[Senate Hearing 110-435]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-435
 
           SBA REAUTHORIZATION: SMALL BUSINESS LOAN PROGRAMS 

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

                               ROUNDTABLE

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              May 2, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia

                 Naomi Baum, Democratic Staff Director
                Wallace Hsueh, Republican Staff Director
















































                            C O N T E N T S

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                                                                   Page

                           Opening Statements

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachusetts..................................................     1

                            Committee Staff

Ferko, Jacqueline, Professional Staff Member for Senator Snowe...     *
Wheeler, Kevin, Deputy Staff Director for Senator Kerry..........     *

                              Participants

Ballentine, James, Director, Economic Development, Office of 
  Government Affairs, American Bankers Association, Washington, 
  DC.............................................................     *
Coratolo, Giovanni, Executive Director, Small Business Council, 
  U.S. Chamber of Commerce, Washington, DC.......................     *
Crawford, Christopher, Executive Director, National Association 
  of Development Companies, McLean, VA...........................     *
Hager, Michael, Associate Administrator, Office of Capital 
  Access, U.S. Small Business Administration, Washington, DC.....     *
Kelly, Kevin, Managing Director for Policy and Advocacy, 
  Association for Enterprise Opportunity, Arlington, VA..........     *
Kwiatkowski, Christopher G., Senior Vice President and Manager of 
  SBA Lending for Popular Small Business Capital Popular, Inc., 
  San Juan, Puerto Rico..........................................     *
Little, Morris ``Mike'', Chairman, National Black Chamber of 
  Commerce, Washington, DC.......................................     *
McCracken, Todd, President, National Small Business Association, 
  Washington, DC.................................................     *
Merski, Paul, Chief Economist and Director of Federal Tax Policy, 
  Independent Community Bankers of America, Washington, DC.......     *
Morrison, James, President, Small Business Exporters Association, 
  Washington, DC.................................................     *
Phillips, Ronald, President, Coastal Enterprises, Inc., 
  Wiscasset, ME..................................................     *
Robertson, Sally, President, Business Finance Group, Inc., 
  Fairfax, VA....................................................     *
Rowe, C. Edward ``Tee'', III, Associate Administrator, Office of 
  Congressional and Legislative Affairs, U.S. Small Business 
  Administration, Washington, DC.................................     *
Sikes, Chris, Executive Director, Western Massachusetts 
  Enterprise Fund, Inc., Greenfield, MA..........................     *
Sullivan, Ann, Federal Legislative Consultant, Women Impacting 
  Public Policy, Inc., Washington, DC............................     *
Wasser Gish, Joan, Principal Policy Progress, Newton, MA.........     *
West, Dennis, President, Northern Initiatives, Marquette, MI.....     *
Wilkinson, Anthony, President and CEO, National Association of 
  Government Guaranteed Lenders, Inc., Stillwater, OK............     *
Walker-Wilson, Greg, Executive Director, Mountain Bizworks, 
  Asheville, NC..................................................     *

* Comments, if any, are located between pages 4 and 50.

                          Prepared Statements

Robertson, Sally
    Prepared statement...........................................    52
Sikes, Christopher
    Prepared statement...........................................    54
Walker-Wilson, Greg
    Prepared statement...........................................    56
West, Dennis
    Prepared statement...........................................    59

                        Comments for the Record

Letter to Chairman Kerry from Harry C. Alford, President and 
  Chief Executive Officer, National Black Chamber of Commerce....    63


