[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

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

56-298 PDF                       WASHINGTON : 2010 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 





















                   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.]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
                                 
