[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
SUBCOMMITTEE ON INVESTIGATIONS AND
OVERSIGHT FIELD HEARING IN PITTSBURGH, PA
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
May 17, 2010
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 111-068
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 INVESTIGATIONS AND OVERSIGHT
______
JASON ALTMIRE, Pennsylvania, Chairman
HEATH SHULER, North Carolina MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana LOUIE GOHMERT, Texas
(iii)
C O N T E N T S
__________
OPENING STATEMENTS
Page
Altmire, Hon. Jason.............................................. 1
WITNESSES
Zarnikow, Mr. Eric, Associate Administrator for the Office of
Capital Access, U.S. Small Business Administration............. 3
Leyh, Mr. Chuck, President, Enterprise Bank, Allison Park, PA.... 4
Landis, Ms. Marilyn D., President and CEO, Basic Business
Concepts, Pittsburgh, PA....................................... 7
Kaluhiokalani, Mr. Karl A., President, RRC Consulting Group,
Inc., Pittsburgh, PA........................................... 9
APPENDIX
Prepared Statements:
Zarnikow, Mr. Eric, Associate Administrator for the Office of
Capital Access, U.S. Small Business Administration............. 24
Leyh, Mr. Chuck, President, Enterprise Bank, Allison Park, PA.... 27
Landis, Ms. Marilyn D., President and CEO, Basic Business
Concepts, Pittsburgh, PA....................................... 31
Kaluhiokalani, Mr. Karl A., President, RRC Consulting Group,
Inc., Pittsburgh, PA........................................... 37
(v)
SUBCOMMITTEE ON INVESTIGATIONS AND
OVERSIGHT FIELD HEARING IN
PITTSBURGH, PA ON ACCESS TO CAPITAL
FOR SMALL BUSINESSES
----------
MONDAY, MAY 17, 2010
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:00 p.m., at
Ross Municipal Building, Council Chambers, 1000 Ross Municipal
Drive, Pittsburgh, PA, Hon. Jason Altmire [Chairman of the
Subcommittee] presiding.
Members Present: Representative Altmire.
Chairman Altmire. Good afternoon. This hearing will come to
order. In recent weeks, economists have pointed to a number of
signs suggesting the economy is improving. The number of new
jobs created in April was the highest in the past 4 years.
April also marked the fourth consecutive month for positive job
creation. Consumer spending is on the rise and the
manufacturing sector is expanding. The first quarter of 2010
saw our Gross Domestic Product grow by 3.2 percent. Here in
Pennsylvania, 22,000 new jobs were created between February and
March of this year.
These are all positive indicators, but we still have a long
way to go. Despite what any economist says, the recession won't
truly be over until Americans seeking work can find jobs. And
that is going to take a resurgence in the small business
sector. Commentators often refer to small businesses as the
backbone of our economy, but the fact is after every recession
small business firms had led the way back to prosperity.
However, if small businesses are the economy's backbone, then
capital is its lifeblood, and without access to capital,
startups cannot launch and create new employment opportunities.
Absent affordable credit, existing businesses cannot grow and
bring on more workers.
As Congress and the Administration work to improve the flow
of capital to small businesses, Pittsburgh can offer some
valuable lessons. Here in Western Pennsylvania, we have
reinvented our local economy in recent years, developing new
industries and becoming a magnet for innovative entrepreneurs.
All of that happened because small firms had financing options
to help them get off the ground, expand an create jobs. It is
my hope that today we will hear which policies have worked, and
how to go forward in helping more firms find affordable loans.
Congress has already taken some steps to get credit flowing
to small businesses. Since being enacted last year, the
American Recovery and Reinvestment Act has helped support $26
billion in small business loans. And here in Pittsburgh, we
have seen a spike in the amount of money lent to small
businesses through the SBA programs. For local firms, SBA loan
volume is on track to almost double this fiscal year over
fiscal year 2009, but we still need to do more. Toward that
end, the Small Business Committee developed the Small Business
Financing and Investment Act, which passed the House in October
with widespread, bipartisan support. Once enacted, that bill
will deliver $44 billion in lending and investment.
By modernizing the SBA's programs, that legislation will
cut red tape, funnel more loans to entrepreneurs and build on
the successes of the Recovery Act. And later this month, the
House will vote on another proposal, which will be aimed at
pushing smaller, community banks to start lending to small
businesses again. Solving the small business credit crunch is
nothing short of essential to our economy recovery, so we have
to get this right. That means listening to and learning from
the entrepreneurs who are driving our recovery forward.
Today, we are fortunate to have with us some of
Pittsburgh's most innovative entrepreneurs, and our local
lending community is represented as well. It is my hope that
this discussion will provide insight as to what is happening
here in western Pennsylvania from the perspective of both
lenders and borrowers. We need to hear these important
perspectives in order to craft effective policies that get
credit flowing, businesses growing, and results in the jobs
Americans need. I want to thank the witnesses for taking time
away from their businesses to join us today to offer their
perspectives and valuable expertise on this very important
subject.
[The statement of Mr. Altmire is included in the appendix.]
Chairman Altmire. With that, let me introduce our first
witness. That is what my statement says, but let me just say
before that what this is about. On the Small Business
Committee, we are in the process of going through this exercise
across the country having hearings in all parts of the
continent to talk about what we can do better with regard to
access to capital bringing together lenders and borrowers,
small businesses to talk about the problems that we have had
with access to capital and what we can do on the Small Business
Committee and in the Congress to get it right because we have
had some good news with the economy. The GDP growth has been
strong for the last 3 quarters. The job growth has been strong
in recent months. The stock market certainly is doing much
better than it was a year ago.
The problem is the last indicator that hasn't improved as
much as we would like is access to capital, and that is what
this is about. So I am going to first introduce--we are going
out of order here, so I am going to start with Eric Zarnikow.
Am I pronouncing that correctly? Zarnikow. Mr. Eric Zarnikow is
the Associate Administrator for the Office of Capital Access in
the U.S. Small Business Administration. Mr. Zarnikow is
responsible for the management and oversight of SBA's lending
and financing programs. Welcome, Mr. Zarnikow.
STATEMENT OF ERIC ZARNIKOW
Mr. Zarnikow. Thank you, Chairman Altmire. I am 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 other
lending partners. This guarantee helps provide access to
capital for creditworthy small businesses that would otherwise
be unable to get loans. To address disruptions in the credit
markets, the Recovery Act temporarily raised the maximum
available guarantee on some SBA loans to 90 percent, and
allowed us to reduce or eliminate most of our fees.
The raised guarantee provided an extra incentive for risk-
averse banks to lend to small businesses, and the fee
reductions made the loans more appealing to borrowers. As a
result, SBA lending has increased by about 90 percent since the
passage of the Recovery Act. We have turned about $600 million
in taxpayer funds into support for $26.5 in loans to small
business owners. This includes over $637 million in
Pennsylvania, and over $40 million here in the 4th district. We
know that times are still tough for small business owners.
While SBA's recovery loans are helping, it is clear that many
small business owners are still having a hard time getting
access to credit. Moreover, declines in home values have hurt
small business owners because many entrepreneurs use home
equity to help finance their business. We know that there is
still much more work to do.