           SBA REAUTHORIZATION: SMALL BUSINESS LOAN PROGRAMS

                              ----------                              


                         WEDNESDAY, MAY 2, 2007

                      United States Senate,
                    Committee on Small Business and
                                          Entrepreneurship,
                                                   Washington, D.C.
    The roundtable convened, pursuant to notice, at 10:14 a.m., 
in room 428A, Russell Senate Office Building, Hon. John Kerry, 
Chairman of the Committee, presiding.
    Present: Senator Kerry.
    Staff Present: Kevin Wheeler, Deputy Staff Director for 
Senator Kerry; Jacqueline Ferko, Professional Staff Member for 
Senator Snowe.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A 
            UNITED STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. Thank you all very much. This roundtable 
will start, and I really appreciate everybody taking time to be 
here.
    I apologize for being a little late. I had to go to the 
Finance Committee just to weigh in because we have a concurrent 
hearing going on there, and I just needed to be there for the 
beginning of it, so thank you for your indulgence. I appreciate 
it. And because of that, I am not able to stay here the whole 
time, but that is a normal procedure with the roundtables that 
we have had.
    Senator Snowe initiated the roundtable process here in this 
Committee, and I think it worked very effectively and has been 
a very comprehensive and effective way of kind of giving people 
a chance to talk a little more and have more of a conversation 
and get rid of some of the formality of the hearing process 
itself. And we do keep a record, and that transcript will be 
available. So there is a record. But, on the other hand, there 
is just much more interchange and exchange and back-and-forth, 
and I think it becomes a more effective way of helping to 
respond to people's criticisms and understand what we can get 
done and how to do it and maybe sometimes even come up with 
some solutions that we would not otherwise.
    Also, I want to put it in the context that last year many 
of you here today or many of your organizations have already 
testified or submitted testimony, and you have helped us build 
a record, which is what we need to do, with respect to the very 
provisions that are in the small business lending 
reauthorization bill that Senator Snowe and I introduced 
yesterday. So the record has been building for that. In 
addition, most of those provisions ought to look familiar to 
you because they were part of the comprehensive reauthorization 
bill that the Committee adopted last summer.
    As you know, we ran into some--the only way to describe it 
is what it is: We ran into sort of a rolling-hold/
administration resistance to it, which I think was regrettable, 
and hopefully we can avoid it this year.
    I want to emphasize that Administrator Preston in his 
hearings here agreed that that was not a productive way to 
proceed and that we ought to just sit down and negotiate 
something. If we have a difference, let's sit down and talk 
about the difference and see if we can work through it on a 
reasonable basis rather than just letting things languish 
indefinitely. And I think maybe the dynamics here may have 
shifted a little bit since both the House and Senate have 
changed control, and so there may be a slightly different 
attitude. I know the House, Nydia Velazquez, is adamant about 
some of the provisions and wants to proceed forward on them. So 
there will be a more coordinated effort here to try to do that.
    Today's roundtable discussion is really meant to complement 
not only last year's hearing, but also to complement the 
hearing that we already held this year on the 2008 budget. That 
budget has generated a lot of discussions regarding the 
microcredit programs, and on a universal basis, from members on 
both sides, there was a deep concern about the proposal to make 
the SBA Microloan programs self-financing and eliminate the 
technical assistance grants and prime. So I would say it is a 
fair representation to say that overwhelmingly members of this 
Committee were opposed to those proposals, and so we need to 
really sort of examine where we are heading there.
    It also touched on the lender oversight and the need to 
lower fees on small business borrowers and lenders. My 
experience has been--and, you know, this is not a pet peeve 
with me. It is simply a response to what we are hearing from 
the marketplace, from the users--that these fees are too high. 
And I do not go to any meeting in Massachusetts or elsewhere 
where small businesses do not tell us that--and the lenders 
tell us that, too. It comes from both sides of the ledger.
    The bill that we introduced yesterday includes language to 
reduce the loan fees on borrowers and lenders, and a narrower 
version of that provision, I want to remind everybody, passed 
with the administration's cooperation in 2004, when they 
succeeded in taking the 7(a) loan program to zero subsidy. That 
was part of the 60 pages that were inserted into the omnibus 
late at night that actually cut out all but one Democratic 
provision from what had been a bipartisan authorization bill.
    So I hope--you know, however well intentioned, the law is 
not working, and we need to fix that. The language that we have 
put in does fix it. We think it does it in a way that would 
address the lending industry's concerns that any funding 
scenario provides efficient program levels and stability to the 
program, avoiding shutdowns of the 7(a) loan program or 
avoiding mandating restrictions on loan sizes or types of 
loans, which becomes its own set of problems.
    Now, I know the administration remains opposed to providing 
any appropriations for that program, and so we have got to work 
through this, folks. But, again, I reiterate, I hope we will 
work through it by really talking it through and not going 
through this, you know, blind process on the floor, which will 
incite my anger and others'. There are plenty of ways to choose 
to respond. So I hope that we can avoid that kind of response, 
and I assure you that given the options available to us as the 
majority, we will respond. But I do not want to do that. I 
would like to get it worked out. I am a reasonable person. We 
are happy to try to find some way to do it. But we need a good-
faith effort to try to do that.
    I might add that while the bill was introduced yesterday, I 
want to emphasize for the record that there has been a 
significant amount of time available to review the fee language 
because it is almost the exact same language that our Committee 
adopted last summer. It is similar to what the Senate passed as 
an appropriations bill in 2006. So there is no surprise here. 
There is no ``God, we need to study this. We have to take a 
while to know it.'' We have been through this one, folks.
    And I might add, OMB has been wrong on calculating the 
subsidy rate for the 7(a) loan program for 13 out of the last 
15 years. So I really think reasonableness dictates that we 
ought to be able to find the common ground on this one.
    I know there will be some differences on a few things. 
One--let me just mention very quickly--is the microlending 
program. I would just quickly make the case that we put less 
than $30 million a year into this microlending program, but we 
put $200 million into microcredit programs internationally in 
2005. We spent $56 for microcredit programs in Iraq in 2006. 
And there is a request for about $160 million for microcredit 
programs in 2007 as part of the supplemental funding for the 
war in Iraq.
    So at the same time as we are struggling to get $30 million 
for our own country for a lot of pockets of poverty in rural 
and urban centers, we are putting severalfold back into Iraq 
to, you know, frustration of a lot of people here. Not to 
mention the contradiction of our Government killing microcredit 
programs because they are ``too expensive,'' even though the 
loans are repaid and they work extraordinarily well, and as the 
Nobel Prize Committee is awarding the Peace Prize to Muhammad 
Yunus for doing exactly that on an international basis. It just 
does not make sense, folks.
    And so I hope that we can find a way to include this in a 
cooperative, bipartisan way. You know, if it were super-
profitable, obviously a whole lot of banks, big banks, would be 
doing it. But it is not a loss. It is not a loser for the 
Government, and it fills a lot of other structural, social, 
educational opportunity needs.
    My final comment is on the 7(a) and 504 loan programs. They 
provide 40 percent of the country's long-term capital to small 
business, and we all understand the benefits. You know, with 
longer repayment terms, the small business owner can spread out 
their payments, reducing monthly costs. It leverages their 
working capital, their ability to succeed, and we have got to 
make sure these programs are reaching those people who really 
need the financing. And, there are two significant places for 
improvement in these programs. One is in the lending to 
minorities, and the other is in the lending in rural areas. 
Those are two places that sort of leap out at us. And loans to 
these markets have been proportionally stagnant or modest since 
2001. We continue to hear a lot of concerns that the 7(a) 
lending is largely consolidated in about 10 lenders, and we 
need to make sure that smaller community banks have an ability 
to be able to participate. We tried to address this in our bill 
and look forward to your feedback today and, of course, of this 
session.
    So I want to welcome on a personal note, if I can, Joan 
Wasser Gish, who worked for me in Massachusetts, and did an 
extraordinary job. She is now a small business owner herself. 
And I welcome Chris Sikes of the Western Massachusetts 
Enterprise Fund. Thanks for being here, Chris, also.
    They have worked on an advisory committee regarding child 
care and small businesses, and I just think it would be good to 
have that discussion today and for people to sort of focus on 
how that fits into the array of efforts that we make here to 
try to empower small business people to be able to succeed.
    So, again, I want to thank you all. I am going to ask Kevin 
Wheeler of our staff to facilitate this roundtable, and Jackie 
Ferko of Senator Snowe's staff, and together they will manage 
this, as they have in the past. And if other Committee members 
come, they will obviously have priority in asking questions or 
engaging you, as they might choose to do so. And if any of the 
staffs of members have any particular questions, please just 
put them in through both Kevin and Jackie. We invite you to do 
so. We want this to be a free-flowing, open effort to get the 
best information that we can.
    So, again, thank you all very, very much, and I hope that 
we will have a good record here today that will facilitate our 
ability to mark up the reauthorization bill on May 16th and 
pass it out of the Committee and on to the full Senate. And we 
really look forward to every member's full participation in 
this so that we do not wind up at the markup with people 
feeling somehow that they have not had a chance to explore 
amendments or possibilities. So we look forward to it.
    Thank you all very, very much. Kevin?
    Ms. Wheeler. The agenda says that we will go ahead and 
start with the Microloan program, and out of courtesy to the 
SBA, we will let them make their proposals first from their 
legislative package. And we will allow the participants at the 
table to comment on them and to also offer their proposals.
    Tee or Mike? We are so informal that we will just use first 
names here.
    Mr. Rowe. Well, thank you, Kevin.
    Chairman Kerry. The record actually needs to know who the--
--
    Ms. Wheeler. I am sorry.
    Mr. Rowe. Yes, Tee Rowe. I am the head of Congressional and 
Legislative Affairs at the Small Business Administration. Good 
morning, everyone. Thank you, Senator Kerry, very much.
    I think the Senator has pretty ably summarized SBA's 
proposal for the Microloan program; that is, the administration 
believes it would be effective for the subsidy of the program 
to go to zero by raising the interest rate on the program, 
which is currently two points below the Federal cost of funds, 
to slightly above the Federal cost of funds, to, I think, 1.06 
percent above. This will enable the program to be self-funding 
and essentially have an open-ended funding stream for any and 
all microlenders interested.
    At the same time the administration is proposing that 
technical assistance be provided through our existing technical 
assistance providers--Women's Business Centers, SCORE, Small 
Business Development Centers.
    That is a pretty straightforward summary. Thank you.
    Ms. Wheeler. You know, may I just add, many of you have 
participated in roundtables before, and I forgot to say--we are 
so familiar--that I forgot to add that if you would like to 
speak or respond, turn your cards on their side, and then we 
will call on you. So would anyone like to----
    Chairman Kerry. Let me just sort of ask an open question 
and some of you can dig into it. What do you say to the sort of 
universal response of the members and the people we represent 
that this begins to be counterproductive, works against the 
purpose of the plan itself? I mean, I understand the market 
concept, and I understand the constraints we all operate under. 
But just from a practical, operative, in-the-field reality, how 
do you respond to this notion, you know, you are kind of giving 
to Peter and you are taking from Paul. You are giving us here, 
and you are taking over here.
    Mr. Rowe. Well, Senator, to some extent I agree with what 
you are saying there. I think, however, we cannot view this in 
a vacuum. I think it is clear, if you ask the other 
participants--for example, I know Mr. Wilson in North Carolina 
accesses at least four other Federal funding streams. And what 
we are looking at here is a larger question of how much and 
where does the Federal Government support microenterprise. Is 
there a need for us to begin to coalesce these various 
programs?
    Chairman Kerry. What other funding streams are you 
including?
    Mr. Rowe. There is CDFI, Rural Business Enterprise at the 
USDA; there are at least several others at HHS, CDBG funding.
    Chairman Kerry. CDBG is really----
    Mr. Rowe. Yes, it comes through HUD, because for a number 
of microenterprise providers, that is a significant source of 
funding.
    Chairman Kerry. So you are going to count a Medicare 
payment? Are you going to count a child deduction? Are you 
going to count all those others and put them on the table and 
say that is too much?
    Mr. Rowe. Well, what I am talking about, Senator, is the 
various funding streams that go to the microenterprise lending 
institutions, the various forms of grant assistance.
    Chairman Kerry. Only those in microlending.
    Mr. Rowe. Right.
    Chairman Kerry. And you feel that in the conglomerate, 
those microlending grants from various sources are somehow 
overly generous?
    Mr. Rowe. Not overly generous, but I think what we are 
looking at is: Has there been a diffusion of effort? Is it 
possible that while supporting microenterprise, we are probably 
overly broad in our various outlets.
    Chairman Kerry. Does that mean we are too generous----
    Mr. Rowe. I do not think it is a question of being too 
generous. I think----
    Chairman Kerry. Are we overly effective?
    Mr. Rowe. I think it is more like looking at your bills, 
and if you had five different ways of paying your electric 
bill, you would say, Why am I not just simply paying one 
source?
    Mr. Sikes. Good morning. I am Chris Sikes. I am the 
executive director of the Western Massachusetts Enterprise 
Fund, and thank you, Senator Kerry, for all the support you 
have given us through all these years, where you are the 
Ranking Member or the Chair for small business and 
microenterprise. It has been phenomenal. And as a constituent, 
I can say that your support has been steady all the way through 
and very proactive, and thank you for that.
    I want to frame, if I could, just very briefly just why the 
microenterprise program is so effective, because the reason, 
the central core of this program is that it marries technical 
assistance and lending. When you are making a loan to a 
microenterprise, it is the most fragile type of business. They 
have the fewest resources. Oftentimes, they are in a highly 
competitive market with larger businesses, and when you can 
link the technical assistance with the loan, you are forming a 
critical partnership for the success of an enterprise.
    What we have seen over the years--and we have been in this 
program since it was the first year of a demonstration 
program--was how effective it is when you link the technical 
assistance with the loan. And we have come up with a whole 
array of technical assistance products to meet the specific 
needs of the businesses in our market. It can be one-on-one 
technical assistance. We can put together support groups for 
that business. We can put together advisory groups for 
business. And the rate of success is seen by the fact that--
roughly you flip the equation, which is generally you see an 
80-percent failure in the first 5 years, to an 80-percent 
success rate. And I attribute that directly to linking the 
technical assistance with the lender, with the microlender. And 
it is the flexibility of being an unregulated financial 
institution--that intermediary, that is--that allows us to do 
that, where a bank cannot do that, and allows us to take the 
type of risk in terms of lack of collateral and being a start-
up, et cetera, that no other lending institute can do.
    Also, because the technical assistance is tied to the 
intermediary, we are the one at risk, so we are there at all 
times working with that business. We are seeking the business 
out as much as the business is seeking us out, and that has 
been a core part of our success.
    Chairman Kerry. Let me come to the gist of the proposals 
that are on the table so we get at it. I doubt we have 
disagreement on technical assistance. We are all in agreement 
we need technical assistance. There are two issues on the 
table. What is the impact on the interest? And what is the 
impact of shifting this to Women Business Centers and Small 
Business Development Centers--does it have an impact?
    Mr. Sikes. Yes, it has an impact. In terms, first of all, 
of the fact that you would go to the SBDCs or the Women 
Business Centers, the big difference there is that when the 
lender has access to the technical assistance, we are going to 
be using our resources with that business directly because we 
are in a partnership for the length of that loan. We need that 
support to work with them, and we are going to be much more----
    Chairman Kerry. So there is a greater synergy to----
    Mr. Sikes. And we are going to be more proactive than 
anybody else because it is in our best interest to be proactive 
to save our loans and to make this----
    Chairman Kerry. Why does it not--I mean, this is like a 
venture capitalist, you get in, you want to be involved in 
decisions because you really want to make sure your loan is 
going to be successful. If you lodge that technical assistance 
somewhere else, aren't you----
    Mr. Rowe. Well, I would say that, unfortunately, when we 
look at this, we find that the interlocking nature of many of 
the funds, whether it is Mountain Business Works or the Western 
Massachusetts Enterprise Fund, is very directly related to the 
local technical assistance providers. They make no bones about 
either being a Women's Business Center and being a microlender. 
And what we believe is we are providing the funding and the 
technical assistance for these borrowers.
    We completely agree that the microlending intermediary 
needs to be hands-on. That is part and parcel of it. What we 
are talking about are the multiple funding streams that are 
coming out of SBA and trying to coordinate and maximize the 
effectiveness of all these outlets we offer.
    Chairman Kerry. Do you want to respond to that?
    Mr. Sikes. It is the same comment again. I just think that 
if you want to see this program work, you have got to allow the 
intermediaries who are making the loans have the technical 
assistance resource to support those loans. Let us get our 
hands dirty, as it were, so we can really work with these 
businesses. You handcuff this program to the point where it 
will not work if you separate the technical assistance from the 
lending.
    Chairman Kerry. Mr. Wilson?
    Mr. Walker-Wilson. Greg Walker-Wilson, CEO of Mountain 
Bizworks, Asheville, NC, also chair of the Association for 
Enterprise Opportunity.
    We work with hundreds of small businesses every year in 
North Carolina, and many of them are low-income, they are 
women. Each of these particular funding sources targets the 
specific needs that each of those has. Prime is for very-low-
income and low-income.
    I really view these bills as the American dream funding 
sources. They make the American dream possible. And that is 
what this is all about. The organizations like mine and Chris', 
we are helping people succeed, pull themselves up by the 
bootstraps, and we are able to help them create a better life 
for their family. And so we are offering them training and 
consulting to hundreds of people. Each of these sources are 
unique, and one is focusing on the needs of women's businesses, 
others on training for low-income.
    The microloans do need to be connected to the training and 
technical assistance. We did a study about 18 months ago 
looking at the 3-year survival rate of our businesses. We saw a 
survival rate of 70, 74 percent. Typically, we see just in the 
general population well under 50 percent. When you marry 
training and lending together, you have a much higher chance of 
success. And that is what this is all about, and that is why it 
is so important.
    Chairman Kerry. Mr. Kelly?
    Mr. Kelly. I am Kevin Kelly. I am the managing director for 
policy and advocacy at the Association for Enterprise 
Opportunity that Greg just mentioned.
    I just wanted to mention one thing, Senator Kerry. When 
