[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
                    SUBCOMMITTEE ON FINANCE AND TAX
                      FIELD HEARING ON ACCESS TO
                      CAPITAL FOR SMALL BUSINESSES

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 19, 2010

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-063
Available via the GPO Website: http://www.access.gpo.gov/congress/house



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

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

                                  (ii)

  
?

                    SUBCOMMITTEE ON FINANCE AND TAX

                                 ______



                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               W. TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 (iii)

  
?



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page

Schrader, Hon. Kurt..............................................     1
Buchanan, Hon. Vern..............................................     2

                               WITNESSES

Mr. Zarnikow, Eric, Associate Administrator for the Office of 
  Capital Access, U.S. Small Business Administration.............     5
Mr. Miller Jr., William C. , Senior Vice President Political 
  Affairs & Federation Relations, U.S. Chamber of Commerce.......    19
Mr. Hall, Brian D., President & CEO, Sabal Palm Bank, Sarasota, 
  FL.............................................................    22
Mr. Orr, John Paul President & CEO, CAST, Inc., Sarasota, FL.....    24
Mr. Brill, Herbert L., Business Consultant, Lakewood Ranch, FL...    26

                                APPENDIX


Prepared Statements:
Schrader, Hon. Kurt..............................................    35
Mr. Zarnikow, Eric, Associate Administrator for the Office of 
  Capital Access, U.S. Small Business Administration.............    37
Mr. Miller Jr., William C. , Senior Vice President Political 
  Affairs & Federation Relations, U.S. Chamber of Commerce.......    41
Mr. Hall, Brian D., President & CEO, Sabal Palm Bank, Sarasota, 
  FL.............................................................    47
Mr. Orr, John Paul President & CEO, CAST, Inc., Sarasota, FL.....    52
Mr. Brill, Herbert L., Business Consultant, Lakewood Ranch, FL...    54

                                  (v)

  


                    SUBCOMMITTEE ON FINANCE AND TAX
                       FIELD HEARING ON ACCESS TO
                      CAPITAL FOR SMALL BUSINESSES

                              ----------                              


                         Monday, April 19, 2010

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:30 a.m., in 
Selby Auditorium, University of South Florida, 8350 North 
Tamiami Trail, Sarasota, Florida, Hon. Kurt Schrader [chairman 
of the Subcommittee] presiding.
    Present: Representatives Schrader and Buchanan.
    Chairman Schrader. Good morning and welcome to Vern's and I 
hosting of the Committee on Small Business Issues. This is a 
hearing on the Subcommittee of Tax and Finance of the Small 
Business Committee of the House of Representatives. We're 
trying to get out in the real world and solicit some 
interesting conversation, give you all a chance to listen and 
hopefully give us some feedback over time.
    We'll probably give a lot of the testimony to our 
witnesses, but both Congressman Buchanan and I are very 
interested in hearing about your responses to the--to the 
hearing today.
    My name is Kurt Schrader. I'm a Congressman from Oregon and 
chairman of the Committee. Mr. Buchanan, of course, is the 
ranking member of the Committee. We actually are in the eye of 
the storm when it comes to lending and access to capital for 
small businesses.
    I really appreciate the opportunity to be here in Sarasota. 
Thank you for the weather. A lot nicer than it is in Oregon 
right now, I'll tell you that.
    There's a reason we call small businesses the backbone of 
our economy. Throughout our history small businesses have 
generated enormous wealth in this country and often led us out 
of the toughest and darkest times. They've also unlocked 
innovation and powered our markets like no other business.
    We also know that the entrepreneurship of the small 
business is the driving force in our economy. But at the same 
time, small businesses can't operate on good ideas alone; it 
takes money to get a start-up off the ground. It takes capital 
to keep a business running. It takes investment to build a 
small firm into an economic powerhouse.
    During past economic downturns small businesses have 
actually managed to grow and flourish, like companies like 
Microsoft, FedEx, Hewlett-Packard, big companies in my part of 
the world, and 45 percent of Fortune 500 companies have all 
been founded during recessions.
    Many Americans who have lost their jobs are not looking to 
unlock their own hidden potential as small businessmen and 
women by starting small businesses right now. And as the next 
generation of entrepreneurs step up to the plate, we need to 
make sure that they have the same opportunities to succeed that 
I had when I got my small business going.
    I'm a veterinarian, started a small business there. Also a 
farmer, started a small farm in the valley of Oregon.
    This hearing is very important. In our conversation this 
morning we're going to be talking about financing options of 
America's small firms, looking for ways to improve those 
choices, choices both here in Florida and hopefully my home 
state of Oregon.
    As a small business owner myself, I understand the impact 
that lending declines can have on small ventures. I've seen 
firsthand in previous recessions as well as this one the role 
that capital plays in all phases of small businesses. In my 
veterinary practice I could have used some of the programs 
we're talking about right now when we had the last recession. 
We've been through some tough times.
    Vern and I, along with some of the rest of our colleagues, 
were able to introduce a bill that is sitting in the Senate 
right now: H.R. 3854, The Small Business Financing and 
Investment Act, passed bipartisanly out of the House, out of 
our Committee, our Subcommittee and the Committee and the House 
of Representatives. And it actually has the opportunity to 
deliver $44 billion in lending and investment for small 
businessmen and women.
    Mr. Buchanan played a critical role in those efforts. He 
particularly sought to modernize the Certified Development 
Company Program, helping established businesses secure capital 
for fixed-asset purchases.
    Meanwhile, his continuing work to enhance SBA's SCORE 
Program would also go a long way to supporting new companies, 
training them in the areas like credit repair and loan package 
preparation.
    Whether we're talking about small companies starting up in 
the valley in Oregon or real estate--real estate developers 
here in Florida, one thing is pretty clear: These entrepreneurs 
are struggling for the capital for the reasons we've talked 
about.
    We're frustrated. We want to know, at least my guys want to 
know why, with a sound credit score and good payment history, 
why they can't access more capital or why their credit cards 
are being terminated, why their lines of credit are being 
stopped.
    So we're hoping that all options will be put on the table 
as we discuss them here today. That includes policies to 
empower creditworthy borrowers over banks, greasing the wheels 
for equity investment, and otherwise deliver the widest array 
of choices for our small business innovators that we can do.
    These are the avenues that Congressman Buchanan and I are 
working on to open and are just some of the issues we'll be 
exploring here today.
    So I'm looking forward to hearing from all of the witnesses 
as we discuss ways to ensure that your small firms have the 
tools they need to be successful.
    And with that, I'm going to yield to the ranking member for 
his opening remarks.
    Mr. Buchanan. Thank you, Mr. Chairman.
    I want to first thank our audience and thank everybody for 
coming. I know I did a seminar probably on small business 
access to capital myself about a year ago, seven months ago. We 
probably had 150 people show up.
    And the first question I asked is how many people are 
having a challenge with banks and can't get lending. I thought 
maybe 20 percent of the room would raise their hand, and 
everybody in the room raised their hand up. So that's the 
reason that I've asked the Congressman to come.
    I want to thank Congressman Schrader for his leadership as 
chairman. We've had a good working relationship. They always 
talk about Washington doesn't work, you can't get Republican 
and Democrat working together. But we've had a good friendship 
and his leadership has meant a lot to the Committee.
    So I just want to thank him personally for being here today 
because congressional hearings are very unique and I don't know 
of the last time we've had a congressional hearing in Sarasota 
or Manatee County. Usually they're held up in Washington. And 
if you have one here, you have a member of the other party be a 
part of the process. So he was very willing to do this. Oregon 
is a long way. So I appreciate him being here in a bipartisan 
effort because he's interested, like I am, to do everything we 
can to help small businesses access capital.
    The other thing I want to say is this Committee oversees 
about an $8 billion loan portfolio, the Committee that he 
chairs and I'm the ranking member of. So it's an important 
Subcommittee in Washington. I'm very proud. A lot of people 
have various committees. I do serve on other committees, like 
the Veterans Committee. We dedicated a new facility in Manatee 
County--very excited about that, a new veterans facility for 
our veterans. And I'm on Transportation, a big Committee and--
in Florida.
    But passion--these are--I'm passionate about the others, 
but my passion, and this is for 30 years, is really to work 
with small businesses.
    When I think about our country, I think what makes it 
special and great and unique is entrepreneurs and small 
business. Being chairman of the Sarasota Chamber and the 
chairman of the chamber in Florida, one thing I realize, that 
99 percent of all businesses registered in Tallahassee, Florida 
are small to medium-sized businesses.
    They create 70--in communities like ours, probably 80 
percent of the jobs. So capital is a very critical thing.
    The national unemployment, I don't have to tell you, is 
hovering around 10 percent, 9.7. Florida is over 12 percent. I 
think in our region it's 13.
    So again, when we look at any kind of legislation, you 
know, we're trying to find a way to help small businesses 
because they create 70 percent of the jobs.
    Access to capital. I did a thing the other day. One of our 
witnesses that's a banker for, I think, 30 years. But I did a 
seminar or a little meeting the other day, I think with about 
12 or 13 community banks. And most of them aren't lending 
today. And that's why the SBA is such an important aspect of 
that.
    I look forward to hearing from our witnesses today. And I 
hope that we can identify ways to open up lines of credit for 
small businesses, things that work and change things that 
aren't working.
    So the idea of our hearing today is to take back these 
ideas, formulate some policies, and see if we can't introduce, 
the chairman and myself, a bill maybe where we can get more 
access to businesses. And maybe that sunsets in a couple of 
years.
    But I can just tell you you'll hear from our panel today, 
many--there are many good businesses in our region. If they had 
access to capital, they could grow from 15 to 30 employees. 
They can't get access to the money.
    So I look forward to our witnesses. And I'll turn it back 
over to the chairman.
    Chairman Schrader. I'm just going to explain the ground 
rules a little bit so everyone understands what's going on, 
hopefully.
    The witnesses will basically have five minutes for their 
opening remarks. We'll probably be a little easier today than 
we would normally be in Washington, D.C. We're more casual in 
Florida. But try and get the witnesses to stay somewhat close 
to that because a lot of the better part of the hearing is, 
quite frankly, in the questions and responses going forward.
    The green light will go on when they start. When they've 
got a minute left, the yellow light goes on. And when we'd like 
them to sort of wrap up the remarks would be when that red 
light is blazing away. So if witnesses could pay attention, 
that would be helpful.
    Since we're in Mr. Buchanan's district, I just want to put 
a plug in for Mr. Buchanan. It's unusual for newer members to 
be in charge of committees and the fact that he's been selected 
as ranking member is pretty significant for Sarasota and 
Manatee County. It's a pretty big deal. So I-- he's too modest 
to say that, but I'm saying he obviously has some cachet in 
Washington, DC.
    With that, let's go ahead and I'll let the ranking member 
introduce our witnesses; we're in his district.
    Mr. Buchanan. I'm excited. Our first witness today is Eric 
Zarnikow. He's an associate administrator at the SBA Office of 
Capital Access. He oversees and manages SBA lending, venture 
capital, international trade, a surety bond program. He's come 
to the SBA with 25 years of private sector experience. His 
latest corporation position was senior vice-president, chief 
officer and treasurer of ServiceMaster companies where they 
played a major role in the sale--he played a major role in the 
sale of the company to a private equity holder.
    I welcome our witness today and look forward to your--your 
comments. And we'll proceed from there and ask you some 
questions and get your thoughts on various things.
    Mr. Zarnikow.