At the SBA, we have examined how to use our programs to
address demand for credit, availability of capital, and risk
tolerance, and with the President we have proposed a jobs plan
which targets gaps that still exist. There are 5 key components
to this plan. First, to address the issue of banks that still
have trouble taking risk, we have asked for a long-term
extension of the increased 90 percent guarantee and the reduced
fees. Second, for banks that don't have the capital to lend, we
have asked that Congress direct $30 billion to a small business
lending fund to provide 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 help
them create jobs. This might be franchisees, manufacturers,
exporters, and others, and we would like to increase the top
loan limit in our program from $2 million up to $5 million.
Fourth, for businesses that can't find access to working
capital, we would like to temporarily raise the SBA Express
Loan limit from $350,000 up to $1 million. These loans will
help businesses restock shelves and fill orders that they have
coming in.
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 can
have a hard time refinancing these loans and may face
foreclosure. So we want to open up SBA's 504 loan program to
commercial real estate refinancing for owner-occupied
commercial real estate. It is critically important that we
prevent creditworthy firms here in Pennsylvania and across the
country from facing unnecessary foreclosure and lost jobs. 504
refinancing will allow them to lock in stable, long-term
financing, while freeing up banks to make even more small
business loans.
This plan is guided by basic principles: build on what
works, maximize limited taxpayer dollars, and make targeted
changes as quickly as possible. It addresses specific gaps in
demand, availability of credit, and risk tolerance. SBA is
confident that this will allow us to continue to help small
businesses in this tough economic climate.
SBA is committed to building on the success of the Recovery
Act by expanding points of access and bringing more small
businesses into a long-term banking relationship with an SBA
lender. In addition, we will continue to work hard on behalf of
small businesses everywhere. Our field staff and resource
partners are standing by to help small business owners and
entrepreneurs as they start and grow their business. Small
business owners here in Pennsylvania have access to 2 district
offices in Philadelphia and Pittsburgh, 17 Small Business
Development Centers throughout the state, 4 Women's Business
Centers and also a Veteran's Business Center, and several
chapters of SCORE, our retired executives mentoring service.
I want to thank you for your support and leadership for
small businesses, and for working with SBA to get them the
support they need. And I am happy to discuss any of these
proposals or answer any questions. Thank you.
[The statement of Mr. Zarnikow is included in the
appendix.]
Chairman Altmire. Thank you for being here, Mr. Zarnikow.
Mr. Chuck Leyh is President and co-founder of Enterprise Bank
in Allison Park, Pennsylvania. Mr. Leyh is also a CPA with over
30 years of experience. Enterprise Bank assists small
businesses and specializes in helping startups and distressed
companies. Currently, Enterprise Bank is the largest dollar
volume SBA lender in all of Western Pennsylvania. Welcome, Mr.
Leyh.
STATEMENT OF CHUCK LEYH
Mr. Leyh. Thank you. On behalf of Enterprise Bank and the
Pennsylvania Association of Community Bankers, I want to
express my appreciation to Congressman Altmire for giving us an
opportunity to speak to you. We prepared our written testimony,
and I would like to take a minute to just on an impromptu basis
discuss the 4 component parts that are in that written
testimony.
Chairman Altmire. And your entire statement will appear in
the record.
Mr. Leyh. We are in agreement with the basic 5 provisions
that are in the new law, the proposed new law that the SBA is
pushing. The 90 percent guarantee has made a significant
improvement, and we believe one of the strongest contributing
improvements to lenders being involved with the SBA program. In
the business of banking, risk mitigation is our lifeblood, and
obviously when you take the risk off of the bank's shoulders
and put it onto the program's shoulders, you motivate the
banking community to be more active, so that is an incredibly
important tool. What we would like to emphasize though are
there are some other provisions that are more day-to-day
operational or regulation structure changes that, in fact,
inhibit some of these programs from being fully utilized, and
they are outlined in our written testimony and broken into 4
component parts.
The first is centralization. SBA went through years ago a
centralization process for purposes of processing loans and
guarantees, and we think it is a tremendous tool in making it a
much more efficient operation. But any opportunity to
centralize communications becomes a challenge, and, in fact, we
see situations where the lack of a local presence of authority
creates a problem when it comes to mitigating problems or
correcting problems in the processing units. There are 3
examples that we gave here but we can give you multitudes of
additional ones.
It should be highlighted that it is both an efficiency
concern with regard to processing when we find mistakes and we
try to get them corrected. It takes too long without having a
strong local presence that has the authority to do something,
but it also has to do with saving dollars for the program. One
of the examples that we included in here was a situation we
just recently have gone through where in a collection process
under the 504 program, we had a situation where we had
approximately a lender that had about $5 million in collateral,
and we were in the first position with approximately $2
million, and the SBA was behind us in a second position for
less than that amount, but significantly greater than a million
dollars.
When we went through this whole process, SBA did not get
involved in court proceedings or cooperating with us, and as a
result the bankruptcy judge did some things that, in effect,
cost the government over a million dollars, which certainly
there are tremendous values to centralization but without that
lack of a local presence and mistakes like this being made
there is a lot of expense that is being generated.
The second major area that we wanted to discuss and
highlight was the new lender rating system. This system
basically evaluates a bank on a 1 to 5 scale and is discussed
as an important parameter as to whether a bank is allowed to be
in the preferred lender program, which is important to a large
volume lender. In this situation, when you look at the
component ratings, the losses, the credit scoring system, it is
very hard for a bank to equate that system to the whole mission
of the SBA and the eligibility concept involved in the SBA
lending.
Prior to this concept being put in place and having an
enforcement provision associated with it, when you evaluated
the loan, you look at the SBA eligibility requirements and you
looked at it from a risk mitigation yourself where 25 percent
of the loan you were at risk for, and the government, in
effect, was at risk for 75 percent (based upon the old
percentages). And that risk is something you weighed in making
your underwriting decision. Now you are looking at it from a
different perspective. Now you are looking at it from this
rating system perspective, and, in fact, in our particular
bank's situation, our rating has been lowered recently. So when
it came time for Congress to implement the ARC program that was
part of the assistance in this recession where the law
encouraged us to make a loan for people to make their loan
payments on troubled debt, our bank concluded not to
participate in the program because we couldn't afford to have
losses show up in that lender rating portal analysis.
When we have had discussions as to how do we reconcile this
with the mission of the SBA the examiners that have come in to
us have kind of looked at us and said you know what it takes to
improve your losses, and, in fact, we do. It means higher risk
lending we start to back away from. But does that really tie in
to what the mission of the SBA is? What it equates to is it
says don't make restaurant loans in lower income areas. Don't
make loans that are higher risk, and, in particular, in our
experiences low income areas have a higher risk associated with
them. Prior to this rating, we paid no attention to where
somebody was located, what level of income they had, the
conventional underwriting concepts. We just looked at it and
said do they have a good business plan? Does it look like they
have thought through the program well? Now we look at it and
say what is their scoring, what is their credit scoring, are
they in a low income area, are they in a high risk business or
area? And we ignore or minimize the typical eligibility
standard in favor of more of a risk mitigation and underwriting
concept. We think that Congress needs to look at the mission of
the SBA and look at this lender rating system and give us
specific guidance as to how to mirror the two and in what
direction a lender is supposed to operate in.
The third area is in new regulations where we think that
Congress has to look at the regulations that are being put out
by the SBA and again see and look through what the cause and
effect is. For instance, now one of the changes that the SBA
has put in place, it says when a loan is evaluated by an
appraiser they want after the building has been built, they
want the appraiser to come back and certify that it is what
they did the original appraisal for, which is a good practice.
