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



 
                    CONDITION OF SMALL BUSINESS AND
                     COMMERCIAL REAL ESTATE LENDING
                            IN LOCAL MARKETS

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

                             JOINT HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                                AND THE

                      COMMITTEE ON SMALL BUSINESS

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 26, 2010

                               __________

  Printed for the use of the Committee on Financial Services and the 
                      Committee on Small Business

                           Serial No. 111-104

                   (Committee on Financial Services)

                           Serial No. 111-58

                     (Committee on Small Business)

               CONDITION OF SMALL BUSINESS AND COMMERCIAL

                  REAL ESTATE LENDING IN LOCAL MARKETS


                    CONDITION OF SMALL BUSINESS AND
                     COMMERCIAL REAL ESTATE LENDING
                            IN LOCAL MARKETS

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

                             JOINT HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                                AND THE

                      COMMITTEE ON SMALL BUSINESS

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 26, 2010

                               __________

  Printed for the use of the Committee on Financial Services and the 
                      Committee on Small Business

                           Serial No. 111-104

                   (Committee on Financial Services)

                           Serial No. 111-58

                     (Committee on Small Business)



                  U.S. GOVERNMENT PRINTING OFFICE
56-768                    WASHINGTON : 2010
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                   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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 26, 2010............................................     1
Appendix:
    February 26, 2010............................................    89

                               WITNESSES
                       Friday, February 26, 2010

Allison, Hon. Herbert M., Jr., Assistant Secretary for Financial 
  Stability and Counselor to the Secretary, U.S. Department of 
  the Treasury...................................................    26
Andrews, Stephen G., President and Chief Executive Officer, Bank 
  of Alameda, on behalf of the Independent Community Bankers of 
  America (ICBA).................................................    65
Bowman, John E., Acting Director, Office of Thrift Supervision...    33
Bridgeman, David, Chairman and CEO, Pinnacle Bank, Orange City, 
  Florida........................................................    66
Covey, Ronald, President and Chief Executive Officer, St. Marys 
  Bank Credit Union, Manchester, New Hampshire, on behalf of the 
  Credit Union National Association (CUNA).......................    69
Dorfman, Margot, Chief Executive Officer, U.S. Women's Chamber of 
  Commerce.......................................................     5
Dugan, Hon. John C., Comptroller, Office of the Comptroller of 
  the Currency...................................................    30
Duke, Hon. Elizabeth A., Governor, Board of Governors of the 
  Federal Reserve System.........................................    29
Gordon, Steve, President, INSTANT-OFF, INC.......................     7
Grant, William B., Chairman, CEO, and President, First United 
  Bank & Trust, on behalf of the American Bankers Association 
  (ABA)..........................................................    68
Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit 
  Insurance Corporation..........................................    32
Hoyt, David, Head of Wholesale Banking, Wells Fargo & Company....    75
McCusker, Charles, Co-Managing Partner, Patriot Capital, L.P., on 
  behalf of NASBIC...............................................    76
Mills, Hon. Karen G., Administrator, U.S. Small Business 
  Administration.................................................    27
Nash, Cathleen H., President and Chief Executive Officer, 
  Citizens Republic Bancorp, Michigan, on behalf of the Consumer 
  Bankers Association (CBA)......................................    73
Robertson, Sally, President & CEO, Business Finance Group Inc., 
  Fairfax County, Virginia, on behalf of the National Association 
  of Development Companies (NADCO)...............................    78
Smith, Wes, President, E&E Manufacturing, Plymouth, Michigan, on 
  behalf of the Motor & Equipment Manufacturers Association 
  (MEMA).........................................................    10
Turnbull, David W., Brighton Corporation, Boise, Idaho...........     4
Wieczorek, Rick, President and Chief Executive Officer, Mid-
  Atlantic Federal Credit Union, on behalf of the National 
  Association of Federal Credit Unions (NAFCU)...................    71
Zywicki, Todd J., Foundation Professor of Law, George Mason 
  University.....................................................     8

                                APPENDIX

Prepared statements:
    Adler, Hon. John.............................................    90
    McMorris Rodgers, Hon. Cathy.................................    92
    Allison, Hon. Herbert M., Jr.................................    93
    Andrews, Stephen G...........................................    99
    Bowman, John E...............................................   114
    Bridgeman, David.............................................   129
    Covey, Ronald................................................   137
    Dorfman, Margot..............................................   156
    Dugan, Hon. John C...........................................   159
    Duke, Hon. Elizabeth A.......................................   188
    Gordon, Steve................................................   203
    Grant, William B.............................................   206
    Gruenberg, Hon. Martin J.....................................   219
    Hoyt, David..................................................   238
    McCusker, Charles............................................   246
    Mills, Hon. Karen G..........................................   252
    Nash, Cathleen H.............................................   256
    Robertson, Sally.............................................   264
    Smith, Wes...................................................   271
    Turnbull, David W............................................   307
    Wieczorek, Rick..............................................   312
    Zywicki, Todd J..............................................   322

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Letter from BNB Bank, dated February 5, 2010.................   339
    Letter from Hon. John C. Dugan, providing additional 
      clarification for the record, dated March 5, 2010..........   344
    Responses to questions submitted to Hon. Elizabeth Duke......   345
    Letter from the International Council of Shopping Centers....   347
    Written statement of the National Association of Realtors....   350
Bachus, Hon. Spencer:
    Letter from Igler & Dougherty, PA............................   357
    Written statement of Independent Sector......................   363
    Written statement of Donald E. Phillips......................   369
Biggert, Hon. Judy:
    Submission from the Illinois Bankers Association.............   432
Capito, Hon. Shelley Moore:
    Written statement of the National Multi Housing Council and 
      the National Apartment Association.........................   439
Childers, Hon. Travis:
    Letter from the General Motors Minority Dealers Association 
      (GMMDA)....................................................   466
Garrett, Hon. Scott:
    Letter from the Metro Funding Corporation....................   469
Hinojosa, Hon. Ruben:
    Letters from various constituents............................   472
Jenkins, Hon. Lynn:
    Letters from various constituents............................   484
Kanjorski, Hon. Paul E.:
    Letters from various constituents............................   495
Klein, Hon. Ron:
    Letters from various constituents............................   533
Maloney, Hon. Carolyn:
    Constituent letter...........................................   537
McCarthy, Hon. Kevin:
    Constituent letter...........................................   539
Miller, Hon. Brad:
    Letters from various constituents............................   540
Neugebauer, Hon. Randy:
    Letters from various constituents............................   578
Perlmutter, Hon. Ed:
    Constituent letter...........................................   593
Peters, Hon. Gary:
    Constituent letter...........................................   596
Posey, Hon. Bill:
    Written responses to questions submitted to Hon. Herbert M. 
      Allison....................................................   598
    Written responses to questions submitted to John E. Bowman...   599
    Written responses to questions submitted to Hon. John C. 
      Dugan......................................................   602
    Written responses to questions submitted to Hon. Elizabeth A. 
      Duke.......................................................   606
    Written responses to questions submitted to Hon. Martin J. 
      Gruenberg..................................................   609
Velazquez, Hon. Nydia:
    Written statement of Associated Builders and Contractors 
      (ABC)......................................................   612
    Written statement of John R. Elmore..........................   613
    Written statement of the Financial Services Roundtable.......   620
    Written statement of the National Council of Textile 
      Organizations (NCTO).......................................   623
    Written clarification from Rick Wieczorek to a question posed 
      during the hearing.........................................   624

                    CONDITION OF SMALL BUSINESS AND
                     COMMERCIAL REAL ESTATE LENDING
                            IN LOCAL MARKETS