                   STATEMENT OF ERIC ZARNIKOW

    Mr. Zarnikow. Thank you, Subcommittee Chairman Schrader and 
Ranking Member Buchanan. I'm honored to be here today.
    One of the missions of the Small Business Administration is 
to provide small business owners with access to much-needed 
capital. We do that primarily by providing a partial government 
guarantee on loans made by banks and on lending partners.
    This guarantee helps provide access to capital for 
creditworthy small businesses who would otherwise be unable to 
get loans.
    As a result, loans to women and minorities comprise a 
greater percentage of our portfolio than from the conventional 
lending market. Our programs are lifelines to many small 
businesses.
    To address the disruptions in the credit markets the 
Recovery Act temporarily raised the maximum available guarantee 
on SBA loans to 90 percent and allowed us to reduce or 
eliminate most fees. The raised guarantees provided an extra 
incentive for risk-averse banks to lend to small businesses. 
And the fee reductions made loans more appealing to borrowers.
    As a result of these actions and stabilization of the 
economy, SBA lending has increased by about 90 percent since 
the Recovery Act's enactment. It has turned about $600 million 
of taxpayer funds since the Recovery Act's enactment into 
support for over $25 billion in loans to small business owners.
    We know that times are still tough for small business 
owners. While SBA's Recovery Act loans are helping, it is clear 
that many small business owners are still having a hard time 
getting access to credit.
    Declines in home values have hurt small business owners as 
well because many entrepreneurs use home equity to help finance 
their business.
    At SBA we understand how to use our program to address 
demand for credit, availability of capital, and risk tolerance. 
And with the President, we've proposed a jobs plan which 
targets gaps that still exist.
    There's really five key components to that plan. First, to 
address the issue of banks that still have trouble taking risk, 
the Administration has asked for an extension through the end 
of fiscal 2010 of the increased 90 percent guarantee and 
reduced fees.
    Second, for banks that don't have enough capital to lend, 
the Administration has asked Congress to establish a $30 
billion small business lending fund to provide low-cost capital 
to community banks to allow them to lend more. This money would 
come with incentives to increase lending to small businesses.
    Third, many small businesses need bigger SBA loans to 
create jobs. This could be franchisees, manufacturers, 
exporters, or other businesses. We want to increase our top 
loan limit for eligible 7(a) loans from $2 million to $5 
million and from $4 million to five and a half million for 504 
loans to manufacturers.
    Fourth, for businesses that can't find access to working 
capital, we propose to temporarily raise SBA Express Loan limit 
from 350,000 to $1 million. These loans will help businesses 
restock shelves and fill orders that are coming in.
    And fifth, we know that many small businesses have 
conventional owner-occupied commercial real estate mortgages 
that will need to be refinanced soon. As real estate values 
have declined, many banks will find that these businesses no 
longer qualify for conventional loans, regardless of the 
strength of the business.
    As a result, even small businesses that are performing well 
and making their payments on time are going to have a hard time 
refinancing these loans and may face foreclosure. So we want to 
temporarily open up SBA's 504 program to commercial real estate 
refinancing.
    It's critically important that we help creditworthy firms 
here in Florida and across the country avoid unnecessary 
foreclosure and lost jobs.
    This plan is guided by basic principles: Build on what 
works, maximize limited taxpayer dollars, make targeted changes 
as quickly as possible. It addresses specific gaps in supply, 
availability of credit, and risk tolerance.
    SBA is confident that this will allow us to better help 
small business in this tough economic environment.
    Some people ask ``Why doesn't SBA just make direct loans to 
small businesses?'' Direct lending would require hiring a new 
work force and significantly expanding our reach. It would be 
much less efficient than the plan we've laid out. Moreover, we 
believe a partnership with private lenders is important for the 
sustainability of small business and to help target viable 
enterprises.
    We want to build on the success of the Recovery Act by 
expanding points of credit access and bringing more small 
businesses into long-term banking relationships with an SBA 
lender. And we want to increase the number of banks that offer 
SBA products.
    Let me close by saying that the SBA is here to help small 
businesses. Our field staff and resource partners are standing 
by to help small business owners and entrepreneurs as they 
start and grow their businesses.
    And small business owners here in Florida have access to 
district offices, 35 small business development centers 
throughout the state, three women's business centers, a 
veterans' business center, and several chapters of SCORE, which 
is our executive mentoring services.
    I thank you for your support of small businesses and for 
working with the SBA to get the support that they need. And I'm 
happy to discuss any of these proposals and answer any 
questions.
    [The statement of Mr. Zarnikow is included in the 
appendix.]
    *
    Chairman Schrader. Very good. You're experienced.
    I appreciate you coming down. It must have been a tough 
deal coming from Washington, D.C. to beautiful Florida, but you 
have to sacrifice every now and then. So I appreciate you doing 
that.
    Talking about some of the programs you were mentioning, 
back up first on the ARC. We chatted a little bit before the 
hearing. The ARC Program, for those in the audience that don't 
know, is $35,000, basically, line of credit that we've set up 
in the Recovery Act that small businesses were supposed to be 
able to access, provided they had a half decent balance sheet 
and plan to turn their business around, even if they were 
suffering a little bit in the recessionary economy.
    With that, it's been a program that's been tough to get off 
the ground. In my own home state we've only had one bank making 
a number of loans and most of the other banks, in the year or 
so the program has been in existence, have only made like one 
loan.
    What are some of the barriers you're hearing, Mr. Zarnikow? 
I've got some that I've heard, and I'm curious what you're 
hearing.
    Mr. Zarnikow. Sure. The ARC Loan Program is attached as 
part of the Recovery Act. And it's a loan of up to $35,000 
that's guaranteed 100 percent by SBA. And we actually pay the 
interest on behalf of the small business so the small business 
does not pay any interest on the loan.
    The loan is to go to viable small businesses that are 
facing immediate financial hardship. And proceeds of the loan 
can only be used to make scheduled payments of principal and 
interest on all high end small business debt. It's-- basically 
it's in essence a bridge loan to help a struggling small 
business that is still viable make payments on existing debt 
until economic times improve.
    With the money that we got out of--out of the Recovery Act 
we have the ability to make about 10,000 ARC loans. So far 
we've made about 7,000--a little over 7,000 ARC loans. We've 
used about 70 percent of the money. We've seen loans in 49 of 
the 50 states plus the District of Columbia. And so far we have 
about 1200--over 1200 different lending institutions that have 
made at least one ARC loan.
    So we've seen pretty good acceptance of it. The program was 
started up in June of last year so we got it out very quickly 
after passage of the Recovery Act. We've seen a ramp-up in the 
program and it's really--we've seen sort of a stabilization of 
the number of loans that are being made.
    I think that some of the challenges that we've seen in it 
is some of the--in many cases what the business is looking for 
is not just a loan to make payments of principal and interest 
on existing debt; in many cases people are working--looking for 
working capital or ability to either start up or expand a 
business. And ARC loans don't fit that.
    We also found that the level of documentation that's 
required to show that the business is viable and is facing 
immediate financial hardship has been challenging for some of 
the lenders.
    In addition, there is a requirement that the lender take as 
much collateral as possible or they follow their existing 
collateral policy. And that's been a challenge, I think, for 
some of the lenders.
    So the level of paperwork that's required has been a bit of 
an issue in order to meet the requirements of the loan program.
    Chairman Schrader. In follow-up on that then, is SBA 
looking at ways to reduce that paperwork?
    I hear from the bank side that it's not, a lot of times, 
worth their effort to get into that book of business. Frankly, 
you're not going to make much money on a $35,000 loan and you 
have to do all--go through all the bells and whistles and 
documentation you do for a much bigger loan.
    Is SBA working on ameliorating or streamlining that to like 
a one-page application and look at freeing up some of the 
paperwork that banks usually have to do?
    Mr. Zarnikow. I think there are several challenges to the 
program, and you reference one of them, which is for a 
temporary program, in some cases banks are unwilling to commit 
the resources that they need to train people, develop the 
infrastructure they need to be able to make the loans for 
what's a temporary program.
    I think that one of the challenges we have is making sure 
that the lenders are following the requirements of the law: 
It's got to be a viable small business facing immediate 
financial hardship. The payment of the loan proceeds can only 
be used to make payments on existing qualifying small business 
debt. So there's a set of definitions that we have around that 
to ensure that the borrower is actually eligible for the loan 
and if the loan goes bad, that we're able to pay on the 
guarantee that we've made.
    So we try to balance the oversight and responsibilities 
that we have as an agency with the goal of getting the capital 
out.
    After the rollout of the program in June of last year we 
did--prior to the rollout we did a lot of conversations with 
banks to try and understand how they would utilize the product, 
how we could make it as desirable as possible for them to make 
loans. We got a lot of feedback.
    When we rolled the program out in June, we continued to 
have a lot of dialogue with our lending partners. That's one of 
the things we do a lot is listen to small businesses, listen to 
lenders to try to understand how we can better-- have programs 
that better fit or better meet the needs that are out there.
    And we did make some changes to the program to simplify 
some of the documentation requirements, particularly around 
loans that were being used to pay credit cards. So we tried to 
narrow it down but at the same time also meet the statutory 
requirements of the program.
    Chairman Schrader. Mr. Zarnikow, you reference the 
Administration's interest in beefing up the Express Loan 
Program. On one hand that makes sense because it's a program 
with a little less onerous paperwork; banks like those 
apparently. But they've had traditionally a pretty high default 
rate.
    So how do we juxtapose increasing the amounts and putting 
more taxpayer money at risk and at the same time trying to get 
money out the door but not have that default rate issue?
    Mr. Zarnikow. Sure. Our SBA Express product is a product 
that--it has a 50 percent guarantee, which is a lower guarantee 
than the rest of our loan programs.
    That program is really targeted and focused primarily 
around working capital and providing working capital to small 
businesses and we have seen historically that that program has 
a higher default.
    As Administration, we've proposed increasing the maximum 
loan size in that program. It's currently $350,000. We propose 
increasing it up to a million dollars. And the hope there 
really is to try and help small businesses that are now 
emerging from the recession, so they've survived the downturn.
    We're hearing more and more that business is beginning to 
pick up. But when lenders look at my historical results, 
they're not as good and they have a hard time supporting a 
higher loan dollar amount, even when I have orders or I've 
gotten a new contract.
    So we think that increasing the SBA Express Loan limit up 
to a million dollars will help provide access to capital.
    To address the concern about taxpayers and taxpayer risk, 
we have seen historically that that program overall has a 
higher loss rate or default rate than our other programs.
    However, when we parse the data and really drill into it, 
we find that that higher loss rate is really for loans of a 
hundred thousand dollars or less and that the default rate is 
actually much lower than our other programs when you get to 
loan sizes that are over a hundred thousand dollars.
    So we think that increasing the maximum loan limit from 
350,000 up to a million dollars on a temporary basis would help 
small businesses get access to working capital that they need 
as the economy is recovering without taking on undue risk for 
the taxpayers and providing that appropriate balance.
    Chairman Schrader. Just a note of cautionary concern. The 
fact that the larger loans don't have as great a default rate, 
I understand. But I don't think there have been that many loans 
made of high magnitude to really justify statistically, you 
know, a lot of the information there.
    And to be honest, I'm concerned most--most of the small 
business and stuff that I talk to are a much smaller nature. 
I'm a little concerned that the limited money set aside for the 
program go to these bigger concerns and be all eaten up and 
then a lot of smaller businesses wouldn't have any money at all 
to access. So just as a note of caution, I think for the SBA 
going forward.
    Similarly, in the 7(a) program there's a push to increase 
the loan amount from $2 million to five. I believe in 3854, Mr. 
Buchanan's and my bill, we went up to three.
    Again, trying to figure out, my understanding and Vern can 
correct me, but the average 7(a) loan in the state of Florida 
is about $290,000. So we're jumping it up to five.