But the regulation goes on to say the appraiser needs to verify
that the building was built according to its original specs.
Well, that is not the expertise of an appraiser. That is the
expertise of an architect or an engineer. Now we have
appraisers who won't sign off on this documentation because
they are concerned that this request is beyond their
profession's capacity. Those are the kind of things that we
need to look at closely before we put regulations in place.
And the last item we wanted to highlight was the guaranteed
payment problems that are in the system. This has caused a lot
of lenders to diminish their activity level or back out of the
program, and those examples are highlighted in here but the
basic solution there also is to have a local person that has
authority to work through the problems as they are encountered.
I appreciate the opportunity to speak, and I think I have more
than used my 5 minutes.
[The statement of Mr. Leyh is included in the appendix.]
Chairman Altmire. Thank you, Mr. Leyh. Now Ms. Marilyn
Landis is President and CEO of Basic Business Concepts in
Pittsburgh, Pennsylvania. Ms. Landis has over 30 years of
experience in financial services. Basic Business Concepts
provides an array of services to small businesses and business
brokerage services. Welcome, Ms. Landis.
STATEMENT OF MARILYN LANDIS
Ms. Landis. Thank you. Thank you. Just to mention and add a
piece on to who I am, I have offices scattered throughout the
United States, but I have a heavy concentration in Pennsylvania
and in Ohio, so very versed on the economy as we are here. I am
also the 2009 SBA National Financial Services Champion. And I
would like to thank you, Chairman Altmire, for holding this
very timely hearing and for inviting me to be part of it. Thank
you. Prior to starting Basic Business Concepts, I spent 30
years working for and with commercial lenders, banks and small
businesses. I worked for 3 of the largest U.S. small business
lenders in the country, marketing, originating and underwriting
SBA loans, and have continued working with my clients on
securing SBA loans, as well as a myriad of other sources of
capital.
After 38 years of working with small business, the one
thing I can tell you without hesitation is it is tough out
there. Small business owners face many obstacles in trying to
garner capital, obstacles that illustrate the very significant
need for, and importance of, the SBA's lending programs. Many
small and startup businesses lack the assets necessary for a
traditional bank loan. In 2010, these are the businesses who
have burned through their savings, their reserves, and even
their retirement accounts to meet their obligations. They have
scaled down to the new reality, found new customers, shattered
unprofitable lines, added new divisions with better sales,
prospects, and margins. In short, we did all the right,
responsible things. We are here receiving orders and unable to
secure working capital.
Smaller loans are generally less profitable for banks and
typically have a higher default rate. The increased usage of
personal credit ratings for business owners further exacerbates
the problem. One of the biggest barriers to small business
financing is debt secured by equity and fixed assets. Many
small business owners do not have the kind of equity required
by banks to acquire a sizable loan. This gap in debt equity
financing primarily hinders both startup businesses and growing
businesses. An entrepreneur wishing to open any business would
face significant barriers to financing. The small business
owner seeking to expand his or her business or hire additional
employees faces the same equity challenges.
The balance sheets for most small businesses especially in
today's economy are not composed of significant fixed assets
especially significant in light of the emerging commercial real
estate crisis. Even the fixed assets the business does own are
likely devalued. A new capital issue has come to the forefront
for small businesses, and that is the increased reliance on
credit cards. Many small business owners were forced to turn to
credit cards as their primary source of working capital in the
early years of this decade when a multitude of banks tightened
their lending standards.
In December of 2009, 78 percent of the respondents to an
NSBA survey reported that they had been impacted by the credit
crunch causing 47 percent not to expand their business. Banking
practices that restricted access to capital were a key catalyst
in the creation of the SBA's flagship 7(a) loan program. As you
can see, however, imperfections within the market still exist,
and SBA loan programs are as important now as ever. Congress
should be pleased the American Recovery and Reinvestment Act,
while not a cure all for the credit crunch, the temporary
elimination of the upfront borrower fees and the increased
guarantee for SBA loans have been instrumental in a recent
uptick in SBA lending.
Given this tremendous success, it is vital that Congress
immediately extend these provisions through all of 2010 on a
reliable, sustainable basis that the lenders can build strong
origination and compliance programs around. The fact that SBA
volume has mirrored the availability of the program confirms
the lenders need the increased liquidity it affords. SBA
programs have served a key role in making capital available to
small business. The use of the SBA programs have enabled
lenders to meet the needs of their borrowers with the SBA
guarantee to mitigate the reach outside of their normal
criteria.
The SBA has made changes to the standard operating
procedures to meet both the need for increased credit quality
and increased flexibility in order to meet current access to
capital needs. There are necessary changes, however, that
cannot be made solely through the SOP. These changes must be
made legislatively. I would like to recommend the following
changes. First, permit borrowers to pledge additional
collateral for a refinance, for example, real estate, in order
to secure a longer term lower payment in order to improve cash
flow. Currently, the law does not permit calculating a SBA loan
term based on the underlying collateral. Second, permit the SBA
to work with lenders to support loans advanced against
projected sales. This could be accomplished in more than one
way. If the lender and the borrower agree, for example, to a
projected sales plan that rebuilds the business the lender
would receive a reduced SBA guarantee for the first year to
ensure both lender and borrower are committed to the viability
of the projections.
If the borrower makes all payments for the first year the
bank would receive an increase in the guarantee amount to the
full amount available under the SBA program. The second way to
support loans for projected sales is to raise the cap on the
SBA CapLine program. These programs, which finance purchase
orders and contracts, are by their nature more costly for the
lender to offer. An increased rate cap would permit the lenders
to participate in this program at an interest rate level that
is commiserate with their requirements for profitability and
still meet the borrowers need for affordable financing. A
legislative change is also required in order to open the SBA's
very practical international line of credit program to domestic
receivables. Currently this program can only be used for
international sales.
I also urge Congress and this Committee to address 2
additional aspects of the credit card industry that urgently
need reform, the absence of explicit protections for small
business cards, and, two, the secretive and unfair interchange
fees. The Administration and Congress must fully support small
businesses as the true centers of growth in U.S. economy.
Congress must recognize that the majority of small businesses
in today's economy are not fixed asset intensive and should
take the lead ensuring the traditional financing practices and
new credit card policies do not restrict small business growth.
I urge Congress to examine the benefits of reforming the
current limitations placed on banks and lending to small
businesses and fully supporting and funding existing SBA loan
programs. I thank you for your time, and welcome any questions
you may have.
[The statement of Ms. Landis is included in the appendix.]
Chairman Altmire. Thank you, Ms. Landis. Finally, Mr. Karl
A. Kaluhiokalani is President of RRC Consulting Group in
Pittsburgh, Pennsylvania. Mr. Kaluhiokalani has extensive
experience in training, strategic planning and performance
management. RRC Consulting Group provides engineering services
for commercial, public and residential properties. Welcome, Mr.
Kaluhiokalani.
STATEMENT OF KARL A. KALUHIOKALANI
Mr. Kaluhiokalani. Thank you, Mr. Chairman, for inviting me
to present testimony today. As a member of the small business
community and participant in SBA programs what is discussed
today has a major impact on my business, the same as other
small businesses. In this period of economic stress, it become
even more important to support small business through effective
utilization and management of existing programs while
correcting the chronic deficiencies identified and discussed by
Congress many times in the past several years. Past budget,
staff, and program cuts have hindered the ability of the SBA to
properly manage programs, adjust to changes in technology, and
meet additional demands of a growing small business population.
