of course, conduct 
their research, they may be influenced by other factors, such 
as the fact that larger businesses that are established have 
better data sets. A landscaper might keep very minimal records.
    Nevertheless, the problem is that these zero-employee 
businesses are extraordinary in their numbers. It is the vast 
majority of all businesses. But I don't think that they have 
been given proper attention as yet. I believe this is changing.
    Mr. Chabot. Thank you very much, Doctor. I yield back.
    Chairwoman Velazquez. Mr. Gonzalez?
    Mr. Gonzalez. Thank you very much, Madam Chairwoman.
    I want to start off with a couple of observations. And the 
first one is that we have got credit card issuers in the form 
of independent and community bankers and the credit unions when 
we price should have, the Chase people here, the Bank of 
America, and so on, because they probably are the ones that 
have the greatest percentage of credit card holders and users 
and so on. But, nevertheless, we do appreciate you being here. 
But I think that you probably represent what are the better 
practices out there by those that issue credit cards.
    Dr. Lahm and Mr. Walker, I want to cover a couple of basic 
points. The first one is--and we're not here to cut off any 
avenues or to access to capital and credit cards very 
legitimate, prudently used, and so on. I think what we are 
trying to explore is what is there the disproportionate use, 
why isn't there as great an effort by the lender to go with 
traditional forms of capital and financing and so on because 
there are some disadvantages associated with credit card use.
    So the first principle I would like to establish is, is the 
risk so great with a small business man or woman that it does 
not allow a lender to promote and extend traditional lines of 
credit? And I will start with Dr. Lahm and very short because I 
have got another one, and it will lead up to something else.
    Is the risk just so extraordinary out there that the 
lenders just can't really treat them as they would, let's say, 
someone like a Bear Stearns?
    Dr. Lahm. Well, I believe one of the points you raised in 
your remarks kind of does suggest that there are differences 
among lenders, the community bankers, for example, that we are 
dealing with. Those who I know personally I recognize that they 
do build their businesses on relationships, they get to know 
their clientele, they understand these individuals, they may 
have gone to church with them or otherwise been members of a 
community over a long period of time. And they're in a capacity 
such that they can assess and get to know, if you will, who it 
is that they're working with and they can have a very close 
working relationship.
    The large institutions, though they may attempt to claim 
that they have some warmth or fuzziness, still don't get it. 
Even as marketers, I get letters from banks. And I love this 
one, ``Your personal banker,'' but there is no signature.
    [Laughter.]
    Dr. Lahm. So go figure. So I do think that there are 
differences. And I do think that at the credit union, community 
bank level, relationship bank level, that the lending field is 
quite different in terms of the model.
    I do know that in terms of the large credit card issuers, 
one of the things that changed, actually came from academic 
research several years ago, some earlier researchers decided to 
look at the relationship between someone's personal habits and 
creditworthiness as compared to the likelihood that they might 
be a good borrower for credit cards that are labeled as 
business credit cards.
    While I didn't think that that was rocket science and 
didn't necessarily require empirical research, not to be 
disrespectful of the researchers, I think it is pretty evident 
that if someone wants to pay as a matter of practice in his or 
her personal life, that they are likely to carry that value 
system with them in their conduct of themselves in a business 
capacity.
    Mr. Gonzalez. I would agree with you.
    Mr. Walker, does the risk just outweigh traditional 
products out there, the availability?
    Mr. Walker. I am afraid that it does, Congressman. And I 
can tell you from my own family's experience that if we had bad 
weather on what's called Black Friday, the day after 
Thanksgiving, on that one day, that meant that our business did 
not make a profit, no matter what else we did.
    The small firms just don't have the ability to go to the 
market for funds. And, of course, even though the law says that 
no bank is too big to fail and the implication is that no firm 
is too big to fail, the footnote in those laws says unless it 
would have a negative impact on the whole economy. And so I 
think it probably is too much.
    Mr. Gonzalez. I guess my point is that it seems to me that 
everything mitigates against the lender really making a 
concerted effort to have traditional types of loan products out 
there for businesses.
    And let me just start by the fact that the interest rates 
can be charged are drastically different, my understanding, in 
a credit card setting, as opposed to the traditional loan. The 
fees, the penalties, all of that is extraordinary as far as the 
exposure to the business person.
    And I think, Mr. Walker, you are exactly right, the old 
thing about too big to fail. When it comes to small business, 
it's probably too little to matter. And I think that is what we 
are trying to get at here with the small business with the 
Committee and trying to figure out why the over-reliance on 
credit card type of financing or access to capital.
    I think one reason is because it is so profitable. And so I 
am going to ask both Mr. Spearman and--I'm sorry. I can't make 
out--how do you pronounce this? I can't make it out.
    Mr. Rosacker. Rosacker.