this proposal was first released earlier in the year about 
getting rid of the technical assistance portion of the 
Microloan program, we had a call with the Microloan 
intermediaries that are part of our membership, and I said I 
think I know the answer to this and what you are going to say, 
but I want to hear from you. What does this mean? How would 
this work in your community? What is your reaction to what the 
President's budget is saying here about using SBDCs, Women's 
Business Centers, and so forth to do this instead of through 
the Microloan program? And informally they said, This does not 
work in our community. Some of the SBDCs, for example, they 
don't work with microenterprises. That is not part of who they 
target.
    So even if there is somebody in that same community--and I 
heard Mr. Preston talk about the overlap and there are a lot of 
them in the same place where the intermediaries are--that does 
not necessarily mean they are working with the same type of 
entrepreneur or providing the same type of services.
    I would echo what Chris is saying because I heard the same 
thing on our call with our members who are the intermediaries 
who are doing this on the ground. To them this is not a 
practical solution to what they are trying to accomplish.
    Chairman Kerry. I have got to back to another meeting, but 
let me just say to everybody it seems to me that there ought to 
be a way. Draw each other out on this. Listen to each other, is 
the most important thing. Let's not get fixed in some sort of 
ideological place. There is a practicality here. There is a 
reality of how the business world works. There is a reality of 
how money works. There is also a reality about accountability. 
I am not suggesting the Government has the best way to handle 
all of it, but there is a synergy that we ought to be able to 
try to create here where you can get the best of both worlds, 
if you can get the Women Business Centers involved in some 
intelligent way, but not to the exclusion necessarily of the 
other folks' ability to be able to get a handle on it. Let the 
marketplace maybe decide. Let people choose, give them the 
breadth of that rather than become in a sense picking a winner 
or a loser here and deciding a rigid sense of the road that it 
is going to go on.
    So I urge you to try to explore that as you think about it, 
and hopefully maybe be able to come to some kind of an 
agreement and consensus on it.
    I know we have got a bunch of folks with cards up and a 
bunch of other issues to roll through, so let me let you do 
that.
    Ms. Wheeler. Before we go, I did not hear anybody answer 
the question to Tee's comment about multiple sources and why 
SBA contends that TA can be provided through these other 
sources and not through this complementary program. So if 
somebody could--Ron, I will go ahead and call on you.
    Mr. Phillips. Thank you, Senator Kerry--who has just left 
us. But my name is Ron Phillips from Coastal Enterprises in 
Maine. We are a rural CDC and CDFI, if you know those acronyms. 
But we have the great pleasure of being on the recipient end of 
those multiple programs that the SBA does put out, including 
the Maine Women's Business Center and SBDC and 504 program and 
SBA microlender and the whole lot. I am not sure whether to 
hide under the table or, you know, say a few things here.
    But I want to back up the comments that have just started 
with the three before me. I think it is a slippery slope to 
delink the TA from the loan program, period. It is a debt 
instrument and a relationship to borrowers that is so critical 
that it would get defused with other programs such as the 
Women's Business Center and SBDC. I would be very cautious 
about that as a slippery slope.
    To the question of those programs being available to this, 
I am not even sure that it would be advisable to put those 
programs into a relationship to borrowers because of different 
goals those programs have. And so I would be very careful about 
that.
    As far as funding goes, that is probably the nub of the 
issue. In fact, from our experience at the local level, as 
practitioners, we are struggling for resources to keep those 
programs going. We are matching funds from the SBA at a 
significant level. We have to raise those annually. We try to 
pursue block grant funds. By the way, challenge development 
block grant, which is not an eligible activity in a continuous 
way. That is more special project-oriented, at least in the 
State of Maine. There may be differing plans around that. So I 
would say that we struggle with other sources just to keep the 
other programs going, especially the Women's Business Center 
and SBDC.
    As I sit here today, we are putting applications in to just 
keep the level of effort. We have much greater demand in the 
market than we have counselor time and availability. So in my 
mind we should dismiss that as an option.
    I think more important is to keep our focus, and we would 
hope the SBA would because they are a great institution to be 
backing small business in America, including the micro level, 
and to delink this TA program from the loan and the important 
value of the debt instrument to create employment and self-
fulfillment among small businesses I think would be a very 
serious mistake.
    Thank you.
    Ms. Ferko. First of all, I would like to welcome you from 
Maine. Senator Snowe gives her welcome, and she apologizes for 
not being here today. I am Jackie Ferko. I am a staff member 
with the Committee, and I have been around for 4 years, and 
some of you know me and some of you do not.
    On the macro level, we would like to say obviously this is 
a very--the Microloan program is a very important issue to 
Senator Snowe, and we do agree that the technical assistance 
really does coincide with the lending portion.
    I do have a quick question for you. On a micro level, in 
our proposal, in our legislation, you had a proposal to 
eliminate the words ``short term,'' and I have been trying to 
work with SBA just to make sure what your proposal does, and I 
believe it is in order to provide greater flexibility and 
ability to provide flexible credit lines to qualified 
borrowers. And I just want to make sure that is--I want to hear 
from you that is what you want to do in our legislation and 
then hear from Tee Rowe to see if that is exactly what it does 
and if maybe there is--if we need to address that legislation 
in our leg package.
    Mr. Phillips. OK. Am I still on here? This refers to the 
line of credit type of financing? Well, in our experience that 
is not a particularly relevant area to be worried about, so, 
just my opinion, it is not something I would want to spend a 
lot of time thinking about or worrying about, frankly. We do 
more term financing, and that is just fine.
    It can get a little bit more costly to handle lines of 
credits, though I would say that there are times and places 
where that can be useful. But it is a more costly way of 
financing microenterprise. So you tend to want to do more of a 
term loan. I hope that is helpful.
    Ms. Ferko. Sure, and I absolutely agree with you that we 
need to address this issue. I am just wondering, you know, does 
that provision do--especially from the SBA, does that provision 
do what you want it to do?
    Mr. Phillips. I have got to look at the language. I mean, 
if it is in there--if it does no harm, I suppose it could be in 
there. Maybe others would comment on that. But I am just saying 
from our experience as a lender, we are not focused on line of 
credit language.
    Ms. Ferko. Line of credit, OK.
    Mr. Phillips. That is all. Thank you.
    Ms. Ferko. Tee?
    Mr. Rowe. I guess--and when we discussed this, Jackie, I 
was trying to understand how the change would have affected the 
program. As I understand from what Mr. Phillips says, it has to 
do with line of credit financing, though I know that a number 
of our intermediaries already offer line of credit financing. 
So I know there is an overall cap for a per borrower lending. I 
am not sure that the language in the act which says ``short-
term, fixed-rate financing'' prohibits line of credit 
financing. I know it does--so, you know, we certainly--if there 
is something in particular that that would change and cure, we 
are, you know, more than happy to have a discussion on it.
    I guess what I am still trying to figure out is what the 
end goal is, because certainly there is no problem with 
multiple loans from an intermediary to a borrower, and there 
is--as long as it is within that overall cap.
    Ms. Ferko. OK. Do you have any response to that?
    Mr. Phillips. I am not sure where to go with this. If it 
does not do any harm, if there are others that are availing 
themselves of line of credit uses--is that what we are saying? 
As a peer field and network, I certainly would not be one to 
stand in the way of their abilities to do what they are doing. 
I am just saying that from our experience we do not need that 
kind--we do not deploy that kind of capital at this juncture. I 
can talk another hour about asset financing. That is another 
issue.
    So if it does no harm, and there could be options for 
others, that would be fine.
    Ms. Ferko. Mr. West, do you want to comment quickly?
    Mr. West. On the technical assistance issue. I am Dennis 
West. I am president of Northern Initiatives. We are based in 
the Upper Peninsula of Michigan.
    Some of the challenges are the universality of the programs 
that were talked about. The nearest Women's Business Center is 
in an 8-hour drive from Marquette. The nearest SCORE volunteers 
would be a 3-hour drive one way, and if you were on the other 
end of the Upper Peninsula, it would be 7 hours one day. The 
Small Business Development Centers have two counselors to cover 
the 15 counties, and they generally only spend time in the 
counties where there is matching support being offered. So the 
ability to offer technical assistance to the providers is not 
universally applicable, particularly in rural communities.
    Our side of the issue is we require monthly statements from 
all of our SBA Microloan borrowers. So the SBA technical 
assistance is triggered by the performance of the borrower. So 
we are able to tailor on a month-to-month basis based upon 
accounting needs, based upon marketing needs, based upon e-
commerce needs, ways to help make that business stronger and 
better.
    And the third point is some of the other programs that were 
cited, we find ourselves as we make microloans with a multi-
year credit and to have opportunities like accessing funds, 
like community development block grant, would give us 
potentially one year of funding on a highly competitive basis, 
and yet our exposure is a multi-year credit and a credit that 
we are trying to grow.
    So those are the three areas I see as problems with moving 
the TA in the way that you have suggested.
    Ms. Wheeler. Mike, do you want to say something?
    Mr. Hager. Michael Hager, head of Cap Access, SBA.
    The Senator brought up a great point, and that is, what can 
we do to reach a practical solution to this? And our big issue 
here with TA is it is a duplicative effort. We duplicate it in 
so many of the other programs. That does not mean that we do 
not have a location Upper Peninsula of Michigan. But we are 
also entertaining the creation of software TA where one can go 
online and go through a program that provides technical 
assistance. As a matter of fact, we are hoping to have it 
developed to meet the technical assistance requirement for 
Community Express, for example.
    But we have a very nice budget that Congress has provided 
the SBA for education, and we have talked about the sources of 
that education: the SBDC, the WBC, and the SCORE. Again, we 
feel very strongly that let's run this program effectively, and 
one way to do that is to stop duplication wherever possible.
    Ms. Wheeler. You know, we hear complaints that when the 
argument is made that these programs are duplicative, that it 
is an oversimplification of technical assistance. And just like 
one loan does not serve all borrowers' needs, technical 
assistance does not serve all businesses' needs. And so if we 
could just go around the table very quickly one minute, try to 
respond to the SBA's assertion that it is duplicative, and then 
I have another question if you could get at it. Do any of you 
receive CDBG money to provide TA to your micro borrowers?
    Do you want to go ahead, Greg?
    Mr. Walker-Wilson. Greg Walker-Wilson. Let me see if I can 
remember all the questions. CDBG, where our central office is 
in the one city, Asheville, we do receive CDBG funds. It has to 
be only for low- to moderate-income individuals. We do it on a 
contract basis. It is sort of a per-fee basis.
    The other sources are not duplicative, and while I like the 
idea of trying to be more efficient and we try to do that, 
online, for example, could help part of the problem, but we are 
in the mountains of North Carolina. There are many places that 
do not really even have dial-up let alone broadband. And the 
clients that we deal with are people that do not fit into the 
mainstream. They are lower-income. They have less education. 
They do not go to their computer to try to get the answers. 
They say, ``I trust those people over there. They are a real 
person. I trust them. They have been in my city, and they are 
going to help me out and help me figure out how to do it.''
    So it may play a role in some ways to do things online. I 
think in general the populations we serve would not access 
that. Some of the population would. So I think that we have to 
deliver them. When we deliver our training and technical 
assistance, it is very specifically to the people that we are 
serving. And for folks who can go elsewhere, we want them to do 
that with financing and whatever. We are not trying to compete 
with the banks. But what our needs are, we are trying to figure 
out what is it they need. And so if they are lower education, 
how do we make it available so it works for them, so they can 
succeed and achieve the American dream.
    Ms. Wheeler. Chris?
    Mr. Sikes. I just want to speak to one example on why 
technical assistance is so important. We have a bakery that we 
are working with that had a--it had ordered equipment, and they 
needed that equipment right away because they were just 
growing. There was a problem with the delivery. It threw off 
their whole schedule, and it just threw off the whole business, 
really. And we had to get in there and really working with them 
in saying, OK, how are you going to restructure by the time 
that it takes to get the business running well enough until the 
equipment arrives.
    We provided hours of technical assistance in that case, and 
it was not like making an appointment with another technical 
assistance provider. We had to be there right away working with 
them. We restructured the loan, and we worked out a way for 
them to deal with their payables and help them get a schedule 
together. All that was obviously to preserve our loan and also 
to work with that business in a way that we were partnering 
with them. So that is why, again, linking the technical 
assistance with the loan is so critical for this program. I do 
not think the program can honestly run unless you have the TA 
linked to the loan program.
    With regard to the block grant program, block grants, 
especially for regional funds like ours, are very 
geographically based by town. So that means with every single 
town you have to have a separate contract with them. 
Administratively, it is exorbitantly expensive to do that 
unless you can get, you know, some grouping. But then you are 
constantly having to go one year after--on an annual basis--on 
these contracts. So it is a very costly way, I think, to run 
the micro program through block grant programs, again, because 
you have got a long-term commitment on a loan, a liability on 
the loan, and you have got a short-term technical assistance 
grant.
    Ms. Wheeler. Mr. West.
    Mr. West. We have never received community development 
block grant for technical assistance support, and it so far has 
not shown up as a priority by our State that would enable us. 
Plus we have the complication of having to go through a local 
unit of government.
    So even if we could get it, it would be hard to do it in 
such a way that we could cover a large geographic area because 
the applicant would be a county or a city. So it is a challenge 
to think that you could use CDBG, particularly in rural areas.
    Second, to offer something on the Internet in rural 
communities where there is not universality of high-speed 
connection, dial-up sometimes is present, but that is a 
limitation. And although we respect the use of e-commerce in 
various ways to connect people using the Internet, it is very 
much in the future and not currently applicable in a lot of 
instances.
    The third point is that TA is really triggered by the 
performance of the business, and it is a conversation about how 
that business is doing based upon its financial performance. 
And it is not likely that someone is simply going to be able to 
look at their financials and immediately go to a Web site and 
figure out off a menu of products what exactly they need.
    So working with small borrowers or start-ups, usually their 
first time in business, it is very important to be able to sit 
down with them to review their situation and to help craft a 
plan to help continue their support and growth.
    Ms. Ferko. Aside from the technical assistance, I would 
also like to hear from the microlenders here. How does SBA's 
proposal of going to zero subsidy affect you? In a negative 
way? In a positive way? I mean, how would that affect you in 
lending to the borrowers?
    Mr. Walker-Wilson. It would just make the money much more 
expensive, and so that affects the bottom line of these small 
businesses who are just getting started, and every dollar 
counts in their monthly cash flow. And so that is the reality. 
And so it is helping them get through in the first loan, 
getting their business going, and then our goal is to 
mainstream them and get them farmed out to the private sector. 
And that is the goal.
    So this is only about helping folks get started, having a 
loan that they can pay for, have enough flexibility, and then 
from there we can send them out to the private sector.
    Ms. Ferko. Would you still participate in the program if--
--
    Mr. Walker-Wilson. Say again?
    Ms. Ferko [continuing]. If it went to zero subsidy?
    Mr. Walker-Wilson. I think it would be difficult to, and it 
would be much less desirable. I have not evaluated it quite 
like that, but I have to be a rational manager of resources, 
and so if this is very expensive and it is not good for our 
clients, then it would be sort of, you know, the last resort 
kind of financing.
    Mr. Sikes. I fully concur with what Greg said on that. 
There is a lot of capital out there. People will go to lower-
priced capital, to their detriment, because they will lose the 
technical assistance and they will not understand how important 
that is, the microenterprises. So the cost will definitely hurt 
this program, and if you put the high cost and no technical 
assistance to this program, I think we are effectively saying 
that this program will not work.
    Ms. Ferko. I guess we could assume that if you were still 
participating in the program, less loans would be made. I mean, 
there would be less participants.
    Do you have----
    Mr. Phillips. I do. I dropped my card there to get in here. 
But just on the block grant, I had said that earlier. I think 
that is a very difficult source of capital to rely on. But, 
more importantly, what I would like to re-emphasize is that 
these other programs are also struggling for resources, and the 
counselors, whom I worry about, frankly, because we have 
several at CEI employed--seven business counselors, by the way, 
in the field--they are overworked and overwhelmed, and we are 
struggling, too, for their budgets to maintain those every 
place we can get those funds for matching and other sources. So 
it is very difficult to think about how a program, an 
additional program could be put on them aside from the fact of 
delinking that program from a very special lending 
relationship. As well, we are doing our best--I am sure others 
are--to create efficiencies and are attempting to put products 
through Web-based technology for access both in training--
especially for remote rural areas in Maine, and that has some 
success. So we are, you know, doing some of the efficiencies 
and coordination that you are talking about. But to delink 
that, I am not sure that would work.
    In terms of the zero subsidy, this is a real struggle 
because our field is based on helping smaller business with 
flexible capital and technical assistance, and pushing us into 
the market level is a place you want to eventually get to and 
we do get to. But it is very difficult, because we are working 
with borrowers that are not quite at that market level. Every 
time you ratchet up the interest rate, you are compressing some 
aspect of the program.
    So to the extent we can maintain the subsidies in this 
lending area, it would be extremely helpful. Thank you.
    Ms. Wheeler. May I ask for a clarification on this? A 
component of the Microloan program is that each of the 
intermediaries have a loan loss reserve in which they put up 
money; they are on the hook for the loans, and if the loans go 
bad, then they have to cover them. So, really, how would it 
work for an intermediary to be on the hook, to have to put up 
the money on these loans but not have control over the TA which 
counsels the businesses in order to succeed? It seems like it--
and maybe SBA could tell me how they see that this would work. 
How can we expect the intermediaries to put up the money for 
these loans but not have the funds to counsel them or have 
control? Because while some of these might have Women's 
Business Center funding, might have Small Business Development 
Center funding, some of them do not. So they would not be 
providing the TA, is what I am saying.
    Mr. Rowe. Right. Well, we view it as the lending 
institution working with the borrower to access the counseling 