According to the U.S. Census Bureau, between 2002 and 2006
small businesses fewer than 100 employees have averaged an
increase in employment of 24.8 percent while those businesses
greater than 100 employees averaged only a 4.15 percent
increase. As a point of information, the SBA defines a small
business as having under 500 employees. According to the SBA in
a report prepared in September of 2009 small businesses
represent 99.7 percent of all employer firms, employed just
over half of private sector employees, pay 44 percent of total
U.S. private payroll, have generated 64 percent of net new jobs
over the past 15 years, create more than half of the non-farm
private gross domestic product, and hire 40 percent of high
tech workers such as scientists, engineers, and computer
programmers.
Given the recognized importance of small businesses to our
economy it becomes increasingly frustration when emphasis has
been placed on big business. So far, billions of taxpayer
dollars have gone to bail out financial institution and the
auto industry while little effective effort has been made to
save the small businesses that are failing every day. Without
jobs, people can't buy cars, save money or invest to make our
economy stronger. Even though financial institutions received
funds to ease the credit crunch, lending has only tightened
forcing small businesses to close or go into bankruptcy. Credit
lines have been cancelled, loans are not available, and
interest rates have risen on current lines of credit making it
almost impossible for small businesses to survive and service
debt.
The recent changes in the SBA loan guarantee program are
more beneficial to companies with over 100 employees and of
little value to the mom and pop businesses typically with less
than 10 employees. A borrower must comply with the lending
policies of the institution providing the loan and without work
or sales and a strong balance sheet a small business is unable
to obtain a loan. Rather than securing loans, most small
businesses are in need of additional work or sales to pay
employees, service debt, and expand their business.
Unfortunately, the federal government does not have the
capacity to assist all small businesses in increasing sales
revenue, however, through programs established by Congress has
the ability to influence federal purchasing and procurement.
Most of these programs are administered or overseen by the
SBA. However, as indicated previously, the SBA has lost its
effectiveness and many of the established programs are in need
of review and revision to make them work as intended. These
situations have been discussed by Congress many times and
examples of these deficiencies continue to be a problem and are
outlined in my written statement. In conclusion, I urge the
members of Congress on behalf of myself and small businesses
overall to address these issues with effective legislation to
promote small business growth, create additional jobs, and move
our economy forward at a greater pace. Thank you for your
consideration.
[The statement of Mr. Kaluhiokalani is included in the
appendix.]
Chairman Altmire. Thank you. And thanks to all the
witnesses, and I wanted to again take a moment to explain what
this is about before we open it up for questions. As I
indicated, the Committee is having field hearings all around
the country to talk about this issue and meeting with the SBA
regional offices and so forth, and I just wanted to make a
point that we have the staff director for the U.S. House Small
Business Committee, Mr. Michael Day, here in the back. He is
the top guy on the Committee. He is here with us today. We, of
course, have a stenographer from the Committee, and everything
that you say is being recorded for the purposes of taking this
information back to Capitol Hill, trying to figure out a way to
make things better, and what you are going to say today is
going to help us sort through these very important issues.
And, Mr. Zarnikow, and members of the Committee, I would
point out the 3 constituents that you have heard from today are
certainly representative of my district and of the concerns I
have heard from dozens of other business owners and lenders and
people who have experienced some of the problems that we are
talking about today. But I would say while there are 3 that are
representative of my district, they are probably the 3 most
articulate on these issues, and I think you have seen that
today, and I really do appreciate each of you being here to
join us, as well as you, Mr. Zarnikow. Thank you.
For the first question, I did want to talk about the SBA in
particular, and in fiscal year 2009 regarding the 7(a) loan
program only 10 lenders made over 20 percent of all 7(a)
programs, and I was wondering that at a time when the nation is
struggling to recover from over concentration of risk in a few
large banks, what is the SBA doing to ensure that the SBA does
not become dependent on only a few large banks to meet its
capital access mission?
Mr. Zarnikow. At SBA one of the things that we are very
focused on is increasing the points of access for small
businesses to the SBA program, so one of our high priority
strategic goals is to increase the number of points of access.
What we are working hard to do is to get additional lending
partners into our programs, whether that is banks, credit
unions, small business lending companies, and other non-
depository lenders. In fiscal year 2009, we saw that the number
of points of access when our fiscal year ended in September,
was about 2,771 lenders. This means that about 2,771 lenders
made at least 1 SBA Loan. That was up about 15 percent from the
prior year.
And currently we have over 4,500 different lenders who have
at least 1 SBA loan in their portfolio. So we are very focused
as an agency on increasing the points of access to capital and
getting as many lending partners into our programs as possible.
Chairman Altmire. I appreciate that. With that said, it is
my understanding that a vast majority of the lenders that were
brought into the program in the past year made only 1 loan, and
were attracted by the Recovery Act, which, of course, is set to
expire after this year. So I was curious what you are going to
do to retain these lenders and increase their participation
after this year.
Mr. Zarnikow. It is not necessarily atypical that a
community bank, a smaller lender out in the country, would only
make 1 or 2 SBA loans a year. In some cases, they may only make
an SBA loan every few years. For a smaller lender in their
community, they really are lending programs focused on
expanding access to capital, so if the lender can make the loan
conventionally without needing the SBA guarantee, then that is
what they do. They make the conventional loan without the SBA
guarantee, so they really utilize our program to expand access
to capital in situations where they need to reach a little bit
further down the credit box. The loan doesn't meet their
conventional lending standards, so seeing that we have a lot of
lenders who only make 1 or 2 loans a year is not at all
atypical.
We are very focused from an SBA perspective on customer
service and being customer service friendly. That may sound odd
coming from a government agency, but we really think of small
businesses as being our customers. Our lending partners are the
people that we utilize in reaching our customers. In essence,
they are our distribution channel. So we have embarked on a lot
of things to really be better partners with our lenders. An
example of that is in our guaranteed purchase program. Part of
centralization at times was a difficult process and getting it
right and getting the right level of staffing in the centers,
getting the processes correct, has taken some time. We have
been very focused on a continuous improvement process.
One of the things we have done is embark on what we call a
"brand promise" that deals with our 7(a) guaranteed purchase
process. We have made a "brand promise" that if a lender
submits a complete purchase package that we will make a
decision on that package and get them paid within 45 days. We
are currently seeing that about 60 percent of the loans that
come into our Herndon center on a 7(a) guaranteed purchase are
meeting the brand promise where the lender provides a complete
package when they submit it. Our decision these packages within
the 45-day period, 1 example of how we are trying to be a
better partner with our lending partners.
Chairman Altmire. Thank you. And a lot of the discussion
that comes up, as you can imagine, is the balance that the SBA
takes between the size of the loan versus the number of people
who can access SBA lending opportunities. And we looked at a
statistical projection of the agency's loan distribution which
indicates that even in the best of circumstances less than 50
loans would be made in the $5 million range through the SBA,
and this follows the logic that business is emerging from an
economic downturn. We want to be cautious, of course, and take
on smaller amount of debt, no more. So why then is the SBA so
focused on a proposal to increase loan size when it appears to
the outside observer that it should be more concerned about
smaller loan amounts?