                              ----------                              


                       Friday, February 26, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                   and Committee on Small Business,
                                                   Washington, D.C.
    The committees met, pursuant to notice, at 9:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the Committee on Financial Services] presiding.
    Members present from the Committee on Financial Services: 
Chairman Frank, and Representatives Kanjorski, Waters, 
Gutierrez, Velazquez, Watt, Sherman, Meeks, Moore of Kansas, 
Baca, Miller of North Carolina, Scott, Green, Cleaver, Bean, 
Klein, Perlmutter, Donnelly, Foster, Carson, Minnick, Adler, 
Driehaus, Kosmas, Himes, Peters, Maffei; Bachus, Royce, 
Manzullo, Biggert, Hensarling, Garrett, Neugebauer, McCotter, 
Posey, Jenkins, Lee, Paulsen, and Lance.
    Members present from the Committee on Small Business: 
Chairwoman Velazquez, and Representatives Dahlkemper, Schrader, 
Nye, Clarke, Halvorson; Graves, Bartlett, Luetkemeyer, and 
Coffman.
    The Chairman. This hearing will come to order. This is a 
joint hearing of the Committee on Financial Services and the 
Committee on Small Business. It is an unusual hearing because 
we are dealing with a subject of unusual importance. As we look 
at our economy today, no subject is more important and very few 
are as important as promoting the flow of lending to 
businesses, particularly small businesses. It is an essential 
element in unsticking the job situation. We are going to move 
fairly quickly. Let me just outline the rules here. First of 
all, we have three panels. And unusually by standards of the 
Congress, the regulator panel representing the public officials 
will not be testifying first; they are on the second panel. We 
didn't want them to state their case and then leave. We wanted 
people who have questions that we need them to address to speak 
first and then others who will speak after.
    So we have borrowers first, then regulators, and then the 
lenders. Because there are a large number of members and it is 
a tough day, we had originally planned to have this hearing on 
February 11th. The Chair of the Small Business Committee 
correctly argued for having it on a day when there would be no 
time pressures on the members. We would be here all day. 
Unfortunately, we got snowed out. And given the calendars and 
coordinating two committees, this is the best we can do.
    So we are going to move. We have agreed that there will be 
2 hours for each panel and we will keep the opening statements 
very, very short. You have just heard mine. And with that, I 
will now call on the gentleman from Missouri, who is the 
ranking member of the Small Business Committee, and then go to 
Ms. Velazquez, and then Mr. Bachus when he gets here, if that 
is okay. So we will do Democrat, Republican, Democrat, 
Republican. We will go to the gentleman from Missouri, and then 
we will go to the gentleman from New York.
    Mr. Graves. Thank you, Mr. Chairman. I would like to thank 
you and Chairwoman Velazquez for holding this important hearing 
on the ability of small businesses to obtain needed capital 
through the commercial and Small Business Administration 
lending markets. Given the continued economic difficulties, 
America will be relying on the innovation, agility, and 
resourcefulness of this country's entrepreneurs to produce 
goods and services that are going to create jobs and lead to 
long-term stable economic growth. To accomplish that goal, 
America's small business owners need capital, whether it is to 
purchase inventory, fund the purchase of land and buildings or 
obtain the latest manufacturing equipment. While an Army might 
march on its stomach, the American economy is going to march on 
capital. There is no doubt that the current environment for 
raising capital is difficult even for the largest businesses 
with AAA credit ratings when they have to compete against the 
voracious appetite of the most creditworthy borrower in the 
world and that is the United States Government.
    So I can imagine how difficult it is for small businesses 
to find capital. The Committee on Small Business has held a 
number of hearings in which entrepreneurs testified about their 
inability to obtain needed debt capital. Some talked about 
longstanding credit lines with banks that were reduced or even 
severed completely with no explanation. Others mentioned that 
they simply couldn't find any capital at all.
    At those same hearings, bankers testified that they had 
credit available and were willing to lend. They may have been 
willing to lend, but apparently they were so concerned about 
the regulators, that they are still keeping their capital. In 
these situations, the SBA programs are supposed to kick in and 
help small businesses obtain needed capital. However, even SBA 
capital access programs have shown significantly reduced 
lending activity.
    Further evidence to inject capital into the credit markets 
is going to increase the debt ceiling and Federal borrowing 
just as we have already seen. So making capital available will 
be of little use if the cost of such capital is so high that 
prudent small business owners will not take the risk. I am very 
interested in hearing from all the witnesses today about their 
ideas for making affordable capital available to America's 
entrepreneurs. In addition, I would like to hear what 
regulatory actions are needed that will allow greater capital 
to small businesses without unduly raising the risks that 
created the current situation. Again, I would like to thank you 
and Chairwoman Velazquez for having this hearing.
    The Chairman. Now, we will hear from the gentlewoman from 
New York, the Chair of the Small Business Committee, who more 
than anybody else is the motivating force behind our efforts to 
deal with this bubble.
    Chairwoman Velazquez. Thank you. And thank you, Mr. Frank, 
for agreeing to hold this joint hearing. Earlier this week, the 
FDIC reported that last year saw the largest annual decline in 
lending since the 1940's. Since that crisis hit, Congress and 
the Administration have taken a series of steps aimed at 
restarting the small business credit market: the TARP program 
was passed to shore up banks; TALF was implemented to clear out 
the secondary market for small business lending; and the 
Recovery Act raised the guarantee and cut fees for SBA-backed 
loans. While these steps have helped to spur the rebound, the 
flow of credit is nowhere near where we need it to be. A recent 
Federal Reserve survey found that 10.8 percent of banks have 
cut small business credit lines over the last quarter and SBA-
backed lending is still down 30 percent from 2007. Part of the 
reason that firms continue to struggle to find credit has been 
that most efforts today focus on getting banks to lend. If we 
are truly going to open up financing options for small 
businesses, we need a more balanced approach. That does not 
mean doing more for financial institutions and expecting the 
benefits to trickle through to small firms.
    Taking $30 billion and simply handing it to banks in the 
hopes that they will make loans is not sound policy. And 
allowing lenders to make fewer loans that are bigger is an 
equally questionable strategy. Until entrepreneurs can go out 
and find affordable sources of financing, we are not going to 
see the type of job growth our economy needs. Small businesses 
are our best job creators, producing 60 percent of new jobs. 
During economic recoveries, this job-creating potential is even 
more important. Following the recession of the early 1990's, 
small businesses created 3.8 million jobs. That outpaced big 
business job growth by half-a-million jobs. In today's economy, 
access to capital is nothing less than the opportunity to 
create jobs and put Americans back to work. For these reasons, 
as we pursue policies to get credit flowing again, we must get 
it right.
    Our very economic recovery depends on it. It is my hope 
that today's hearing will take a hard look at proposals that 
have been floated and help us make wise decisions as we move 
forward. Thank you, Mr. Frank.
    The Chairman. I thank the chairwoman. And I would urge the 
Administration--let me just say the jurisdiction over what the 
Administration is proposing is shared. Some of it goes to the 
Small Business Committee, and some to the Financial Services 
Committee. But is my view that it has to be done together. So I 
urge the Administration to work closely with the Chair of the 
Small Business Committee in the interest of our being able to 
get a package together that can go forward. Now, the ranking 
member of the Financial Services Committee, the gentleman from 
Alabama.
    Mr. Bachus. Mr. Chairman, I don't have a statement.
    The Chairman. We will then begin with the panel. And I will 
ask the gentleman from Idaho to introduce our first witness.
    Mr. Minnick. It is my pleasure to introduce one of the 
largest and most efficient of the real estate developers of 
residential real estate in Idaho, Mr. David Turnbull, who is 
going to talk about the difficulties of obtaining financing in 
the current market. Mr. Turnbull?
    The Chairman. Please begin, Mr. Turnbull.

 STATEMENT OF DAVID W. TURNBULL, BRIGHTON CORPORATION, BOISE, 
                             IDAHO

    Mr. Turnbull. Thank you, Chairman Frank, Chairwoman 
Velazquez, and members of the committees. I appreciate the 
invitation and the opportunity to testify before you today. I 
am the president and owner of a diversified real estate 
development firm headquartered in Boise, Idaho. In addition to 
our activities in Idaho, we have projects in Wisconsin, 
Minnesota, Colorado, and Utah. Our real estate development 
activities span both residential and commercial real estate 
development, which makes us a little bit unique. Given the 
nature of our business, I have been a ground zero witness to a 
series of economic events that have brought the economy of the 
United States and the world to its knees. I watched the 
formation of a residential real estate bubble that was inflated 
by cheap credit, loose and sometimes fraudulent underwriting 
practices, and certainly inadequate regulation. Much of it was 
not supported by underlying economic fundamentals and the 
correction was inevitable. What was avoidable, however, was the 
depth of the correction and the associated collateral damage. I 
watched as prominent government officials and economists opined 
that the residential real estate calamity was contained and 
would not spill over into the general economy. I shook my head 
and wondered.
    Everything I saw around me was deeply impacted by the 
housing market. Housing starts in our market have fallen 80 to 
85 percent. It is not a recession for us. This is a depression. 
Unlike housing, we did not witness the formation of a bubble in 
the commercial real estate markets. The first office lease I 
did in 1990 was at a rate of $13.50 a square foot; 18 years 
later, at the peak of the market, we were doing office leases 
in superior buildings for $18.50 a square foot at the 
compounded annual increase of just 1.77 percent. Those are not 
the kind of numbers that suggest a bubble in the commercial 
real estate market, at least in our markets. As another 
example, I sold an office building in 2002 for $2.7 million. 
The replacement cost on that building, even in today's 
depressed construction markets, would be $2.2 million. That 
same building went into foreclosure last month and failed to 
sell at a credit auction, a foreclosure auction for $1 million, 
the minimum creditors bid.
    That is indicative of what can happen in our commercial 
real estate markets when it becomes an all-cash market where 
credit isn't available. The values can fall to below 
replacement cost by 30 to 50 percent. Those are not fundamental 
business issues. Securitization, in my view, is the most 
critical component of the secondary or term loan market. It 
provides for the democratization of credit. Properly structured 
securitization should reduce risk and thus provide credit at 
the most reasonable costs possible. While the TALF program has 
been effective for reconstituting the AVS market for credit 
card, auto, and other consumer loans, in my view it is ill-
suited and ill-structured to resurrect the secondary credit 
markets for commercial retail.
    The TALF requirements are so complex that it is 
realistically available only to the most sophisticated and 
elite borrowers. A reconstituted commercial mortgage-backed 
securities market must have at least four characteristics that 
were not required under the now defunct system: One, bond 
issuers, those that are responsible for underwriting and 
issuing the debt, must retain a significant level of risk to 
ensure proper underwriting procedures; two, rating agencies 
must be accountable for the ratings they issue and they should 
be compensated by the purchaser, not the issuer of the 
securities; three, servicers must be authorized and given the 
tools to effectively deal with troubled assets within the 
security pool; and four, initially, Federal guarantees will be 
required to stimulate the formation of a functional CNBS 
market.
    Those guarantees can be phased out over time as the private 
sector gains confidence in the system, the system that was 
destroyed recently, and replaces the need for Federal 
participation. I would like you to consider this. Without the 
existence of Fannie Mae, Freddie Mac, and the FHA, we wouldn't 
have a housing market today and we wouldn't be in a full blown 
depression. The only equivalent we have today for these 
conduits in the commercial real estate market is TALF, which I 
submit is the equivalent of the Fed creating not just a jumbo, 
but a super jumbo market for commercial real estate. If we did 
that in the residential market, we would be leaving the entry 
level to medium-priced home buyers dangling with no viable 
options.
    TALF, as it is currently structured, will not solve the 
problem. Too much time has passed without adequate action to 
resolve this problem. The President, Congress, and regulatory 
agencies should move expeditiously to pass the necessary 
legislation and/or regulation needed to reconstitute the 
commercial mortgage-backed securities markets. Failure to do so 
will result in further unnecessary devaluation of commercial 
real estate assets and the associated damage to our economy. I 
thank the committee for its time and I welcome any questions 
you might have.
    [The prepared statement of Mr. Turnbull can be found on 
page 307 of the appendix.]
    The Chairman. Thank you, Mr. Turnbull.
    Next, we are going to hear from Ms. Margot Dorfman, who is 
the chief executive officer of the U.S. Women's Chamber of 
Commerce.