and make sure that that counseling is effective, whether it is 
through an SBDC or Women's Business Center.
    Now, of course, as Mr. West pointed out, you know, there 
are gaps in rural areas, and these are problems that we have to 
surmount. Nevertheless, in looking at the TA costs and then 
looking at the spread--and I believe it is a roughly 8-point 
spread between what we lend the money out at and what it is 
lent out at, just to address Mr. Sikes' comment about people 
seeking less expensive capital. We view the slight shift from 2 
points below Fed funds to 1 point above Fed funds as a 
reasonable cost shift that allows us to expand the program from 
a current level of about $20 million based on roughly a $2.5 
million subsidy to a much larger program level without any 
subsidy, so that not only Mr. Sikes but, you know, any 
microlending institution in the country can access these funds, 
and we do not have to worry about requesting additional 
appropriations.
    Ms. Wheeler. And we understand that it is considered a 
modest amount, but the feedback we got is that already many of 
these funds, because it is not a high-profit business, that 
they are already losing money and this would just exacerbate 
the situation.
    But I want to go back to the loan loss reserve. So if SBA 
were to take the technical assistance funding away from these 
intermediaries, would they drop the requirement that they have 
to put down loan loss reserve funds as an insurance policy for 
the success of these loans? Because it seems unreasonable to 
expect them to take scarce dollars for an insurance policy when 
they do not have control over the management or the counseling 
of them.
    Mr. Rowe. Obviously, if we created a zero subsidy program, 
we would not consider the need for a loss reserve to be as 
crucial.
    Ms. Wheeler. Right, but they would be paying indirectly 
anyway. Their fees would simply go up if their defaults go up, 
and right now there is only one loss in the program. So if 
there truly is correlation between TA and success and the low 
losses in the program and we took that out of the equation, 
defaults go up, then the subsidy to provide the program would 
go up and, therefore, they would be paying more in fees.
    So there seems to be----
    Mr. Rowe. OK. I see what you are saying.
    Ms. Wheeler. There seems to be a disconnect in the 
proposal. So if the TA is not going to be provided to these 
organizations, would the SBA drop the requirement that they 
have a loan loss reserve fund?
    Mr. Rowe. The problem with that is that presupposes that 
the absence of the TA funding means that there is a complete 
absence of technical assistance available for the borrowers, 
and we do not agree with that because obviously we see all the 
other various outlets that we fund and have available right 
now.
    Ms. Wheeler. Well, I think what it supposes is that these 
groups are on the hook for these dollars when they are not in 
control of the technical assistance. We can come back to it, 
but I wanted to get on the record that this would have to be 
part of the proposal. It really seems unreasonable that these 
groups would have to have a loan loss reserve of 15 percent of 
the loans if they do not have control over the TA.
    Mike?
    Mr. Hager. Kevin, I want to be really clear that we are not 
taking away TA. We are offering several venues to participate 
in TA.
    Ms. Wheeler. Did SBA request money for TA, extra TA money 
through Small Business Development Centers, Women's Business 
Centers, or SCORE in order to compensate for the additional 
borrowers going to those programs?
    Mr. Hager. We think there is capacity to do that.
    Ms. Wheeler. I am sorry. Was there a request?
    Mr. Hager. No. But we think there is capacity to handle the 
request for TA.
    Ms. Wheeler. OK.
    Mr. Hager. And, again, you know, the options that we have 
today, one could argue we think we run a really good TA shop 
with numerous resources to access that TA, and there could be 
an argument that we think our TA would be enhanced over what 
takes place today.
    Ms. Wheeler. OK. Greg, do you want to make one final 
comment? And then we are going to move on to the intermediary 
lending pilot program?
    Mr. Walker-Wilson. Sure. Greg Walker-Wilson. Just a 
respectful different point. We do have several different 
sources, like you are saying. We still have waiting lists, and 
we still have a budget deficit, and we are leveraging the 
Federal funds at least one time over. And it is sort of a 
jigsaw puzzle, and a certain funding source can serve a certain 
target group, and a certain other funding source can serve 
another target group. There is not overlap, so it is just--I 
mean, if we had twice as much money, we could serve that many 
people. The demand is there, and the creative ideas are there, 
and I think that our role is to try to help people, help 
businesses succeed.
    Ms. Wheeler. OK. Jackie, do you have a question?
    Ms. Ferko. No.
    Ms. Wheeler. May I ask one more thing? Could someone please 
on the record explain to us the distinction between the 
Microloan program and the Prime program? Go ahead.
    Mr. Walker-Wilson. The Microloan program is specifically to 
lend money, and so we have been talking about that. Prime is to 
provide training and technical assistance to low-income and 
very-low-income, and it has no tie to lending. So there are 
many people--take my own organization, for example. Probably 75 
percent of our clients just want training or technical 
assistance. They do not want a loan. Or they have some other 
source. And so if we only put money in the lending, then there 
are these other folks that want to start businesses that will 
not have options. And so these are ways of providing capacity 
building, the prime funds, to helping people have the chance to 
succeed, adding management capacity, marketing capacity, and so 
forth.
    And for the record as well, I just want to point out that 
right now the prime funds, only 16 or 17 States are eligible to 
access these, and this is meant to be a national program in all 
50 States. And I think it is important that that barrier be 
lifted so that any program--there are low-income and very-low-
income entrepreneurs in every single State, and to have two-
thirds of the country excluded from being able to participate 
is not fair to those folks.
    Ms. Wheeler. OK. We are going to go ahead and move on to 
the intermediary lending pilot program. For those who do not 
know, the bill authorizes a 3-year pilot program, and it allows 
SBA to make loans to local nonprofit lending intermediaries, 
and then the intermediaries, similar to the SBA's Microloan 
program, re-loan those funds to small businesses. The program 
seeks to address the capital needs of start-up and expanding 
small businesses that require flexible capital, but for some 
reason are ineligible for private or other funding. It is aimed 
at businesses that desire larger loans than what can be provide 
through SBA's Microloan program, loans of sizes between $35,000 
and $200,000. The loans to the intermediary would be long term, 
of 20 years, at 1-percent interest, and they would have a 2-
year grace period.
    I think we have two participants here today who would like 
to explain to the Committee why there is a need for this 
program and why we should test this to see if it could get at 
this gap lending.
    Ron, your card is gone. Do you want to lead off?
    Mr. Phillips. Thank you again. And to the SBA, they can 
take these clam chowders and lobster bisques with them.
    Mr. Hager. You cannot do that.
    Mr. Phillips. They are under a hundred bucks each.
    [Laughter.]
    Mr. Phillips. Or whatever it is, $49. Thank you again.
    We have, I guess, the honor in some ways of being the first 
rural development intermediary lending program in the Nation 
when USDA adopted that program in the late 1980s. It was a 
program that came out of Maine with one of our colleagues in 
Vermont, and it has been a terrific program, well 
oversubscribed, I believe, and there are a lot of statistics on 
this throughout rural America, and many entities have 
advantaged themselves with these kinds of funds and had a 
tremendous impact in helping to develop and create jobs among 
small businesses in rural communities.
    Our proposal is to have the SBA adopt a pilot program to 
mimic effectively this successful program.
    Ms. Wheeler. This is at USDA, Ron?
    Mr. Phillips. Yes, in Rural Development, and I am speaking 
out of the experience with that rural development program, 
which in our case we have made loans to over 200 small 
businesses in rural Maine, and these funds have cumulatively 
been recycled to amount to something like $15 million of what 
we call sub-debt capital. And we all know what that means. It 
is the kind of capital that is near equity that can help 
enhance the collateral base of the company so that conventional 
financing can be drawn in, especially the bank. And then you 
get into this magical area of leverage, and you bring in the 
banks to that particular deal. And in our case, we leveraged 
$115 million of bank capital.
    The SBA program is modeled on this successful effort. There 
is no TA assignment to this. The assistance we provide 
companies is blended in with what you think of as the arbitrage 
between the cost of funds we have and the amount we loan out to 
companies.
    Some 8,000 jobs, by the way, have been created or sustained 
in these projects. One of the projects, by the way, is this 
great company in Whiting, ME, down east Washington County, the 
poorest county in Maine or among the poorest counties. And they 
process gourmet-type clam chowders and seafood and herring 
products and so forth. And you can buy them here in Washington 
if you are around or at Whole Foods or natural food outlets, 
because that is their prime market.
    The story here is that there is an entrepreneur that 
decides to try to make a go of it, and he and his significant 
partner bought a 100-year-old company that was sitting there 
not going very far. The name Looks goes way back historically 
in that particular county, and he took it--I think they are 
employing eight or ten people, and he rebranded the company and 
developed a strategy to grow the company, and hopefully it will 
do quite well. They have almost tripled employment, and they 
are on their way. We hope they are very successful.
    Sub-debt money--and even equity capital, but I am talking 
about sub-debt money--is very important to help a project like 
this get off the ground. I think Machias Bank is involved with 
this particular thing.
    So my last point--I know I am over my time here. I can go 
on and mention so many other companies here. But the SBA is not 
the only institution in this, but it is an important voice and 
piece to put in it because we cannot use the rural development 
money in the urban areas. That is only for communities with 
25,000 or less population, so we are trying to mimic this into 
the populations of Maine and throughout the country. And I 
think you have got a really great program opportunity.
    Foundations like the Ford Foundation, the Kellogg 
Foundation, the Casey Foundation, and many others have been 
buying into this kind of revolving loan type of program. You 
are not the only ones there. But to have the SBA, this 
venerable institution nationally, in this type of pilot would 
be exceptionally valuable as a pilot.
    Thank you.
    Ms. Wheeler. Mr. West?
    Mr. West. Again, I am Dennis West with Northern 
Initiatives. We serve 49 rural counties, primarily in Michigan. 
Northern Initiatives has been an SBA microlender since 1994, 
and we have also been the recipient of USDA IRP loans since 
that time, too.
    We asked Senator Levin and his staff to help create this 
program because what we saw is a gap in the market. Of the $24 
million that we have loaned, 55 percent of our loans have been 
to start-ups, and 75 percent of our loans come as community 
bank referrals. Now, why would community banks make referrals 
to us to help the start-up of businesses? Generally, it is 
because of the size of the loan, past bankruptcy, often health-
related in a rural area is the cause of the bankruptcy, low 
equity or no equity, collateral shortages, or the loan is just 
plain odd and they are not sure how to underwrite it.
    So typically in our situation we help support a business to 
get started and grow, and that is a 3- to 5-year process to get 
back into the hands of a community bank. And by the end of that 
3- to 5-year process, our borrowers typically are back in 
community banks and successful and growing businesses.
    What we would ask the Committee's support for this title is 
to recognize that what the fund will do is to be able to 
revolve. We would expect that this amount of money would 
revolve at least four times over the course of the pilot 
program the 20 years. So the money will leverage itself.
    It will enable us to support the fastest-growing sector of 
our local economy, which is start-up and entrepreneurs starting 
and growing small businesses. And, frankly, they have capital 
needs that are not totally being met by the market, and it 
gives us the ability to support them.
    But in support of the success of small businesses, it helps 
us to continue to grow and have a stronger partnership with our 
community banks, so the small business lenders will be the 
beneficiaries of this program, but also community banks who are 
our partners will be beneficiaries of this program because in 3 
to 5 years they are going to be getting growing businesses that 
are sound, workable credit.
    Ms. Wheeler. James?
    Mr. Ballentine. James Ballentine, American Bankers 
Association. I wanted to commend the drafters of the language, 
but I have some questions in the language of the bill because 
the language indicates eligibility for participation and that 
the intermediary can have--it looks like up to 1 year of 
experience or not less than 1 year of experience in making 
loans to start-ups. And I wondered whether that level of 
experience was enough to actually be proficient in making loans 
through this program if you only have 1 year of experience 
versus what it sounds like you all have much more experience 
than that.
    I also wanted to speak to the availability of 
intermediaries in urban communities and whether there were 
adequate intermediaries in those communities to serve the 
population that you speak of, these start-up businesses.
    And my final point was about a 3-year pilot program. I know 
that is traditional in Washington, but in light of the fact 
that these loans will not have to start repayment until 2 
years, whether you would have adequate experience within the 
program to determine whether a 3-year pilot was enough or 
whether that should be extended to, say, a 5-year pilot.
    Those are my basic questions.
    Ms. Wheeler. I think that the intermediary drafting 
question that you asked applies to the SBA Microloan program, 
separate from the intermediary lending pilot program.
    On the 3 years, I think we could certainly go back and 
discuss making it longer. You are right that it is--typically, 
we do reauthorization every 3 years, and so we try to put 
everything on sync. This is Senator Levin's provision, and it 
has passed the Senate several times, but we could certainly go 
back and talk about it.
    Your middle question was?
    Mr. Ballentine. The availability of intermediaries in urban 
communities to serve those particular businesses.
    Ms. Wheeler. Whether there would be enough capacity in 
order to reach those?
    Mr. Ballentine. Whether there are enough intermediaries. I 
know there are a thousand, roughly, around the country, and 
they are primarily in the rural parts of the country, and 
whether there would be urban capacity for the intermediaries.
    Ms. Wheeler. Do any of the intermediaries at the table know 
the answer?
    Mr. West. I do not know the answer, although I will tell 
you one of the intermediaries I have the utmost respect for is 
in Detroit, Detroit Enterprise Institute, which I think is one 
of the best that I am aware of. And I simply do not know the 
answer to where capacity exists in a lot of urban centers.
    Mr. Phillips. I would agree with Dennis, though I know that 
in Maine--and this is from our experience--municipalities where 
we would be active here generally do not have a funding base. 
They might have a downtown redevelopment association. I know in 
Lewiston and Auburn, there is Lewiston-Auburn Economic Growth 
Council that has come to us for money, by the way, because they 
cannot get block grant funds to refuel some of the lending. So 
the demand, I think, is better.
    I do not know of any group in Maine, other than us, that 
would be active in these markets, that would be eligible, that 
would have an entrepreneurship relationship and a business 
development relationship as robust as we would have. Now, that 
is in our State. I think you are talking about 20--there are 20 
pilot----
    Ms. Wheeler. There would be enough for 20 grants, as I 
understand it.
    Mr. Phillips. Twenty, and maybe if this goes, which I think 
would be great, there could be more analysis of how this is 
going to supplement other areas of the country.
    Ms. Ferko. I appreciate you, Ron, for bringing up the Maine 
businesses. Too bad you did not bring clam chowder for the rest 
of us since we are going to be here until 1:00.
    Mr. Phillips. Well, this is for you, then.
    [Laughter.]
    Ms. Ferko. I do not think I can accept that, either. But I 
would like to hear from the SBA their comments on this pilot 
program just to see what they are thinking and get them on the 
record.
    Mr. Rowe. Well, we have looked at this before, and, of 
course, it was in the bill through 3778 last Congress. At that 
time CBO scored the proposal at about a 37-percent subsidy 
rate, which means as it is drafted with the current 
authorization, you are talking about probably maybe $55 million 
if you got the full $20 million authorized appropriation, 
perhaps $55 million being available for intermediaries.
    But there are a couple of other questions. First off, you 
know, James is correct, the definition of an eligible 
intermediary, 1 year of experience, which seems to be a 
pretty--an incredibly low bar for an area of lending where you 
are talking about loans from $35,000 to $200,000. The other 
thing is that, frankly, the way this is drafted, I would 
imagine that both CDCs and credit unions would be available 
intermediaries since they are not-for-profit organizations, 
whether it is a C-14 credit union or a CDC.
    I would just go back to the fact that this is a very 
significant subsidy, I mean, 1-percent interest over 20 years 
with a 2-year grace period, and I noticed there is no interest 
rate set for the borrower. So there is no cap here as to what 
would be charged between the 1 percent the money is being 
borrowed at.
    Ms. Wheeler. For the record, I just need to clarify that 
while CBO did assign a subsidy rate estimate of 37 percent, it 
also said--the quote is that, ``We estimate that the subsidy 
cost for the authorized loan amounts would be about $7 million 
over the 2007-2011 period.'' So I just think it is important to 
say exactly what the cost would be, because 37 percent sounds 
so expensive, but the ultimate decision of CBO is that it would 
be $7 million over a 5-year period.
    Mr. Rowe. Yes, well, they are basing that on $20 million 
authorization for 4 years, so that would work out about right, 
$7 million a year. And at $7 million a year and a 37-percent 
subsidy rate, we can figure that would probably be about $11 
million in funding that we would be able to put out as SBA in 
any given year.
    Again, there is a question: What is the rate cap there and 
what is the spread that the intermediary would be expected to 
offer? And there is very little here that defines the 
responsibility of an intermediary in this program beyond the 
actual----
    Ms. Wheeler. So SBA would like to see an interest rate 
parameter added to the program and to address, as American 
Bankers Association pointed out and SBA has pointed out, the 
qualifications for eligibility to be an intermediary at----
    Mr. Rowe. Well, at the very least, you would expect that if 
the proposal was to go through. But the larger question is the 
issue of the market niche that we are trying to achieve here. I 
will point out that the $35,000 to $200,000 range is probably 
the largest part of the 7(a) program. I would venture to say it 
is something on the order of 60 percent of the $15 billion that 
SBA guarantees in a year.
    Ms. Wheeler. I want to move on to the CDC 504 program, but 
quickly, Chris, you have had your card up. And then we will go 
to Mr. West to respond to----
    Mr. Crawford. Thank you, Kevin. I am Chris Crawford with 
NADCO, the National Association of Development Companies. We 
are the 504 lenders around the country. There are about 260 
certified development companies, and those CDCs have many more 
offices spread around the country in their States.
    As I read the language on page 22, frankly, I assume that 
CDCs would be qualified to operate this program. Is that 
accurate?
    Ms. Wheeler. It was my understanding that your proposal was 
that you wanted to specifically name them, and not only to 
apply to this program but in general to be defined as an 
intermediary so that CDCs could apply for any program that 
calls for an intermediary.
    Mr. Crawford. Yes. The language here appears to describe 
certified development companies. We could probably make it a 
little clearer if you did name CDCs in that. CDCs, as you know 
and as Ron knows, are microlenders. We do a lot of 
microlending. I think we have a fairly successful track record 
in microlending as well as large lending. So I think our 
industry would be eminently qualified to participate in this 
and would certainly offer a number of endpoints, access points, 
as James has asked the question on.
    Ms. Wheeler. OK. Then we can look into that going into 
markup.
    Mr. West, did you want to comment on why the 7(a) and 504 
loan programs do not serve this financing gap that the pilot is 
intended to serve?
    Mr. West. In the Upper Peninsula, we have 29 community 
banks, and they range in size from $30 million to $300 million, 