    I'm wondering again like in the Express Loans, are we 
catering to the bigger smaller businesses as opposed to the 
small--the 70 percent that are mom, pop with just a few 
employees, small businesses that I think need more help than 
some of the larger firms.
    So if you could comment on why five.
    Mr. Zarnikow. Sure. What we've tried to do at SBA is really 
serve all small businesses, whether you're a tiny small 
business, micro small business, or a little bit larger small 
business.
    And what we've found is as the credit crunch has hit, a 
little bit larger small businesses typically have had better 
access to capital than the very small businesses.
    With the upset in the credit markets, little reduced or 
increased risk tolerance, reduced risk tolerance from the 
banks, we hear more and more from a little bit larger small 
businesses and from their lending partners that they're having 
a harder time getting access to capital for what I would call a 
little bit larger small business.
    The $2 million maximum loan limit hasn't been changed for a 
number of years. What we find is particularly in certain 
industries, franchise markets, exporting manufacturers, that 
there is a need for a little bit larger loan size. And those 
larger small businesses also provide a lot of job growth and 
job opportunity.
    We do find and it would seem historically over the last 
several years that there's been more of a bunching in our 
loans, loans in the one and a half to two million dollar range, 
which is right up against our $2 million maximum; that the 
percentage of loans in our portfolio that are being made each 
year, there's an increasing percentage that's in that one and a 
half to the two million dollar range.
    So we're seeing in our own lending that people are bumping 
up against that maximum.
    When we talk with small businesses, when we talk with our 
lending partners, we hear a lot more of a concern that ``I 
could help these businesses; they don't meet my conventional 
standard but I'm maxed out by the $2 million limit.''
    So our proposal is to increase the limit from two million 
up to five million.
    We also have found that historically in our portfolio the 
larger size loans perform better and they actually provide a 
positive subsidy which helps support smaller dollar loans that 
are made in the portfolio as well.
    Chairman Schrader. Just as a follow-up comment, again, most 
of these loans are smaller. I guess I want to make sure that, 
again, the limited dollars in these programs, these are not 
mandatory programs where just anybody comes in and gets it; if 
the money runs out, then someone wouldn't be able to get a 
loan.
    So I would urge the SBA, if they haven't already, to look 
at some sort of set-aside, some, you know, information or--or 
an account where there is a certain amount allocated to smaller 
businesses, perhaps under the two million and then a certain 
amount of the money that would go to those over that to make 
sure that, again, the small businesses have that-- that access 
and don't get crowded out.
    With that, I'm going to turn it over to the ranking member 
for his series of questions. Thank you.
    Mr. Buchanan. Thank you, Mr. Chairman.
    I want to mention a couple of things. SCORE is out front if 
anybody--SCORE is a national organization. We've got a good 
chapter in our area, a very active chapter, a lot of our 
seniors, executives in big companies that want to help small 
businesses get off to a faster start. They've got a lot of 
expertise. And one of the big things I like about them is 
business planning.
    The other thing I wanted to mention, again, the 
administrator will be available after all of our witnesses 
today, and I think he would really like the opportunity to 
visit a little bit. If it runs a little later, I'll buy you 
lunch or something. But we need to keep you here for this.
    Let me mention I talked to your boss, the lady that's--the 
SBA administrator and we spent, you know, probably a half hour 
on the phone. We identified a lot of things.
    But the President agrees on many things. I mean, he agrees 
in terms of capital gains taking zero for a year or two. That's 
one of the things that he agrees with the idea of 30 billion.
    She was talking to me about getting access to community 
banks, $30 billion for those who qualify. It just seems like 
we're very good about watching--getting money out to the big 
banks. We're not getting it out to the little guys, the little 
banks. The little banks are dying. They provide a lot of 
capital for, you know, this area.
    That's why the SBA really in this kind of environment, 
which doesn't come along very often, happened in the early 
1990s and now--Florida has had a great run, I'd say, from 1993 
to 2006, 13 years. But now we need some help. And the SBA is 
someone who is a provider and can really make a difference.
    So I want to just--you know, listen: We need to get action 
because people are dying out there on the vine; they don't have 
any access to loans. So I want to run through--you know, I've 
got quite a few different questions, but I want to keep it--so 
if you keep your answers a little bit more concise. They're 
fine, but I just want to get to some things and get your point 
on a couple of things. And these are things that people in the 
audience have asked me if I wouldn't mind asking.
    First thing: Is there, in your opinion, a segment of 
lenders, big banks, community banks, or other lending partners 
that, in the environment in the last year or so, that are 
lending or doing anything particularly well in the past year to 
year and a half? Do you see any segment?
    What's your--and I'm sure Arizona, California, our area in 
Florida has been hit harder than most. Some areas aren't quite 
as bad, but we've been hit real hard because we're so heavy in 
terms of housing.
    But what's your thoughts in terms of your sense of whether 
banks are lending or not?
    Mr. Zarnikow. What we've seen is that there's been a real 
focus in small business lending around smaller or regional or 
community banks.
    One of the things we have is strategic goals to increase 
the number of banks that participate in our program. We really 
want to increase the points of access.
    And in fiscal 2009 we had about a 15 percent increase in 
the number of banks that made at least one SBA loan. And the 
vast majority of those were really focused around regional, you 
know, smaller regional and community banks, banks with less 
than $10 billion assets or community less than $1 billion of 
assets.
    And we've seen a shifting in our portfolio over the last 
years where a much increasing percentage of SBA loans are being 
made by smaller community banks.
    Mr. Buchanan. Let me ask--I just want to make a quick note 
here. SBA, the default rate in the last ten years, what has 
that been? Do you know offhand?
    Mr. Zarnikow. Now--
    Mr. Buchanan. Just an overall portfolio.
    Mr. Zarnikow. I'd say the overall portfolio has varied 
depending on economic conditions. But when you look at the 
overall default rate, it's probably in the 6, 7, 8 percent 
range.
    Mr. Buchanan. Because I heard it was--are you talking about 
lately or are you talking about the last ten years?
    Mr. Zarnikow. I'd say for the last ten years it's probably 
lower, lower than that, and we've seen an increase in the last 
few years.
    Mr. Buchanan. Okay.
    Mr. Zarnikow. There's also a difference between the default 
rate and our loss rate because we do have recoveries on loans 
that are--
    Mr. Buchanan. What is the loss rate?
    Mr. Zarnikow. The loss rate is more like 4 percent.
    Mr. Buchanan. Okay. So 4 percent. So the taxpayer's helping 
small business, and we've got about a 4 percent loss rate. I 
think that's important for people to know.
    Also you suggested that the Administration supports 
increasing loan size for the SBA loans. My question is: If the 
banks are hesitant to do the $2 million loan now in the current 
system, why are we suggesting up to five million?
    I'd like to see it go up to five million. But, you know, 
what's your thoughts on that?
    Mr. Zarnikow. What we've seen is: an increasing percentage 
of our loans that are made each year are in that one and a half 
to two million dollar range, which tells us there's kind of a 
bunching, that the two million dollar cap is sort of an 
artificial limitation on expanding access to capital.
    We would say that, you know, we would expect that banks 
would make larger loans with the SBA guarantee up to the $5 
million level. We're not saying that the volume would be 
enormous, but we do see that there is a big, you know, access 
or loss of access to capital as businesses get a little bit 
larger. I think these businesses have been successful and want 
to expand. They want to add a location. We want to be able to 
grow with those small businesses and continue to support their 
needs.
    Mr. Buchanan. Why is the general feeling with the SBA with 
a lot of banks you provide 80, 90 percent guarantees, some of 
these small loans maybe a hundred percent guarantee, we can't 
get more banks to access SBA?
    It seems like it's a no-brainer for banks and something 
banks should do or want--because we need that capital in our 
communities, whether it's here or in the Chairman's district.
    Why is it in such a tough time that we can't find a way to 
either cut the fees a little bit or be more accommodating to 
small banks? Small banks in general, you know, like it takes 
forever to issue a loan or something like that.
    I think it's gotten better, but we need to make it--find a 
way where banks will actually access and use you guys more.
    Mr. Zarnikow. You know, we, as an agency, have been very 
focused on how do we be better business partners. You don't 
often hear a government agency talk about being a business 
partner, but that's how we really think about it.
    I mean, our programs, ultimately we're supporting small 
businesses. But our programs, our lending programs, are all 
delivered through lending partners.
    Our programs are voluntary, so if the lending partners 
don't find them attractive, they're not going to participate in 
them. So we try very much to be more and more business friendly 
while also making sure that we have appropriate oversight to 
protect the interest of taxpayers.
    We have seen last year, fiscal 2009, about a 15 percent 
increase in the number of lenders who made at least one SBA 
loan. And that was about 2800 different lending partners.
    We're on pace in fiscal 2010 to actually exceed that goal. 
One of our strategic goals really is to increase points of 
access and add additional lenders into our lending, you know, 
programs. So we're very focused on trying to simplify our 
programs, be better partners, and have commitment to our 
lending partners as far as turnaround times and other things 
while at the same time making sure we're appropriately 
protecting taxpayer dollars.
    Mr. Buchanan. The other thing, you have offices in Florida; 
one in Tampa and the one in Jacksonville, one in Miami. Where 
do you have other--human employees, if someone has a question 
and wants to--what office would they use? They'd use the Tampa 
office, wouldn't they?
    Mr. Zarnikow. You know, here in Florida?
    Mr. Buchanan. Yeah.
    Mr. Zarnikow. I would say for this area they would use the 
Tampa office primarily. And we actually have a couple of people 
here from this area who are also--would be glad to help answer 
questions afterwards as well.
    Mr. Buchanan. Okay. Where are they at, just out of 
curiosity? Do you want to stand up just so everybody can see 
you, if anybody wants to see you after the program?
    Thanks for coming. Thank you.
    Mr. Zarnikow. I would say too, very quickly, if you go to 
our website, which is www.SBA.gov, you can get through--off the 
Internet, access to all of our resource partners across the 
state of Florida or across the country are available on 
website. You can see the address and contact information as 
well.
    Mr. Buchanan. Okay. I have a few more questions. I want to 
kind of run through these.
    You touched on the idea of the Express Loan, the SBA 
Express Loan, raising that up to a million dollars. Is the 
Express Loan more attractive to lenders, do you find? Because 
that's important. When I'm thinking express, I used to go to 
the SBA in the 1980s and Express was like a year later. But the 
point is is there--what is--how long does it take to get an 
Express Loan that's a million dollars? Raising that up, have 
you found more lenders open to that?
    Mr. Zarnikow. No, the--there's a trade-off for lenders in 
our Express products. Our regular, our 7(a) product carries 
either a 75 or 85 percent guarantee depending on the size of 
the loan.
    The Express product carries a 50 percent guarantee, but 
essentially we allow the banks to use their own paperwork to 
process the loan. So there's a trade-off for a bank. They get a 
lower guarantee but they're allowed to use their own paperwork.
    SBA Express is really used by our most experienced lenders. 
They have delegated authority so they're actually allowed to 
put the guarantee on behalf of SBA.
    So to the lender it's really a trade-off on ``how much risk 
am I willing to take? Would I prefer to do more paperwork and 
have the higher guarantee or am I okay with the lower guarantee 
and the express paperwork?''
    Mr. Buchanan. Another thing--again, I can't tell you how 
many businesspeople I talk to; been to six banks, seven banks, 
been turned down.
    Why isn't the SBA open-minded towards direct lending for 
these economic times for a year or two where we can get money 
out quicker? Because you're really at the mercy of the bank if 
you have no banks in the region that are enthusiastic about it 
or might do it or might not do it.
    I mean, you're guaranteeing 90 percent. Why don't we, you 
know, make some funding available for small business on a more 
direct basis? I know you touched on this in your opening 
remarks. But I--that's something I've been pushing for, the 
idea, sunset in a period of time.
    What's your thoughts? Anything additional on that?
    Mr. Zarnikow. Sure. The concern we have in trying to do 
direct lending, we really work through lending partners. We 
provide a partial government guarantee that--of the loan that's 
made by a bank or a credit union or a non-depository 
institution.
    When you look at the reach out there, we have 68 district 
offices around the country. Our lending partners literally have 
tens of thousands, if not a hundred thousand branches.