  STATEMENT OF MARGOT DORFMAN, CHIEF EXECUTIVE OFFICER, U.S. 
                  WOMEN'S CHAMBER OF COMMERCE

    Ms. Dorfman. Chairwoman Velazquez, Chairman Frank, Ranking 
Members Graves and Bachus, and members of the committees, I 
thank you for this opportunity to be here today. I am 
representing today the 500,000 members of the U.S. Women's 
Chamber of Commerce. Simply stated, the status of the small 
business lending is so devastatingly poor that many business 
owners have given up even trying to secure capital and credit 
for their businesses. Our members tell us regardless of their 
personal credit scores, proven business and financial track 
records, and contracts in hand, their access to capital and 
credit has become severely limited and the fees and interest 
rates on their existing loans have risen to loan shark levels.
    The consequences of this sudden and now extended 
contraction in access to capital and credit have had a 
devastating effect on small businesses. Over the last 2 years, 
small business losses accounted for 40 percent of the 4.7 
million positions cut by firms. The results of a recent survey 
of our members have provided us with a clear picture of the 
small business lending marketplace.
    The smallest businesses have either been wiped out or are 
struggling every day to stay in business. Businesses in the 
$250,000 to $500,000 range have weathered the storm so far and 
are seeking access to capital to fuel growth. Firms in this 
range tell us they could grow now and add jobs if they could 
only access the capital and credit they needed. Many of the 
businesses in the $500,000 to $1 million dollar range have 
significant overhead, equipment and raw materials that make 
growth right now very challenging. And with little or no access 
to capital, they have no way to leverage their assets to fuel 
growth.
    And firms with over $1 million in revenues have a more 
diversified set of capital and credit providers, but they tell 
us they have very little appetite for growth due to the 
exorbitant fees, interest rates, and uncertainty. Nearly all 
businesses tell us that consumer confidence is extremely poor 
and that increased consumer confidence would fuel their 
business growth.
    They also tell us it is important to complete the reform of 
our health care system and financial market regulations and 
create a strong consumer financial protection agency so that 
they will have a clear picture of the future and can plan with 
confidence. U.S. banks report the sharpest decline in lending 
since 1942, and another troubling trend is the extreme 
contraction in SBA-backed lending to women- and minority-owned 
firms.
    Between 2008 and 2009, the percentage of SBA-backed loans 
going to women-owned firms dropped from 23 percent to 20 
percent and the total dollars lent dropped from 18 percent to 6 
percent. During the same period of time, the percentage of SBA-
backed loans going to minority-owned firms dropped from 33 
percent to 22 percent. And the total dollars lent dropped from 
32 percent to only 4 percent. The job creation legislation 
recently passed in the Senate falls woefully short in 
addressing the size and scope of our problems. The recent FDIC 
comments on meeting the credit needs of creditworthy small 
businesses do nothing to change the basic problem. And the 
President's proposal to distribute $30 billion of TARP funds to 
local and community banks is simply more of the same.
    Clearly, this action would once again benefit the banks 
with no guarantees of assistance to small business owners. 
Treasury Secretary Geithner has said these funds should be 
removed from the TARP program. He says TARP has outlived its 
basic usefulness because banks are worried about the stigma of 
coming to TARP and they are frankly worried about the 
conditions.
    Additionally, he said 600 small banks withdrew their 
applications for TARP money because they did not want to face 
the restrictions or the perception that they needed the bailout 
money. Specifically, we recommend: increasing SBA lending 
guarantees to 90 percent; focusing on 2 sectors with the 
greatest urgent need, loans under $200,000 and loans in the 
$200,000 to $500,000 range; and establishing a direct lending 
program through the SBA allowing the sale back of loans to 
private sector investors and lenders after a period of time. We 
strongly encourage Congress to respond with larger-scale 
solutions to improve the opportunity of businesses to secure 
capital and credit, to help stabilize costs, to convert 
expensive debt into fixed-term loans and to assess their 
current financial condition to make good choices for the 
future.
    Strength, transparency, access to capital, and protection 
from abuse are vitally important so that our economy may be 
revitalized, our small businesses brought back to life, and 
jobs created. Thank you.
    [The prepared statement of Ms. Dorfman can be found on page 
156 of the appendix.]
    The Chairman. Thank you. Next, Mr. Steve Gordon, who is 
president of Instant Off, Incorporated.

    STATEMENT OF STEVE GORDON, PRESIDENT, INSTANT-OFF, INC.

    Mr. Gordon. Madam Chairwoman, Mr. Chairman, and 
distinguished members of the committees, thank you for inviting 
me to Washington to testify this morning. My name is Steve 
Gordon, and I am from Clearwater, Florida. I am honored to be 
here and to deliver this testimony before the people's 
Congress. I am here as the voice of regular small business 
owners who have historically been the largest creator of jobs 
in our country. We are frustrated with the inability to obtain 
financing to create critically needed jobs. Jobs can only be 
created with capital. And the bailed-out banks are not helping 
the situation.
    In spite of the taxpayers' generosity, 2009 saw the 
sharpest decline in lending since 1942. Further compounding the 
problem, banks are taking away existing credit lines. While 
this may be a prudent act of self-preservation, credit 
reductions lower your credit score, giving the banks a 
convenient reason to increase your rates. Consider my story. I 
am the owner of a small business called INSTANT-OFF. We 
manufacture water saving devices that fit on any faucet and 
save up to 10,000 gallons of water a year. Instant-Off costs 
less than $10 and we have sold over 800,000 units. Our U.S. 
market potential is 50 million units and globally around 200 
million units. We can create 25 jobs right now and 75 more over 
the next 3 years.
    As we grow, 25 percent of our employers will be people with 
disabilities. And we challenge other companies to match this 
commitment. In addition, we will create jobs for suppliers and 
distributors. We are ready to move forward and implement our 
marketing plan, but none of this will happen without the 
necessary capital. American innovation is what made this 
country an economic leader. People with innovative ideas grow 
them at a huge personal expense in pursuit of the American 
dream. Yet when the time is right to grow beyond their 
individual means, this creative endeavor is often not judged 
for its business plan or proven success, not on its management 
team or what it can do for the country, not on what it can do 
for the environment, not for the jobs it will create, and for 
the potential increase in export sales.
    It all comes down to your credit score. The current lending 
model does not work in today's post-crash economy. If we depend 
on banks to make business loan decisions, we are in for a long, 
painful recession. Banks can't even figure out how to solve 
their foreclosure problem. At this point, we must change our 
strategy. The government must take responsibility and solve the 
capital crisis.
    Congress lent directly to the banks, directly to the auto 
makers, and directly to AIG. It is time for a similar program 
for small businesses. I propose that Congress pass legislation 
to make the SBA a direct lender to small businesses. Any money 
approved for small business loans should be kept in a separate 
account. The American people do not want to give any more money 
to the banks. The real estate crash, the recession and the 
banks have lowered credit scores on most Americans. In order to 
create the amount of jobs we need, credit scores cannot be used 
as the sole factor in obtaining business loans.
    I am proposing a 15-point lending criteria to serve as a 
guide in evaluating and determining small business loan 
approval. Some of the key determining criteria are: How many 
new jobs will the loan create; how many jobs will be created 
for disabled Americans; will this business help protect the 
environment or conserve natural resources; will the product or 
service be produced in the United States and can it be 
exported; and has the applicant's credit score been damaged by 
the recent economic downturn?
    Again, I urge Congress to pass legislation to make the SBA 
a direct lender. Capital is the tool that drives American 
business and we need your help. Please move quickly to resolve 
this critical issue. And now a brief message from the American 
people. Congress needs to put an end to its partisan behavior. 
It is time to drop the ``I win, you lose'' mentality and find 
compromises. In the business world, we get things approved with 
a majority vote. As a reminder, there is no ``R'' or ``D'' or 
``I'' in ``team.'' The Americans have been so proud of the 
Olympic team, Team U.S.A.
    The American people request that ``team Congress'' pick up 
the pace and immediately take action to solve the job crisis. 
And, please, pass health care reform for the 45 million 
Americans who do not have health insurance. Thank you for 
giving me the opportunity to be heard on these very important 
issues.
    [The prepared statement of Mr. Gordon can be found on page 
203 of the appendix.]
    The Chairman. Next, Mr. Todd Zywicki, foundation professor 
of law, George Mason University.