    Mr. Gonzalez. And I don't know what it is for the community 
or independent bankers I have such great respect for, so 
different from my big banks. And, of course, my credit unions 
have more credit union members in my district than probably 
anywhere else in Texas.
    The question is--and I'm trying to see how diplomatically I 
can put this--do you all expend the same amount of money and 
effort in extending to the small business man and woman loan 
products, access to capital as you do in promoting credit 
cards?
    Mr. Spearman. We do spend more time in providing input into 
business loans. In our situation, the credit cards become 
more--they are certain a credit value for our credit cards in 
the credit union operations and our--they end up being more of 
a transaction to them.
    The credit card is used mostly in most cases of managing 
the operation. In many small businesses, the office for the 
small business is the vehicle. I have seen it up PC set-ups, 
cell phones. And they conduct their business from their 
vehicle.
    So the credit card, while it provides a credit limit, our 
maximum credit limit in our portfolio is something like 30 or 
40 thousand dollars. It's very small. So the credit portion of 
that vehicle is really a small piece of what they are using the 
card for. They are using it for transactions.
    And I think, as the Committee's information research 
showed, about 60 or 70 percent of the small business credit 
cards get paid off every cycle. And so it becomes a vehicle for 
them.
    We do sit down. And in our situation, we do provide term 
loans, vehicle loans, lines of credit of 100,000. And many of 
the clients that we have start with the credit card. And then 
we develop relationships with them for these lower-cost capital 
situations. And I would assume the community bank situation 
would be the same, but I will let Mr. Rosacker.
    So we do do the traditional financing for our small 
businesses. The credit card becomes a small important piece, 
but it is part of the whole puzzle for the process.
    Mr. Rosacker. I will address the same question, maybe 
coming at it from a little bit different angle. But I do agree 
that on the credit card side, 80 percent of our portfolio pays 
off every month. So it is an interest-free loan.
    On the other side, on the traditional products, one problem 
arises out of the fact of how the regulatory agencies look at 
market segments. When one market segment goes bad, the entire 
country is bad.
    So you get a knee-jerk reaction many times that the banker 
says, ``Wait a minute. I am not going to go down that road 
anymore because of the regulatory issues that the entire world 
has gone sour in a certain market segment.'' And that's not 
true. It is far different in California than it is in Virginia 
and Minnesota as it is in Texas.
    But also banks would like to use or have more access to the 
SBA. And the SBA, the Small Business Administration, does not 
make it real easy for banks to get access to capital and 
funding and guarantees of loans. The fees have gone up 
dramatically. So a lot of bankers can't sell that. And the red 
tape and the bureaucracy are terrible.
    So if there were a better streamlined method to use the 
SBA, the community banks would certainly use that route, which 
is a traditional route to go. But that is one area that needs 
to be addressed because it is a real cumbersome thing to do.
    There are many small community banks that will not even--
there's nobody even in the bank that knows anything about SBA.
    Mr. Gonzalez. Thank you very much, Madam Chair, for giving 
me the additional time.
    Chairwoman Velazquez. Mr. Akin, do you have any question at 
this point?
    Mr. Akin. No, I don't have a question at the moment.
    Chairwoman Velazquez. Thank you. Thank you,
    Mr. Johnson?
    Mr. Johnson. Thank you, Madam Chair.
    Mr. Spearman and Mr. Rosacker, what percentage of your 
small business customers using credit cards for business 
purposes pay their credit card balances in full each month ?
    Mr. Spearman. The percentage? About 70 percent.
    Mr. Johnson. At your bank?
    Mr. Spearman. At my--
    Mr. Johnson. At your credit union?
    Mr. Spearman. Yes.
    Mr. Johnson. And how about you, Mr. Rosacker?
    Mr. Rosacker. As I said, about 80 percent.
    Mr. Johnson. Eighty percent? In 2005, Congress passed a 
bill that made filing for bankruptcy more difficult and more 
expensive. The credit card companies strongly supported this 
legislation because they claimed that borrowers were being 
reckless with their credit and then filing bankruptcy to avoid 
paying their debts. These companies argued that credit card 
fees would decrease when bankruptcies decreased because 
individuals would not be able to avoid paying their debts by 
filing of Chapter 13. As a result, there would be less risk to 
the credit card companies in interest rates and fees would 
decline.
    This has not happened, however. Bankruptcies have fallen 
precipitously by 62 percent between 2004 and 2006, but credit 
card rates have not.
    Given this seeming disconnect, why is it necessarily the 
case that regulating this increasingly consolidated industry 
would increase credit card fees? And this is for anyone on the 
panel that may want to respond.
    Mr. Rosacker. Well, I will take a stab at it from the 
standpoint of we are talking about small business here and 
individuals are significantly different. In the small business 
world, the use of the credit card, again because 80 percent of 
ours pay off, they don't pay any interest. And our fees are 
traditionally well below the market value.
    Again, they are our neighbor. They are our friends, not 
that you are giving them anything preferential, but that is 
just the way the community bank is.