    What we're trying to do is make sure that when a small 
business needs capital, they go to a bank. Our programs have 
credit elsewhere attached, so we're not trying to replace the 
conventional market.
    If a loan can be made by a bank on a conventional basis, 
they do it conventionally. If it doesn't qualify for a 
conventional loan, they can look at doing an SBA product. And 
obviously there are some small businesses that are out there 
that aren't creditworthy and are going to be unable to get 
access.
    When we look at the infrastructure that would be needed to 
set up a direct loan program, there would be an enormous amount 
of hiring, and we would have to do training and we'd have to 
do--we would also be redirecting small businesses to now come 
to the government and apply for loans, go to those 68 district 
offices rather than go to the lending partners.
    And we just feel that it's a very costly process to do. It 
would take a long time to hire up that level of people. And 
then we would have these loans on our books for a long period 
of time we'd have to continue to have to service and liquidate.
    We also look at and have a concern that it is a small--if a 
bank is unwilling to make the loan at a 90 percent guarantee, 
should we, as the government and as taxpayers, in essence doing 
the loan--be doing the loan at 100 percent guarantee.
    Mr. Buchanan. I don't think the bank is--they like the 
guarantee, but I think that they--many banks just feel like it 
may--you know, to get that guarantee, it takes too long to get 
the money back if someone defaults on a loan.
    Let me mention--someone just dropped me a note-- because we 
do have hurricanes and coming into hurricane season, you do do 
some SBA lending for national disasters, don't you? Is that 
true--
    Mr. Zarnikow. Our disaster group, which is a whole 'nother 
area within SBA, we do do lending for disaster. Their mission 
is really focused on lending in areas there's been a disaster, 
whether it's a hurricane or an earthquake or flooding. And the 
focus there is primarily on homeowners and it's primarily on 
property damage.
    So if you look at the number of loans that they do, 95-plus 
percent of the number of loans would be to homeowners and it 
would be for property damage.
    They do do a limited amount of business disaster lending, 
once again, primarily focused on damage, replacement or damage 
loans that are--have caught--businesses had.
    So when you look at their expertise, they do a wonderful 
job. They really do a great job in responding to disasters, but 
their focus is on property damage loans for homeowners.
    Mr. Buchanan. The last question, I think maybe the Chairman 
touched on a little bit, but what are you doing to develop 
relationships with community banks, with banks, you know, local 
regions?
    You mentioned--touched on it a little bit, but it just 
seems like we need to do a lot more. I want to bring SBA down 
here with our banks, I know, and I'm sure the Chairman does, 
just to make sure that our banks have complete access and they 
understand the pluses and--ideally pluses and some minuses with 
SBA--
    Are you--do you have an aggressive reach-out program with 
banks or do you kind of let the banks come to you? Are you 
marketing it in this period, in this time frame?
    Mr. Zarnikow.--I would say we have a very aggressive reach-
out program primarily through our district office network in 
that you have 68 district offices around the country. And we're 
very aggressive about reaching out to lending partners who 
are--can potentially do SBA loans.
    I mentioned we've seen 15 percent increase in the number of 
lending partners who made at least one SBA loan in fiscal 2009. 
And we have a goal to increase that even more.
    We're also reaching out through some of the trade 
associations, the American Bankers Association, Independent 
Community Bankers Association to try and get the word out 
through the trade associations as well about SBA programs. So I 
would say we have a very aggressive program to try and increase 
the number of lending partners that participate in our 
programs.
    Mr. Buchanan. I appreciate your comments. And I yield back 
to the Chairman.
    Chairman Schrader. Thank you very much. Just a few follow-
ups if I may. We don't have others to ask the questions so we 
can ask a little longer period of time than usually in 
Washington, D.C. here.
    You talked about aggressive outreach and I would agree with 
that. I see that in my district back in Oregon.
    What about the follow-up? Getting one more bank to sign up 
is considered a victory, but it's not really a victory for a 
small business that can't get a loan from that individual.
    What sort of follow-up--do you have the manpower, I guess 
is the basic question, to actually follow up and, you know, 
encourage these banks to sign up? You know, what are your 
barriers? How can I help you follow through and make sure, you 
know, Schrader's Veterinary Clinic gets a loan?
    Mr. Zarnikow. I'll tell you a couple of things. One is what 
we really measure is the number of partners who make at least 
one loan. So it's not enough to get them to sign up and say I'm 
open for--
    Chairman Schrader. Could we expand that to three loans 
maybe?
    Mr. Zarnikow. We'd be glad to do that. You know, our focus 
really is points of access for--you know, points of access to 
capital for small businesses.
    We also are continuing to try and make our products easier 
to do. A little over a year, year and a half ago we rolled out 
what we call Small Rural Lender Advantage product, which is a 
simplified processing method that's really focused on the 
smaller community banks that basically do less than 20 SBA 
loans per year. They have a simplified method.
    We have a process to really kind of hold their hand through 
the whole process because our processes and paperwork can be a 
little bit intimidating. So we have a simplified processing 
method that really helps the community banks get through the 
process.
    Chairman Schrader. I think both the ranking member and I 
would like to see data on how that works--
    Mr. Zarnikow. Sure.
    Chairman Schrader.--as soon as possible.
    You mentioned with the ranking member along this line of 
questioning about letting--some of these progressive banks are 
allowed to use their own paperwork. Why not allow that as a 
routine at least temporarily for the 7(a) program, the 504 
program, some of the others, you know, besides the Express Loan 
program? Why not do that with some of the ARC loan program? Why 
not allow the banks to do their own thing and not have to jump 
through another--another hoop for the SBA?
    Mr. Zarnikow. The balancing we have there is making sure we 
have programs that do protect taxpayers' dollars but also help 
support and expand access to capital.
    Chairman Schrader. I just would be cautionary because--
because we've heard, at least our communities, the banks are 
being pretty tough already. So I think not only are they 
protecting their shareholders, they're trying to protect the 
taxpayers too. They do not want to make a bad loan. I've yet to 
come across a banker or credit union individual that's making 
frivolous loans, at least in this day and age.
    I just urge SBA to think about that.
    What other elements--the other big thing I hear all the 
time is, Well, the SBA talks a good game, but they really 
can't--you can't get guarantees paid, they're difficult to work 
with, et cetera.
    What has happened in the last year, year and a half that 
SBA has changed how they're doing business to make it more 
friendly for banks?
    Mr. Zarnikow. Sure. We have focused very hard on our 
guaranteed purchase process. That's when a loan goes bad and 
the bank comes to ask money on our guarantee. So we put in 
about two years ago now what we call a brand promise where if 
the bank submits a package, a guaranteed purchase package, and 
it's complete, it's all the information we need to evaluate the 
guarantee to ensure that the loan was eligible, that the bank 
followed the rules around servicing and liquidation, we have 
committed that we will decision that case and get the guarantee 
paid within 49 days. And so far we have not missed a brand 
promise. We've been very focused on making sure that we paid a 
guarantee timely as long as the bank submits the information 
that's required.
    Chairman Schrader. Last question and I'll turn it back to 
the ranking member for any additional questions here.
    One of the things that was identified in my neck of the 
woods and in Washington, D.C. in some of our hearings was, you 
know, some of the carve-out programs and some of the abuses.
    We have a pretty robust veterans small business assistance 
program trying to encourage entrepreneurship among our fighting 
men and women that come back and want to start a business. 
They're, unfortunately, 45 to 50 percent underemployed or 
facing no job.
    But there have been horrible abuses in that program so the 
veterans aren't really getting help; there's the charlatan 
companies that are actually getting help.
    What's SBA doing to fix some of those problems that we've 
seen particularly--I know Vern has met with veterans here in 
Florida. So how are we helping our fighting men and women?
    Mr. Zarnikow. You know, from the loan side, and I don't 
know if you're talking about government contracting or the 
lending side. My area is really the loan side.
    You know, we do focus on and have specific outreach to the 
veterans community because we find that a lot of the veterans 
want to be entrepreneurs, they want to start small businesses. 
You know, our loan volume, somewhere between 5 and 10 percent 
of our loan volume each year goes to veteran-owned businesses.
    We do have also our Patriot Express product, which is 
really focused on the veteran community and their families. 
Once again, it's an express product with a higher guarantee to 
try and make sure that they have access to capital. We're 
supporting the veterans community.
    Chairman Schrader. Thank you very much.
    Mr. Buchanan. Yeah, I just--one other question. You know, 
one of the things that, you know, anybody that's looking for a 
loan, they want a quick yes or no; I'm sure that banks are the 
same way.
    What is the process time? I mean, even--people say, Look, 
if I get a no, I don't want it but that's fine. But give it to 
me. Don't drag out it for three months and then find out I 
can't get my, you know, $75,000 loan.
    Have we done anything to expedite decision-making to get a 
quicker yes or no? I know some of the programs that have a 
little less money attached to them, they're quicker.
    But just in general, are we doing anything to expedite 
that? Because, you know, people are usually at their wit's end 
to try to get a loan and you wait three months and they're all 
frustrated.
    And that's true of banks a lot of times too. They don't 
give a quick yes or no. It's a slow no.
    But what's the mentality on that today? What are we doing 
to try to get a quick yes or no?
    Mr. Zarnikow. Sure. Our process--there are several things 
that we've done. One is we have what we call preferred lending 
programs where for our largest, most experienced lenders we 
actually delegate authority with them to put the government 
guarantee on the loan. So they can have the ability without 
coming to SBA for pre-approval; they can actually put the 
guarantee on a loan.
    And through delegated authority for the loans that come to 
SBA for approval we generally have a five- to seven-day 
turnaround while we decision that loan and give either a yes or 
no once we have a complete package.
    The thing that I would highly encourage anybody, a small 
business who's looking at getting a loan, make sure you're well 
prepared, you know, through our small business development 
centers or SCORE volunteers or women's business centers. They 
can help you get prepared to go to a bank to get a loan. Make 
sure that you have a business plan, that it's well thought out.
    Make sure you have the basic information that the bank's 
going to ask for. They're going to want to see tax returns, 
they're going to want to see financial statements. They're 
going to want to see information about your business and what 
your road map is, which is basically your business plan.
    So I really encourage any small business who's thinking 
about getting a loan, make sure you're well prepared when you 
walk into the bank. And please access SBA resource partners to 
help you get it.
    Mr. Buchanan. If you're prepared and you give them a 
complete package or maybe most of it, how long should it take 
between whether they're going to get a loan or not in terms of 
the bank making a decision and then getting your commitment 
towards the guarantee from the SBA? What do you think is a 
reasonable period of time in your mind for that time frame?
    Mr. Zarnikow. You know, for the--it's hard to speak for 
each bank because each bank has their own internal process that 
they have to go through, the credit approval.
    Smaller dollar loans tend to get decisions pretty quickly. 
A lot of times those are done on credit scores and some basic 
analysis.
    A much larger dollar loan that's complicated can take 
longer. Once again, once--you know, we do have delegated 
authority, so once the bank decides, if it's a delegated 
lender, they can make the decision right away. Or if it comes 
to SBA, generally we have five- to seven-days turnaround time.
    So it really depends on the size of the loan and the 
complexity of the situation.
    Chairman Schrader. Okay. I'd like to thank our witness. He 
will be available later. And if we can get our four other 
witnesses to come forward, we'll take a quick break.
    [Recess.]
    Chairman Schrader. Let's resume. And the ranking member 
will introduce our first witness.
    Mr. Buchanan. We've got a great panel. I appreciate all of 
our panelists for being here today.
    Our first witness is Brian Hall, who is president/CEO of 
Sabal Palm Bank; has 26 years in the Air Force as an officer 
and pilot. Mr. Hall received his degree in finance from Indiana 
University, an MBA from University of Cincinnati. He's been a 
leader and very active in the Sarasota and Manatee community.
    And I personally have known him and he's been a great 
banker, as well. I met him when he was actually at South Trust 
Bank. But he started his own bank, I would say, about 2005, I 
guess, 2006 he started a bank from scratch and they've done 
well.
    We look forward to Mr. Hall and your testimony.