and many are not SBA lenders and do not have a relationship 
with the SBA. And so start-up money and the money to help 
support their growth is not always available or easily 
available to them.
    Ms. Wheeler. OK. Chris?
    Mr. Sikes. It is important to mention that the IRP program 
is really a subordinate lending program and that the loan 
guarantee program is not, and that this really does fill a 
different niche which the USDA program has really shown in the 
rural setting to fill. And I would say that by increasing the 
service area to the urban areas, we are giving a tremendous 
amount of financial liquidity to the businesses in the urban 
areas.
    Ms. Wheeler. Ron?
    Mr. Phillips. Just to reinforce what Chris said, that the 
differences in this program--of course, it is a pilot--than the 
7(a), it is a sub-debt, subordinated debt instrument, and the 
7(a) program as a guarantee program still carries with it 
certain requirements around collateral coverage for that 
guarantee. And this is a much more flexible way of helping to 
develop a company and getting them into a more financially--
standard, conventional financing market.
    Ms. Wheeler. OK. Mr. West, last comment--oh, and Chris.
    Mr. West. I also wanted to add that the kinds of loan that 
we find ourselves doing are with low-equity, no-equity 
borrowers, history of bankruptcy, not brought on by other 
things other than a lack of access to health care, things of 
that nature, size of loan, collateral strategies, collateral 
availability, for God's sake, we take Airedales (dogs) as 
collateral in one loan.
    So these are not things that if a regulator saw that a bank 
had done them, they would be very pleased to see, because they 
in many cases are things that a regulator would not want their 
banks to do and would cite them if they did them.
    Ms. Wheeler. And is the administration funding the 
companion program to this within USDA? This is modeled on a 
program within USDA, and is it funded in the fiscal year 2008 
budget?
    Mr. Phillips. I do believe that it is, yes; even the 
President, I believe, likes this program.
    Ms. Wheeler. OK. Great.
    Jackie?
    Ms. Ferko. Just quickly. Tee mentioned that the 7(a) 
program covers that niche, but obviously there is a need for it 
since we are giving out those grants through USDA.
    What do the 7(a) lenders think? Is there any thought that 
there is a niche out there for this? I am just curious.
    Mr. Kwiatkowski. My name is Chris Kwiatkowski. I am senior 
vice president with Popular, Inc. I head up the small business 
lending division, and I would like to thank the Senate Small 
Business Committee for holding this important roundtable and 
letting us participate.
    This is probably an underserved niche, as our bread and 
butter is the 7(a) program. My division focuses totally on SBA 
lending, and we do have 50-plus business development officers 
across the Nation, but probably not serving this particular 
niche. And the size of the loans are difficult. The smaller 
loans take just as much paperwork to generate as the larger 
loans do, so it is not very cost effective as a lender to go 
after these types of loans.
    Ms. Wheeler. Jackie, would you like to let Mr. Wilkinson 
go?
    Mr. Wilkinson. I am Tony Wilkinson with the National 
Association of Government Guaranteed Lenders, and I would like 
to just hit one of our numbers. Year to date, about 80 percent 
of the loans made in the 7(a) program are for amounts of 
$150,000 and under. That said, they are not subordinated debt 
loans. They are typical credits. And if this program is 
designed to reach lower than what we are doing, then it is 
probably a niche that our members are not serving.
    Ms. Ferko. Thank you, Tony.
    Ms. Wheeler. OK. Let us go ahead and move on to the next 
topic, which is the certified development companies, the 504 
loan program. We will allow SBA to present their proposals, and 
then as we did under the Microloan program, we will let the 
participants comment and then make their recommendations.
    I am very sorry. We are little behind, so if we could try 
to keep it short so that we can move through this. I am sorry.
    Mr. Rowe. Well, I will move pretty quickly. There are just 
a few proposals.
    First off, there are some proposals that came from our 
Office of Inspector General, changes to penalty provisions to 
include fraud by loan packagers and agents, and to include 
fraud under the 504 program; also to extend the current 5-year 
statute to 10 years for fraud against CDCs, and also small 
business lending companies. The IG has pointed out that a 
longer statute is needed because effective fraud prosecutions 
often take a great deal of time.
    Beyond that, really quickly, there were two proposals: to 
harmonize the appraisal policies between the 7(a) and 504 
programs so that appraisals by a State-licensed appraiser is 
required in either program when real property is being financed 
for more than $250,000; and also harmonizing the leasing policy 
and setting a common standard of up to 40 percent of a facility 
allowed to be leased out in a new or existing building.
    The last proposal is a proposal from the Office of Capital 
Access. I know there has been some debate between Capital 
Access and industry about this. SBA has put forward a proposal 
that issuing debentures for 504 that would use a monthly rather 
than semiannual payment schedule. One of our reasons is that we 
believe a monthly payment schedule would allow borrowers to 
reduce their principal balance on a monthly basis and, 
therefore, reduce the amount of interest that they are paying 
on an ongoing basis.
    That sums it up.
    Ms. Wheeler. OK. Would the participants like to respond to 
the three proposals that SBA highlighted out of their 
legislative package? Chris Crawford.
    Mr. Crawford. Yes, I would, Kevin. I am Chris Crawford with 
NADCO. First of all, I apologize, I just received the 
administration's proposal recently, and so we have just begun 
to analyze it.
    On their authorization request, we oppose their 
authorization request. We feel it is too short; we will run out 
of money. I would note, responding to Senator Kerry's concerns, 
our minority lending is up 15 percent just year to date. Our 
rural lending is up 11.5 percent year to date. We have loaned 
over $1 billion year to date to minorities. I would hope that 
we would not be in a position to run out in 2008, 2009, and 
2010 and that Congress would support the higher authorization 
levels which are in S. 1256. We support those authorization 
levels.
    Secondly, changes to the fee provisions, we absolutely 
oppose what the administration is proposing. The administration 
disclosed those fees to us recently in a meeting, and they 
indicated that the cost of a weekly audit would be $25,000 and 
that they want to get to field audits to CDCs with portfolios 
as low as $30 million. A CDC with that portfolio size receives 
only $150,000 a year in servicing fees per year, total fees. 
This would take up to 20 percent of their revenues. I would 
suggest that smaller CDCs would exit this program in droves. 
They simply could not afford to operate under those 
circumstances.
    They also indicated there would be a fee for the Dun & 
Bradstreet scoring system that was created several years ago, 
and we calculated that fee could run from $2,000 a year to 
$10,000 a year for some CDCs. Those are astronomical costs 
given our nonprofit status. So we oppose that fee.
    Section 211, maximizing use of electronic technologies. 
While we support the computerization of many of the processes 
that SBA uses--and Mike knows this--in fact, we oppose the 
language that is in their request. It is far too vague. There 
is no description of what they would require CDCs to do. As 
many folks around this table know, SBA does not have a stellar 
track record in implementing new technologies. So we would ask 
for much more definition on this because, otherwise, it could 
leave CDCs wondering what we should be implementing.
    Real estate appraisals. Could I ask Sally to comment on 
that?
    Ms. Wheeler. Sure.
    Ms. Robertson. Sally Robertson with Business Finance Group 
in Fairfax, VA. We are a certified development company.
    We noted that the appraisal comment was that appraisals 
would be required for all projects in excess of $250,000 for 
both the 504 and 7(a) program. We would like to submit that 
that is perhaps a fairly low dollar amount for appraisals which 
cost a minimum of $3,000, and that if an average 504 project 
exceeds $1 million, that means that 75 percent of 504 projects 
would be subjected to this requirement. That could amount to 
some $22 million a year in costs for small businesses.
    We would recommend that the appraisal requirement be set at 
a $750,000 real estate acquisition size with the exception of a 
business acquisition which involves real estate, where you 
would definitely need to know the valuation of the fixed 
assets.
    Then we also wanted to talk a little bit about the leasing 
policy. SBA has proposed that small businesses would occupy 60 
percent of the facility and allow 40 percent of that property 
to be leased out. We believe that that is a serious problem, 
particularly in inner cities and rural areas. The primary 
reason is that a two-story building would then essentially 
become ineligible for 504 because, generally speaking, in a 
two-story building, the first floor the SBC occupies and it 
leases out the second floor to another tenant. And we think 
that that one-size-fits-all rule would make the program 
unavailable to many more small businesses, and we think that it 
is our motivation to finance more small businesses and try to 
keep that more flexible.
    I would say that in the District of Columbia or in Boston, 
which are inner cities, one of the ways you bring small 
business into the inner city areas and the low- and moderate-
income areas is by allowing multiple use particularly of row 
house type buildings, where you have a commercial tenant on the 
initial floor and a residential use on the upper floor. And if 
you eliminate that, you eliminate a lot of jobs to low- and 
moderate-income individuals that those small businesses are 
bringing in.
    Ms. Wheeler. SBA, would you like to respond to NADCO's 
request that instead of setting the threshold at 250, that it 
be raised to 750 and then also address the leasing numbers? Or 
would you like to, you know, submit comment? We can come back 
to discuss it, but we would like to give you the chance to 
comment.
    Mr. Hager. I would like to first of all, if I may, comment 
on the fee structure.
    Ms. Wheeler. Sure.
    Mr. Hager. The fee structure is created, defined as an on-
site review every 2 years. There are----
    Ms. Wheeler. Actually, you are talking about fees for 
lender oversight?
    Mr. Hager. Yes.
    Ms. Wheeler. The examinations? OK.
    Mr. Hager. Yes. Those are conducted every 2 years. There 
are 150 of the smallest CDCs that would receive no on-site 
review, therefore, no cost.
    The off-site review, which is a--you are familiar with the 
Dun & Bradstreet review, and we look at that data monthly. The 
CDCs, there are 55 of them that would have a fee of $200 or 
less. We would waive that fee. At least it is our intent to do 
that. The other fees would range anywhere from $250 per year to 
the very largest CDC at $32,000. So, again, we believe 
oversight is absolutely critical for the program. As we expand 
the portfolio, we simply must expand our role as the oversight 
regulator. And we feel that these fees are pass-through fees. 
There is obviously no profit margin involved in these. And we 
think they are essential for the program going forward.
    Ms. Wheeler. Pass through to whom?
    Mr. Hager. Whatever we are charged, we pass it through to 
the CDC. These are fees that we pay----
    Ms. Wheeler. Yes, but then who ultimately pays?
    Mr. Hager. The CDC pays.
    Ms. Wheeler. But, indirectly, does the borrower ever get 
touched?
    Mr. Hager. Chris would have to answer that question.
    Mr. Crawford. It is my understanding the borrower would not 
get touched, except that CDCs are going to be hurting for cash 
flow. $32,000 a year for the largest CDC in the country is a 
significant amount of money. So I would be very concerned about 
that. Pass-through, eventually I would see CDCs having to raise 
their charges. Right now, most CDCs charge five-eighths, are 
required to charge five-eighths for servicing, of which one-
eighth is going to the agency as part of the guarantee fee to 
keep us at zero subsidy. CDCs will almost certainly have to 
increase their fees for the borrowers. There is no doubt. So 
ultimately there would be a pass-through.
    Mr. Hager. We think these fees are very reasonable. If you 
compare the other parts of the Government financial services, 
the oversight, what they charge----
    Ms. Wheeler. Are those nonprofit institutions that you are 
using as comparison?
    Mr. Hager. No.
    Ms. Wheeler. No. So they are banks versus intermediaries, 
that is the distinction here.
    Mr. Rowe. We would have to say that we are not--I do not 
know off the top of my head what the NCUA charges the credit 
union industry for their regulatory oversight.
    Ms. Wheeler. Sally, did you want to comment how your CDC 
might be affected? I do not know where you fall in the spectrum 
of small or big.
    Ms. Robertson. I think our CDC would probably fall in the 
spectrum of a large CDC. We rank about number 10 nationally. I 
think while we are very much in favor of oversight from SBA of 
CDCs, we think it is extraordinarily important to credit 
quality. I think the cost is very high and that perhaps SBA 
should look to some budget authorization for at least some of 
these fees.
    Ms. Wheeler. Mike, did you want to make any comment on the 
industry's adjustments to the levels for the appraisals and 
for--the appraisal threshold or for the rent specifications?
    Mr. Rowe. Well, I will just toss in here that any proposals 
we have put forward are just that--proposals, working with the 
industry.
    Now, for example, raising the rate of an appraisal from 250 
to 750, obviously, we are talking commercial property, and I do 
not know what the standard operating procedure is in the 
commercial real estate industry. It may be that a certified 
appraisal is really not the norm below a certain level.
    Ms. Wheeler. But SBA feels it is important for what reason?
    Mr. Rowe. Well, we feel it is important to have a certified 
appraisal in order to, you know, protect the interest in the 
property and make sure--this is both a fraud and a financial 
management issue. Now, the question that Chris raises is 
whether, you know, $250,000 is really probably going a little 
low for a certified appraisal, which is an expensive 
proposition, versus, you know, the more normal course of 
business if it is not normal in commercial real estate to be 
seeking certified appraisals for smaller properties.
    Ms. Wheeler. OK. Thank you.
    One other comment, Chris?
    Mr. Crawford. I would say that we are absolutely not 
opposed to appraisals. We do real estate deals all the time, 
and we get appraisals all the time. I think our loss record 
demonstrates that. Our default rate is 4.5 percent and 
dropping. So I think we are doing good deals, and we are 
adhering to standard commercial real estate financing 
practices.
    Our concern is that this would hit probably 75 percent of 
our projects because, as you know, our average loan is 
$584,000, average project is approaching $1.6 million. The cost 
of those appraisals would be $22.5 million per year to our 
borrowers. That is a huge amount of money. But we absolutely do 
not oppose the notion of appraisals.
    Mr. Rowe. We will go back and take a look and reassess.
    Mr. Crawford. Thank you.
    Mr. Rowe. But I did want, if just for a second, to discuss 
the monthly debenture payment schedule because what we are 
looking at here is trying to come up with a possibly more 
useful tool for the borrower. On the other hand, I know that 
the industry has some concerns as regards to the financing 
instrument itself because, of course, debenture financing for 
the program is based on a secondary market.
    You know, I do not want us to be out there with a solution 
in search of a problem. On the other hand, what we are looking 
for here is perhaps a more normal and useful product for the 
borrower. I do not know if Chris had anything to say on that.
    Ms. Wheeler. Go ahead, Chris.
    Mr. Crawford. This is a grave concern for us. In fact, we 
believe--and we have met with our dealers, two fairly 
sophisticated dealers, Merrill Lynch and CS First Boston. We 
have met with our fiscal agent, our bond counsel. This would, 
in fact, rise the cost of borrowing if we convert to a monthly 
debenture repayment, and it would do absolutely nothing in 
terms of saving any money for anyone.
    Wall Street, and I am sure everyone at this table knows, 
works on the basis of risk and risk management. In fact, we 
have worked for 22 years to create an instrument, the DCPC, or 
the bond that is guaranteed by the SBA. We have worked for 22 
years to establish a presence and a known quantity in the 
markets in New York where we sell--now we are selling an 
average of about $400 million a month in DCPCs. Our spread to 
comparable instruments is 14 to 18 basis points. We refer to 
our program as Small Business' Window to Wall Street, because 
we have brought the kind of financing that Wal-Mart gets and GE 
gets to Sam's Sunoco in McLean. And I would suggest that to 
tinker with the instrument that has the understanding of the 
underwriters, the understanding of our investors, among whom 
are the largest and most sophisticated investors in the United 
States--and, in fact, the world, because we are receiving a lot 
of international interest in our product--this will 
fundamentally change the instrument, will create a new 
instrument. So we will have the old instrument, the old DCPC, 
and we will have the new one. The new one will have absolutely 
no track record in the markets. It will take us another 15 
years to establish that track record and understanding.
    If Wall Street does not understand something, they see it 
as more risky. If they see it as more risky, more interest. By 
comparison, the SBIC program in March removed the prepayment 
requirements of penalties from their program. We happened to 
have a 10-year sale. They happened to have a 10-year sale in 
March. This just occurred this year. Their rate--both 
instruments had the SBA full faith and credit guarantee. Their 
rate was 33 basis points higher than our 10-year rate. Thirty-
three basis points. That means that those borrowers for the 
next 10 years will be paying more interest than our borrowers 
were paying in exactly the same month of sale.
    Ms. Wheeler. And the reason would be that the investors 
were afraid that people would prepay and, therefore, they would 
not have the revenue stream. And so it was not as attractive as 
an investment. Is that what you are getting at?
    Mr. Crawford. It created unknown.
    Ms. Wheeler. OK.
    Mr. Crawford. And any time you create unknown on Wall 
Street, they are going to charge you for it.
    Ms. Wheeler. OK. Thank you.
    Mr. Hager. We will go back on this issue. The purpose of 
this is to do exactly what it is doing, and taking ideas going 
back and reassessing it. So we will do that.
    Ms. Wheeler. OK. Thank you.
    Ron?
    Mr. Phillips. Could I just make a comment?
    Ms. Wheeler. Quickly. Sorry. Your microphone?
    Mr. Phillips. I am sorry. We are a CDC in Maine, rural 
Maine. I would want to look over this and send some comments. 
And we have not studied it, but I am inclined to agree with the 
comments that just went before. I just want to make sure we all 
understand. It is an exceptionally interesting and important 
program in rural markets, as well as nationally. We have done 
170 projects. Our average venture I think is running around 
$350,000, with 3,500 jobs. We just approved a daycare center in 
South Portland using these funds, by the way. It is a job 
creation program, but it also can finance other services.
    So I just wanted to go on record here that it is an 
important program, and we hope to make some comments, too, as 
well as around this.
    Thank you.
    Ms. Wheeler. OK. In fact, that is a very good segue into 
the next 504 component of the bill that Senator Kerry and 
Senator Snowe introduced yesterday, and it is the child care 
lending pilot program. For those who do not know, this pilot 
has passed the Committee and the full Senate many times, going 
back to the 107th Congress, and what it does essentially is it 
makes nonprofit child care providers eligible to apply for 504 
loans. And we have two participants here today who are familiar 
with the genesis of this proposal and will explain to us why it 
is important, and then we will open it up for others to make 
comments on it.
    We will start with Joan Wasser Gish.
    Ms. Wasser Gish. Thank you, Kevin, and good morning. My 
name is Joan Wasser Gish, and as Senator Kerry noted, I 
recently opened my own small business and am a former senior 
policy adviser to Senator Kerry.
    While working with the Senator, I spearheaded his Child 
Care Small Business Initiative, and in 2002, we assembled a 
statewide advisory committee, which included representatives 
from the small business community, such as the U.S. Small 
Business Administration's Massachusetts District, the 
Massachusetts Small Business Development Centers, the 
Massachusetts CDCs, the Southeastern Economic Development 
Corporation, the Center for Women in Enterprise, and 
microlenders like Accion USA and the Western Massachusetts 
Enterprise Fund, headed by Chris Sikes, who is to my left.
    This advisory committee also included a cross-section of 
stakeholders from the early education and care or child care 
industry. These representatives reflected an array of service 
delivery providers that span economic sectors. They included 
sole proprietors, home-based family child care businesses, for-
profit child care centers, and nonprofit providers.
    Senator Kerry charged this group with making 
recommendations to better connect entrepreneurial resources 
with child care providers in order to both strengthen the local 