    We operate on a one to two to two and a half percent 
margin, much smaller margin than the large credit card issuers. 
Again, it's a service that we offer, but it isn't our profit-
making service.
    Mr. Spearman. Yes. I will try to answer that as well. We do 
I think recognize a number of studies that have been done on 
the credit card industry regarding credit card rates and the 
credit union industry as being one of, if not the, lowest. I 
think the average rate credit unions charge nationally is 
around 11 percent.
    So we have always been, I guess, the low-cost provider. We 
are maybe underwriting the credit cards a little more carefully 
in the beginning. Yes, bankruptcies have subsided a little bit, 
but now with economic situations and pressures, we have seen 
the blip up. But we are very, very competitive with rates. We 
don't charge those fees, and we provide a very competitive 
product.
    Now, to exhibit the result of this, our credit card 
portfolio has actually grown over the last five years, in spite 
of the competition that everyone receives in their mail every 
day. Our portfolio--and I think people have read our fine print 
and have not found any surprises in our fine print. And that is 
why our portfolio has grown.
    So we offer, we think, a very, very competitive product and 
a fair product for our members.
    Mr. Johnson. All right. Have any of you experienced or seen 
predatory credit card lending to small businesses? And if so, 
what form has it taken? And if not, can you explain why not and 
if you anticipate predatory lending becoming a problem for 
small businesses in the near future?
    Mr. Rosacker. I don't think on the small business side the 
community banks have--they're not into that. I mean, it would 
not be to their best interest to have any hidden things in 
their agreements and be in the piranha and predatory mode 
because of the other relationships that they want to build.
    And I would think, Bill, you would be the same way.
    Mr. Spearman. Yes. We still actively engage in the credit 
card programs for small business. We offer a very competitive 
rate. I think right now the actual rate for a business account 
is 11 percent, which is I think an extremely fair rate.
    Mr. Johnson. Well, neither one of you would argue that 
predatory lending in the credit card industry is nonexistent?
    Mr. Spearman. I would agree. There is predatory lending out 
there. We can only speak for the industries that we represent.
    Mr. Johnson. How extensive is it, do you think?
    Mr. Spearman. I don't know if I could really answer that 
from our perspective. I don't have the data to be able to 
identify that, but I have read and understand that there are 
some issues out there in that regard. But I can't speak to our 
industry in that regard.
    Mr. Johnson. Dr. Lahm, do you want to jump in?
    Dr. Lahm. Yes, sir. I don't know what we want to call 
predatory lending in terms of a definition, but if someone is 
late, they get a late fee. That is the least of their problems, 
whatever it may be, $35. They tend to be tiered based on 
account balances held. But when a revolver is late and when 
they incur a late fee, that is just the beginning. The next 
thing is 30-something plus interest.
    I don't know what rate we are going to call legalized loan-
sharking, but I think we are certainly pushing it when we get 
into 30-something plus interest. Maybe we'll just call it 40. 
When they get to 40, we'll call it official legalized loan-
sharking.
    But 35 percent, as I had read in my earlier testimony, 
quoting a government report, 35 percent of account holders were 
charged late fees in 2005. So there's a tremendous number of 
big banks, in particular, accounts that are suffering through 
these sorts of practices.
    Mr. Johnson. Thank you.
    Mr. Gatewood. Congressman, I think that, actually, the late 
fees have gone up dramatically, but the rates on the credit 
cards have come down a bit. If you compare, for instance, the 
rates on the credit cards have come down faster than the prime 
rate over the last couple of years. And I think what they are 
doing is making it up in fees.
    Mr. Johnson. There has got to be a profit motive to it and 
a profit--
    Chairwoman Velazquez. Time has expired.
    Mr. Ellsworth?
    Mr. Ellsworth. Thank you, Madam Chair. A lot of the 
questions that I have been asked a couple of different ways 
already. I would like to ask--we just heard some testimony 
mentioned of the SBA and its effectiveness.
    Do any of you have any suggestion on how we could make that 
in Congress more effective, one, the SBA, just your shoot-from-
the-hip reaction? What can we do in this Committee to make that 
more effective for you all?
    And, second, just the ones, twos, and threes of how do we 
make credit cards more effective for the small business owner? 
What is a good way? What can we do in this Committee and this 
Congress to make the use of credit cards more?
    I was very interested in the interest rate. I think Dr. 
Lahm just answered my question about the interest rates because 
I get a lot of calls on that but how the SBA could be more 
effective.
    And so you all just start wherever.
    Mr. Rosacker. Since I brought it up, I will take a shot at 
it. I think from the community bank standpoint, they are not 
big organizations. They don't have deep staff. Their lending 
people are ag or commercial-orientated.