                    STATEMENT OF BRIAN HALL

    Mr. Hall. Good morning. Thank you for the opportunity to 
participate in today's hearing.
    In June of 2009 there were 53 FDIC-insured banks with 
locations in Sarasota and Manatee counties with approximately 
$18 billion in deposits.
    This market has three banks, Bank of America, Wachovia, and 
SunTrust that have a combined 48 percent share of the market.
    The nationwide and regional banks typically control 80 to 
85 percent of banking in this area and the community banks 
around 15 to 20 percent of the market.
    With the exception of a few banks that are focused only on 
consumer lending, private banking and/or wealth management, 
most banks in this market consider small business lending to be 
an important target segment.
    Banks can play an important role in helping our economy 
recover. Our industry is needed to supply loans to small 
businesses that want to buy, build, expand, or support 
something that creates commerce and job growth.
    Banking is a highly regulated business and banks are 
required to maintain certain leverage and risk-based capital 
ratios by their primary regulators based on the financial 
condition of the bank and the composition of the bank's loan 
portfolio.
    For every dollar of capital that a bank has, it can 
leverage this about ten times into loans, again based on the 
type of loan and overall condition of the bank.
    Many bankers will tell you that the number one 
consideration for determining the volume and the type of 
lending that they can do is their level of capital.
    The key considerations for a bank's capital are as follows:
    First, do banks have enough capital to deal with the loan 
risk that's inherent in their current loan portfolio?
    Almost all small businesses--small business borrowers, 
unless they're in the business of providing a highly essential 
product, have experienced declining trends for the past two or 
three years. The cumulative impact of declining revenues, 
margins and liquidity has left small businesses in a very 
fragile condition and with reduced ability to pay their loans.
    Second, are banks confident that they can get additional 
capital when they need it in a timely manner and a fair price 
to support future growth or use as a cushion for the risk of 
losses?
    For most community banks, even mature banks that are 
profitable and have relatively clean balance sheets, it is very 
difficult to raise additional capital today, even at 50 percent 
book value per share.
    The President's announcement a few months ago about a Small 
Business Lending Initiative that would make capital available 
to community banks under reasonable terms and conditions has 
many of us eagerly waiting for more details.
    And third, how confident are banks about the results of 
their next regulatory exam, especially as it applies to the 
review of their loan portfolios and capital expectations by 
regulators?
    There have been many well publicized comments by our 
political leaders and banking association leaders calling for 
regulators to show restraint, consistency, and provide more 
time for banks to work through problem loans and complete 
capital raises.
    The only microwaved solution for a problem loan today is 
just to charge it off or set aside reserves which reduces 
capital, which reduces--which results in less lending that 
banks can do, which results in less commerce and job creation.
    So what can be done to help small businesses get more 
access to bank loans for building, buying, supporting 
something?
    I have a few suggestions:
    First as it applies to bank capital, as I previously 
mentioned, the level of bank capital is the key driver for how 
much lending and what type of lending a bank can do.
    There are a number of initiatives being discussed to 
strengthen bank capital which will lead to more lending.
    Number one, the President's Small Business Lending 
Initiative proposed $30 billion to be provided to banks with 
$10 billion or less in assets as recommended by their primary 
regulator.
    The details of this program have not been announced. But 
it's critical that the applying bank be evaluated based on 
their condition and ability to repay after receiving the 
capital, not on the bank's current condition. This wouldn't be 
a bailout or a handout, but it would be a capital investment 
required to be repaid with dividends.
    Banks should be encouraged to use these funds for small 
business lending and receive a reduction in the dividend or 
interest rate based on their lending results.
    The program should encourage but not require banks to do 
SBA lending if they participate. Many banks are SBA lenders, as 
we heard this morning, but many are not.
    Gearing up to do SBA lending does take a lot of time and 
expertise that many banks don't have today. We just don't have 
that time to spend.
    Currently banks are limited on the amount of their 
allowance for loan loss that can be counted as part of their 
capital. These limits didn't anticipate the type of economic 
challenges that we're facing today and the limited access to 
new bank capital.
    Accordingly, a bank's entire allowance for loan loss should 
be treated as a form of capital. And really that's what it is. 
It's funds to be set aside to help support the future risk of 
loss in a loan portfolio. This would increase bank capital 
which could be leveraged into increased small business lending.
    Third, very few banks have been profitable over the last 
two or three years. Current accounting for deferred tax assets, 
which are basically treated as reductions from capital for 
capital adequacy measurement, needs to change.
    Current treatment of deferred tax assets is very 
destructive to capital and the U.S. has among the most outdated 
accounting treatment for deferred tax assets of any modern 
country.
    Our leading trade association, American Bankers 
Association, recently announced this issue as a key initiative. 
But frankly, with so many other things gong on in our industry 
it's really not received the attention that it deserves.
    Modifying the treatment of deferred tax assets for capital 
adequacy would increase capital for banks which would--could be 
used for additional small business lending.
    Second, as part of the American Recovery and Reinvestment 
Act--we heard a lot about it this morning from our first 
speaker, I agree and applaud the SBA's efforts to reduce fees 
and increase the amount of guarantees. I think as Mr. Zarnikow 
said, that has been helpful. Our bank is a relatively young 
bank. But we have been an active participant with the SBA.
    And finally, regulators need to provide some relief as it 
applies to commercial real estate lending. Not all commercial 
real estate loans are alike. Most bankers agree that loans for 
land, development and other speculative purposes are very high 
risk, especially in the current economy.
    However, if conservatively underwritten, other types of 
commercial real estate loans such as office, medical, anchored 
retail, and multifamily are not necessarily higher risk than 
traditional commercial loans.
    To summarize, in order for our economy to recover, 
qualifying small businesses need access to capital from banks 
for loans to buy, build, expand or support their businesses. 
Banks are motivated to find ways to make loans; that is what 
they do. However, bank capital is the key.
    These are solutions that I mention that are available to 
increase capital for banks which will allow for more lending 
which will advance the volume of commerce and job growth in our 
economy.
    Thank you again for the opportunity to speak for you today.
    [The statement of Mr. Hall is included in the appendix.]
    *
    Mr. Buchanan. Our next witness is Bill Miller. Bill is 
Senior Vice-President for Political Affairs and Federation 
Relations, which means--when I was chairman of the Florida 
chamber, we had 137,000 businesses in the federation. A lot of 
chambers are part of the state federation. And they are, all of 
those chambers, tied into the national. I think there's over 
three million small business and businesses that tie in, in 
terms of the U.S. Chamber; Bill Miller oversees that.
    In his capacity he's responsible for directing and 
implementing the Chamber's political grassroots and elected-
related activities. You know, his job is to find members of 
Congress and the House or Senate that are pro-business, 
Democrats or Republicans.
    His biggest issues in terms of his portfolio, in terms of 
legislation pertain to keeping taxes low, trade, legal reform, 
govern--corporate governance and election reform.
    He serves as spokesman and has appeared on many numerous 
shows including CNN, Inside Politics, Bloomberg, ABC Nightly 
News, PBS as well as the Wall Street Journal--he's written 
articles, published articles in the Wall Street Journal, New 
York Times, Fortune.
    I want to thank you for being here today, Bill.