economy and improve the overall quality of child care programs. 
This advisory committee met monthly for 1 year. One of the 
central conclusions this committee reached was the dearth of 
lending and other financial resources available to the 
nonprofit child care centers specifically. Nonprofits have 
barriers to accessing loans through traditional lending 
institutions as they operate on slim financial margins and 
often lack the capacity to make a sizable downpayment for 
capital investments.
    Advisory committee members noted that this lack of access 
could actually have broader economic ramifications, including 
inhibiting economic growth, community development, and worker 
availability and productivity. It was the recommendation of 
this committee that Congress expand the 504 loan guarantee 
program to nonprofit child care facilities, which is the idea 
you see embodied in the child care lending pilot program in 
Section 416 of the SBA reauthorization bill.
    This program would be consistent with the 504 loan 
guarantee program as it does help to maintain and strengthen 
the overall economy, supports community development, promotes 
job creation, worker productivity, and job retention. However, 
we also recognize that the expansion of 504 should not be 
undertaken lightly. Thanks to the able work of this Committee, 
there are numerous safeguards placed in legislative language. 
These include initiating this program, first and foremost, on a 
pilot basis with a 3-year sunset provision in place; requiring 
loans to be personally guaranteed and collateral owned by the 
borrower; limiting access to not more than 7 percent of all 
loans guaranteed in any fiscal year; requiring eligible 
entities to meet the same standards as a for-profit would save 
for their nonprofit status; and also requiring reports by the 
SBA to this Committee and the House Committee on Small Business 
regarding implementation of the program on a 6-month basis as 
well as a final report by the Comptroller General to this 
Committee and to the House Committee no later than March 2010, 
which would enable a very careful assessment of the impact of 
the child care lending pilot program before taking any future 
steps.
    So, with these safeguards in place, I would respectfully 
urge the inclusion of the child care lending pilot program in 
the SBA reauthorization package, and I welcome any questions.
    Ms. Wheeler. Would anyone else like to comment on this 
program? SBA, do you have any comments about it?
    Mr. Rowe. Well, despite the fact that SBA does make some 
limited lending available through the microlending program, in 
general we would oppose this provision for the simple fact that 
the Small Business Act clearly states that the purpose of the 
Small Business Administration is to support private enterprise 
in free competition. And we would not support subsidizing 
unfair competition from not-for-profit entities which 
specifically do not pay income taxes or, for that matter, real 
property taxes, have access to grants that are not available to 
small businesses that are for-profit, and have access to 
contracting opportunities which are not available to for-profit 
small businesses.
    Ms. Wheeler. And then how does SBA reconcile the fact that 
its legislative package proposal this year proposed making 
disaster loans available to nonprofits?
    Mr. Rowe. Disaster lending is a separate item from our 
regular business lending. We recognize in our disaster lending 
that we give physical disaster loans to churches and other 
religious institutions to whom we would not give loans in our 
regular program due to constitutional implications.
    Now, if we are going to start blurring that distinction, 
then I suppose SBA's response would be to completely get out of 
lending to nonprofits in disaster situations. But we do not 
propose that. We believe a disaster is a different set of 
circumstances from the normal economic life of the community.
    Ms. Wheeler. And the agreement has been made to the 
Committee over the years since this proposal has been out there 
that the child care industry is different than other industries 
and that it is worthwhile to try using these loans to get at 
this very real workforce issue. Would SBA be willing to work 
with the Committee to find something they would be comfortable 
with on the pilot given that there is precedent, as you said, 
in the Microloan program for making loans to nonprofit child 
care centers and the SBA's proposal this year through disaster 
loan programs?
    Mr. Rowe. Admitting to the precedent set by the prior 
administration, we would be comfortable exploring this, but 
what we would really be comfortable with is understanding why 
the child care industry, I guess, is different in the same way 
that any other industry is different from any other. We have a 
large number of for-profit family child care centers in 
Massachusetts and a number of other States, the majority of 
which are run by women and are not offered the advantages that 
the not-for-profit child care industry receives. Those family 
child care centers run by women in any number of neighborhoods 
all across the State of Massachusetts pay property taxes, which 
are specifically exempted under Massachusetts general law under 
Clause 3 in the property tax.
    So we are looking at this as a fair competition issue, and 
allowing the not-for-profits to have access to the same funding 
stream that the for-profit child care industry has we find just 
fundamentally inequitable.
    Ms. Wheeler. Chris, and then we will go to Joan.
    Mr. Sikes. First of all, I agree that in lending to 
nonprofits we do need to be very careful. For example, in my 
town the YMCA and the local what they call ``The Body Shop'' is 
a for-profit business are at odds because of exactly the type 
of things that you have brought up in terms of unfair 
competition in the exemptions that the Y gets versus this for-
profit.
    I would say, though, that it--and I understand it is a 
difficult issue, but I would also say that child care is a 
crisis issue in this country and that when we look at the for-
profit centers, they are generally in areas that can require a 
higher fee because they are in generally a higher-income area, 
and that the areas that we see most of the nonprofit daycare 
centers are in lower-income areas where they just do not have 
access, as easy access certainly, to the market and market 
rate, and yet it is a necessity. And so the subsidy is really 
needed.
    We are really trying to fill a gap here--and I was, as Joan 
said, part of that group--fill a gap in the sense that these 
lower-income daycare centers do not have access to traditional 
financing, and they need some sort of subsidy, which the 504 
really is, in order to provide the essential services that are 
needed in the community. And that is why this was brought 
forward.
    So I do think it is needed to be further explored by the 
SBA, and I would ask that they do that and really see if it is 
an exceptional basis by which to make a loan.
    Ms. Wheeler. Joan?
    Ms. Wasser Gish. Thank you. If I may, I would like to 
respond to a number of the points that, Tee, you raised.
    First and foremost, the child care industry does play a 
vital role in supporting private enterprise in free 
competition. There are, as you know, 5.8 million small 
businesses that hire employees, and many of those hires are, in 
fact, parents who are able to work by the availability of child 
care.
    Moreover, research has shown that quality early education 
and care is associated consistently with improved worker 
productivity, and studies have shown that availability of 
quality child care can reduce employee turnover by 37 to 60 
percent.
    Conversely, breakdowns in child care availability are 
associated with absenteeism, tardiness, and reduce 
concentration at work, all of which can have very substantial 
impact on the operation of small businesses. It is estimated 
that child care breakdowns leading to employee absences cost 
United States businesses in excess of $3 billion annually.
    Now, nonprofits comprise a substantial share of the U.S. 
child care industry. According to the 2002 economic census, 
they are 35 percent of all firms with employees. They 
contribute to the economy both by supporting parent workers and 
also as employers in their own right. In fact, they hire 
disproportionately. Job growth in the child care industry is 
projected by the Bureau of Labor Statistics to increase by two 
and a half times the national rate, and nonprofit firms hire 
close to half of all employees in that industry.
    Nonprofits are also playing a significant role in community 
development. They are choosing, as Chris said, to serve 
children and families in economically depressed urban and rural 
communities, places that are generally unappealing to for-
profit entities because the for-profits would like to have a 
higher parent fee revenue base in order to make their margins.
    In many communities, nonprofits are, in fact, the sole 
source of center-based child care available, and they play a 
very important role, particularly in helping to allow low- and 
moderate-income workers to participate in the labor force.
    In Massachusetts, for example, 90 percent of the subsidized 
care purchased by the State, primarily with Federal block 
grants dollars through the child care development block grant 
and TANF, is purchased from nonprofit providers.
    In talking with Bill Hager from Child Care Services of York 
County, ME, he estimated that about half of all subsidized care 
is provided through nonprofits in that county. A study in 
Minnesota found that 23 percent of all jobs in health care and 
16 percent of administrative jobs are directly supported by 
child care subsidies, which are likely supported by nonprofit 
child care establishments.
    In addition, the nonprofits are often hiring from within 
the communities in which they locate, and when they are 
locating in low-income communities, they are facing very 
significant facilities challenges. One of the few States to 
study the facilities' needs of the early education and care 
industry is the State of Maine, and in the study produced last 
year, it was found that improving facility quality is deemed 
``an urgent need,'' that facilities are barriers to providing 
healthy and safe environments conducive to learning for the 
children enrolled, and more than 70 percent of child care 
centers in Maine identified facilities as a barrier to 
achieving accreditation, which is a proxy for quality within 
the field.
    In Maine, in Massachusetts, and a lot of other States where 
there is aging building infrastructure, these nonprofits have 
to go in and remove asbestos, eliminate lead-based paint, fix 
leaking roofs, update electrical and plumbing. They have to 
make buildings handicapped-accessible. They have to put in 
place plumbing and child-size fixtures and other types of 
modifications that are necessary in order to create settings 
that are conducive to the health, safety, and learning of the 
children enrolled. And these entities, which, as I described 
earlier, tend to work very closely in terms of receiving 
subsidized vouchers and contracts from the State, are actually 
prohibited to use their child care development block grant 
funding for capital expenditures. And so by accessing the 504 
loan guarantee program, we would really allow these programs to 
build and expand and upgrade their facilities and equipment.
    Now, you mentioned access to grants that nonprofits might 
enjoy that would not be available to for-profits, and while 
that is true, it is also true in a very limited sense almost 
exclusively for those nonprofits that are in States with a 
very, very strong philanthropic base. On a national level, you 
might consider Massachusetts to be one of those places, but 
places like Maine and Montana and Oklahoma and pretty much most 
of the country, availability of grants is simply not there to 
meet those gaps.
    You also raised some concerns about for-profits being faced 
with unfair competition, and because in Massachusetts and in 
many other States around the country the nonprofits are 
locating themselves in communities that are generally 
unattractive to for-profit providers, in most cases that 
concern is probably not going to be realized. The nonprofits 
are at more than 95-percent capacity in Massachusetts. There is 
a wait list of about 19,000 children, which is almost 
exclusively concentrated within urban and other low-income 
communities in the State.
    In Maine, a study estimated that only one child care slot 
is available for every four children who need care so that 
parents can work, and there is a wait list there of over 43,000 
children. And the Maine Office of Child Care Service and Head 
Start projects shortages would be particularly acute in five of 
Maine's counties--Cumberland, Lincoln, Knox, Waldo, Penobscot, 
in particular.
    So with all of those factors in place as well as some 
longer-term trends projected in terms of women's participation 
in the labor force and some national movement toward providing 
universal pre-kindergarten, it is anticipated that there is 
likely going to be both increased enrollment and increased 
demand, and there would certainly be room for both for-profit 
and nonprofits because they do serve such different segments of 
the demand side.
    Mr. Rowe. I appreciate all of that, and I have read your 
very interesting paper on universal pre-care that you did for 
Progress Policy. But we are not here to talk about the need for 
daycare generally nationwide. That is not the point. The point 
right now is the propriety of using a small business program 
for non-small businesses, not-for-profit organizations.
    The fact of the matter is they do compete, and compete 
unfairly. Without paying income taxes, very often not-for-
profit organizations are able to take employees away because 
they are able to offer better benefits. They do not pay 
property taxes. Again, I bring that up.
    Every family child care center in the State of 
Massachusetts, just for instance, has to pay property taxes. 
The State tried to, unfortunately not very well, create an 
exemption for small businesses on property taxes. That was 
taken up by exactly five townships in the State of 
Massachusetts. We are talking about a very wealthy State that 
cannot support its small business base.
    Ms. Wheeler. But the State endorsed this proposal, in fact, 
came here and testified on behalf of it in 2003 at the last 
reauthorization, one of the many times it has passed. So while 
they may have disagreement----
    Mr. Rowe. Because the State of Massachusetts has a long and 
unfortunate history of supporting not-for-profits to the 
detriment of the small business community. And, frankly, we do 
not see the propriety of using a small business program for 
not-for-profit institutions.
    Ms. Wheeler. They are not going to have tax revenues if 
people are not working and people do not have places to put 
their children.
    Mr. Rowe. Again, it is not an issue of the availability of 
daycare, which we can all agree on, as a useful item for our 
economy. It is a question of how we are going to support both 
the small business sector and the nonprofit sector in daycare. 
And SBA believes that it is not appropriate to use our programs 
for this.
    Ms. Wheeler. But they do for microloans, and now they are 
asking to do it for disaster loans.
    Mr. Rowe. Again, you are asking me to support a prior 
administration's decision, and I am going to tell you that, 
yes, they supported that to a limited extent in the microloan 
industry. But I am going to tell you----
    Ms. Wheeler. I am just talking about the double standard 
that we see here and what is on the books and what has been 
proposed and what is in this proposal that has passed----
    Mr. Rowe. Again, there is no double standard there. As I 
told you, disaster assistance is a completely different item 
from our organized assistance for the mainstream of our 
economy.
    Ms. Wheeler. Shall we turn to Chris Crawford? Do you want 
to make some comments? Microphone, Chris.
    Mr. Crawford. I am sorry. Thank you. Chris Crawford with 
NADCO. We have had a number of discussions about this. As Tee 
and Mike probably both recognize, I would normally not support 
lending through our program to not-for-profits because I well 
understand our mission. I would also suggest that daycare for 
any of you folks that live in Washington--I have raised a son 
and now am watching grandsons be raised. My daughter-in-law 
happens to work in the daycare industry, so I have very 
personal experience with it. I would suggest that lack of 
daycare is an economic disaster in this country, especially in 
the urban areas.
    My daughter-in-law, who has worked in several different 
organizations, indicated to me there is not one that did not 
have a lengthy waiting list for kids who could not get in. 
Those are almost invariably, as Joan pointed out, generally 
mothers who are wanting to work who cannot work because of 
that. My own daughter-in-law cannot afford to pay for the 
daycare that she is working in.
    I would suggest that not-for-profit daycare is certainly a 
needed program. I do not believe that it will result in what I 
would call excess capacity in this country. I am not sure there 
will ever be excess capacity.
    So I would suggest that it is something that needs to be 
addressed some way by this Congress.
    Ms. Wheeler. And I just wanted to clarify for the record 
that NADCO did bring concerns to us when this pilot was first 
initiated in the 107th Congress and that we worked through its 
members concerns about underwriting standards, collateral, 
safety and soundness issues, and that the 504 trade 
association, NADCO, signed off on the language and is 
comfortable with the underwriting standards that we have for 
the pilot program.
    Mr. Crawford. You are absolutely correct. You worked very 
closely with us, and I believe that these--we have a long 
history of solid underwriting, as I have said before, and our 
track record demonstrates it. I am all too aware that we work 
at zero subsidy, which Mike is certainly concerned about, and 
we have absolutely signed off on your proposal.
    Ms. Wheeler. I would like to add that there was a letter 
from the president and chief operating officer of Omni Bank in 
Houston, TX, that said, ``Designation as a nonprofit business 
does not equate to an inability to pay loans or other 
expenses.'' And the National Black Chamber of Commerce has 
submitted comments where they are strongly endorsing this 
because they see it as a local economic development issue, 
supportive of small businesses, and believe that this is a 
worthy cause to give this a try for 3 years. And CBO has not 
attributed a cost to it of harming the program at all.
    Joan, did you want to add something--we need to move on to 
the 7(a) program. We can come back after 7(a), but do you want 
to make one more comment? And then we will go on.
    Ms. Wasser Gish. Yes. I just again wanted to respond. I do 
think that there has been an opportunity for comment and input 
from a variety of different quarters, including SBA, the CDCs, 
and others. And in that I do think that there are safeguards in 
place that do reflect the sensitivity of the change that is on 
the table through the child care lending pilot program. And 
because those are in place and because this is a pilot and it 
is something to be learned from, there will certainly be 
opportunities to address any types of issues that would arise 
from it. And because of the particular nexus between child care 
and the small business economy in particular in the Nation, 
this would seem to be an appropriate provision to include 
within the bill.
    Thank you.
    Ms. Wheeler. Jackie, did you want to make any comments 
before we go on to 7(a)?
    [No response.]
    Ms. Wheeler. First I want to tell everyone--oh, can we come 
back? Is it on the child care? Can we come back to that? Just 
because I know some people need to leave, and I appreciate 
everyone's patience. Let's go on to the 7(a) loan program, and 
then when we wrap that up, if others want to make general 
comments on what the Committee should do or about your 
organization, things that are important, we will continue. Is 
that OK? All right. Let us move on the 7(a) loan program, and I 
am just going to flip the order for a minute from leading with 
the SBA because Tony Wilkinson, who represents the 7(a) lending 
trade association, NAGGL, has to catch a plane, and then we 
will go to SBA to present their proposals. Is that OK, Jackie?
    Ms. Ferko. That is fine.
    Mr. Wilkinson. I am fine. My flight is not until 2:05 if 
they want to go first.
    Ms. Wheeler. Oh, did you want--OK. Well, Tee?
    Mr. Rowe. Yes. Again, I will be brief because I know we 
have got time constraints. I had mentioned the real estate and 
leasing proposals previously. SBA is also seeking some 
additional supervisory and enforcement authority for small 
business lending companies. Small business lending companies, 
as you all may know, are the 15 SBA-licensed 7(a) lenders.
    SBA is also asking for legislative authority to enable our 
lenders to use the systematic alien verification for 
entitlement program that is run through the Department of 
Homeland Security. This would eliminate the current rather 
cumbersome verification process and enable SBA and its partners 
to meet the requirements in the Small Business Act that our 
programs only be used by resident aliens and citizens.
    The last item is SBA is proposing a guarantee fee for the 
secondary market under the prompt payment guarantee in Section 
5 of the Small Business Act. The fee would not be imposed in 
either fiscal year 2007 or fiscal year 2008. SBA is merely 
looking for this fee as a possible fee to keep that prompt 
payment guarantee at zero subsidy.
    Currently the market keeps the program at a zero subsidy, 
and the secondary market works at a wash. But long-term 
projections, we are worried it may get upside down, and a minor 
fee, which would be paid by the institutional investors who 
purchase the securities, would keep that in balance.
    That is the entirety of it.
    Ms. Wheeler. Tony?
    Mr. Wilkinson. Again, Tony Wilkinson with the National 