  STATEMENT OF TODD J. ZYWICKI, FOUNDATION PROFESSOR OF LAW, 
                    GEORGE MASON UNIVERSITY

    Mr. Zywicki. Thank you, Mr. Chairman. It is my pleasure to 
testify today on the subject of the ``Condition of Small 
Business and Commercial Real Estate Lending in Local Markets.'' 
As noted in a recent study by former Federal Reserve economist 
Thomas Durkin, and as he reminds us, many independent 
entrepreneurial businesses rely on what is conventionally known 
as consumer credit in starting to build their businesses, 
things like credit cards, home equity loans, and even auto 
title loans. These sources of credit are especially important 
for women and minorities who tend to be excluded from 
traditional small business lending markets. As a result, a lot 
of regulations that seem to be ostensibly aimed at consumer 
lending will also tend to disrupt effectively small business 
lending as well. Prudent, well-designed government regulation 
of consumer and small business lending can certainly promote 
competition, expand consumer choice, and lead to lower choices 
and overall productive lending. For instance, the original 
Truth in Lending Act, as it was originally conceived before it 
got larded up with a lot of regulation and litigation, provides 
a good example.
    But well-intentioned lending regulations may also have a 
large number of unintended consequences as well. And most 
relevant to this hearing, one of those unintended consequences 
is the curtailment of lending, especially to consumers and 
small entrepreneurial businesses. Unintended consequences are 
most likely and most severe when legislation and regulation 
goes beyond the modest goals of improving the market process 
but instead supplants individual choice and competition through 
the substantive regulation of particular terms of credit 
contracts.
    It is basic economics that in order to make an economically 
prudent loan, a bank has two considerations: First, it must be 
able to estimate the risk of the loan and price the loan 
accordingly. Regulations that either increase the risk of 
lending or make it more difficult to accurately price risk will 
make this task more difficult and expensive.
    Second, if the bank is unable to accurately price the loan, 
it will have to reduce its risk exposure. It can do this either 
by limiting the number of loans it makes, limiting those to 
whom it will lend, lending for instance to only lower-risk 
borrowers or by reducing the amount it lends such as by 
reducing the size of loans made or credit lines on credit 
cards. Provisions in recent legislation that has been enacted, 
such as the Credit CARD Act, have made it more difficult for 
credit card issuers to price risk efficiently. The consequences 
of something like the Credit CARD Act have been predictable; in 
fact, I predicted them.
    Credit card issuers have tried to adjust other terms of 
credit card agreements in order to try pricing risk efficiently 
and to the extent they have been unable to do so, they have 
acted to reduce their risk exposure by offering fewer loans, 
lending to fewer people and reducing borrowers' credit lines. 
If enacted, proposed legislation such as the proposal for a 
national interest rate ceiling on credit cards of 6 percent, 
the proposed consumer financial protection agencies, and the 
proposal to permit cram down of home mortgages would further 
exacerbate this credit crunch by further increasing the risk of 
lending, and make it more difficult to price risk, resulting in 
a greater curtailment of lending.
    Let us talk about the Credit CARD Act for a moment. The 
Credit CARD Act had some modestly decent proposals in it that 
may have helped consumers a little bit. On the other hand, 
there are other provisions of the law that interfered with 
accurate risk-based pricing, such as new limitations on 
interest rate adjustments, default provisions and that sort of 
thing. The market response to the CARD Act illustrates how 
regulation can disrupt lending markets by interfering with 
efficient risk-based pricing. Consider just a few of the terms 
of the credit card. Interest rates, penalty interest rates, 
annual fees, length of grace payments, the amount of 
circumstances under which behavior-based fees will be assessed, 
the degree of acceptance by merchants--I could go on, but I 
only have 5 minutes.
    I would guesstimate, what, 60, 70, 80 terms have potential 
for a credit card. The CARD Act placed political limitations on 
the ability of lenders and borrowers to establish these terms 
through free-market processes. In order to try to price risk 
accurately and offset declining revenues from newly regulated 
credit card terms, credit card issuers have repriced other 
terms of credit card agreements. As a result, borrowers have 
seen newer increased annual fees, fixed-rate interest cards 
have been converted to variable rate cards, frequent flyer and 
other rewards cards have become stingier, and other fees such 
as cash advance fees have risen. Most notably, some provisions 
of the CARD Act make it more difficult for card issuers to 
raise rates on consumers based on risk and changes in economic 
circumstances.
    Again, the market response has been entirely predictable. 
Credit card issuers have had to raise interest rates on all 
cardholders in order to guard against the risk they might need 
to raise risks later but might be unable to do so as a result 
of regulation. Most relevant for this hearing, there have been 
widespread reports that as a result of the CARD Act, credit 
card issuers have slashed credit lines and cancelled credit 
lines. Although this reflects many different factors, in part, 
it reflects the effect of the CARD Act. Thank you.
    [The prepared statement of Professor Zywicki can be found 
on page 322 of the appendix.]
    The Chairman. And I now recognize the gentleman from 
Michigan, Mr. Peters, to introduce the last witness.
    Mr. Peters. Thank you, Mr. Chairman. We are joined today by 
a gentleman from Michigan, Mr. Wes Smith, who is representing 
small manufacturers. As members of both committees know, many 
small businesses have been impacted by this credit crunch, but 
it has been particularly acute for our small manufacturers. As 
a result of this credit crisis, we are continuing to see that 
happen. Mr. Smith is the owner of E&E Manufacturing Company. He 
is also a member of the board of a community bank. He brings a 
unique perspective. He has a company that employs 250 employees 
and is located both in Michigan and in Tennessee. Thank you, 
Mr. Smith.
    The Chairman. Mr. Smith?

STATEMENT OF WES SMITH, PRESIDENT, E&E MANUFACTURING, PLYMOUTH, 
  MICHIGAN, ON BEHALF OF THE MOTOR & EQUIPMENT MANUFACTURERS 
                       ASSOCIATION (MEMA)