                    STATEMENT OF BILL MILLER

    Mr. Miller. Thank you.
    Good morning. Again, my name is Bill Miller. I'm here 
proudly representing the United States Chamber of Commerce.
    Thank you, Chairman Schrader. Thank you, Member Buchanan. I 
greatly appreciate the opportunity to offer the perspective of 
the business community on the important discussion of issues 
today.
    In addition to representing the chamber, I'm also a small 
business owner myself; over the years starting and selling an 
entertainment company, starting a--starting and running a small 
community bank. And today I'm a part owner of two restaurants 
in Washington, D.C.
    The nation is clearly emerging from trying economic times. 
With the unwinding of the housing market, severe liquidity 
crisis, and the general deleveraging of financial markets, the 
economic downturn was severe.
    Not surprisingly, many small businesses are still in that 
survival mentality, making defensive operational decisions in 
an attempt to protect assets.
    As economic activity gains momentum, credit markets will 
need to respond by providing robust avenues of capital for Main 
Street to replenish those inventories, purchase equipment, and 
make investments in new opportunities.
    The following are a couple of policy initiatives that the 
U.S. Chamber of Commerce feels are warranted to help small 
businesses grow and create those new jobs.
    First, with regard to federal income tax rates, many small 
business are organized as Subchapter S Corporations, limited 
liability partnerships, or LLC for federal income tax purposes.
    This means the profits are not taxed at the corporate level 
but instead passed through to the individual income tax 
returns.
    While small business owners pay personal income tax on the 
profits, the reality is only a portion of the income generated 
by the businesses actually make their way back to the personal 
bank accounts. Much of the income small business owners are 
being taxed on is actually reinvested in the companies in the 
form of expansion and new equipment.
    The chamber recommends that Congress lower all marginal tax 
rates or, at the very least, keep those rates at present 
levels. By lowering or keeping the rates at present levels, 
Congress would enable small business owners of all size to 
invest more in their businesses. Allowing these rates to 
increase would increase the cost of capital and diminish the 
investment opportunities.
    Secondly, repealing the 3 percent withholding tax, Section 
511 of PL 1009-22, requires a 3 percent tax withholding on all 
government payments, which affects all government contracts as 
all as other payments, such as Medicare, grants, and farm 
payments.
    While this requirement is not set to go into effect until 
January 1, 2012, there are many companies that are already 
expending funds to prepare for the implementation of this. 
These are needless preparation expenses for a requirement that 
most believe should have never been enacted.
    The chamber supports repealing the 3 percent tax 
withholding law which will have tremendous impact on working 
capital for those companies that are local, state and federal 
government contractors.
    Three, access to capital provisions. As was discussed by 
the previous two witnesses, access to capital is a critical 
component for small businesses for them to fully unleash the 
job-creating engine that will be vital to igniting the economic 
turnaround for our country.
    In order to have capital available for small businesses 
they need to revive the economy, the chamber supports the 
following legislative efforts: Extend and fund through the 
current calendar year the reduced borrowing and lending fees 
for SBA 7(a) and 504 programs. These fee reductions will 
continue to incentivize financial institutions to lend and will 
make funds more affordable for small businesses to borrow.
    Extend--number 2, extend fund--extend and fund through the 
calendar year the 90 percent government guarantee percentage of 
the SBA 7(a) loans. Appropriate increases in the federal 
government guaranteed portion of the loan reduce risk to the 
financial institutions and provide additional incentives for 
the industry to underwrite small business loans.
    Make improvement in the SBA Express Loan provisions 
increasing the maximum Express Loan value to $1 million and 
temporarily increase that Express guarantee for 75 percent for 
the next two years. This was discussed in some detail in the 
last presentation.
    Number 4, increase the maximum loan size and maximum 
guaranteed portion of the SBA loans. This was discussed also. 
And the Chairman and Ranking Member have a proposal. There's 
also one in the Senate by Senators Landrieu and Snowe on the 
Senate Small Business and Entrepreneurship Committee that has 
introduced increasing the size of the maximum size of the SBA 
7(a) and 504 loans from two million to five million.
    And then finally, Small Business Innovation Research and 
Small Business Technology Transfer programs, these were 
established by the Congress in 1982 to use innovative talents 
of small businesses to help meet the government's research and 
development needs at a time when there was a significant 
concern that the United States was falling behind its global 
competitors in developing innovative technologies.
    SBIR and STTR currently do not enjoy long-term 
reauthorization. In order to make sure that these small 
businesses are fully involved in advancing the nation's 
innovation and technology, we need to expeditiously get the 
Senate to get a comprehensive reauthorization of these two 
programs.
    In conclusion, I appreciate the opportunity to submit these 
comments on proposals that will be helpful to small businesses. 
I look forward to working with you and the Committee to 
champion the policies to unleash the innovative abilities and 
the entrepreneurial spirit of American job creators, our small 
and medium-size businesses.
    [The statement of Mr. Miller is included in the appendix.]
    *
    Mr. Buchanan. Thank you, Mr. Miller. I just want to say the 
U.S. Chamber, as well as the state Chamber, will lobby in terms 
of small business or pro-business in Tallahassee with members 
of the House and Senate. The U.S. Chamber weighs in 
aggressively with Democrats and Republicans in the House and 
Senate in Washington.
    And I say that because it's just not a Republican-based 
thing. Aggressively with Democrats, anybody that's going to be 
pro-small business policies in terms of less tax, less 
regulations, less frivolous lawsuits. They do a heck of a job, 
and I appreciate Mr. Miller being here today.
    The next gentleman I just met a week or so ago, but he 
represents why I want to have this access to capital. This 
whole thing is about jobs and working families.
    And he--I got introduced to him by a mutual friend. And he 
was talking about if he had access to capital, he's got a 
company that's grown quickly. He's got a company that's 
profitable; just that he's a newer business, he can't get--he 
can't get money from banks or anything else locally, as many 
small businesses can't.
    Mr. Orr is the founder and CEO in Sarasota of Creative 
Agency Service Team, Inc. or CAST. CAST provides retailer and 
manufacturers with creative manpower and virtual interactive 
services.
    His company currently supports an average of over 25,000 
retail locations a month, brands like American Express, Macy's, 
Wal-Mart, CVS, and many others.
    Mr. Orr has over 30 years of retail and marketing 
experience and serves in a--he did serve in a senior leadership 
position for three different Fortune 500 companies prior to 
starting the company three years ago, CAST.
    After initial investment of 175,000 from private investors 
less than two and a half years ago, CAST is projected to 
deliver top-line revenue of $6 million this year in 2010 in 
downtown Sarasota.
    The company currently employs about 450 employees, not all 
full-time, some of them are part-time, and employs 
opportunities for over 18,000 independent contractors in the 
country.
    I'm glad to have Mr. Orr with us today.

                   STATEMENT OF JOHN PAUL ORR

    Mr. Orr. Thank you.
    Well, before I begin, I think I'd like to start by 
introducing my wife Kelly who's--stand up, Kelly. Kelly is my 
wife for 28 years and the last two years she's been my business 
partner. She left her nursing career as an RN and she's joined 
me in business.
    So I said to someone as we were preparing for this that now 
that we've learned to work together in business, that if you 
should need some help with settling peace in the Middle East, 
Kelly and I would be glad to step up.
    So what I want to do today is just really give a personal 
experience here in Sarasota, how it's related. It's related to 
our need to raise capital and some of the challenges that we 
face.
    I'd like to first just repeat some of the things that Vern 
has already said. As founders of a small company that's 
experienced fairly significant growth since its inception, I'm 
honored today to discuss the opportunities that we believe 
could be created if small businesses are afforded more 
sufficient and reliable access to capital.
    Like many small business owners, our American Dream 
actually began as a nightmare. Without notice, we received a 
phone call informing us that the job we thought our entire 
future depended on was being eliminated.
    Fortunately, we were armed with over 30 years of corporate 
experience, an extremely generous group of friends and family 
who believed in us, many of those are here today, and a healthy 
dose of entrepreneurial naivety; in other words, we didn't know 
what we were getting ourselves into.
    I'm here today to provide evidence though also of society's 
return on investment when small businesses do succeed.
    The name of our company is Creative Agency Services Team, 
Inc. or CAST for short. Our mission is to support major 
retailers and their suppliers in over 100,000 retail store 
locations across the country.
    And CAST's model requires us to train and deploy thousands 
of agents to do work in all 50 states. This means that our 
success is hinged greatly on our ability to make investments in 
state-of-the-art technology, to establish scalable 
infrastructures, and to create sufficient cash flow to floor 
plan our payables.
    CAST was started, as Vern said, with an initial investment 
of $175,000 from private investors just a little over two years 
ago when the company started and is projected this year to 
deliver top-line revenues of 6 million. It's a testament to the 
American economy that a company started by a husband and wife 
and one employee in the worst economy since the Great 
Depression currently provides jobs to over 450 employees and 
deploys opportunities to 18,000 independent contractors.
    Naturally we are proud of these accomplishments and 
grateful for the support that has got us to this point. But 
it's important that I use the opportunity today to point out to 
the Committee that with better access to capital, we believe 
that CAST could have grown at twice that rate and employed a 
much larger work force at a time when America desperately needs 
jobs.
    Small business investment is not only a great deal for 
savvy investors, it also yields significant returns for society 
at large. In contrast to the rhetoric we hear about corporate 
America and big labor and big government, small business 
continues to embody the true spirit of America. By definition, 
no small business is too large to fail; and, therefore, company 
politics and hidden agendas and wasteful spending are better 
left to those who can afford to fail.
    We've been thrilled to find that in small business it's 
still very personal. Loyalty to customers and to employees and 
to deep-rooted principles is still very much in vogue.
    Small businesses literally bloom from the roots of the 
community. Friends and relatives offer unconditional support 
and encouragement. Employees bring their experience and their 
ambition, while investors add a sense of confidence and 
responsibility to the organization by betting that success is 
within reach.
    If you think about it, all great American institutions can 
ultimately be traced back to their small business DNA. That's 
why I submit to you today that placing too much of our nation's 
priority on businesses thought too large to fail at the expense 
of small business is like frantically gathering fruit from a 
burning vineyard while allowing the roots to die.
    At the end of the day, small business gives birth to our 
future economies. It makes a major contribution toward the 
culture that most Americans long to restore and it truly 
represents the most powerful mechanism at our disposal for 
stimulating economic growth and job creation.
    I'm honored to be part of the panel, and I look forward to 
learning, as I've already learned some things today, and 
sharing ideas that can help us maximize the potential of our 
small business economy. Thank you.
    [The statement of Mr. Orr is included in the appendix.]
    *
    Mr. Buchanan. Thank you, Mr. Orr. I--you know, I--that's 
the American dream. You start out a business. My wife and I 
started ours in 1976, we put in a few dollars and grew it over 
the years. In fact, the two of you are doing that.
    We're going to find in this recession, a deep recession, 
you're going to see a lot of successful entrepreneurs come out 
of this. But even if they didn't want to necessarily be an 
entrepreneur but always had some interest in maybe being one, 
it's forced them into that position.
    So I'm excited about your company. I'm excited it's based 
in Sarasota. And I think the American Dream, as long as we've 
got access to some capital, is alive and well.
    Our fourth witness, Mr. Herbert Brill, is a private 
business consultant who advises small business clients on a 
host of activities including access to capital. We're excited 
about him being here today. He's a member of several 
professional associations such as the New York and Florida Bar 
Association. Mr. Brill has held a variety of jobs throughout 
his career, I believe managing partner of a law firm in Miami. 
He's also general counsel to a bank in Miami so he understands 
a lot of things that we're talking about today in terms of 
access to capital.
    In addition to his professional experience, Mr. Brill has 
also taught at several universities throughout the United 
States including locally in this region the University of 
Florida, University of Miami. He has a law degree from Columbia 
University Law School. He currently resides in Lakewood Ranch.
    We're excited to hear your testimony today, Mr. Brill.