    Streamlining the process so they can get at the SBA and get 
the loan application in. Get rid of the red tape and some of 
the fees. Make it easier. Most community bankers now shy away 
from the SBA. I don't know in our part of the country--and our 
bank covers about 11 states.
    We have even seen a program put on by the SBA telling us 
about programs and things that they are doing. I mean, they are 
not out there. They are missing in action. And I think that 
would be a big help.
    Streamline the process and then educate us on what you can 
do and can't do and won't do. Don't forget years ago the SBA 
was very active, but they have slowly drifted away. And now you 
have new young loan officers that have never seen the SBA and 
don't know what it's all about. That would be my response, a 
knee-jerk reaction.
    Mr. Ellsworth. Thank you.
    Mr. Spearman. If I could comment? While I agree with Mr. 
Rosacker's comment on it, we have a couple of SBA loans. Our 
member business loan officer is familiar with them but, 
frankly, because of the tedious nature of the process sometimes 
shies away. I certainly would support an increase in SBA 
lending with a streamlined process.
    And I guess I would suggest that we taken action on H.R. 
1849 introduced by Chairwoman Velazquez and move on that issue. 
It is an important tool that we have. We received education 
years ago. Programs have changed. We don't see the SBA people. 
We don't have contact with them.
    I think it is a valuable tool. I really do think that it is 
a valuable tool. I would like to see us use it more. And I 
would encourage the Committee to do whatever they could to push 
that along.
     Certainly we are an approved lender. And we would 
certainly want to include that product in more and more 
opportunities with our member businesses.
    Mr. Gatewood. Congressman, I sought a small business loan 
for my wife's partnership. And inquiring of banks in the 
Washington area, Washington, Maryland and Virginia, close in, I 
found that if the loan was going to be an SBA guaranteed loan, 
then the rate would be at least 50 basis points higher because 
of the cost of dealing with the SBA process. And I am quite 
sure that is not what the Committee intends and it is not what 
any of us as public policy interest would prefer, but I think 
that is the fact.
    Mr. Ellsworth. Thank you.
    I don't want to start a fight with the two gentlemen from 
the end, but I know Mr. Chabot brought up the curiae 
legislation. Does the Community Bankers Association have a 
position on curiae? I know that when I talk to bankers and 
credit unions back home, you know, it seems to be a little bit 
of a sticky point, to say the least.
    [Laughter.]
    Mr. Rosacker. Can't we all just get along?
    Mr. Ellsworth. I was going to say, if you want to switch 
chairs before you answer this, that is okay.
    Mr. Spearman. No. That is all right. He has no sharp 
objects.
    [Laughter.]
    Mr. Rosacker. The community bankers have always taken the 
position that we oppose expansion of powers, et cetera. And 
that has been our history, and that is our position today.
    So yes, we would be opposed to some expansion of that as we 
move forward.
    Mr. Ellsworth. Don't turn the microphone off now.
    [Laughter.]
    Mr. Spearman. We disagree. We would argue that the 
enhancements in the bill are very, very important. They include 
the risk-based lending process, which I think puts us on equal 
basis with all financial institutions, modest increase in the 
member business lending areas, and a number of other things 
that would actually help us serve under-served areas and things 
of that nature.
    So we strongly obviously support the bill, respect the 
community bankers in what they do in their communities. And so 
that is the counterpoint on that.
    Chairwoman Velazquez. Time. The time expired.
    Mr. Ellsworth. Thank you very much.
    Chairwoman Velazquez. Mr. Sestak?
    Mr. Sestak. Thanks, Madam Chairwoman.
    Just a question. Mr. Gatewood, I am really taken by your 
written testimony. I wasn't here for your spoken testimony. It 
really speaks of kind of what America is all about. You know, 
here you are. You knew by your effort, you say, that you're 
going to make it. So you with prudence used probably an 
abnormal but, nevertheless, an accessible form of risk, so to 
speak, access to capital, and use that to have float time, as 
you describe it.
    I guess my question is more--I mean, I really am taken that 
this is neither inherently good nor bad, credit cards using for 
business. I am more taken that oversight or transparency in 
education and preventing ill use of it, I am convinced of that.
    But I guess my question would have to do maybe just a 
little different. I am more concerned about people being less, 
like Mr. Gatewood here, be more risk-averse.
    Yes, a credit card use is going up, but SBA's access to 
capital is going down. Health premium has gone up 70 percent. 
You know, people not going to small companies are going to big 
companies because they still, by and large, give health 
security to some degree.
    Do you see this risk-averse, independent almost, credit 
card usage? Because I think I got enough from that. Do you see 
any of this in people who are even coming? Is there an impact 
that you are seeing as the SBA comes down, as the economy comes 
down?
    Yes, more go into credit cards maybe, but is there more of 
a sense of a difference of this entrepreneurialship you see and 
I think emblazoned in you?
    And I guess that is really more of a question for the 
community bankers and credit unions.