    Mr. Smith. Thank you. Again, my name is Wes Smith, and I am 
the president and owner of E&E Manufacturing. I also serve on 
the board of a small community bank, so I can bring a unique 
perspective from both the borrower and the lender. First and 
foremost, though, I have been a manufacturer for 45 years and 
appreciate the opportunity to discuss the challenges that small 
manufacturers in the motor vehicle industry face. My company, 
E&E Manufacturing, is one of those suppliers located in 
Plymouth, Michigan, and Athens, Tennessee. My father began the 
business in 1962. It has since grown its footprint from a small 
5,000 square foot job shop to an over 400,000 square foot world 
class, full service supplier of highly engineered stamped metal 
solutions. We were the first metal stamping facility in the 
Nation to be awarded the star award from OSHA for our 
outstanding safety program and are determined to continue to 
provide safe and meaningful employment to our now over 250 
employees.
    While our current sales projection for 2010 is up over 20 
percent of what we achieved last year, it remains only 55 
percent of what we enjoyed in 2007. And I can tell you no one 
was happier to close the book on 2009 than me. Although we were 
able to turn things around the last half of the year, E&E took 
a pounding in the first 7 months and we will record a loss for 
the first time in 40 years. We project that our sales next year 
could allow us to rehire almost 200 people.
    However, access to capital to fund these sales projections 
could stunt our growth. Just recently, our lender reduced our 
line of credit to an insufficient amount and changed our loan 
covenants. Many banks are clearly avoiding manufacturers, 
especially in the automotive industry, as they aim to reduce 
their exposure to temporarily impaired companies in a 
struggling industry. Most small manufacturers enjoy a long 
history with their lenders, in many cases having successfully 
worked together for decades. My personal opinion of that and 
many in our industry is that lenders are under such intense 
pressure from Federal regulators that they went from one 
extreme, flooding the market with too many substandard loans, 
to almost completely closing the faucet. I urge Washington 
policymakers to work with lenders and borrowers to reach a 
delicate balance needed to help restore manufacturing in 
America and stimulate job growth. I don't believe the 
regulators should ease their standards and oversight of 
lenders.
    I do, however, believe that Congress and the agencies can 
develop a unique set of guidelines to govern loans to small 
businesses in a pooler program. This will allow banks to feel 
comfortable lending to manufacturers while establishing set 
compliance rules. I applaud the committees on Capitol Hill for 
holding these hearings and the various proposals from the White 
House and leaders in Congress are encouraging. It is up to 
Washington to help create an environment whereby small 
manufacturers like ourselves can access adequate and timely 
credit and the lenders can conduct sound transactions without 
fear of government reprisal. Injecting capital into the market 
is only one part of the equation.
    Banks and borrowers need guidance from Washington to 
strengthen oversight without stifling economic growth. 
According to the indication administration, small companies 
comprise over 98 percent of manufacturing firms in the United 
States, yet we are often an overlooked segment of our industry. 
For example, the auto industry is one of the most intricate 
industrial complexes and one side is the vehicle manufacturer, 
a dozen or so major original equipment manufacturers that 
dominate world production, have sales measuring from the tens 
to hundreds of billions of dollars. On the other side is a 
dozen or so major material suppliers, the steel, aluminum, and 
plastic providers that too have sales measured in the tens of 
billions. Caught in between are some 3,000 suppliers that 
produce the over 10,000 parts necessary to make up every 
passenger car and truck.
    Because of drastically reduced volumes and nonfunctional 
capital markets, financial assistance to suppliers has not 
provided small manufacturers with the capital and resources to 
survive. Banks, most with diminished capital positions, are 
generally not in a position to increase their loan portfolios 
regardless of the enhanced collateral positions. However, this 
committee has before it two interesting proposals that 
collectively will go a long way in addressing the challenges 
faced by small manufacturers.
    H.R. 4629, the Manufacturing Modernization and 
Diversification Act, and the proposed small business lending 
fund, taken together are significant and essential steps 
forward. We will be pleased to work with committee members on 
the initiatives and legislation laid out in my written 
statement and I would like to thank you for your time and 
efforts for making the millions of American manufacturing 
voices heard. I only hope my message is understood and acted 
upon before it is too late. Thank you.
    [The prepared statement of Mr. Smith can be found on page 
271 of the appendix.]
    The Chairman. At this point, I want to ask unanimous 
consent to introduce into the record a package of materials 
that were submitted to members, to Mr. Bachus, to Mr. Childers 
and myself, Mr. Hinojosa, Mr. Kanjorski, Mr. Klein, Mrs. 
Maloney, Mr. Miller of North Carolina, Mr. Neugebauer, Mr. 
Perlmutter, Mr. Peters, and Mr. McCarthy of California. These 
have been looked at by all sides. Is there any objection? If 
not, they will be put in the record. If there are other 
documents that members would like to submit--does the 
gentlewoman from Illinois have a document that she wants in the 
record? That will be included as well.
    Next, as we go to the questioning, we have a large number 
of members of the panel. What I plan to do on the Democratic 
side on the Financial Services Committee, of which I can only 
speak for that, is to give members the choice of which panel 
they want to talk to. As we get to the member, if you would 
prefer to defer and ask your questions of a later panel, that 
would be acceptable. So I am going to do that myself. I am 
going to save my questions for the regulators and I will, 
therefore, not be asking questions of this panel. And so I will 
now--the gentleman from Alabama--and I would say the Democratic 
members on the Financial Services Committee, if you want to ask 
this panel, fine. If you would rather defer, you can defer. 
There is no guarantee we will get to everybody anyway.
    Mr. Bachus. Mr. Chairman, let me get a point of 
clarification. Can we ask this panel a question and the next 
panel a question?
    The Chairman. In terms of recognizing Republican members, 
you can do pretty much what you want.
    Mr. Bachus. I think we will just let everybody--
    The Chairman. Yes, go ahead.
    Mr. Bachus. Ms. Dorfman, your testimony is similar to Mr. 
Gordon's, and I think part of that testimony is that the SBA 
should just lend money directly; in other words, bypass the 
banks. Is that what I am hearing, Ms. Dorfman?
    Ms. Dorfman. Yes. What we find is the banks have not been 
lending and the best way to get the money into small businesses 
would be to provide a direct lending program through the SBA so 
that the small businesses actually access those funds.
    Mr. Bachus. Mr. Gordon, is that--
    Mr. Gordon. What I propose--and this is the problem in 
banking today. You go in for a loan, you deal with a bank 
officer, he has no idea what you do as a manufacturer. At the 
SBA, there are so many smart people there. If you just set up a 
task force for jobs in the SBA and you had 3-member panel, one 
from a hired--a score member and, two, from an SBA person, they 
could review and call in and in 30 minutes they could decide if 
it is a good loan or not.
    Mr. Bachus. What I am saying is, you want the SBA to sort 
of--
    Mr. Gordon. I want the business to be back in business 
loans. That is the whole point.
    Mr. Bachus. I understand your goal is to create jobs and 
get lending going. But what I am saying, I think essentially, 
you want the SBA to come in and loan additional amounts of 
money because the banks aren't doing it, is that--
    Mr. Gordon. Because they are not doing it, because they 
don't understand business. It is a big problem. Banks do not 
understand business.
    Mr. Bachus. I understand that.
    Mr. Gordon. But that is true. I want the SBA to work on it 
directly.
    Mr. Bachus. I understand what you are saying. Do you 
believe that the SBA is as qualified as the banks to make 
decisions on lending and creditworthiness?
    Mr. Gordon. No, I don't. I think they are more qualified. 
Much more qualified.
    Mr. Bachus. Ms. Dorfman, do you believe that the SBA would 
make much better decisions as to lending?
    Mr. Gordon. I think that if you--first of all, we have such 
a huge problem out there, we would have to--
    Mr. Bachus. I understand there is a huge problem. I just 
want to focus on which one is better qualified.
    Mr. Gordon. I think we need expanded criteria and the SBA 
is more qualified to deal with business loans.
    Mr. Bachus. How about it, Ms. Dorfman?
    Ms. Dorfman. I would say what we have seen not just from 
the economic turndown, but from years prior, is that the banks 
typically go cherry-picking. They will take the best looking 
loans. It costs them the same to do a loan for $75,000 as it 
does $10 million. So in order to move forward, if we take the 
money and put it to the SBA to allow them to lend--and would we 
have to put in the program that would help them determine, yes. 
I think they can do it.
    Mr. Bachus. I understand. So you want the SBA to basically 
play the role that the banks have, as you say, ``not played by 
not lending?''
    Ms. Dorfman. I would like the SBA to have a direct lending 
program to small business.
    Mr. Bachus. How big would the two of you visualize that 
program being to do any good?
    Ms. Dorfman. Well, if we can take the funds that the 
President was going to give the banks and just turn them over 
to the SBA--
    Mr. Bachus. All right.
    Ms. Dorfman. --that is a drop in the bucket really.
    Mr. Bachus. $30 billion?
    Ms. Dorfman. Yes.
    Mr. Bachus. Mr. Gordon?
    Mr. Gordon. To put it in perspective, $30 billion is 3 
percent of the original money for the first stimulus package. 
So the goal here is to take 3 percent of the money and create 
75 percent of the jobs that we need. And it is just not enough; 
$30 billion is not enough. We would like to start there, but it 
is just not enough.
    Mr. Bachus. Let me ask you this: If the loans aren't paid 
back, who is ultimately responsible, from your understanding? 
Is it the taxpayer?
    Ms. Dorfman. Well, at this rate, there are few default--
when you take a look overall of what the SBA lending has done, 
there is a relatively low default system. What we have seen 
with the banks--
    Mr. Bachus. No. I understand. But if the loan is not paid 
back, who--
    Ms. Dorfman. It would be absorbed, of course, by the SBA 
because we have--
    Mr. Bachus. And where does the SBA get its--
    Ms. Dorfman. We understand that it is taxpayers, but this 
is an investment in the U.S. economy. It is small business--
    Mr. Bachus. I understand. I am not arguing with you. But it 
is the taxpayer who ultimately is on the hook if it is not paid 
back?
    Ms. Dorfman. Correct.
    Mr. Bachus. Mr. Gordon, is that your understanding?
    Mr. Gordon. That is exactly right. Right now, the SBA 
guarantees 90 percent of the loan anyway. So they are 
guaranteeing 90 percent of something that is not getting done. 
The other alternative is to continue paying unemployment 
compensation. There is a 100 percent chance--it needs to be 
looked at because--
    Mr. Bachus. Let me ask you one other question if I can. Are 
you all aware we are spending so much we are going to double 
the national debt in 5 years and triple it in 10 years? Does 
that bother you? Is that a concern?
    Mr. Gordon. Okay. What we are doing here is we are 
investing in businesses to create jobs for people.
    Mr. Bachus. I understand. I am not asking you that.
    Mr. Gordon. It is a very important issue because if you 
don't understand why we need to make loans, and that is what 
the banks don't understand, the banks would move quicker if 
they were paying the weekly check for unemployment. But since 
they have no expense and the weekly check, they don't.
    The Chairman. The gentleman's time has expired.
    Chairwoman Velazquez. Yes. Ms. Dorfman, as has been 
discussed, the Administration has proposed the liquidation of 
the $30 billion fund. And if this proposal moves forward, do 
you believe there should be penalties for lenders who receive 
money but do not make loans to small businesses?
    Ms. Dorfman. I absolutely do and I would also like to see 
some sort of penalty for the banks who are now ``providing SBA 
loans'' that are not. What we have seen is that a small 
business will go in, ask to get a business loan or an SBA loan. 
They are told they are not to giving them, but what they can 
do, they are pointed to the higher interest rate credits.
    Chairwoman Velazquez. So your opinion is clear that if this 
money is supposed to help small business access affordable 
credit, the banks that take this money should use it to lend to 
small businesses. Do you believe that there should be a penalty 
for lenders who use the funds solely to increase profit margins 
on loans that they would have made anyway?
    Ms. Dorfman. Absolutely, yes.
    Chairwoman Velazquez. And, Mr. Gordon, in the last year, we 
have seen the government bail out AIG, give lines of credit to 
GM and Chrysler, and provide capital infusions to our Nation's 
largest banks, including Goldman Sachs. Now, the Administration 
is proposing to cut another $30 billion check for banks under 
the premise that it will trickle down to firms like your own. 
Do you believe that any of this $30 billion will reach 
businesses like yours?
    Mr. Gordon. Absolutely not. And this is what really bothers 
Americans. I don't understand, and neither do millions of 
Americans. Why can't Congress just cut through all of this 
stuff and work direct? Why in the world would you want to give 
money to the banks and hope they can do something? Why not just 
take that $30 billion and put it in an account and have it 
under government management so that 100 percent of those funds 
are used for loans?
    Why would you give money to banks and hope that they are 
going to do something when they have proven we don't need more 
branch signs, we don't need more branches, we don't need more 
chairs. We want loans and we want--if you are only giving us 
$30 billion, then we want 100 percent of that money to go to 
loans. We want that money in a separate account.
    Chairwoman Velazquez. [presiding] Thank you. Mr. Bartlett?
    Mr. Bartlett. Thank you very much. I am pleased to be here. 
I have a couple of questions. In a former life, I was in small 
business, and for 12 years, my wife and I every Wednesday met a 
payroll for a land development and home construction company. 
So I have been there. I know that the way banks make money is 
to loan money, and I would think that banks would be anxious to 
loan money.
    I am having some trouble understanding if there are 
creditable small businesses out there that want to borrow 
money, why banks aren't loaning money to them. I know they are 
gun shy, but they have been in this business for a very long 
time. I am surprised that they aren't devising means of 
determining whether or not the applicant is creditable so that 
he is a good risk for a loan.
    And I am wondering why they haven't done this. I am very 
suspicious that the government does not a better job than banks 
in making these assessments. A second question I have of Ms. 
Dorfman is, you mentioned that for existing businesses, fees 
and interest on present loans have risen to loan shark levels. 
I don't go to Las Vegas and I don't play Russian roulette and I 
don't understand why a business would have opened themselves up 
to a variable rate interest loan. Apparently, that is what 
happened. That is really a gamble if you are a business, to 
open yourself up to all of the potential problems of a variable 
interest rate loan. What percent of the loans of our small 
business community are these variable rate interest loans so 
that the fees and interest rate can go up?
    Ms. Dorfman. I don't have an exact rate, but what I do know 
is that we have heard from our members that what has happened 
is they have gone to apply for a loan because they need to grow 
their business, but what they are provided with is an 
alternative lending instrument with high interest fees and they 