Mr. Zarnikow. At the agency we are concerned about loans of
all dollar amounts, and what we have seen after spending a lot
of time trying to understand what market gaps are is that there
is a way for the SBA to appropriately balance that expanding
access to capital while also appropriately managing risk. One
of the gaps we have seen is that with the changes in the credit
markets, changes in the economy, that somewhat large or small
businesses have had a harder time accessing capital much like
very small businesses have had at different times. And,
therefore, increasing the loan limit would allow those somewhat
smaller, but still small, businesses have greater access to
capital.
We find, too, that large or small businesses
disproportionately are bigger job producers so we think it is
important from a job production standpoint. And there are
certain industries when you look at manufacturing industries,
franchise industries, exporters, where we think the larger loan
size is particularly important, but we don't think that that
comes at expense of the smaller loans. What we find is the
larger loans in our portfolio typically perform better and
actually help subsidize the cost of the smaller loans.
Chairman Altmire. Thank you. The last question for Mr.
Zarnikow for now, later we will get to the others, but I want
to focus specifically on the district that I represent, which
you are right smack in the middle of right now. It is a 6-
county district that has a mixture of high tech, high growth
areas and heavy manufacturing, industrial areas that, of
course, over the years have seen the loss of some of those
manufacturing jobs, so it is a very good mix. I think it is
instructive for the SBA to look at the recovery and how it
affects a district like this. And SBA data shows that the
number of loans made in the 4th district will likely remain
constant this year and the dollar volume has already surpassed
all of last year's $2 million with a year to date total for
2010 expected to be $21 million.
And this would suggest that lenders are making bigger loans
instead of extending credit to a greater number of small
businesses who in turn drive job growth, what we were just
discussing. I was wondering if you see this to be the case in
western Pennsylvania, and if you have it in this district in
particular.
Mr. Zarnikow. The numbers you quoted would be consistent
with what we have seen, and I think it is pretty consistent
with what we have seen nationwide which is our average loan
size has been increasing. Some of that is the smaller dollar
loans or smaller businesses typically don't have as much
collateral or don't have as much of a track record, and that
makes it harder for lenders in the current environment to
extend loans to them. So in the end businesses still need to be
creditworthy. Our programs are loans. We, with partial
government guarantee, help lender expand the credit box but in
the end the small businesses still need to be creditworthy.
I think that the current economic environment and the
credit environment has probably been typically harder on a
start-up type business where there isn't a track record that a
bank can look at where the business doesn't--or where the
business or person doesn't have much in the way in collateral.
But I would say that even given in the current environment we
are still seeing that about 25 percent of SBA loans are going
to start up businesses, so compared to the conventional market
we still disproportionately support start-up businesses.
Chairman Altmire. Thank you. I am going to move to Marilyn
Landis. Ms. Landis, I want to give you the opportunity to
publicly voice concern about something that we have talked
about many times, and that is the extent of the credit crunch
facing small businesses demonstrates the problem with relying
entirely upon the private sector for a solution, and I was
wondering if you could talk about whether you think that banks
alone will be able to meet the credit needs of small businesses
or if it is time that we look for other solutions, and, if so,
what you would propose.
Ms. Landis. I think the banking industry has built a long
tradition of managing credit risk very carefully looking at all
the things that determine whether or not somebody is
creditworthy. I spent a lot of years in that industry and I
understand the scoring mechanism. Do we have appropriate
collateral? Do we have sufficient liquidity? Do we have an
increasing sales line? Do we have an increasing net profit
line? What does the owner's personal credit score look like?
What is the debt ratio? All of those have built a body of
evidence that the regulators use when they come in to look at
the bank to determine if this loan is creditworthy or not.
In today's economy most of those things have been altered
or completely blown away. Companies that are very strong from
the credit model perspective may have reduced sales because
they were smart enough to move away from a sale that is not
productive and move into one that is. They may have taken
slightly less profit margins because they were forced to but in
turn made internal cuts in their system so they could survive.
Business owners have loans through their own cash reserves so
if you are looking at liquidity of a business it is not there.
As a result, the model of a successful business has changed.
Thirty-eight years ago when I started in banking, we knew how
to do a projection loan and had a regulatory environment that
permitted us to do projection loans without the collateral,
without the historic cash flow, and what the misnomer is that
all projection loans are startups. That is untrue.
In today's economy the vast majority of businesses were
here with their sales. They dropped to here with the economy
and that curve is growth. They have got to go back on a
projection loan to where they were before, which is where their
sales would slightly extend beyond their ability to pay. The
lending community is made up of a lot of very bright people and
in time they will come up with new models. They will build the
body of evidence that the regulators will accept so that they
can follow that model and get the credit ratings that they need
to get there, but that will take time. In the interim, there
are private lenders who do not have to meet the same regulatory
requirements who have personal capital at risk of their
investors, their stockholders, their depositors that are
willing to test some of these new models and that is happening,
and it is exciting.
I also think there is a role for the SBA to enable the
banks to take some of those risks and set these new paradigms
to make that possible because the reality is indeed the
business that can afford a large commercial real estate loan
probably is in a building that is too big for itself, and what
the most valuable asset a business has today is its people, its
patents, its process, its intellectual properties, none of
which we have mastered a model to be able to lend against that
will stand up against the rigors of the regulatory environment,
so I think it is important to explore 2 things, one, lending
opportunities outside the traditional banking structure to give
the banking structure time to rebuild and to heal. Second, to
enable individuals to expand their business so that they can go
back to a traditional bank for the more traditional loans like
real estate or heavy equipment.
Chairman Altmire. Thank you. Mr. Leyh, if we want to create
new jobs, which, of course, is the priority, it is critically
important to encourage creditworthy businesses, many of whom
have remained on the sidelines, to enter the credit market, and
to do so some have proposed giving small business loan
deferrals for up to 6 months or 0 percent interest for the
first few years. In your opinion, would these types of
incentives get small business customers to apply for loans,
and, if not, what type of loan incentives would be needed?
Mr. Leyh. When you reduce the cost of funds in any way,
whether it is no interest, deferral of payment, you put an
economic benefit in the hands of the requester, the borrower,
and obviously it will make a very positive difference. The
things you have to weigh are is it a short-term fix or is it a
long-term fix and certainly a program like that would not be a
long-term fix because it is not a long-term sustainable type of
stimulus.
But in the short term there certainly can be a value
especially in regards to an existing operation that is
attempting to come back from a tough economic time and giving
it a lower cost of funds is going to be a plus.
Chairman Altmire. And, certainly, Mr. Leyh, you and I have
discussed this next point many times, but I was wondering for
the record if you could talk about the fact that some financial
regulators and some of the banking industry have told me that
the primary reason for the decline in small business lending is
that firms aren't applying for the loans in the first place.
Has a decline in this loan demand been something that you have
seen in your business, and, if so, why do you think it is
occurring?
Mr. Leyh. In the discussions that I have had with other
bank presidents being in my role in the executive committee for
the Pennsylvania Association of Community Bankers many of the
small banks either have a bad experience with SBA or listen to
stories second hand and it scares them away from the program.
There in the past was a strong push, and I know Karl does in
this local district, have an attempt to get out and visit with
the banks and try to overcome those issues. But when you hear
stories, and I think if you look in my example we all know the
liquor license, liquor story from Dollar Bank, and that scares
away a lot of people. And so there has to be a better job. The
SBA has to do a better job. And it is a much more challenging
environment now with centralization.