    Mr. Gatewood. Well, yes. As far as risk aversion is, let me 
just be quite honest here. I hear the congressmen talk about 
the predatory lending. No one is a victim unless they want to 
be a victim.
    First of all, business people, entrepreneurs as such, have 
a responsibility to function responsibly. Good business people 
understand what they are getting into or they shouldn't be in 
business, first of all.
    So I, for one, don't have a lot of feelings for people that 
recklessly use credit cards or any form of lending.
    Mr. Sestak. I guess mine was more of a strategic type of 
take, not so much on the credit cards, because I think I got 
enough out of the testimony and the great questions that are--
    Mr. Gatewood. Right.
    Mr. Sestak. I am just wondering about what you see, 
particularly down at that end of the table, about small 
business people coming forward to invest with their time and a 
bit of risk as they reach for capital to do what you did. 
That's kind of what I am curious about, the state of the risk 
taking, so to speak, out there in the economy.
    Mr. Gatewood. I think it is dependent upon the person and 
what they have and what they can afford to give up as 
collateral. I had absolutely no collateral, and the banks 
wouldn't talk to me. So I had to take the risks I had.
    I will tell you right now coming from a minority business 
community at the same time, oftentimes we're just turned out 
flat basically from where we come from.
    Mr. Sestak. How about the institutions? Because they all 
come to you.
    Mr. Rosacker. I can respond to it this way. The 
entrepreneurial individual is a risk taker from the start. And 
I think that is what has built this great nation. We were all 
risk takers at one time.
    And I think bankers, contrary to the popular belief, we are 
risk takers. Community bankers are the only people that bet 
their personal net worth that that entrepreneurial is going to 
succeed. And their personal net worth is in the value of that 
bank, their franchise value.
    So they are risk takers, community bankers. But when you 
look at how that risk is assessed, when you are looking at a 
traditional bank business loan, the regulatory agencies look at 
it differently than they do a credit card loan.
    They look at a credit card loan from the consumer side. Is 
the application filled out properly? Is the closure statement 
sent? And are they reminded of those terms annually?
    Mr. Sestak. If I might, what about the person who walks in 
the door? All your years you have been involved in this, for 
the two of you, have you seen less people willing to be like 
him? I am more interested in the trends right now.
    Mr. Rosacker. No.
    Mr. Sestak. You are saying you are still seeing the same 
type or the breadth, not just the individual but the breadth, 
willing to take?
    Mr. Rosacker. I would say so because we are all community 
bankers. And in that town of 500 people, 300 people, businesses 
are dying, but there is somebody else willing to take the 
hardware store business on or be it the gas station fellow or 
the auto body repair store, the implement dealer.
    There are always people walking in. They want a certain 
lifestyle of living in a community, and that is their way of 
doing it: staying in the community and starting a business. No, 
I don't think it has dropped off at all.
    Mr. Sestak. If I could, if you don't mind, Mr. Spearman?
    Mr. Spearman. Thank you, Congressman.
    Yes, I would agree with Bill on that. We are in the 
business of managing risk, not risk-averse. Because of the--
    Mr. Sestak. I am not worried about you. I am worried about 
the person coming in the door.
    Mr. Spearman. Yes. And we have no problems with people 
walking in the door. Simply because of the fact in our area 
that IBM went away a number of years ago, many of the folks 
stayed in our community and started small business.
    So all the business in our community, to be frank with you, 
is small business. So we have a tremendous amount of demand for 
that type situation. And that's relevant, again, to the member 
business lending cap. We have no scarcity of people coming in 
with innovative ideas, some well-thought-out, and some very, 
very successful stories, just even based on our portfolio.
    Mr. Sestak. Thank you.
    Chairwoman Velazquez. Time has expired.
    Mr. Cuellar?
    Mr. Cuellar. Thank you, Madam Chair.
    I have been a small business. I was in the import/export 
business. And I never used credit cards for a way to finance. I 
went to a bank. But I know of friends of mine that it was so 
easy for them to go to a credit card and use the credit card 
for financing.
    Part of the reason has been mentioned already, ``Oh, you 
know, you've got to go to SBA, so much paperwork.'' They're 
going to say, ``No'' for whatever reasons have been mentioned. 
And it's just the process is so long. And it was a lot easier 
to just go ahead and get a loan. And, of course, when they have 
to pay the high interest rates and when they have to pay all 
the fees, the late fees and all of that, they regretted that.
    But at the moment, they needed something to be done 
quickly. It's the moment because you are under all the pressure 
to get this done and get some money available, get some cash 
into the business.
    So I guess what the Committee has been referring to is, how 
do we make this--you know, because there are a lot of steps. We 
know the SBA, the accessibility, and all of that, the 
paperwork. I mean, what is the easiest way to get this done?
    By the way, credit cards are a heck of a job at marketing. 