                   STATEMENT OF HERBERT BRILL

    Mr. Brill. Thank you. Before I begin, I'm very happy to be 
here today, but it did cause me some distress this morning. And 
that distress was how do you make a tie? It's been so long 
since I had to put on a shirt and tie that I'm thinking, Well, 
wait a minute, they are only members of Congress. What do I 
need a tie for? So I figured, Well, what the hell.
    So I put a tie on and I did remarkably. Thank you for 
jogging my memory.
    I look at what I am here today to say and what I've heard 
from the bank's point of view. I was general counsel for Bank 
of Miami, Banco Popular, and counsel to Key Credit, et cetera, 
et cetera, et cetera. So I look at it from a lender's point of 
view, having sat in on executive Committee meetings, board of 
directors meetings, that said yes or no over a long period of 
time.
    We all know we're in a recession. And the cause of it, you 
know, that's for another time. But we do know that the 
Secretary of the Treasury went to the President in the fall of 
seventy--2007 and said, ``Mr. President, the sky is falling, 
we're out of credit, the banks are frozen, the credit is 
frozen. What do you want to do?''
    Well, historians ten years from now will probably tell us 
what he really thought or really said. I don't know and I don't 
really care.
    But at that point that Administration, the prior 
Administration, said, ``We have got to do something'', and went 
to Congress. And in Congress and it was Congress that said, 
``Okay, we approve all this lending and borrowing, et cetera, 
et cetera''.
    Was it good? Was it bad? Was it done well? We'll see. But 
it did do one thing: It did stop the bank panic. It did stop 
the credit flow from increasing and at least put a stop to it. 
It is now progressing on the right side.
    I don't think anybody can argue about that. You can argue 
about means, methods, and long-term effect, but we did stop it.
    Okay. One of the specific things that came out of that, 
among many others, and that is that credit to small business 
like Mr. Orr dried up. It just isn't there.
    Personal experience, first let me just say that the SBA--
the SBA is wonderful. They do a good job. They've increased 
their lending. They've modified their ability to do it quickly 
because they've eliminated cost. They're doing a terrific job.
    Congress has hampered them by saying this increased 
authority is month to month. Now it's only until April 30th. 
After April 30th, you can't continue to do what you've been 
doing, which is the right thing.
    And the President has asked that they extend it to 
September 30th. And there's a bill pending and I spoke to 
Congressman Schrader, I think it's 3854, that would extend that 
until the end of fiscal year 2011.
    So it's not a question of fault. But one of the answers to 
keep SBA going--and I love SBA, they're very effective, 
especially today--is to get that extension. Banks are not going 
to want to loan on a month-to-month basis and set up a program, 
hire people, train them, and then say, Oh, it's over next 
month. You've got to get real about these things.
    I do most of my work pro bono for the Manatee Chamber of 
Commerce. And I think the chambers of commerce are terrific 
locally. And they do a great job. And I agree with everything 
that Mr. Miller said about taxes on small business.
    I do not agree on the national policies of the U.S. Chamber 
on national tax policies. But that's for another time.
    But as far as the SBA and as far as local tax and tax on 
small business, I'm in total accord.
    I was retained and paid a nice fee, thank you, for getting 
a loan on a business, a local business, manufacturing, that 
hired people, that I helped streamline, got their balance sheet 
in shape, et cetera. And I personally wrote the proposal, 
business plan, everything.
    I know what banks want. I've reviewed them for banks. I've 
been with banks. And I said to my client, It's a 90 percent 
shot.
    This is January of 2008. Okay? 2009. I'm sorry, 2009. I 
spent six months and went to six banks, three major, three 
local, one small community. I was turned down by all six.
    And I was almost insulted. I said, ``I know what you want. 
This is a good loan.''
    ``Oh, yeah, but it's based on collateral, the major 
collateral'' which is the building in which he operates.
    And I said, ``Fine. But that's $175,000 on a building that 
was assessed today, now, in the middle of recession at 
$800,000, and we want four and a quarter.''
    They said, ``Sorry.''
    It just didn't make sense. So I got this answer from 
virtually every bank.
    But knowing bankers, I then said to two or three or four of 
them, ``Let's go to coffee''. So we went to Starbuck's. I drank 
Starbuck's coffee, and I don't like Starbuck's coffee; it's too 
bitter. But we went.
    And I said, ``Guys, what's going on?''
    They said, ``Herb, we've raised our lending standards to 
the extent where if you come in and before all this happened 
you were triple A, we were delighted to give you the money, to 
keep you on our books. But now those loans are going to the 
SBA.''
    So I said, ``Well, the effect of that is to eliminate all 
these good-credit people over a standard and your triple -- 
AAA''. And he says, ``That's right.''
    I said, ``Why?'' He said, ``Because we have got to get our 
balance sheets in order or I'm going to lose my job. I will not 
make a loan or approve a loan or even set up a loan, I don't 
care how good it is, unless I know the bank examiners are not 
going to come in and say it's questionable because--not because 
it's SBA, but it's SBA, or it may go into default because we 
have to get our balance sheets.
    Why do they have to get our balance sheets? Because the 
Secretary of the Treasury and the government has said, 'Clean 
up your balance sheets'.''
    How many times have you heard that?
    Mr. Hall said balance sheet. Mr. Orr was talking about 
balance sheet. Most clients don't know what a balance sheet is, 
by the way. That's another problem.
    And they said, ``Because you must do that.''
    And that problem stems from the federal government's left 
hand saying, Clean up your balance sheet, and the right hand 
saying to the banks, Loan money.
    They're not going to loan money. If I--if Mr. Orr came to 
me today and said, ``Get me a start-up loan'', I'd say, ``Thank 
you. Buy me a cup of coffee and let's go home because there's 
no way; no way, any start-up is going to get a loan. Absolutely 
not. I don't care what it is or how it's collateralized.''
    So it doesn't happen even with the 90 percent bank 
guarantee.
    The big problem there--and again, this gets somewhat 
technical--it's GAAP, generally accepted accounting principles, 
which are formulated, that all banks must look at because the 
major accounting firms will look at it that way.
    And I could go into what--what--the games that have been 
played, Lehman Brothers made assets disappear, they disappear 
off their balance sheet. They weren't just sold and put on as 
assets, which is what they did; they disappeared because GAAP 
said you could do that. And we could spend a-- you know, a 
whole day talking about GAAP.
    The problem with GAAP is because it was so loose and so 
flexible, that banks can do whatever they want.
    But when it comes to the balance sheet now, if you come 
back to the balance sheet, as everybody on this panel has said, 
the problem lies in having enough equity.
    Sabal Bank--I've never done business with them, but they've 
got a good reputation, has basically said, ``We must protect 
our balance sheet.''
    The three items or three of the four or five that he listed 
are capital, additional capital, and bank examiners.
    That means capital. That means keeping your balance sheet 
clean.
    I can only tell you that you can say what you want and do 
what you want, have all the great programs like SBA, which is a 
great program, but it starts with the banks.
    The SBA doesn't lend money. I have clients that think, Oh, 
let's go to the SBA. You don't go to the SBA. You've got to go 
to a bank.
    So why are the banks not lending? They're scared. They're 
frightened of their jobs. They've seen what's helping.
    The last two years friends of mine in the banking business 
call me and say, Herb, do you know anybody who's looking? I 
lost my job.
    What do you mean you lost your job?
    Well, it's the industry. That happened to Mr. Orr. He went 
out on his own.
    So what is the answer? There's no one answer. But certainly 
GAAP and the Accounting Standards Board that sets the rules for 
GAAP are a major, major problem. We get left hand to know what 
the right hand is doing, we're going to be fine.
    I could go into the history like everyone has written 
government intervention. And government intervention started in 
1933, and that was the year I was born, not that that's 
particularly noteworthy. But when I got out of law school and 
went into law and into business, the FHA and the alphabet 
people, all government regulation, the FCC were there and doing 
what they were supposed to be doing.
    That ended when the Glass-Siegel Act was--was canceled by 
Congress. When they canceled Glass-Siegel, which was the law 
that said the banks shall only lend; they should not invest; 
and Wall Street, you invest, you don't lend. And you don't mix 
the two.
    Well, we've got Citibank which became 300,000 employees 
around the world. And they became everything. And you've got 
the--I think I know a little, and I don't begin to understand 
them, but they're bets on bets on bets. There's five hundred 
million dollars worth--trillion, trillion dollars out there, 
and guess who controls 95 percent of them? Right. The five big 
banks.
    There's a lot to do. But my bottom line is we can do what 
we want with SBA, we can have all these things going that are 
great. But unless Congress, and I mean Congress, steps up--and 
I don't want bipartisanship, I want nonpartisanship--and get 
this thing solved.
    Thank you.
    [The statement of Mr. Brill is included in the appendix.]
    *
    Mr. Buchanan. Mr. Brill, I agree with you. And that's 
reason I'm holding this hearing today.
    I've met with banks, they're not lending. And they're--it's 
all about--I ask them where they're at. One key word: Capital, 
capital, capital. That's it. Most of them don't have enough 
capital.
    Mr. Hall knows if you lend ten to one your capital is not 
there, you're going to shrink the size of the bank. That's 
what's going on a lot in our region and all over the country.
    I'll turn it back over to the chairman. We are a little bit 
on a time frame here. People have got flights and things. So 
we're going to--I ask you to be fairly concise. Our witnesses 
will be around for few minutes right after. Mr. Chairman.
    Chairman Schrader. Well, I guess the obvious question--
well, a comment first. I agree with Mr. Brill that we need to 
put some certainty in the marketplace. And frankly, it would be 
nice if the Senate would pass our bill, and hopefully that will 
happen. It would be nice to have that, to do what he was 
talking about. And hopefully that will happen. We'll get back 
and use his testimony, might light a little bit of a fire.
    I'd like Mr. Hall to respond a little bit to Mr. Brill. 
Obviously you guys aren't lending at all. You're not doing 
anything right. And you're hamstrung by all these evil 
regulators. Respond, please.
    Mr. Hall. Well, it is interesting. If you had a group of 
bankers, I think you'd hear them say the two toughest 
challenges for banks today--and I'm talking about local 
community banks here-- number one is just managing through the 
loans that are already on their books.
    But number two and maybe it's 1, 1A, is "we've got to grow 
our own portfolios. Do you know of any good loan opportunities? 
Do you have any that you could participate with me?"
    Now, there are a few banks that really are not doing that. 
They're trying to manage to their current capital levels. And 
it's clear they're on the sidelines.
    But I think if you got most banks together they'd say, 
"We've got to find a way to grow our loan portfolio."
    But yes, I would say lending standards having tightened; 
there is no doubt about that. The economy is very, very 
uncertain right now. As my directors say, Brian, let's look at 
the business; the last three years key indicators have gone 
from here to here to here. Where is it going next? Well, that's 
a very hard thing to know.
    Chairman Schrader. So if I can interrupt you guys, just for 
the sake of moving things along, not to be disrespectful. So 