That is kind of why we push hard for that go to person in
the local office because a local presence like Karl going out
and talking to people and trying to get them in a program
doesn't really have the ability to succeed without the
authority behind him to cut through the red tape and to get
some things done. When somebody is new in the program, we are
used to the program so things become second nature, and we
still have challenges, but it is very hard to empathize with a
startup bank getting into the program and running into a
roadblock and having centralization. And if you put those
factors together, it is very frustrating to be involved in a
program. There needs to be a local presence. There needs to be
an authority behind that local presence to break down the
barriers.
Any large organization, and SBA is a large organization, no
matter how efficient it becomes, has to have a local touch with
authority or it is going to become like the Wal-Marts or the K-
Marts or Exxons where they lose some of their efficiencies just
based upon their size.
Chairman Altmire. I want to give Mr. Kaluhiokalani a chance
to talk about that issue, and then I will give Ms. Landis and
then finally Mr. Zarnikow on this question a chance to weigh
in.
Mr. Kaluhiokalani. Thank you, Mr. Chairman. I agree with
Ms. Landis about the issues that are facing small businesses,
and I can relate with my own experience. When I started my
company, we were doing very well. I went to a bank, borrowed,
actually established a line of credit as a cushion in the event
that something would happen I would always have something
available that I could fall back on to draw and to help with
operating capital. In my business, the real estate market, I am
very sensitive to the real estate market and when the economy
started failing in that area, my business suffered
dramatically. So, again, I started to rely on my line of credit
to draw down and try to help me through some rough spots and
try to continue to grow my business or replace the business
that I was losing in the commercial markets.
One of the things I did was turn to the government
procurement trying to go through the certification process with
the SBA. But my point is during that period my line of credit
was cut off. I lost my line of credit. So I had to find
alternative means of financing to try to keep my business going
and I had to turn to the private sector and get an investor
involved in my company and now shares ownership with my company
to keep me going. And I am not the only one that has a small
business that is in this position. And what has happened, once
you lose your ability or your revenue source or reduction the
bank automatically did a credit check and they said because of
the change in your credit score that is why we have cut off
your line of credit. Well, you know, now what do I do, and now
the situation snowballs and there is no way that my business,
and I am just being very honest, could go to a bank today and
get a loan. It is just not going to happen because of the
policies that the lender has.
And again I am not the only small business in that
situation, and as I pointed out, a great percentage of
businesses, small businesses, have less than 100 employees, and
they are the ones that are really suffering with the lending
policies that are out there now. Those with 400 or 500, you
know, they have revenues, $50, $60, $70, $80 million a year.
You know, they have a good balance sheet. Those small
businesses under 100 employees don't.
Chairman Altmire. Ms. Landis.
Ms. Landis. You have heard me say this before. Small
businesses are small not because we are too stupid to be big,
so if we don't think we have a realistic opportunity to either
secure the loan or pay it back, we are not going to ask to
borrow. I think the biggest thing that has prevented small
businesses, as you mentioned, your line of credit being cut
back. The biggest impact of a small business being both
creditworthy under the traditional sense and the ability to
reach out and borrow has been the variances of the credit card
industry. It has become the wild west of finance. In many
cases, small business owners have been impacted by the very
fact that they were growing fast or as I relayed to you earlier
paying down my debt. I paid down a major credit card I used to
open my New England office, and I paid it down by two-thirds.
The credit card company rewarded me by cutting my credit
limit to the outstanding balance, so now instead of being 33
percent utilized, I am 100 percent utilized. That dropped my
credit score which prompted 2 other credit cards to drop my
credit limit which further dropped my score. Am I going to go
to the bank and borrow when my credit score dropped? Even if it
is still within acceptable standards psychologically I have
been impacted that my credit score is bad. You add to that that
another credit card company, and, again, I have made all my
payments on time, tripled the amount of my payment each month.
My health insurance has gone up significantly. As a result, I
don't have the money to pay back a traditional loan. I need
longer terms. I need some flexibility here if I am going to do
that.
The other thing that impairs the small business owner are
the gatekeepers. Many of the small banks, the individual is
able to walk in and talk to a banker and get a feel for whether
or not they can borrow. I have met with credit managers of very
large banks who have no idea how many people are being turned
away at the desk in their branches because of simple questions
the borrower will ask. The people leave and somebody in credit
says we don't have the applications. We can't lend the money
because the people were turned away by the gatekeepers in the
beginning who did not want to take the time to work with the
credit. The industry has changed significantly for small
business lending in that lenders by and large are rewarded on
the volume they do, so if there is an easier loan to do you
can't blame them for taking it and skipping the harder ones.
Those folks never make it into the credit pipeline to get
counted so the credit cards, the industry, the nature of small
business, the gatekeeper says do you have collateral, and they
say, well, no, I have got my people, I have got my accounts
receivable. Well, I am sorry, we can't help you, and they are
not counted in your statistics.
Chairman Altmire. Thank you. On that point, Mr. Zarnikow,
do you have anything to add?
Mr. Zarnikow. I do think that information and data that we
have seen at SBA is there has definitely been a pull back in
the credit card industry, and obviously small businesses use a
lot of different sources for financing. They use family and
friends. They historically borrowed against their home either
on a home equity line or using their home as collateral. They
have used credit cards. They use traditional bank debt. So
there are a lot of different sources of financing for small
businesses, and a number of those have been impacted by the
current credit environment. We do think that this is where SBA
programs really play a critical role by providing the partial
government guarantee. It does encourage banks or other lending
partners to stretch the credit box.
We believe the Recovery Act has really worked, that the fee
relief from the higher guarantee has really driven a big
increase in SBA lending volume up over 90 percent, and that
long-term extension of the Recovery Act is really a critical
thing to keep access to capital for small businesses going.
Chairman Altmire. Thank you. And with regard to default
that takes place although rising defaults in the agency
portfolio we believe were triggered by the recession these
losses would not have occurred without overly permissive
lending practices by lenders and a lack of oversight and risk
management by the agency. I would ask if you agree with that or
what your comment is about that and what you would do to try to
correct those problems and extend any losses going forward?
Mr. Zarnikow. Sure. At SBA, we work through lending
partners so we provide the guarantee. We do delegate a lot of
authority to the lending partners to make the credit decision
and have a system of oversight where we monitor lenders both
through on-site reviews and also an off-site monitoring tool
that was actually referenced earlier in the testimony. What we
have seen in the portfolio is there has been a rising level of
defaults. The curve that we have seen in defaults is very
consistent with what has been going on in the broader credit
markets obviously because with the partial government guarantee
the lending partner is taking additional risk versus
conventional loans. The losses that we are seeing in the
portfolio are higher than what a bank would see in its
conventional portfolio which is exactly what you would expect.
We have seen that, the change in the default curve has been
very similar to what lenders are seeing, so we think that it is
really a function primarily of what has been going on more
broadly in the economy. Obviously, the increase in unemployment
over 10 percent has had a pretty significant impact on the
economy, and a significant impact on small businesses' ability
to sustain sales and profitability, so what we have seen
overall in the portfolio is pretty much what you would expect
given the overall economic environment. I think we have seen a
swinging pendulum in credit standards, which is not uncommon at
all when you look at credit cycles where you see a loosening of
credit and then there is a pendulum swing where you see a
tightening of credit.