I mean, I think they know how to market. They know how to make 
it easy. And it's on the moment when you need the money. And, 
like I said, I have been a small businessman. But, you know, I 
never used the credit cards for the business. I use it personal 
but not for the business. It is so easy to just go ahead and 
get something because on the moment you need the money.
    So, I mean, how do we make this? How do we make government 
more or how do we work with you to become more responsive?
    And I don't want to get into curiae. You guys have done 
very well sharing the same mike together, but how do we get 
this competition? How do we make this more flexible?
    And keep in mind put yourself in the shoes of a small 
business person. They need this on the moment. They are not 
going to go and do all this paperwork unless if it's a longer-
term type of situation. I mean, you have got to put yourself in 
the shoes of the small business person.
    From anybody?
    Mr. Spearman. Well, part of the thing that we didn't talk 
about, we have identified our small businesses. And small 
businesses use business credit cards. What we haven't talked 
about are the folks that are using our personal credit cards 
for the same reason. We don't know that. So this is a lot of 
times--
    Mr. Cuellar. And they do that.
    Mr. Spearman. I know they do that.
    Mr. Cuellar. And they do that.
    Mr. Spearman. And the point of view of education is if they 
were to come into the organization, a bank, mini bank, credit 
union, discuss what their plans are, I think we could handle it 
a lot better.
    But some of these decisions are made independently by the 
individual. And we have no idea. Perhaps even some home equity 
loans have been done in this regard. We have no idea because 
they have never come in to talk to us.
    Mr. Gatewood. And if I might add, sir, when I started my 
business, I had, I would say, maybe 13-14 credit cards. 
Sometimes I just paid the interest because I needed that lead 
time to become successful. I knew I could make it happen.
    And, in all due respects, you indicate you went to the 
banks. Well, many of us don't have the capacity to do that. I 
came out of the Marine Corps, 21 years. I never had a bank 
account. I was overseas for 15 years of my 21-year Marine Corps 
career. I never had a credit card. I was unknown.
    Many of us who come from communities throughout the United 
States never had bank accounts. Our families never had money. I 
mean, I grew up on surplus food in the projects in upstate New 
York, you know? So nobody would look at me.
    The only way, the only way possible I was able to take this 
idea I had and move forward with it was to use credit cards. 
But I used them responsibly.
    I knew when my payables were coming in. And I knew that I 
would succeed over time. The banks would not let me in the 
door.
    Mr. Cuellar. Right.
    Mr. Gatewood. They would not talk to me.
    Mr. Cuellar. And you are hitting the point that I want to 
emphasize. As a former small business person, the import/export 
business and having a lot of folks on the border, you know, 
going to the bank, you know, bank, credit union, whatever it 
might have been, it was a lot easier just on the moment to move 
it, to go with a credit card.
    I didn't do that, but, again, you put yourself in their 
shoes. So what do we do? And I guess it is more to you all. I 
mean, is there anything that can be as flexible as a credit 
card and not be the credit card company out there, but--
    Mr. Rosacker. I suppose we could develop that at the SBA or 
something. I think, like I said earlier, it is the streamlining 
of the application process and the reams of paper that go along 
with it and al of the disclosures and everything else that have 
to be made, not that that is bad unto itself.
    But, again, it is part of this whole regulatory burden. And 
if you could shift some of this, make it streamlined, and move 
forward with it, you know, make it a low-doc loan of some type, 
yes, more banks would use it. But it is not an easy process to 
go through today.
    And I can only say streamline. And I don't have any 
particular examples of how I would recommend doing it, but that 
is it.
    Mr. Walker. Congressman, I think that is why the home 
equity lines have become so popular, that essentially what you 
have is a line of credit. And when you want to use it, you 
write a check.
    The disadvantage, of course, to the institution is that it 
is an off-balance sheet liability. And they really have no 
control. If I have a line of credit of $400,000 and I have 
drawn down nothing, tomorrow the bank could have a $400,000 
loan outstanding to me without me even telling them they have 
it.
    Mr. Gatewood. If I might before--because I don't know what 
time we are going to finish, Madam Chairwoman. So I am going to 
take this opportunity, Madam Chairwoman and Mr. Chabot, Ranking 
Member, to thank this Committee, particularly under your 
leadership, ma'am, for what you are doing for Service-disabled 
veterans and veteran-owned small businesses.
    We need your help. We appreciate your help. And it is not 
only our veterans but our women in business and our minority-
owned business. So I want to thank you for all of your 
initiative and leadership.
    Chairwoman Velazquez. Thank you.
    Dr. Lahm, do you want to answer?
    Dr. Lahm. Thank you. I would like to insert something. What 
I have to say will be a little bit fuzzy, but I think it should 
be a point that should be considered. Particularly the 
bootstrapper, particularly the students that I work with, one 
of the biggest problems is they don't have know-how.