Association of Government Guaranteed Lenders, and I appreciate 
the opportunity to comment today. I just would like to touch on 
a couple of SBA's points.
    I would like to agree with Sally Robertson on the oversight 
fees. You talked about the 504 fees coming up. The SBA has in 
process right now a rule--they solicited comments on lender 
oversight fees in the 7(a) program, and those fees could be 
upward of $150,000. And I know most folks have opposed the 
charging of those fees and would hope that this Committee would 
take a look at that proposal and see what they have in mind. I 
am under the impression that SBA is moving forward, and it 
appears to be--well, let me just go to the secondary market 
fee. This is the third time, I believe, that SBA has requested 
a secondary market fee--the ability to charge a secondary 
market fee in their budget, yet they always put a zero subsidy 
cost along with it. So they are just simply looking for the 
authority to charge the fee.
    It is my understanding that there are out-years--that they 
are looking at somewhere in the neighborhood of 2017 is where 
potentially there might be a problem, and I think with that we 
have plenty of time to figure out whether we really do have a 
problem. And as we have learned over the last few years, if 
there is the ability to charge a fee, they are going to charge 
a fee. And do not think for one minute that a fee on the 
investor does not end up being charged to the borrower, because 
it will be.
    Now, if there is a fee that is truly needed, then let us 
sit down and talk about it, because the one thing we simply 
cannot have happen is that the secondary market would close 
down because we are a 1- or a 2-basis-point fee away from 
solving a problem. So if there is a problem, please disclose 
it. Let us talk about it. We will work through it. But my 
understanding is this is a problem that is at least a decade 
away, and so I would question why we would need to put forward 
a fee authorization today.
    I would like to comment quickly on S. 1256. NAGGL endorses 
this bill. This bill would substantially improve small 
businesses' access to capital in many ways, including improving 
the ability of small lenders to participate in the program, 
particularly through WAC pools or weighted average coupon 
pools. This is a proposal that NAGGL has had out for 10 years. 
I do not think the SBA disagrees with this at all. It has been 
more of a timing thing as to getting around to it. This would 
improve the efficiency of the secondary market and I think 
would help bring a lot of community banks back to the program 
as pricing on Government-guaranteed portions of 7(a) loans 
would improve. And, thus, if we get more lenders involved in 
the program, it will improve the ability of small businesses to 
access the program.
    With respect to the idea that 7(a) fees need to be reduced, 
NAGGL agrees with that proposition. Just a quick history 
lesson. Over the last umpteen years, anytime there was a need 
to increase fees, those fees were imposed on the largest 
borrowers. Anytime there was an ability to reduce fees, the 
fees were reduced for the smallest of borrowers. So today we 
have a mismatch between large loans and small loans such that 
the largest loans pay more than double fees that the small 
loans do. And on some of our largest loan requests, those fees 
are more than $50,000, which is very, very expensive. So if 
there was a way to look at a fee reduction targeted to the 
largest borrowers or to get our fees more in line, that would 
be something that we would seriously look at.
    That said, any fee reduction that would come forward must 
not result in any kind of program curtailments or shutdowns, as 
we have seen in the past. What we learned in the past was the 
costs of shutdowns and program caps and program restrictions 
was far greater than any of the fee reductions that came 
forward. So we would ask that Congress not put anything in 
action that would result in a program cap or a program 
shutdown.
    Finally, we are realistic and we want a bill. There are a 
lot of good things in this bill. But we also believe that 
unless the administration says it is willing to accept 
authorization language to reduce fees, they will simply place a 
hold on this bill, and this bill will not move. I hate to say 
that, but I believe the administration is adamant about the 
7(a) program not going back on appropriation, and hopefully 
this can get resolved soon so that the other pieces of this 
bill can move forward.
    Thank you.
    Ms. Wheeler. Anyone else around table like to make a 
comment?
    Mr. Crawford. We are on 7(a)?
    Ms. Wheeler. Yes, we are on 7(a).
    Mr. Kwiatkowski. My name is Chris Kwiatkowski, and I am 
with Popular, Inc. Popular, Inc., is a 113-year-old financial 
services institution that was founded in San Juan, PR, and it 
was founded to serve the underserved. And the North American 
subsidiary of Popular, Inc., is Banco Popular North America, 
headquartered in Rosemont, IL.
    Since 1961, being in the States, we have participated in 
the SBA program, and since our institution's mantra is to serve 
the underserved, the SBA programs are crucial to our ability to 
do so.
    We are a member of NAGGL. We do support what Tony has put 
forward. There are just a few things that I would just like to 
reiterate.
    First of all, the oversight fees would be exorbitant, 
excruciating, and would chase lenders away from this program. 
This program does not exist without lenders like Popular, and 
to charge over $100,000, as we would be charged, being the 
fourth largest SBA lender in the Nation now, that would 
seriously curtail our interest in the programs. So we are very 
concerned about that.
    Restoring funding to the SBA. I myself--just a little 
background, my career started at the SBA. I worked at the SBA 
for 3 years. I then went on to work for one of the largest 
banks in the Nation. I owned my own small business. I have 
worked for the Nation's largest non-bank SBA lender, and I have 
been here at Popular, Inc., the number four SBA lender, for the 
past 2\1/2\ years heading up this institution. So I have seen 
small business lending from all sides.
    I have seen the SBA head count severely diminished, and to 
the points that these other gentlemen brought up before who are 
in rural areas and locations outside of these metropolitan 
areas where the SBA offices are located, the staff has been 
seriously demoralized for the SBA. They cannot reach the people 
they are trying to reach. They cannot carry out the mission of 
the SBA. They have been reduced to marketing outposts, and they 
cannot even effectively do that very well.
    So an agency that brings so much good to the economy has 
been seriously hampered in delivering that service, and we 
would wish to see restored funding to the Agency.
    Increasing loan limits, this is in the bill. I think all of 
NAGGL is for this. We would love to see the SBA 7(a) loan 
program increased to $3 million. This would help us serve a 
much larger market, and it supports and benefits all parties 
involved--the Government, the private sector, the borrowers.
    7(a) simplification. One of the most popular and successful 
programs the SBA has rolled out lately has been the Express 
loan program. It allows lenders to lend on their own 
documentation with a single-page form and with a diminished 
guarantee. It has been very popular because banks have to have 
technical expertise to participate in the SBA program.
    I would love to see that same sort of ingenuity applied to 
the 7(a) program as a whole to help uncomplicate it. As I said 
before, we have to find specialized personnel to help 
administer this program. The program has become a program of 
the have and have-nots. As somebody pointed out earlier, ten 
lenders do the vast majority of the lending in the Nation, and 
it is not easy to find that talent. It is expensive talent, and 
most lenders will not participate in the SBA program, or if 
they do participate and their guarantees get repaired or 
denied, they do leave the program. And, again, without the 
lenders, there is no viability to the 7(a) program. So I would 
love to see some sort of simplification to that program.
    As Tony said, reducing the fees, an exorbitant amount of 
fees is paid by the larger loans. Larger loans do create a lot 
of jobs, a lot of tax base, and we need to keep that in mind 
when we are looking at the 7(a) program.
    Thank you.
    Ms. Ferko. Kevin--and I think you would echo my same 
comments on here--and, Tee, I have told you this many times. 
Those oversight fees, we have serious concerns about those. I 
know there are many banks in Maine that have written to Senator 
Snowe saying that they are concerned and that they would not 
participate in the program. And I am sure that is the same for 
Massachusetts, too.
    So before you move forward with making any action, the SBA 
does, I would like for you to give us sufficient notification, 
number one, whether you are going to move forward on it, and 
just let us know what your plans are on that. I think that 
there is a lot of serious stakeholders in this, and I know many 
other banks have said that. They plan on not participating in 
the program.
    Ms. Wheeler. Before we go on to James and Todd, may I just 
ask SBA where they are on the reg regarding the lender 
oversight fees that participants have raised concerns about.
    Mr. Hager. It is in process.
    Ms. Wheeler. As final?
    Mr. Hager. This has been cleared by OMB, and it is going to 
the Federal Register.
    Ms. Wheeler. I am sorry. If that is the case, can you 
explain to us when this would start to impact the lenders that 
participate in the 504 and 7(a) loan program?
    Mr. Hager. The 504 is not included in this. Janet, what is 
the effective date of this?
    Ms. Tasker. Well, it is scheduled to be published I believe 
on May 4th. I believe there is a 30-day effective date.
    Ms. Wheeler. In 2 days? Great.
    Ms. Tasker. It has gone through the proposed rule and 
comment process and, you know, a final rule has been developed.
    Ms. Wheeler. But, again, the effect is that when this is 
released on the 4th, the fees that we have talked about will be 
imposed on these lenders.
    Ms. Ferko. For the 7(a) loan program, right, only.
    Ms. Tasker. For the 7(a) loan program.
    Ms. Wheeler. Right, and there will be----
    Ms. Tasker. Smaller lenders, those lenders that would--you 
know, again, it is an issue of on-site reviews or every other 
year, unless there is a problem, then we need to go in more 
frequently. In addition, there is--for really small lenders, we 
only look at those that are 10 million and above, and then for 
really small ones that are assessed, the outside market fee, if 
it is $100, $200, we waive it completely.
    Ms. Wheeler. But the issue is not whether people agree that 
there should be oversight. I think there is agreement that we 
need soundness. But the question is the imposition of 
additional fees on our lending partners and how much they would 
be, right? Isn't that the disagreement at this table? The 
lenders are not saying they do not want oversight. We 
understand that argument. It is just that the fees they say 
they cannot stomach. So--oh, I am sorry. May I just go to Todd. 
Todd, do you want to comment on the fees?
    Mr. McCracken. No.
    Ms. Wheeler. Could we just finish this very quickly? Who 
else has a comment on the fees? All right. Go ahead.
    Mr. McCracken. I only wanted to step back a little bit and 
look at the picture that I think the small business community 
is facing there. We released a survey of small companies just 
last week where we asked companies specifically about their 
access to adequate financing, and we have seen a full 10-
percentage-point drop in the number of companies that say they 
have access to adequate financing in the last 7 years. In fact, 
while they were steadily improving for quite a few years, we 
are now seeing members that are--we are going to go back down 
in response to that question, approaching what we were seeing 
as we were emerging from the credit crunch of the early 1990s 
for the first time in quite some time.
    At the same time, we are seeing a marked jump in the number 
of companies that say they are carrying balances of some 
significance on their credit cards every month, and it is not 
because they are suddenly getting a great deal from the credit 
card companies. They say that their terms on their credit 
cards--by a six-to-one margin, they say the terms on their 
credit cards have gotten worse in the last 5 years. So, 
clearly, all is not well in the credit and capital markets for 
the small business community.
    So I would like to say that by way of backdrop that this is 
not the right time, I do not believe, to be increasing fees on 
lenders and borrowers, and, in fact, we believe it is the right 
time to begin looking at ways to restore Federal appropriation 
for the 7(a) loan program and to begin to roll back the fees 
that you already have in place. And to that end, I think the 
bill, the provisions specifically in the authorization bill you 
have put forth begin to move us in that direction and I think 
ought to begin to help address any emerging credit issues 
before they fully blossom.
    Ms. Wheeler. And, Todd, just remind everybody for the 
record your organization.
    Mr. McCracken. Oh, I am sorry. My name is Todd McCracken. I 
am the president of the National Small Business Association.
    Ms. Wheeler. OK. James, did you want to go ahead.
    Mr. Ballentine. James Ballentine, American Bankers 
Association. I wanted to associate myself with Tony's remarks 
and Chris' remarks as well. On the issue of the fees, I think 
at some point we are going to have to carve an ``F'' into SBA 
and just put, you know, associated with fees there, because 
everything is a fee now related to this 7(a) program. And 
whether it be oversight, whether it be the annual fee, 
whatever, those fees continue to go up. And we would like to 
sit here and say that those fees are not passed on to the 
borrower, but they are passed on to the borrower in some way, 
shape, or form. So to the extent that SBA is there to help 
these small businesses, these fees are not helping the small 
businesses at all.
    I wanted to commend the drafters of the bill as well. There 
are several provisions in there which ABA is in support of--the 
preferred lenders program, obviously--but I also wanted to 
commend them on the Minority Small Business Development portion 
of the 7(a) title and the rural lending outreach program, which 
I think is significant to help reach some of those smaller 
lenders that are involved in the 7(a) program.
    When we speak of the oversight fees and we say that those 
fees are largely going to be waived for the lenders that are on 
the low end of the scale, well, there are over 2,000 lenders 
that are involved in the 7(a) program. If you go below the top 
20, the number of loans below that top 20 decreases 
significantly, and you have a number of lenders within this 
program that only make one or two loans.
    So I would encourage the Committee not only to look at the 
oversight issue, oversight fees--I do not know if we can do 
anything about that since we are, you know, 2 days away from 
it--but I would also encourage the Committee to look at the 
7(a) program in its entirety. I think the program has a certain 
level of staleness to it that needs to be addressed as we 
attempt to get more lenders involved in this program.
    Ms. Wheeler. Paul, you have been scarily quiet. Would you 
like to say anything?
    Ms. Merski. Just to continue on the fees, I find it 
somewhat preposterous that the SBA needs additional fees to do 
something when there are several regulators already in the 
banks examining the entirety of the banks' loan portfolio. I 
see it as simply a money grab of fees from the SBA to 
reduplicate a lot of the regulatory work already done by the 
FDIC, by the OTS, by the Fed. When these regulators come in, 
they examine all the banks' loan portfolios, including every 
SBA loan in that portfolio. So it is somewhat preposterous that 
yet another agency would be levying fees in addition to the 
fees that banks are already paying to have these loan 
portfolios examined.
    So we strongly object, and hopefully Congress can step in 
and solve this problem.
    Mr. Wilkinson. I would like to comment again on James' 
point of fees. I think if you look at the trend, first it was 
to take the 7(a) program to zero appropriation. Then there was 
a proposal and in last year's budget, I believe, you wanted $7 
million to cover your overhead. Then there is a secondary 
market fee. Now there is a lender oversight fee. And if you 
just look at the trend, the trend is, you know, let's reduce 
Government expenditures in this program, period.
    And I think at some point in time we have got to raise our 
hand and say: Where are we going? You know, this program has 
switched from 90 percent of the loans going into the district 
offices for loan approval where you had to have massive amounts 
of staff to process loans, to today where 95 percent of the 
loans go through expedited procedures, so we are doing all that 
work for you now, yet your budget has taken a significant hit 
downward and you continue to try to pass loan fees. We are just 
raising our hands saying it is time to slow down here, that 
part of this is your responsibility, in particular the cost of 
the overhead at the agency. And I just think the lender 
oversight fees are one that the agency should cover.
    Mr. Kwiatkowski. I have a question. I am familiar with the 
PLP audits that we go through every other year, and it has been 
a normal course of business that we pay for those. Why is there 
this new oversight beyond that? Because as Paul pointed out 
here, we are subject to Fed audit. We are subject to our own 
internal audit. We are subject to the PLP audit. What is this 
one more oversight?
    Mr. Hager. We do oversight on loan portfolios every month. 
For example, the D&B system that we contract, we compare you 
against your peer group of banks. We are under extreme scrutiny 
to make sure that we are managing that portfolio, managing the 
growth, which today is at the all-time highest, and to, you 
know, grow the portfolio and not have increased risk management 
is just something unacceptable. We have got to do this.
    We do think that--you know, I hear a lot about fees, and I 
hear a lot about the fee increase. Practically every month 
someone brings up fees. I want to show you something.
    The myth is we have been raising fees in 7(a) and 504. Look 
at these lines. The only time that the dip--this is a 
congressional dip for a couple of years. But some of these fees 
go back to the 1990s and they have never been changed. And when 
you look at 504 fees--I know you are all familiar with this. 
Look at what is going on with fees. We are working very hard to 
achieve this. One way we can achieve it is lender oversight, 
making sure we are managing the portfolios, we are eliminating 
risk, we are addressing risk.
    But here is the fee structure, and I am really puzzled 
every time I hear the fact that our fees are going up and up 
and up and up. Look at this. It is not true.
    Ms. Wheeler. Well, I think that there needs to be a 
clarification. One, we are talking about 7(a) fees, and----
    Mr. Hager. This is 504.
    Ms. Wheeler. I understand that, but there was a chart up on 
7(a) fees. And I have seen the press scolded for printing that 
the administration doubled the fees and rebuttals from the 
administration that that is not true. And I think it is 
important to note that that is not quite accurate. While, yes, 
Congress holds the only power to change the law and it has 
changed the law, the reason the fees did not become permanent 
as Congress was proposing during the 2003 reauthorization is 
because SBA wanted to go to zero subsidy. In order to take it 
to zero subsidy, the fees were raised.
    That was not in a House bill. That was not in the Senate 
bill. In fact, when we went into the appropriations season for 
that omnibus for 2005, there was money that had been put in on 
the House side to restore appropriations as well as on the 
Senate side.
    Mr. Hager. What year was that? Excuse me.
    Ms. Wheeler. 2004.
    Mr. Hager. OK.
    Ms. Wheeler. December of 2004. I believe it was the 4th of 
December, possibly 108-664. I do not know.
    [Laughter.]
    Ms. Wheeler. I believe that it was in that bill----
    Mr. Hager. Are you sure it was not 665? No.
    [Laughter.]
    Ms. Wheeler. The omnibus 2005 bill is where SBA succeeded 
in taking the program to zero subsidy. In order to get there, 
the proposals that were put forward by both the House and 
Senate were eliminated and the fees were raised in the program. 
So I think it is important to know----
    Mr. Rowe. Well, to be fair, Kevin, those fees were not 
raised. They were restored to their prior level.
    Ms. Wheeler. But, no, let's note the distinction here. The 
legislation pending in Congress was to make those permanent, 
and the genesis of those fees going down was that, if we go 
back and look at the record, as Senator Bond's staff noted, the 
fees were increased at one time when they took the program, 
they said, oh, the costs are going up, the business community 
is going to have to contribute a little bit more so that you 
all can get to the program levels that you want. And the 
industry started coming to us and noticing that the subsidy 
rate--and I am sorry to get very technical here. The accounting 
method by which they determined how much it cost to run these 
programs was seriously broken, and it was referred to as ``a 
black box.'' And nobody could figure out where these cost 
estimates were coming from. And, of course, this is not a 
partisan issue. Both sides were running OMB during this, and 
what they said was if we cannot get OMB to cooperate and to fix 
this subsidy rate problem, then Congress will lower the fees 
because the GAO study came out and concluded that borrowers and 
lenders had been overcharged by almost $1 billion. I think it 
was $980 million or something.
    So Congress took it into their hands to lower the fees 
until we could get traction. So then comes the new subsidy rate 