are forced to take it because the economy has had a downturn 
and that is their only opportunity to either make ends meet or 
get to the next level.
    Mr. Bartlett. So these aren't really interests and fees on 
existing loans, that if they want to increase their existing 
loans, they have to pay higher fees and interest. Is that what 
you are saying?
    Ms. Dorfman. It really depends on the instrument. There are 
some loans obviously that are fixed rates and then there are 
others that are not. And those are the ones that have grown.
    Mr. Bartlett. Thank you very much, Mr. Chairman, I yield 
back.
    The Chairman. The gentleman from Georgia, who is on both 
committees, but still only gets 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. I appreciate it. I 
cannot think of a more important hearing if we want to do 
something about the jobless rate and the high unemployment 
because small business is an incubator of our jobs. It creates 
more jobs than any other level of industry. That is where the 
jobs come from. But I want to deal with each of you and see if 
we can't get to the bottom of this. We have a problem here with 
the core of our financial system and that is--that has been the 
history of this for the last couple of years. We have been 
grappling with this financial problem. And that is the failure 
of the banking system to do its job. That is heart of our 
financial system. That is the heart pump that pumps the blood 
out, that pumps it all out. So I want to ask of you, why is it, 
in your opinion, that the banks don't want to lend money?
    Even in the very beginning, one of the reasons we had a 
problem with the automobile industry was the fact that the poor 
dealers couldn't get loans. They have been here before you with 
the same problem. Now we have $30 billion that is set aside 
here and I would like to get each of your understandings of how 
this works and particularly, is it your understanding that even 
if the banks, these small banks that we are going to set this 
money up for, even come and get some of this money, there is no 
definitive requirement that they even lend it. The only 
incentive, it seems to me, for them to lend it is they will get 
some kind of benefit on a sliding scale.
    So, Ms. Dorfman, let me start with you, because I think 
your testimony and Mr. Gordon's testimony really hit this 
issue. What is stopping the banks from lending the money and 
what is wrong with the program of the $30 billion that we have 
set up there? Your fear that that it will not be lent out?
    Ms. Dorfman. I see two different challenges, sir. The pre-
economic challenge where the banks were only doing the cherry-
picking in lending--if you want $10 million, we will consider 
you; if you want $75,000, forget it, it costs too much. The 
second thing that I see is that once the economic downturn 
happened, then the banks claimed they have trouble, they need 
our money. But what they did was balance their books and then 
also paid the executives the bonuses, but they were not 
lending.
    So the money is still not there. What we are hoping with 
the direct lending program is that instead of having to deal 
with whether a bank will or won't lend through the SBA, that we 
will get the loans out there. Once the administrative costs 
will be picked up from the SBA side, once they are out there 
and in a good payment cycle, then perhaps we can sell them off 
to the banks and then continue to work with the other new 
lenders.
    Mr. Scott. Let me ask you this, Ms. Dorfman. Do you know 
that if we were to raise the level for credit unions from their 
present 12.5 percent and raise that cap to 25 percent, that 
might be helpful, that might give some competition to these 
banks, that might get them to act straight more and that would 
access more capital to small businesses if we allowed--would 
credit unions be a help on that?
    Ms. Dorfman. They could be, but once again, do we know that 
the money is going to truly be lent? And I think what we are 
concerned about is, are we going to repeat the past, giving 
money to banks and seeing it not getting out to small 
businesses? And I also have to say that we have heard a lot 
from this Administration about the small businesses being the 
answer to the growth of our economy. We need now to have the 
money where the mouth is. Put the money at the SBA. Get the 
money into the pockets of small businesses so we can grow those 
business, we can create jobs, and we can turn the economy 
around.
    Mr. Scott. So you are saying, rather than take this $30 
billion and getting it to the banks as an administration of 
what we are proposing, that we should instead get it in through 
the SBA?
    Ms. Dorfman. Correct, as a direct lending program.
    Mr. Scott. I see. Is that your assessment, too, Mr. Gordon?
    Mr. Gordon. I think to understand where the problem is, you 
need to understand where the banks came from. Before the crash, 
they were totally focused--they weren't doing a lot of business 
loans anyway. So before the crash, they were focused on 
mortgage loans. It is really easy to send an appraiser out to a 
property, find out what the value is, and make a loan decision. 
It is much more difficult to have the time and the resources to 
evaluate someone's product potential. If I came to a bank and 
showed them my business plan, they would say, who is going to 
review that? They don't have the people qualified to review 
business plans. They are not set up to do it. You are asking 
banks to do something they don't feel comfortable with. And 
that is the problem.
    The Chairman. Thank you. Time has expired. Let me invite 
the people standing to take these seats. Somebody put things on 
there that say don't sit here, but I say ignore them. So, 
please. What happens is, the first row is set aside for people 
who staff the Federal regulators, none of whom are not allowed 
to go out without three people to make sure they don't say what 
they are not supposed to say. But the current people don't need 
that. So please feel free--if there is an empty seat, sit in 
it. I don't like people to have to stand up. With that, I 
guess--who is--we go to the small business--we did? I 
apologize. Mr. Neugebauer?
    Mr. Neugebauer. Thank you, Mr. Chairman. I want to thank 
you, witnesses, for sharing your perspectives. There are many 
factors impacting lending, but I think one of the biggest 
issues is the uncertainty created by the government. Small 
businesses are uncertain about the cost Congress may add on to 
them and the taxes that they will have to pay and the lenders 
are uncertain about the changing regulatory environment. I just 
spent 2 weeks in my congressional district, and over the last 2 
months, I have been talking to lenders and have been talking to 
small businesses and touring a number of those businesses and 
asking them what they feel like the state of play is. And quite 
honestly, I hear more about what Congress is doing than what 
the banks are or are not doing and what the SBA is doing or not 
doing. I was in a business last week, and they said, 
``Congressman, we don't know what to do. We are concerned that 
the government is about to put these new burdens for health 
insurance, they are going to raise our taxes, the cap and trade 
or cap and tax bill that may increase our cost of energy in 
this particular business that uses a tremendous amount of 
energy, that the huge deficits that are being incurred and how 
we are going to begin to pay that back and what will be in the 
environment, the inflationary potential of the Fed monetizing 
debt.''
    The list went on and on and on. And when I sat down and 
talked to bankers, I said, ``Tell me why you are not lending.'' 
They said, ``Randy, we would love to make some loans right now. 
But quite honestly, our good customers are not coming and 
asking us for loans right now because of overall uncertainty, 
and when they do come, the amount of paperwork and regulatory 
environment is terrible.''
    Several banks in my district said that they were having 
problems making home loans and real estate loans to the people 
in their small communities because of some of the new 
regulations that are out there, particularly for example, 
requiring escrow accounts where these little community banks 
have been making these home loans in their communities for 
hundreds of years or many years and now have these new 
requirements.
    I want to read you some of the comments that I entered in 
the record here as the chairman said. This is from a community 
bank in Abilene: ``The increased regulation proposed by 
Congress and various Federal agencies will continue to make our 
jobs more challenging and costly. Our hope is that Congress 
will stop much of this pending regulatory legislation and 
realize that community banks have not caused today's economic 
problems and already are overregulated.''
    From a small business in Abilene, Texas, ``With Congress 
and the Executive Branch planning so many changes that add both 
uncertainty and decisions and certainty in higher taxes to pay 
for everything, small business have no choice but the wait-and-
see approach to any future growth.''
    From a community bank in Hereford, Texas, ``Those asking 
why we are having a trouble making loans should get a mirror 
and understand that it is not that we are not making loans, but 
we are being driven out of making loans by those who are asking 
us to make loans.''
    From a mortgage lender in Abilene, ``Is the answer more 
regulation, more government involvement, more oversight? I tell 
you it is not. We are here today because our government started 
manipulating the industry, and the industry quite honestly does 
not understand. I suggest that free enterprise be allowed to 
work to bring us out of this financial mess.''
    And finally, a community bank in Plainview, Texas, 
``Community banks want to lend. That is how we serve our 
communities. Increase our capital for growth is what we do. 
Given the present uncertainty in the economic and political 
climate, banks are understandably anxious regarding extensions 
of new credit.''
    And so I think one of the things that I have been saying is 
that the best thing that we can do for the economy, the best 
thing we can do for the American people, the best thing we can 
do to get this economy going again is quite honestly for the 
government just to stop all of this nonsense that we have been 
about. We are creating a huge amount of uncertainty. I am a 
former businessman. I am a former land developer. And when I 
look at the environment today of the uncertainty that is 
created out there, I am not sure I would be out looking for new 
deals right now.
    So I think I am listening to the people in the 19th 
Congressional District and I think they speak for quite 
honestly people all across America as they just wish the 
government would stop it, they wish the Congress would quit 
trying to micromanage our financial markets and quit this silly 
stimulus program that we are doing where we are trying to 
borrow and spend our way into prosperity.
    Quite honestly, how we got here was borrowing and spending 
and a lot of people borrowed and spent too much money and now 
they are having to pay it back. Some can't pay it back and that 
has certainly created a great deal of uncertainty in our 
marketplace.
    The Chairman. The gentleman's time has expired. The 
gentleman from Michigan.
    Mr. Peters. Thank you, Mr. Chairman. I want to talk to you 
a little bit about manufacturing here and also build on the 
previous comments. We have a situation, Mr. Smith, in the 
manufacturing sector of auto suppliers where we are seeing 
increasing orders coming in and yet the working capital is not 
available to ramp up the production necessary in order to meet 
those orders. So it is a situation where there really is a 
dysfunctional capital market system here when you have orders 
coming in, you can hire people, move forward, but the capital 
isn't there. Perhaps--I know you talked about that in your 
written testimony. If you could elaborate a little bit more 
about the challenges of manufacturing, where you are right now, 
why credit is going to limit your ability to create jobs even 
though these orders are coming in right now.
    And also you talk about the collateral support program and 
why that is a way to have direct help to you through the 
banking industry. I know you referenced the Manufacturing 
Modernization and Diversification Act, which I appreciate, 
which Mr. Dingell, Mr. Levin, and members of this committee--
Mr. Frank, Dennis Moore, Mr. Kanjorski, and others--have 
endorsed. If you could kind of flesh some of that out for us, I 
would appreciate it.
    Mr. Smith. Sure, absolutely. I would have to disagree with 
what has been said before about the President's plan on 
injecting $30 billion of capital into the banking industry. I 
think it is absolutely what is necessary. You know, when I sit 
on a board of a community bank, I think our situation in 
manufacturing is really simple. We have a top line situation; 
we need more sales. I don't know what the banks are going to 
do. And again what has been said is that the small community 
banks did not create this issue.
    In our particular area, I ran a pure bank report for banks 
under $5 billion in assets, and this is Genesee, Kent, 
Livingston, Oakland, Ottawa, Wayne, Macomb, and Washington 
Counties. And of these, the total capital ratio, the aggregate 
average capital ratio is 7.7 percent. Well, the FDIC says in 
its public cease-and-desist order that you require a minimum 
capital ratio of 8 percent. So what has to happen is that these 
banks need to raise $45 million in capital before they can make 
one loan. The real issue is that the banks can't make loans 
because the regulators have their foot on their necks. They 
cannot function. I mean the only way that in order to make your 
capital ratios where they need to be is either you need more 
capital, and if you don't have access to capital through a 
program such as what is being proposed, is to shrink the size 
of your bank. And how you shrink the size of your bank is you 
just simply don't make loans. That is clearly on the community 
bank that I am on the board with, that is what we do. We 
absolutely just don't make loans. We have to shrink the size of 
our balance sheet.
    So if you are a manufacturer or a small businessman, where 
do you go? So it is a really a twofold process. Number one is 
the banks have to have the ability to make loans, and this $30 
billion, and if you use a typical 10 to 1 ratio for banks, is 
that $30 billion then becomes 300--you know, 10 times that, 
which is going to be available for loans that could be created 
throughout our entire economic--you know, the portfolio that we 
have, particularly in manufacturing.
    The other situation we have is that as companies ourselves, 
we need to take a look at our deteriorated balance sheets, and 
that is because banks are under pressure from the regulators, 
and everything has to be reappraised. So I can tell you that 
many of my peers have had regulators come in, take a look at 
their balance sheet, and reappraise all their assets. And all 
of a sudden, they find that they are taking a third hit to 
their balance sheet and they don't have the ability to make the 
loan.
    So having a program where your collateral is guaranteed by 
the government, such as the bill that is being proposed, is 
absolutely the other part of the step. It is really a two-step 
process: the banks have to be able to make money; and they have 
to have their capital ratios restored. The $30 billion is an 
excellent program. I can tell you for the community bank, it 
can't come fast enough. And the rules and how this gets 
disbursed if it is to be disbursed aren't really clear.
    In terms of manufacturers, we need to have our collateral 
positions guaranteed because we have taken such a hit.
    Chairwoman Velazquez. [presiding] Mr. Graves?
    Mr. Peters. Also, I have been hearing from our other 
suppliers that they have had lines of credit pulled or new 
loans denied, not because of underwriting concerns, or 
necessarily risky investments but just because the bank is 
overexposed to the auto sector.
    Has your board position on the Equipment Manufacturers 
Association, can you tell us a little bit about that?
    Mr. Smith. Absolutely. You know you are almost better off 
being a really lousy customer to the banks because they can't 
get rid of you, but if you are marketable, if you are bankable, 
you are really in jeopardy. So it is almost really worse if you 
are in better financial shape than worse financial shape.
    Chairwoman Velazquez. Five minutes has expired. Mr. Graves?
    Mr. Graves. Thank you, Madam Chairwoman. Really quick and 