    You had an import/export business. I recently heard someone 
who has expertise in that area addressing some study that he 
had done, but basically 65 percent of all small businesses 
wouldn't know where to turn to. They wouldn't have a clue where 
to start should they begin pursuing an import/export 
opportunity, which, of course, is a huge opportunity.
    The point that I want to raise is that know-how is so 
critical. I know the focus of today's meeting is capital 
itself, but if we have know-how, we don't necessarily need 
quite as much capital. And that is one of the biggest problems, 
one of the biggest roles that the SBA could perhaps play. And 
this goes to one of the earlier questions asked at the end.
    Students don't have know-how. They have all of these grand 
schemes. But they don't know how to actually act upon it. So if 
you want to make the capital more efficient, make the people 
more efficient through their knowledge enhancement.
    Mr. Cuellar. Thank you. Thank you, Madam Chair.
    Chairwoman Velazquez. SBA has a network of small business 
development centers throughout the nation. And some of them 
partner with higher education institutions. The problem is that 
the funding for those has been cut in the last six years.
    The same is true with the fact that the cost of guaranteed 
loans has increased in the last six years at a time when there 
is a credit crunch.
    I understand, Mr. Gonzalez, you have more questions.
    Mr. Gonzalez. Yes, Madam Chair. Just a couple of things. I 
think it has been so enlightening. And I surely want to pick up 
on something quickly. I think there has been by both the credit 
unions and the independent community bankers--and I call 
independent community bankers--to me they are one and the 
same--which represent, really, the old way of doing business, 
which I so appreciate because you still maintain relationships 
with the customers.
    But I think those remarks that maybe as great as 70 percent 
or some number of credit card holders actually pay their 
accounts on time or maybe in full. I know Mr. Gatewood--in 
full?--which then means that the other 30 percent have to be 
subsidizing that service, which then, in turn, means that you 
have to build in those penalties, those fees, and those 
interest rates. And I think it is undeniable.
    And I am not casting blame on you two particular lenders on 
it because I think, actually, where the abuses truly are and 
taking advantage of the consumer lies elsewhere.
    I think we set up ourselves a system where, yes, the 
prudent and the responsible, but even those that are prudent 
and responsible sometimes because of situations, circumstances 
beyond their control cannot make that payment, cannot pay it in 
full. And there are consequences.
    The interest that they are paying on that balance far 
exceeds what probably would be paid in a conventional loan 
instrument. I think that is undeniable. And I think we have to 
face this.
    If it is, in fact, free money for 30 days or whatever it 
is, like my American Express account, I have got to pay it at 
the end of the month. And it does really instill discipline in 
me, as opposed to, let's say, my Visa or whatever it is 
account, which I don't pay fully at the end of the month.
    So I understand it, but the problem that we have--and now 
this leads me into the last question, which is going to be 
posed to Mr. Walker and Dr. Lahm. And maybe it is just 
something I have struggled with and I don't know if Mr. Chabot 
and the Chairwoman--I don't think that Congressman Cuellar was 
here.
    But a couple of years ago or maybe more than a couple of 
years ago, we voted on a bill that made it impossible to 
discharge a consumer's credit card debt. We thought at that 
time that was a good and prudent thing to do. We weren't going 
to reward irresponsibility and so on.
    I will tell you that part of that debate did entertain that 
the lenders, the issuers, were going to do something else in 
return. We were going to look at interest rates. We were going 
to look at penalties. We were going to look at the fees. We 
were going to look at how you score. We were going to look at 
how you score credit and so on.
    We were also going to look at practices such as you may be 
paying your credit cards on time on two accounts, fall behind 
on another one, and it impacted those other two accounts. We 
were going to try to establish that you should set and 
ascertain one's creditworthiness based on that relationship one 
on one and not necessarily with a third party.
    I will tell you now that never came to fruition. And I am 
going to ask Mr. Walker and Dr. Lahm, did Congress make a 
mistake to make it so incredibly difficult for the consumer to 
discharge credit card debt, which impacts small businesses?
    Mr. Walker. I am not sure, Congressman. I have studied that 
history a bit, but I don't really feel like I can contribute to 
that discussion.
    Mr. Chabot. Would the gentleman yield?
    Mr. Gonzalez. Of course.
    Mr. Chabot. Thank you.
    I just want to make sure I understand what you are talking 
about. Are you talking about the bankruptcy reform bill when 
you say it made it impossible to discharge debt on credit 
cards?
    Mr. Gonzalez. The way we set it up makes it nearly 
impossible to completely discharge.
    Mr. Chabot. Okay. I guess when you say, ``nearly 
impossible,'' it depends on what you are really talking about 
because the bankruptcy reform, what it did is that you can 
discharge, just as you could before, except you have to go into 
Chapter 13. Most people qualify, you know, depending on the 
means test, how much your income levels are, et cetera. A whole 
lot of people can still fully discharge debt, including credit 
card debt.