model, the econometric model, and what do we see the first year 
that it comes out in the President's budget? It is wrong by 67 
percent. And if we look at the President's budget this year, 
every year that it has been in place, it is still off. It has 
been operating at a zero subsidy.
    So please do not present the fee increase as the doing of 
Congress.
    Mr. Rowe. You know GAO said that the econometric model is 
completely reasonable, and, yes, it is not exact. It cannot be 
exact. No one can make one that is exact.
    Ms. Wheeler. I understand that, but please do not present 
to the public----
    Mr. Rowe. The re-estimates have been downward----
    Ms. Wheeler [continuing]. That Congress is the one----
    Mr. Rowe [continuing]. For the past few years.
    Ms. Wheeler [continuing]. Who raised those fees or draw 
disingenuous nuances that they did not go up, they just lapsed. 
That was not Congress' intention----
    Mr. Rowe. The fees were lowered after 9/11----
    Ms. Wheeler [continuing]. And we went into that session 
making those lower fees permanent. And I do not know anyone in 
this room who was part of those negotiations who would disagree 
with the facts there. So, please, do not say that. The 
administration wanted this program to go to zero subsidy----
    Mr. Rowe. I am not denying that----
    Ms. Wheeler [continuing]. And to get there, those fees----
    Mr. Rowe [continuing]. Any more than the Clinton 
administration did not want it to go to zero subsidy. They did, 
too. It is a good policy. It gives us a good solid program.
    Ms. Wheeler. But there is disagreement over that, and that 
is not what this is about. I am asking, please, from the 
Committee's perspective, do not distort the facts of whose 
proposals belong to whom.
    Now, on the fees, can we go back to the review fees? In 2 
days, these go into effect. Is there any way--because we hear 
grave concern at this table that it would be harmful to access 
to credit through the SBA's program. Is there any way that we 
can work with the administration before those are finalized?
    Mr. Rowe. I do not know. It is possible for the 
administration to withdraw that. It is. I would not lie to you 
about that. But, honestly, I do not know whether it is 
probable.
    Ms. Wheeler. And is the administration going to have anyone 
place holds on the reauthorization bill if the current language 
on fee reduction allowing appropriations for fees, should there 
be any still in the bill when it comes before the full Senate?
    Mr. Rowe. The administration's position is that the 7(a) 
fee, zero subsidy policy, makes the most sense for the program, 
and that there is honestly no fiscal necessity for lowering 
fees in the program. The current fee structure is almost 
identical to the fee structure in place in 1996 and forward. 
And, frankly, we have all seen the CBO estimate to lower the 
fees in the program or eliminate--to eliminate the fees would 
cost approximately $600 million; I think about $589 million to 
be precise. To just cut the fees in half would be about $300 
million. And the cost savings we are talking about there are 
honestly de minimis. To the average borrower, it is perhaps $10 
a month; to a lender, $657 on the annual ongoing fee.
    And, frankly, $300 million could be better spent elsewhere 
because what that does is puts us in the situation of, if you 
will, a first-to-the-courthouse program. If we run out of 
appropriation support, then everybody who comes in later in the 
year ends up with a higher fee. The administration does not 
support a situation where a borrower is going to be penalized 
for wanting a loan in September as opposed to May.
    Ms. Wheeler. May I just clarify, in case there is a 
confusion, that the language in the bill does not require full 
funding to get to a program level that the industry is 
proposing, such as $18 billion. What the language in the bill 
does--and it has passed several times, and a version of it was 
passed as part of that omnibus 2005. What it says is that if 
there were appropriations or if there were excess fees charged, 
that the administration could reduce the fees on borrowers and 
lenders. What is in law right now is not workable because there 
is the qualifier that it must be a zero subsidy, and it creates 
a catch-22, and it only applies to borrowers. It would not 
reduce the fees on lenders, too, and we have heard concerns 
that should there ever be the occasion, the opportunity to 
reduce the fees, that it should apply to both lenders and 
borrowers.
    So I want to make clear that while we understand the 
administration does not want appropriations, this does not 
mandate appropriations. What it does is fix the current 
language and make it possible to reduce fees should there ever 
be an opportunity to do it. And so I just want to make that 
clear because I think that there could be a distinction that 
this would cause shutdowns, that it is so expensive, that 
somehow we are going to have to come up with $600 million in 
order to keep the program running, and that is not the effect.
    Mr. Rowe. Now, and that is not what I said. What I said 
was----
    Ms. Wheeler. OK.
    Mr. Rowe [continuing]. That any reasonable reduction--or I 
would not even say ``reasonable,'' but that to have any 
noticeable reduction in the program, it would cost something on 
the order of $300 million.
    Ms. Wheeler. OK. I just make that point because it is 
important that if the administration is planning to put holds 
on this bill, the holds would not--it seems to me that the 
holds are not necessary because it does not interfere with zero 
subsidy or demand the appropriations. It is fixing something 
that is currently in law. So----
    Mr. Rowe. Well, no authorization bill can ever demand an 
appropriation----
    Ms. Wheeler. I understand that, but----
    Mr. Rowe [continuing]. Unless it is a mandatory account.
    Ms. Wheeler [continuing]. There is a distinction here, and 
so if the goal is--and I think Senator Kerry made it clear that 
he wants a bill, a reauthorization bill. We have not had a real 
reauthorization bill in years. And everybody has worked very 
hard in the industry. We keep spending people's time and money 
to come up with proposals that would improve upon these 
programs, that if we want a bill, that it does not seem 
reasonable to put a hold on a bill when it would not interfere 
with the policy stand of the administration.
    Mr. Rowe. I guess we are going to have to agree to 
disagree.
    Ms. Wheeler. OK. Tony, did you want to say something?
    Mr. Wilkinson. Yes, if I could. The NAGGL members account 
for over 80 percent of all the 7(a) loans that are made 
annually, and our members have made it very clear that they 
have been pleased with the fact that there have been no program 
disruptions over the last couple of years.
    That said, large loan volume since we have gone to zero 
subsidy has gone down. The SBA has done a very nice job with 
the express program. There are 10 to 20 lenders who are fully 
utilizing that program, and that is where we have seen the big 
growth in numbers. So we have got about 80 percent of our 
numbers of loans being done by the 20 most active express 
lenders, and they are doing loans with an average loan size of 
about $50,000.
    But the old regular meat-and-potatoes 7(a) program is still 
there, and it is done by a broad-based group. The problem is 
since 2005 our large loan volume is slipping, and that is where 
we are focusing, on the fees on large loans as perhaps a way to 
get some volume back into the larger loan category.
    That said, we just simply cannot have program caps and 
shutdowns because that is very disruptive and very difficult to 
manage a lending operation if you are always worried about are 
we open tomorrow or are we not. Our members have liked business 
as usual for the last 2 years.
    Ms. Ferko. Tee, again, I want to revisit this oversight 
issue, the oversight fee. In 2 days, something is going to 
change, and we need to address this now. I mean----
    Mr. Rowe. Well, the rule goes final in 2 days. It does not 
get implemented for 32 days.
    Ms. Ferko. Now, you received overwhelming criticism back in 
October and November during the comment period. Why wasn't that 
taken into account?
    Mr. Rowe. Well, Mike, maybe you can answer.
    Mr. Hager. The comments were carefully assessed. We come 
back to the same issue. The way we have stabilized, we believe, 
the fee structure is through managing the portfolio. This 
enables us to--managing the portfolio from a quality 
standpoint. This enables us to expand that oversight of that 
portfolio. It enables us to place in-depth analysis of lenders 
on a priority, and we believe over time it will be good for 
everyone. And, yes, we did solicit comments. We addressed the 
comments to the extent possible. But we also felt that we had 
to increase the oversight of the program.
    Ms. Ferko. So you are saying what currently in the 
structure, oversight structure of the program----
    Mr. Hager. That is correct.
    Ms. Ferko [continuing]. Is not appropriate.
    Mr. Hager. We think it needs to be enhanced, and that is 
what this program does for us.
    Ms. Ferko. Kevin, could you--I have not heard from SBA that 
this needed to be enhanced. Have you?
    Ms. Wheeler. Again, what I hear is a distinction here only 
on money. There does not seem to be a disagreement on 
oversight. There seems to be a disagreement on who should pay 
for it. And so the feedback we are getting is that it will be 
harmful to the small businesses, and that is really who the SBA 
is supposed to be serving. We want to keep that access to 
capital open. And so I think that there really--the Committee 
would like to see SBA come talk to us and see where we can--if 
there is some way to find a more reasonable approach.
    Mr. Rowe. And in implementing this, the administration was 
operating off of the authority we have been given and operating 
off of what we consider to be fairly regular practice among 
financial regulatory institutions.
    Now, as Paul mentioned, OCS, OTC, FDIC all come in and 
examine banks for safety and soundness and other financial 
aspects. But the fact is they do not pull SBA-based loans 
unless they happen to grab one by accident in a random audit. 
Our oversight is very specific to our portfolio, which, you 
know, our guarantee operates as a little bit of a shield for 
the average bank, and as something that the FDIC will not 
normally examine very carefully. So that leaves it in our lap.
    Now, the cost of the fees, again, that is a separate issue.
    Mr. Hager. You asked specifically what this does. This 
enables us to move the audits, reviews, from the current level 
of about 50 a year to 250--again, significantly broad--and the 
same review process but more of it.
    Ms. Wheeler. Again, nobody is arguing----
    Mr. Wilkinson. No, we absolutely support the oversight 
function. I think my overriding concern is the continuation of 
trying to push your overhead costs out to the lenders. This is 
a fee that is going to hit the existing portfolio that we did 
not know anything about at the time the loans were made. So it 
is now an add-on fee to a loan that is already on the books. It 
will impact the pricing structure for borrowers going forward 
because we have got to recoup our costs somehow. I mean, at the 
very least, it almost needs to be a fee on a go-forward basis, 
on new loans we originate. But we do not want to have any 
hiccups in our credit quality. We are all for lender oversight. 
That is an appropriate function for you to service. I 
absolutely do not want to come to the Hill and argue about a 
subsidy rate problem because of bad credit. I do not want to be 
here doing that. But I do question, you know, whose 
responsibility is it to pay for these reviews now, and I just 
think it is an overhead function of the agency that should come 
out of your budget.
    Ms. Ferko. Annually, how much would these fees cost, these 
additional oversight fees?
    Mr. Hager. It would be between $20,000 and $25,000 a 
review.
    Ms. Ferko. Totally?
    Mr. Hager. Biannually. It is not every----
    Ms. Ferko. Annually? OK.
    Ms. Wheeler. No. Weren't you asking how much it would cost 
for the SBA to do the----
    Ms. Ferko. Yes, I mean, how much in appropriations instead 
of for the lenders.
    Mr. Rowe. If we did not charge the fees and had to cover 
the overhead, it would probably be $7 or $8 million, as just an 
estimate.
    Ms. Wheeler. I think the SBA is losing ground here.
    [Laughter.]
    Ms. Wheeler. I think we have gone over this issue enough, 
and I feel sorry that so many people have been here and have 
not had a chance to comment. Let's just say for the record we 
understand that this is a problem, and hopefully we can talk to 
SBA about this before the final reg is released, and let's go 
to the other people at the table who have their cards up.
    Mr. Hager. Excuse me. Just one, if I may.
    Ms. Wheeler. Sure.
    Mr. Hager. The lender reviews, the audits, we also have in 
that a cost for the D&B expense that I referenced earlier. So 
it is a combination of that. But the number that Tee mentioned, 
the total budget for this is about $8 million.
    Ms. Wheeler. Right, and that includes the----
    Mr. Hager. Which includes the D&B cost.
    Ms. Wheeler. OK. As I said, that weakens SBA's 
justification for charging this if it is not saving $7 million 
versus the potential unintended consequence of driving lenders 
out of the program or ultimately increasing the cost of SBA 
loans to borrowers. So I think we have been over this.
    Ann, did you want to say something?
    Ms. Sullivan. Just two comments on the issues we discussed. 
I am Ann Sullivan with Women Impacting Public Policy.
    First of all, it gives--the people I represent are the 
borrowers. They are the end users. So it gives us great pause, 
sitting here listening to this discussion, the comments of the 
lenders, that increased fees will decrease participation in the 
programs. That is counterproductive to what certainly my 
membership is interested in.
    Second of all, I just wanted to go back to the Women's 
Business Center microloan discussion. We are all for cross-
pollination, so it sounds like the microlenders sitting here 
with their technical assistance, I just want to encourage that 
any cooperation between Women's Business Centers and their 
assistance can be coordinated. I know that in rural areas you 
have mentioned it is not possible, but there are a lot of Women 
Business Centers that I think are trying to serve the same 
population that you are, and we just would encourage them to 
work together.
    Ms. Wheeler. Paul, did you want to make a comment? Do you 
remember what your question was? I know your placard has been 
up for a long time.
    Ms. Merski. Not to beat a dead horse here, but I was going 
to ask if the SBA had checked with several other banking 
regulators, if they would, in fact, be able to expand their 
audits or oversight in the process of already being in the bank 
to look more carefully at the SBA loans if they are not, which, 
frankly, I think they are already looking into these SBA loans, 
particularly for banks that have large SBA loan portfolios, and 
why the SBA would need to charge an additional fee for 
something other regulators are already in the bank doing. And I 
would be curious to see if they have checked with the Federal 
Reserve, the FDIC, the OTS, State bank regulators, if they, in 
fact, look at this before imposing a new fee and going ahead 
with additional oversight in the bank, which will be costly to 
the bank in time and resources in the bank in addition to the 
fee.
    Ms. Wheeler. Giovanni, would you like to make a comment?
    Mr. Coratolo. Giovanni Coratolo. I am Director of Small 
Business Policy for the U.S. Chamber of Commerce. We represent 
4,000 State and local chambers, and I will tell you the 504 
program, as well as the 7(a) program, is critical to those 
State and local chambers. We are very engaged in access to 
capital for small business. We were involved several years ago 
in several battles involving subsidy as well as the econometric 
model. Over the last several years, I guess we have been on the 
sidelines. We do look toward Tony as well as Chris as far as 
the leadership in those programs, and we do subscribe to most 
of what they have said as far as the health of those programs.
    I would strongly encourage SBA to look at what they have 
said as far as the comments they have had as far as the health 
of those programs, and we will certainly look to see how this 
proceeds in the future as to whether we get involved again and 
to making sure that the SBA 7(a) and 504 programs stay healthy 
for the future.
    Ms. Wheeler. And has the U.S. Chamber of Commerce seen, 
like NSBA, any survey or anecdotes from their members about the 
increased need for SBA's programs as they rely more heavily on 
credit cards or about needing more access to capital?
    Mr. Coratolo. We have done several surveys, one involving 
the minority business lending, and we find that it is an 
underserved community. As far as over time, we see the health 
of those programs waning a little bit. As far as when we are 
talking about 504 and 7(a) as we go into the future, we are a 
little concerned as to its ability to service our small 
business needs. And, you know, we have not seen any direct 
surveys like Todd has put forward, but at this point we are 
still on the sidelines, but we can be encouraged to be brought 
into the fight.
    Ms. Wheeler. OK. I want to allow anyone else to make 
comments, and everyone should else feel free to go. Thank you 
for participating. We really appreciate your time and your 
patience waiting your turn to make comments. But as I said, we 
will just spend maybe another 15 minutes to tie up loose ends 
since we got off to a bit of a late start.
    Chris? Oh, I am sorry. Jim Morrison. I am very sorry. We 
would like to hear from Jim Morrison. He has not had a chance 
to speak.
    Mr. Morrison. Excuse me. I am Jim Morrison. I am the 
president of the Small Business Exporters Association of the 
U.S. I have just a point about one section of the bill I would 
like to comment on.
    Ms. Wheeler. Is your microphone on?
    Mr. Morrison. Section 309. We really do appreciate the 
Committee's responsiveness to the needs to increase the loan 
sizes of the international trade loans and utilize the 
refinancing terms and the collateral terms offered for the 
other loans. That is a very positive aspect of this bill. We 
also appreciate the Committee's support on the size of the 
guarantee.
    Ms. Wheeler. And the guarantee is important as an incentive 
to lenders?
    Mr. Morrison. That is correct, because there is foreign 
risk involved, and a guarantee is quite important.
    Ms. Wheeler. OK. Thank you.
    Chris?
    Mr. Crawford. Thank you, Kevin. First of all, I want to 
thank the Committee for the hard work on the bill. We strongly 
support this bill, as you know already.
    Ms. Wheeler. Is your microphone on?
    Mr. Crawford. I am sorry. We are concerned--there is one 
section under the definition of CDC, use of excess funds. We 
are very concerned with the ethics issue. We are concerned with 
where SBA is going in terms of pushing CDCs to expand, expand, 
expand, take greater risks potentially in the future, serve 
markets they are not naturally serving, they are not used to 
serving, opening CDCs willy-nilly. There are some IRS 
regulations that address the question of what are not-for-
profits for, what are they supposed to do, what are they not 
supposed to do. We would urge the SBA to take a look at those 
IRS regulations--I happen to have a copy here for your 
benefit--and be cautious in terms of this continued expansion 
of CDCs, their role, the authorities of their staffs and 
associates, especially.
    Ms. Wheeler. I think the Committee in the bill makes clear 
that there is a distinction between lenders and the 
intermediaries and the purposes they serve, that banks are 
strictly for lending, whereas CDCs have a special role in not 
only providing capital but spurring community and economic 
development. And so we will work with you, if you are concerned 
about that provision. We feel that the Committee worked it out 
between the Chairman and--well, let's just say Senator Kerry 
and Senator Snowe in the last Congress, and so it was 
incorporated it in this bill. But we are happy to work with you 
to address your concerns.
    Mr. Crawford. Kevin, you have actually done a marvelous job 
doing that, and I appreciate what you have written in 1256. But 
I urge the administration to look more cautiously at the way 
they are implementing regulations and proliferating 
regulations, not the least of which, obviously, is this big 
surprise on the fees.
    Ms. Wheeler. OK. Thank you.
    Joan, did you want to have any more comments on the child 
care?
    Ms. Wasser Gish. No.
    Ms. Wheeler. SBA, Ron, Paul, Sally?
    Mr. Phillips. The only thing I wanted to say earlier about 
the child care, because I did mention we had financed a child 
care facility in South Portland with the 504, that was a for-
profit. We do a lot of financing of child care facilities in 
the State of Maine, both nonprofit and for-profit. On the 
nonprofit side, I just want to back up some of the comments 
made, that the whole goal here is to get affordable child care 
to the private sector, and that is the ultimate goal. And 
nonprofits tend to be working with those harder-to-serve and 
people who cannot pay as much as in the for-profit side. And so 
we have a lot of evidence for that, and that is why this 
program probably would not be competing at all, but just be a 
complement if you were able to open this up. So that was one 
thing.
    And I did want to thank Senator Snowe, too, and Senator 
Kerry for this. I thought and we all think quite a visionary 
and innovative bill that is put forward here with different 
components. Thank you for your work, and the Senator for that, 
too. Thank you.
    Ms. Wheeler. Thanks, Ron.
    Ms. Ferko. Thank you.
    Ms. Wheeler. SBA, anything else?
    [No response.]
    Ms. Wheeler. Thank you, everyone. We appreciate it.
    [Whereupon, at 1:14 p.m,. the roundtable was concluded.]
      

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