how do we untighten standards and still protect investors and 
taxpayers?
    Let's do several things. GAAP is one I've heard again.
    Mr. Brill. Let me add to GAAP, get rid of mark-to-market. 
GAAP is scoring the balance sheet. And that makes people like--
    Chairman Schrader. But on a temporary basis. Not doing 
mark-to-market, some people have argued, is what got us into 
this mess.
    Mr. Brill. I think it's the worst thing that can happen to 
keep credit--to keep banks from lending.
    Chairman Schrader. Mr. Hall?
    Mr. Hall. Well, I think the SBA is doing a much better job. 
They are being good business partners. We're a young bank; 
we're three and a half years old. We've done six ARC loans. We 
have two more that are pending. I'd like to see that keep going 
and make it a little more streamlined but raise the dollar 
amount, to at least $50,000. That would be helpful.
    But I think that really in the current environment banks 
are going to be looking at what's the primary source of 
repayment and what's the secondary source of repayment. And if 
there's a heavy speculative element to that, those kinds of 
loans are going to be very, very hard to get done.
    Chairman Schrader. The ARC loans we are trying to increase. 
That's in our bill actually. So we agree with you and hopefully 
that will come to fruition.
    Mr. Orr, you mentioned some things that--well, obviously 
you're successful. You could have been more successful. What 
things in the lending environment got you to be successful 
briefly? And then what are the things in the lending 
environment that are hindering you from being as successful as 
you think you should be?
    Mr. Orr. Well, the thing that I think helped us with our 
capital getting started up is angel investors. And with the 
current unemployment rate, a lot of very qualified people are 
being in the market considering starting businesses.
    These programs may exist and they just don't know about 
them. But I think one of the things that would be powerful in 
our nation is I think it's high time that angel investors are 
given tax breaks or given some of the benefits that banks are 
given for backing loans, even though it may not be at the same 
rate.
    These people are actually stepping up and taking huge 
risks, believing in people like myself who have given us an 
opportunity and absolutely given no--none of these programs or 
none of them the benefit--
    Chairman Schrader. Are you aware of the new market venture 
program that--okay. We've got to get more information out on 
that.
    Mr. Orr. So I think that--
    Chairman Schrader. What's holding you back? What should we 
do?
    Mr. Orr. At this point, I think it's kind of like a 
conventional loan for an individual: Once you get to the point 
where you don't need the money as much, obviously you can get a 
loan.
    So I think that some of those things will be behind us. But 
I think a lot of it--as I've learned today, a lot of it's 
education. When you're--when you're starting a new business, 
you're very busy. You're scrambling. You're trying to find out 
where you can get capital and get it quickly.
    And, you know, I think it's--a lot of it's just educate 
yourself. So some of that is not--you know, not up to Congress. 
It's not up to society. It's up to the business owner themself.
    But I do think that programs that motivate people who have 
previously been in the real estate market made a lot of 
investments, there's quite a bit of capital out there with 
investors who are willing to bring capital to the table for 
the--for the right business plan.
    I just think that emphasis in not only educating business 
owners but educating those potential investors of the programs 
that you're--that are out there can be very powerful.
    Chairman Schrader. Last comment and I'll turn it over to 
the ranking member. I'd ask Mr. Hall, you reference in your 
testimony the allowance for loan loss and accounting. If you 
could give my office, our offices some more elaborate 
information on that, that would be very helpful as we go back.
    Mr. Hall. I'll be glad to.
    Mr. Buchanan. Thank you, Mr. Chairman.
    Mr. Hall, there's been discussion with the Administration 
and the administrator called me about capital, access to 
capital for community banks. Big banks got the money; we're 
talking 30 billion.
    What's your thought? Is that something--because what I hear 
from banks, you know, a lot of them, if they don't get it, 
they're going to be out of business, and they can't get it 
anywhere else; it's too expensive or nobody wants to invest in 
this period of time.
    Isn't that 90 percent--I hear from banks, community banks, 
all of them, many of the banks that have gone out of business 
in our communities here came to see me a week or two before 
they got taken over, taken out. Isn't that 80 percent of the 
issue?
    Mr. Hall. I think capital is top shelf for all bankers 
right now. And the details are important of this program, kind 
of headline news. But I think having something where banks 
could apply for up to 5 percent of the risk-weighted assets. A 
bank like ours, we're three years old, that would amount to 
somewhere around two and half, $3 million.
    It's very, very difficult to go out in the private market 
and raise bank capital today. If you can, the price is 
extremely low.
    So, yeah, I think that--I think that would be an 
outstanding program. It would help, I think, banks quite a bit 
in terms of, maybe being more bullish towards small business 
lending.
    You can't give it to every bank. There are some banks that 
probably wouldn't qualify. But the banks that are well run, 
well managed we could look at ...
    Chairman Schrader. So like if we did the program, how do we 
make sure it goes out to small businesses? You said you didn't 
want to tie up SBA necessarily. How do we make sure--would the 
banks be open to some requirement that that be loaned out to 
small businesses?
    Mr. Hall. I think so. I think most banks, that's what they 
would want to do is to put it in small business loans.
    And as I've heard discussed, there would actually be some, 
incentives for banks based on their small business lending 
performance; the more they do, the lower the cost of the 
program is to the bank. So I think something like that would be 
very good.
    Mr. Buchanan. Thank you.
    Mr. Miller, I know one of the big things I always hear is 
mark-to-market. We're in an area, region, where somebody might 
have a piece of land, you know it's worth five million three 
years ago. And today, you know, you could put it almost zero, 
20 percent or some number. So the regulators come in, make them 
break that down. And if they've got ten million in capital, all 
of a sudden they've got to write down four million or something 
else.
    Why--you know, everybody talks about adjusting the 
accounting on that, the GAAP, in terms of mark-to-market, the 
original market. How come they don't make a concession for a 
year or two? Are you up to speed on that?
    Mr. Miller. Well, to a degree. And one of the things that 
we do often is poll our membership with regard to, you know, 
the major issues that they're facing, particularly small 
business.
    One of the things that has been discussed today is what is 
collateral. And as--with the problems with regard mark-to-
market and the lack of identifying, because of the downturn in 
the housing market and the ability to actually identify from 
the bank's perspective what collateral is, and at the end of 
the day when a loan goes bad, what is the banker going to be 
able to hold is a very difficult issue.
    And so while there are--the SBA programs help out a lot of 
the banks that are not just trying to manage current loan 
portfolios but actually moving forward, it's--the real issue is 
the issue of collateralization and as--making the final 
determination, as a loan committee or others are making those 
determinations on good versus bad loans, the lack of ability on 
mark-to-market collateralization is a huge issue.
    Mr. Buchanan. Someone says, ``Are the banks lending?'' 
Yeah, they'll lend. If you want to borrow a million, put up a 
million-dollar CD; they'll loan it back to you.
    Mr. Orr, let me ask you, because we're talking about SBA 
today, and I know you talked about access to capital, have you 
looked at SBA? If you have, great. If you haven't, why not?
    Mr. Orr. Well, we looked at SBA early on. And actually we 
did participate in an Express Loan, you know, early on in our 
business, a small loan.
    But after that it's basically every banker we talked to 
before we even filled out an application, within two minutes 
they could tell you if you haven't been in business for two 
years, you need not apply.
    So it doesn't matter really how well you're doing. It 
doesn't really matter what your balance sheet says. If you 
haven't been in business for two years, then you need to 
survive another year.
    So that's been our experience, and we've survived it. But 
at this point I'm fairly confident we would qualify for an SBA 
loan.
    Mr. Buchanan. I want to say, Mr. Brill, a little bit on the 
SBA thing because you sound like you've had some experience 
with it. You said, ``Well, the banks aren't lending.'' And I 
agree with you totally. But then if the banks aren't doing SBA, 
can't we look at--are there banks in the region--I would say 
ideally Sarasota/Manatee County, but if you go up to Tampa, 
aren't there some banks that are open-minded to SBA?
    Part of the concern I don't understand is if a bank can get 
a 90 percent guarantee from the federal government, it seems 
like a regulator is not going to come in and pop them on it. I 
mean, they might write it down 10 percent, but you've got a 90 
percent guarantee.
    Why don't banks do a lot more lending under some of these 
programs? They have a guarantee. Why not? It's just crazy. If I 
was a bank, whether I liked to do it or not is one thing, but 
I'd want to do it as a community service, especially in these 
tough times.
    It might take a little longer, but you still have the 
guarantee of 90 percent; where you've got a piece of real 
estate, God only knows what that might be worth in a couple of 
years. What's your thoughts on that?
    Mr. Brill. Well, when you say banks, lending, community 
service, that's an oxymoron. No way.
    Mr. Buchanan. Trying to give Brian the benefit of the doubt 
here.
    Mr. Brill. Like it or not, over the last 25, 30 years banks 
have become the primary source of capital for small business 
and big business, of course. Well, they become the source of 
capital for small business and they have ability and did make 
loans with a certain amount of community access because they do 
have the SBA.
    But things changed two and a half years ago. And when the 
bank examiners come in, having an SBA loan doesn't necessarily 
make them, Oh, my goodness, we don't really care, you can keep 
that as a full asset on your balance sheet, at least up to the 
90 percent. That's not the way that works in the real world.
    The trauma, the absolute trauma, that the bank officers, 
their people, have felt in the last two, two and a half years 
when they see their friends losing their jobs-- one guy I know 
very well; I visited him in Miami and he said, ``Come look at 
our office.''
    We looked at the office. He said, ``This is my desk. Look 
at those other empty cubicles.'' He says, ``I survived; they 
didn't. I'm not making any loans, period.''
    That's one thing. Now you've got to get the banks 
themselves, and I don't mean the local banks, Sabal Bank; I 
mean the major banks to say, ``Okay, we've got to get the 
balance sheet working. But we've got to get the examiners and 
GAAP to coordinate. Otherwise, it'll be there a year from now 
and it'll be a little bit better, but it isn't going to 
change.''
    Mr. Buchanan. I want to thank you, Mr. Brill, and all our 
witnesses today. We're on a time frame. We have a big thing on 
Port Manatee down the street. I'm speaking at 12:30 or 12:45. 
And I want to especially thank our Chairman of the Finance and 
Tax Committee, who came all the way here from Oregon.
    I appreciate that, Mr. Chairman. And I yield back.
    Chairman Schrader. Thank you very much. It's been a great 
hearing and a great outpouring of interest, which I think we 
both appreciate. We thank the witnesses very much.
    The members will have five days to submit statements and 
supporting material for the record. Without objection, so 
ordered. The hearing is now adjourned. Thank you all very much.
    [Whereupon, at 12:12 p.m., the Subcommittee was adjourned.]

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