then I am going to yield back. Mr. Gordon, you said that if you 
put together a business plan and take it to a bank, there is 
nobody there who is qualified to look at it?
    Mr. Gordon. There are people there, but what Congress needs 
to understand is we are in a crisis. We haven't had business 
loans and liquidity for 3 years. This isn't like a future 
problem that we are talking about. We are talking about how to 
solve this problem. Right now, there are businesses going out 
of business.
    Mr. Graves. If you put the Federal Government in charge of 
direct lending, do you think there is going to be anybody in 
the Federal Government qualified to look at a business plan and 
make a decision? Just yes or no.
    Mr. Gordon. Okay, every single SBA office I go into, there 
are extremely qualified people there. Some of the smartest 
people around work for the SBA.
    Mr. Graves. I am going to yield to Mr. Luetkemeyer.
    Mr. Gordon. They are really, really qualified.
    Mr. Luetkemeyer. Thank you, Mr. Graves.
    Quick question, I have a number of questions here. Mr. 
Smith, you have made some great points, and as a former bank 
regulator, you are right on. I am telling you, you are right on 
with what is happening right now in our economy with the 
banking industry and lending dollars.
    With your experience with your manufacturing group, have 
you seen a tightening of credit to everybody across-the-board 
or is it just good actors, bad actors?
    Mr. Smith. Absolutely it is across-the-board.
    Mr. Luetkemeyer. Ms. Dorfman, I have heard you testify a 
couple of times in different committees and you keep talking 
about direct lending. I know Mr. Graves made the comment a 
minute ago as well. As a regulator, and yes, I am old enough to 
remember the mid-1970's when I was a regulator, the FHA was in 
the business of direct lending to farmers. That experience was 
a disaster, an absolute disaster for agriculture. We wound up 
getting people in business who had no business being in 
business, at least the agricultural business, and wound up 
causing inflation in our real estate prices, our farmland, over 
production. Once we got them out of that, and got the 
government back to guaranteeing loans instead of direct 
lending, we solved a lot of our problems.
    What data or what information do you have to believe that 
the SBA can be a better direct lender than banks?
    Ms. Dorfman. What we are looking for is making sure that 
the small businesses are accessing the capital they need. 
Currently, the banks are not lending. The SBA with the direct 
lending, and there was a question about are they qualified. 
Yes, they are qualified to oversee the process. There are 
numbers of employees who have been let go from banks, who used 
to do the lending, and could be hired into a program to provide 
this program.
    Mr. Luetkemeyer. One of the problems that you have with 
direct lending though is, who is at risk? It is not the SBA; it 
is the American taxpayer. When the banks are on the hook, it is 
their stockholders; it is the bank itself that is on the hook. 
And that is a really big difference between suddenly when you 
have the government involved and the people lending money they 
don't care. All you can do is qualify for the loan. If you 
qualify, you get the money. It is not about whether this is a 
viable entity that is going to be able to survive down the road 
and make a good customer and be able to be a good part of the 
community. If you qualify, you get the money. That is exactly 
the way it worked back with the FHA program and that is exactly 
what will happen with the SBA. I have a real problem with this 
direct lending. I don't see how you can make it work and make 
it viable for what we need with regards to small businesses.
    Ms. Dorfman. Well, and I would say with the concerns that 
were talked about the banks being overregulated, it is another 
answer to removing those regulations from the banks. The banks 
don't have to be involved. We are putting a program together 
that would make sure that we followed the 5 Cs of credit, made 
sure that the businesses were just as viable as if they were 
the bank. I think it can be done.
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Luetkemeyer. Sure.
    Chairwoman Velazquez. Let me remind the gentleman that we 
passed direct lending in the House. It passed with 389 votes. 
You, sir, voted for it. It is a temporary fix where it treats 
this economic crisis as a disaster. It will not compete with 
the private market. It will make the loans like the SBA has 
done every time there is a natural disaster in this country. 
The SBA makes all the disaster loans to homeowners and small 
businesses. This will be a temporary fix, 6 months of 
performing loans will be again sold in the private market. So 
it is a temporary fix.
    Once we get out of the recession, when unemployment rates 
go down, the program will cease. Let me remind the gentleman 
again that you voted for it. Thank you for yielding.
    Mr. Luetkemeyer. Thank you for your comments, but I think 
my comments are apropos as well. It is a temporary fix; it is 
not a solution to the problem. And Ms. Dorfman, in my mind, is 
talking about a permanent fix from her previous testimony at 
many of the other committee hearings that I have heard her. And 
I want to make a point that it is a temporary fix as long as it 
doesn't--but there are problems with that temporary fix and we 
have to be very cognizant of those problems. I am trying to 
point those out this morning that we have to be careful that 
this is not the road we are going to go down.
    You pointed to something as well, Ms. Dorfman, about 
regulation, and Mr. Smith made the point here that one of the 
problems that we have with the banking institutions right now 
is the regulators. He has the exact words, they have their foot 
on their necks. And you have to remember that most banks are 
small businesses as well. They have to make a profit and they 
have to make things work.
    I am very concerned, and I appreciate the comments of Mr. 
Smith. Thank you, Madam Chairwoman.
    Chairwoman Velazquez. Mr. Minnick?
    Mr. Minnick. I must say I agree totally with the comments 
of Congressman Luetkemeyer, and I would like to add the thought 
that the suggestion that the Small Business Administration or 
frankly any government agency could do a better job of 
commercial lending than banks and credit unions is, I think, 
naive and totally ill-informed. We must recognize that the 
reason why our banks are not lending is not that they don't 
want to, it is a combination, as Mr. Smith and Mr. Turnbull 
have testified, of pro-cyclical regulations by our regulators 
who are insisting that banks have greater reserves than are 
required by their own regulation. It is a combination of that 
with illiquidity in their loan portfolios, triggered by the 
fact that there is no secondary market, particularly for 
commercial loans, and inadequate reserves triggered by 
distressed sale valuations of the collateral that backs up 
their loan portfolios.
    I would like to ask Mr. Turnbull with respect to the last 
issue if he agrees or tell us why he agrees that a loan 
guarantee is a key to unlocking these illiquid portfolios?
    Mr. Turnbull. Mr. Minnick, some comments have been made 
about the status of the community banking system, whether or 
not they were the cause of this problem that we are in right 
now. I would submit that in our market area, we have good 
community banks and we have bad community banks. We have some 
bad community banks that were probably part of the problem. But 
now all of the community banks are kind of in the same soup 
because of this illiquidity. A large percentage of their loan 
portfolios are in real estate and they have no place to take 
those. And so because of that illiquid position, they are 
capital constrained. They couldn't make a loan if they wanted 
to. And I know that there has been some guidance issued by the 
regulators, by the FDIC about how banks should be able to--or 
regulators should treat these banks, but it is not being 
uniformly administered.
    That is the key to the issue right now, these community 
banks have to be able to offload their commercial real estate 
assets to be ale to make lending available again.
    Mr. Minnick. Now, Mr. Turnbull, if we were to institute 
either through TALF or some GSE a commercial loan guarantee 
program, would it be feasible to direct regulators to put in 
guarantees based on some percentage of current replacement 
market value with that value discounted to probable time of 
sale as a benchmark to deal with the issue of valuations coming 
in at 10 or 20 or 30 percent of current replacement value?
    Mr. Turnbull. Absolutely, that is the issue.
    Mr. Minnick. And you think in your opinion that would be 
the key to getting this market unfrozen so that commercial 
banks could start lending again and particularly small 
community banks?
    Mr. Turnbull. Yes, I think there are several things that 
have to be done, but I think that is the first thing that has 
to be done. That is the only way we are going to get community 
banks lending again. I have several--I am a shareholder of a 
community bank, I have several close friends who are CEOs of 
community banks and they all tell me the same thing.
    Mr. Minnick. Mr. Smith, would you agree with that 
statement?
    Mr. Smith. Yes, I would. I think that in the community bank 
that I am on the board of, it is that issue that we have the 
revaluation of all the commercial loans that has really dragged 
the ability to make any loans. And again, when you are 
shrinking your balance sheet, you are not making loans. I think 
it is really a two-step process. Banks have to be in the 
position--again, when the original TARP program came out the 
government picked winners and losers, and unfortunately, the 
small community banks which support most of the small 
businessmen were just left in the dark and they need help. They 
didn't create the mess; they are just being subjugated to it. 
So it is a two-step process. The banks have to be healthy to be 
able to make loans, either that or they have to change the 
regulation and change the ratios that they are allowed to 
operate on. One or the other has to happen.
    The second thing is we need to improve the collateral 
position of the lenders. We need to be able to temporarily get 
that help so that when we are asking for loans and it is 
collateral-based, there is that guarantee out there.
    Mr. Minnick. Thank you, gentleman. My time has expired. We 
appreciate your expertise.
    Chairwoman Velazquez. Mr. McCotter?
    Mr. McCotter. Thank you. Wes, you and I have known each 
other a long time. We have faced significant challenges at home 
in the district throughout Michigan. I think I am the last 
speaker on our side. What I would really like to do is yield 
you the balance of my time so that you can tell this committee 
what you think is important to keeping manufacturing in our 
district, in Michigan, and in America.
    Mr. Smith. Thank you, Congressman. I think what is really 
important is, obviously, we are having a heart attack right 
now, we have to get that solved, and that means we have to be 
able to have access to cash. So that is number one. And the 
programs again that are being proposed can't come fast enough, 
but I think some of the real issues in manufacturing really 
have to do from my standpoint is, for instance, our trade 
policies and lack of enforcement. We are just seeing in 
Michigan, since the recession, 400,000 jobs leave, what I call 
the recession in 2000, which is really when the recession of 
manufacturing started. There have been almost 6 million jobs 
vacated, and again manufacturing jobs are the backbone of this 
Nation. It has the highest job creation factor. For every Tier 
1 automotive job that was in Michigan, it also employed an 
additional anywhere from 4 to 7 other jobs. They are absolutely 
key jobs that we need to keep going and particularly in our 
State. They are good jobs, high- paying jobs, and they have 
great benefits programs.
    I think manufacturing has been overlooked and particularly 
not appreciated, not necessarily in the Midwest, certainly as I 
would say in Michigan is that all of our Congressional Members 
in Michigan sing from the same hymnal; they just sit in 
different churches.
    The reality is that we understand what is important, what 
is important for our State to work. Clearly, we have to address 
our trade policies. We have to address the fact that our 
trading partners do not behave properly whereas we just kind of 
open up the doors and say, come on in. And unfortunately, it 
has put us at a very distinct disadvantage.
    One of the reasons banks don't like to make loans to 
manufacturing is because they understand it, they see that. 
They clearly understand that you know what, with the pressures 
we are seeing from low cost countries and the way that they are 
being coddled and handled by their governments they just suck 
jobs away from the United States. They know that, they see 
that, and they clearly understand if Congress won't do anything 
about it, if the government won't do anything about it, then 
they are just going to find somewhere else to park their money 
and that is clearly what we have seen. We have to address this 
policy. I believe that in my heart, I can just see it. You can 
see it since--since, you know, 2000. And I can tell you from my 
standpoint that in 2000 in my industry I have had to deal with 
32 customer bankruptcies. Prior to 2000, in the history of our 
company, we dealt with one. It is absolutely catastrophic and 
we need manufacturing in the United States, and it is just not 
being appreciated.
    Mr. McCotter. Reclaiming the balance of my time, I think 
that the point you make is absolutely necessary for Congress 
here. While we support trade on a fair and equitable basis, and 
I would add with free nations, what we continue to see is what 
Natan Sharansky told us a long time ago: How a nation treats 
its own people is how it will treat other nations. When you 
look at some of the practices engaged in the domestic policies 
of nations that are our trading partners that the average 
American would find repugnant, the average American would find 
it antithetical to the concept of human liberty coming from a 
creator rather than a central government. I think you can 
understand why the United States has employers like Wes Smith 
and others in this country who try to provide a humane and 
decent job for their workers so they can pursue their 
happiness. Why we are at a distinct disadvantage because we are 
a good and decent country when competing or trading with other 
nations that have no regard for the rights of their people 
except as pawns to be used in the political game, or to be used 
in a mercantile strategy to deindustrialize the United States.
    Thank you for coming. Wes, I will see you after.
    Chairwoman Velazquez. Time has expired. And let me take 
this opportunity to thank all the witnesses on this panel. The 
committee will stand in recess until we--how many votes? So we 
have seven votes, and we will reconvene right after the votes.
    Mr. Bachus. Madam Chairwoman, let me say one thing, several 
of you said that the banks want to lend money, but the 
regulators and the examiners are saying, raise more capital. 
And I tell you, I have heard that every day. I talk to bankers 
from Florida, from different places. They don't know each 
other, but they say if the examiners would get out of their 
banks, they would start lending the money.
    Chairwoman Velazquez. If the gentleman will suspend, we are 
going to have a panel with the regulators, so I guess that you 
will be making those statements to the regulators.
    You are all excused. Thank you.
    [recess]
    The Chairman. The hearing will come to order again. I 
apologize obviously for this delay, but it has been very 
important.
    We have a panel now of regulators who are the second panel, 
which isn't always the case, but we think it was very 
important. Let me begin by asking all of you, one of the most 
frustrating questions we get is--frustrating in that we can't 
get it answered, to what extent are accounting standards over 
and above everything else an obstacle here? That is part of our 
problem. We will not legislate accounting standards, but we 
have talked to the Accounting Standards Board. Are accounting 
issues any part of the problem here?
    Let's start with Mr. Allison. Oh, I apologize. You didn't 
give your opening statements. Well, we will have your opening 
statements first. Mr. Allison, go ahead.
    Mr. Allison. Would you like me to begin, Chairman Frank?
    The Chairman. Yes, with your opening statement. Ignore me 
from time to time. The hearing will go better. So just give 
your statement.