    Now, if you have a job and you have certain income levels, 
then you have to go into Chapter 13, which is like a wage-
earner test. The idea is that, rather than discharging all of 
the debt, if you had the ability to pay off some of the debt, 
that made more sense to everybody. So that is why a lot of--
    Mr. Gonzalez. But, see, you know, reclaiming my time, it is 
unquestionable, indisputable that we made it so incredibly 
difficult for the average consumer, businessman, businesswoman, 
to take advantage of bankruptcy laws that were there, actually, 
to take care of these circumstances.
    There is no doubt. And if you talk, even to your bankruptcy 
trustees, to the judges, and to the practitioners on both 
sides, the creditor side as well as the bankruptcy applicant, 
we have totally changed that whole universe. I think there is 
no doubt about that.
     So, Dr. Lahm, do you have an opinion on where we are in 
that state of the law?
    Dr. Lahm. Thank you. I yielded to my colleague to let him 
go first, but I do have plenty to say. I am not sure what the 
timer is.
    Let me just start by saying I am in favor of responsible 
borrowing and lending. And I think across this table and 
probably in this room at large, we are all in favor of people 
doing the right thing.
    The problem is that the bigger banks, in particular, are 
definitely plaything a game. I characterized their "or we may 
change their terms for no reason" as whimsical. I think that is 
a very fair statement.
    A lot of the bankruptcies if they are frivolous, well, you 
know, maybe they shouldn't be, those who are filing should not 
be able to so easily discharge, but, on the other hand--and 
payback is kind of interesting.
    I personally have had dealings with the likes of MBNA. And 
I remember very vividly a few years ago a discussion in which I 
said, ``But we didn't do anything wrong. Go pick on someone who 
has done something wrong.''
    This was a discussion about an adverse decision that had 
been made with respect to my wife and myself personally when we 
had missed no payments. And the little quip, which I am happy 
to repeat here today, was I said ``Why don't you go pick on 
someone who has done something wrong?''
    The quip was ``Oh, we pick on them, too!'' Well, I hope 
that is entered into this record.
    Furthermore, it doesn't take much cruising of the Internet 
to find credit card company horror stories. Someone was on an 
automated payment system. The bank failed to deliver on time, 
no fault of their own. They were late.
    Years ago anyone reasonable would have taken a letter from 
the bank saying, ``Sorry. We messed up this payment. Please 
know, credit card company, it was our fault. Let things go on 
as normal.'' And someone would have accepted that.
    They don't do that now. They are waiting for someone to be 
late. They want someone to be late. And they will just cream 
someone if they are late--one hour late. I have got a cite tip 
for that, which is in a paper.
    Chairwoman Velazquez. The time has expired.
    Mr. Gonzalez. Thank you very much. And thank you for your 
indulgence.
    Chairwoman Velazquez. Mr. Chabot, do you have any 
questions?
    Mr. Chabot. Yes. I don't want to get into a huge discussion 
here about the bankruptcy law, but it was basically kicked 
around for seven or eight years in the Congress before it 
finally passed years ago.
    But the whole idea of the changes that did pass with 
considerable support on both sides, although it was mostly 
Republicans, but there were a fair number of Democrats who 
supported the change as well, the idea was we had some folks 
that were literally filing for bankruptcy on a fairly regular 
basis, every seven years. There were just a lot of abuses in 
the system.
    And that was causing the average household to have an extra 
cost of, I believe it was, 5-6 hundred dollars a year or 
something. Just stuff costs more because people weren't paying 
for what they bought. They were just filing bankruptcy. So we 
were trying to do away with the abuses.
    And Henry Hyde was instrumental in this. He was the Chair 
of the Judiciary Committee, I believe, when this passed. And 
what Henry was trying to do was a lot of folks who clearly--it 
was a medical problem they had, loss of job. There were a lot 
of people who really needed bankruptcy. It was still there. 
They can still file and have all their debts discharged and get 
a fresh start.
    But for those folks that do have a reasonable income--and 
this is written into the law--reasonable income and able to pay 
at least a portion of their debts, why not have them over a 
period of a number of years try to pay off some of that debt so 
that that debt isn't just hoisted on the rest of the consumer 
public? That was the idea of the bankruptcy reform.
    So I just didn't want to leave unchallenged the fact that 
all debt, that credit card debt, is non-dischargeable now. That 
is just not the case. Some of the credit card debt is clearly 
dischargeable by those folks at lower income levels. Folks that 
have income and can pay off, some of that will be paid off. So 
I just wanted to put that out there.
    I yield back.
    Chairwoman Velazquez. Well, again I want to thank all the 
witnesses for participating today and for offering your 
insights on this, the issues at hand. And I ask unanimous 
consent that members will have five days to submit a statement 
and supporting materials for the record. Without objection, so 
ordered.
    This hearing is now adjourned.
    [Whereupon, at 11:46 a.m., the Committee was adjourned.]
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