One of the things we monitor is the Federal Reserve's
senior loan officer opinion survey where they actually survey
loan officers on what is going on in their lending institution
relative to credit standards, and what we have seen is that for
the last number of quarters, I think it is 12 or 13 quarters in
a row now, we have seen a tightening of credit standards. The
most recent survey that came out showed that the credit
standards were unchanged, which means we may be at the bottom
of the tightening cycle. We have definitely gone through a very
significant tightening of credit based upon the surveys that we
see.
Chairman Altmire. Would you expect that trend to continue?
You say you think we are at the bottom now. Do you expect an
uptick?
Mr. Zarnikow. What I would expect, I think what I was
referencing was the tightening of the cycle, so the most recent
one basically lenders weren't continuing to tighten but they
also hadn't begun to loosen the credit cycle yet. My own
expectation is that the worst is behind us as far as tightening
of credit. It may be a while yet before we see a loosening of
credit as banks rebuild their balance sheet and the small
businesses have an opportunity to recover from the current
economic climate.
Chairman Altmire. Thanks. I thought of something as Ms.
Landis was talking a moment ago, many businesses that I have
spoken with have expressed frustration that despite interest
rates being near all time lows, near zero, heightened scrutiny
from regulators has made banks unwilling to make more loans, so
in the context of what we were just discussing a moment ago, I
was wondering how you felt we could address that problem.
Ms. Landis. The problem is not the interest rate. The
frustration is that the interest rates are low but we can't get
at them. Many businesses are borrowing at 18 or 20 percent if
they are using a factor of purchase order financing or contract
financing from private lender and they are making a profit with
those dollars. It is a matter of having access to the dollars.
That was one of the reasons we talked about the rate cap
increase. We can absorb some interest rate impact. The
frustration is the difference when the headlines tell us that
there are such low rates available. Obviously, if we could
repay a loan at a lower rate, it would be much easier for us to
pay it back.
But if you based your business model on your cost of
funding credit cards, for example, small businesses don't use
them because we aren't smart. We use them because that is what
we were given. Twice I applied for a line of credit. Both times
I was approved. Then they sent me the credit card. I had not
been improved for a line of credit. I had been approved for a
credit card. That is true of small businesses across the board.
As a result, they are now paying 27, 29, and 30 percent
interest rates and they are paying significant larger payments.
Is it hurting them? Absolutely. And is it increasing defaults?
Perhaps, because of that. But if your model is built around
that higher rate, you can absorb some rate increase but the
frustration is huge and it is not so much that I am paying 27
percent and somebody else is paying 5 is that the only money I
could get was at 30.
And you have a feeling that the 5 percent was a giveaway.
There is an over emphasis on purchase of a home. I am sorry.
For a small business owner who would like to pay their employee
enough to buy a home, that is more important, is payroll.
Chairman Altmire. I wonder if you and Mr. Kaluhiokalani
could address as a business consultant if you could describe
the role the technical assistance mentoring and other services
can play in helping new entrepreneurs successfully borrow and
build a sustainable business.
Ms. Landis. We have had 20 plus years with a small business
owner who wanted to borrow money could walk into a bank, flash
their credit score, talk about the equity in the home and
nobody read their business plan. As a result, we have fostered
a generation or more of small business owners who never had to
do the tough job of really building a good balance sheet and a
good income statement and really knowing if they could afford
that loan, that payback, that interest rate. I worked for a
lender that is not at this table that will remain nameless, a
national one, that the deal was there are certain professions,
if they were breathing they could get a loan if they had the
credit score and they had the equity in their home.
These business owners are now for the first time facing the
reality of having to produce a balance sheet and an income
statement. That is the world I work with every day. These are
bright business people, and when I show them how to use an
income statement and a balance sheet, they get it. There are
wonderful things that are happening to the way they can manage
and run their business, but we raised a couple of generations
of folks that never had to pass that test before and they need
technical assistance to get there, absolutely.
Mr. Kaluhiokalani. I would agree that small businesses
would find value in education, on the technical aspects of
financial planning. Just going in up front knowing exactly what
the risks are, how to mitigate that risks, what sources of
financing are available, what happens if there is a shortfall
there, and have a plan to recover. I mean obviously our
situation with the economy if there is a dip in the economy how
are you going to survive that. So a program established up
front for the financial health of the company that is growing
or someone planning on going in businesses, I think is a very
valuable tool for them to succeed in the long term.
Unfortunately, there aren't enough programs available out
there. Even your small business development centers are
stretched to the limit and they only have a certain amount of
capacity to assist a small business, but I think more emphasis
needs to be placed in the up front planning of your business.
Chairman Altmire. Thank you. Since you have the mile there,
Mr. Kaluhiokalani, let me address this to you. Some have
proposed to give small business owners a rainy day account.
Under this proposal small businesses would have a special
escrow account funded by the SBA set up at their lender's bank
to use if the businesses should need temporary payment relief.
Knowing they had a cushion during the recovery, do you think
this type of assistance would incentivize more small businesses
to seek a loan?
Mr. Kaluhiokalani. It is a difficult question because, one,
you have to know the terms, obviously. What am I going to have
to repay and when do I have to start that repayment plan? What
do I have to pledge up front in order to secure the loan? You
know, what happens if the economy doesn't recover as fast as we
would like? I mean there is a lot of consideration in even
taking on something like that. If there were favorable terms,
if it was a long-term situation, you know, until there is a
time when the economy reaches a certain point or your revenue
increases, I would feel comfortable but I don't think that is
going to be the situation. A lender is not going to--even the
SBA I don't think is going to wait forever for that money to be
repaid, so I just don't see where it is going to have people
running to the door to apply.
Chairman Altmire. Ms. Landis, did you want to comment?
Ms. Landis. I did. What you just described was in the
traditional banking sense a true work out. When a business ran
into a hiccup, it could go in to its bank with a plan for
recovery from that hiccup, whatever had caused it, fire,
economic disaster, and truly have a workout plan whether it was
a period of interest only, whether it was some additional funds
because they saw the need to work through that. We have also
had several decades where the bank didn't work out, the bigger
banks simply did not do a work out. They liquidated. As a
result, there is not the skill set, particularly in the larger
banks, to really understand. That is a good old-fashioned--I
spent 4 years collecting delinquent loans, and I would sit down
with the borrower and say, well, what can you afford and what
can you do and what are you doing about it?
And we built that reserve fund and, in some cases, lent
money to a distressed company under special terms because we
could see they were coming out the other side. That is good
old-fashioned workout. That is what needs to come back. The
banks need the flexibility to do that.
Chairman Altmire. Thank you. Mr. Leyh.
Mr. Leyh. I can't speak what happens at other banks. I can
speak what happens to ours though. That principle is done now
on a routine basis. SBA statistics are 2 out of 5 businesses, I
think, fail in the first 5 years. We do almost all small
business lending. We are probably in work out discussions and
work with people constantly. About 20 percent of our actual
lending base is in some form of work out, distress, or needs
help. I can't speak for everybody, and I certainly can't speak
for the larger banks but in our case that is what we do. We
also have a small business research center that people can come
in and help create a business plan.
Selected professionals look at the pros and cons with
different professionals, get help whether it is advertising,
accounting, business plan, referrals to CDCs who have time
available to work, and consultants. There are people out there
that do that type of thing. When we make recommendations or
think about empowering a private lender system versus the
banking environment remember what we have. I mean we have a
financial crisis because we have people outside the banking
system who weren't regulated who created the problem. That is
what happens when you go to a line of business that is nor
regulated. People will take advantage. I mean that is part of
the capital society.
And if you a weakened player, then you are going to be
taken advantage of. The banking system on the other hand has
regulations that prohibit that from taking place. The issue you
have is unlike other industries a regulator can actually take
your bank from you. I mean they have that kind of authority,
which is not in other industries. So they have an incredibly
strong influence. And so if you are going to want banks to do
things, you are going to have to go to the regulators that are
in the safety and soundness arena and say we want you to do
these things. The same issue that we have in banking is the
same issue that I talked about that we have with the SBA with
the new lender rating system.
On one hand, you want safety and soundness. On the other
hand, you want aggressive lending when there is higher risk.
You have to give a clear cut set of rules to all the players
that says here is what you want. If you don't send a clear
message then people will get conservative or do what they need
to do to protect themselves. So if you want more aggressive
lending, you have got to go to the regulators and say give the
banks a chance. In our case, the things that you are
complaining about, I think are realistic in most banks. They
aren't in ours. The regulators have been very, very good with
us allowing us to do work outs and work with people and
probably give us the benefit of the doubt because we have had
10 years of doing what we said we could do, and when that
occurs then they give you the benefit of the doubt.
Other institutions have to do the same thing, so I don't
think going to private lending is going to be the end all of
all because you will have then problems without there being
regulation. You have an industry, it is a well capitalized
industry in the banking environment, but you are not going to
get them to do these things in the norm unless you get the
regulators to work with them. You can't have Congress saying
lend and a bunch of regulators on the other side saying if you
make that loan, you won't have a bank anymore in really that
simplistic terms.
And you have to create the balance in between just as you
do with SBA. You can't go to me and say I want you to do ARC
loans. I want you to go do more aggressive loans. And, by the
way, if you have losses or when I credit score your businesses
they are not high enough, well, then your lender ratings are
going to go so low that we may tie your hands up and ask you to
leave the program or reduce what lending we are going to allow
you to do. You have to give us a clear cut set of rules to live
by. Then everybody knows what the game plan is.
Chairman Altmire. Thank you. We have gone over it a little
bit but I still wanted to finish up 1 more question with Mr.
Zarnikow specific to the district again where you are right
now. Pennsylvania's 4th congressional district is on track to
double the number of 504 CDC loans and quadruple the dollar
volume of those loans this year compared to FY 2009, and that
is one area, of course, where SBA lending has seen significant
growth in the 4th district. However, there is some evidence,
some experts believe, that the commercial real state market may
be in for a collapse similar to that experienced in 2006 in the
residential market, which it goes without saying, would bring
significant losses to both the SBA and the taxpayers. So does
the SBA have policies in place to mitigate some of these risks
associated with commercial real estate in the 504 CDC program
if that were to occur?
Mr. Zarnikow. Basically the 504 program is a program that
is designed to help a business finance fixed assets. That could
be machinery and equipment. It could be land and a building. It
could be a combination. It provides a long-term fixed rate
financing for that small business that is tied specifically to
job creation and job retention. The structure of the program
requires about a 50 percent loan to value first mortgage being
done by a conventional lender. SBA does up to 40 percent with
its second mortgage position debenture, and then the small
business puts in at least 10 percent equity. In all cases in
SBA lending, the primary source of repayment is the business
being successful, the cash flow of the business, repaying the
loan, and that is really the primary thing that we look at.
Obviously, to pin down what happens in real estate cycles,
real estate cycles go up and down, values go up and down. If
the business is successful then the business repays the loan
out of the cash flows of the business it generates. We are
concerned at SBA about that there could be a coming commercial
real estate refinancing issue in the conventional market. If
you go back and look at the conventional small business or
commercial real estate market a lot of the commercial real
estate mortgages are done with a long amortization but a
shorter term maturity where the loan may balloon in 5 years or
7 years or 3 years--unlike SBA that has long terms
What we are concerned about is in marketplaces where there
has been a significant decline in value that those loans may no
longer qualify for conventional lending standards, and as a
result the lender may not be able to or may be unwilling to
roll over that loan. We have proposed as an administration to
utilize on a temporary basis the existing SBA 504 program to
allow refinancing of those loans. This would not be a situation
where we are taking on risk of businesses that aren't
performing or that are bailing out the banks. It is really to
try and address situations where the loan is performing. The
small business is making its payments, but the loan no longer
qualifies for conventional mortgage standards that would allow
it to be rolled over in the conventional market.
So we propose to basically do a 504 to allow refinancing of
owner-occupied small business commercial real estate into the
504 program on a temporary basis to try and address that
situation.
Chairman Altmire. Thank you. I will close by asking each of
you, starting with Mr. Zarnikow, and then we will move from
your right to left, is there anything that you wanted to make
sure was in the record that you weren't asked that you wish you
were or any statement that you wanted to make that we
overlooked in talking about this afternoon?
Mr. Zarnikow. I would just like to thank you again for
holding this hearing. I think it is very important to hear what
is going on out in the marketplace. We spend a lot of time
talking with small businesses, talking with lending partners to
try to and craft smart solutions to the existing problems. We
do think that the proposals that the Administration have made,
and particularly extending the Recovery Act, the 90 percent
guarantee and the fee relief are critically important,
increasing the loan sizes, and also allowing for the 504
refinancing provisions, as well as the small business lending
fund that is really a treasury program that would help provide
capital to small banks to help them increase their small
business lending.
Chairman Altmire. Thank you.
Mr. Zarnikow. Thank you.
Chairman Altmire. Mr. Leyh, is there anything that we
missed that you wanted to add?
Mr. Leyh. No. I appreciate the opportunity and I think it
has been all encompassing.
Chairman Altmire. Thank you. Ms. Landis.
Ms. Landis. I just want to thank you that I gave the
opportunity to address the fact that, as I said earlier, most
of us don't need another building right now. And I am seeing
across the U.S., and I have clients--I have offices from
California to New England, I am seeing small businesses taking
a second breath. The first breath was I am here. The second one
is I think I can go forward. And there are 78 percent that have
growth plans for the coming years and of those about 57 percent
have growth plans for this year. These are people who have
survived and are moving forward. They need working capital,
desperately need working capital.
Mr. Kaluhiokalani. I just want to thank you again for
allowing me to testify today, but also I wanted to say that
there needs to be a real emphasis on the SBA and its programs
to continue to develop those programs and revise them as
needed, not just only in the loan program but in other business
development programs that the SBA is in charge of. The SBA
traditionally has had a loss in budget, staffing, and they are
so overworked right now to even have somebody communicate with
you is a real challenge for a small business, so I believe that
they really need some help internally and also from Congress in
the form of funding, additional funding, for their programs.
Thank you.
Chairman Altmire. Thank you. Thank you all. And I would say
for the record once again that I would hope that the other
members of this Committee would realize that these really are
as expert a witness panel as we could possibly have come up
with in western Pennsylvania. I think this has been a great
discussion, and it is going to be very helpful to the Committee
in moving forward to try to address these issues. So I would,
therefore, ask unanimous consent that the record be open for 5
legislative days. Having heard no objection, so noted. This
hearing of the Committee on Small Business, Subcommittee on
Investigations and Oversight is now adjourned. Thank you.
[Whereupon, at 3:18 p.m., the Subcommittee was adjourned.]
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