 STATEMENT OF THE HONORABLE HERBERT M. ALLISON, JR., ASSISTANT 
    SECRETARY FOR FINANCIAL STABILITY AND COUNSELOR TO THE 
           SECRETARY, U.S. DEPARTMENT OF THE TREASURY

    Mr. Allison. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the House Financial Services Committee, 
as well as Chairwoman Velazquez, Ranking Member Graves, and 
members of the House Small Business Committee. Thank you for 
the opportunity to testify today.
    The Administration strongly believes that small businesses 
are critical to our economic recovery. We have listened to 
small business owners across the country, and we understand 
that they are facing real challenges in accessing credit. This 
week, the FDIC reported that lending by the banking industry 
fell by $587 billion last year, the largest annual decline 
since the 1940's. While the pace of contraction has slowed, the 
Fed's Senior Loan Officer Survey has shown tightening credit 
standards for small business borrowers for 13 straight 
quarters.
    We must improve credit conditions for small businesses. 
That is why the President proposed authorizing $30 billion for 
a new Small Business Lending Fund, or SBLF. The program would 
provide a strong incentive for strong- and mid-sized banks to 
accelerate small business lending. For example, if a bank used 
this new capital to increase its small business lending by 10 
percent, its cost for this capital would fall to just 1 percent 
per annum. Additionally, banks could leverage Treasury's 
investment to increase by more than the $30 billion dedicated 
to the facility. It is important to note that the $30 billion 
is not a cost to taxpayers. It is an investment. We expect that 
almost all of that investment will be returned to Treasury over 
time. As you know, Treasury's previous investments in banks are 
already producing a profit to taxpayers.
    The SBLF would be created through legislation to make it 
separate and distinct from the TARP. While Treasury has the 
authority to create a small business lending fund under TARP, 
we are convinced that if we did so, very few banks would 
participate. Various restrictions under TARP have had 
unanticipated consequences for small- and mid-sized banks. For 
example, a small community bank may not be permitted to make 
severance payments to a bank teller due to the golden parachute 
prohibition that applies to senior executives and the next five 
highest paid employees. As evidence of banks' reluctance to 
participate in TARP programs, when we reopened the Capital 
Purchase Program for small banks with less than $500 million of 
assets, 7,000 banks were eligible to participate. Only one new 
bank took funding during the next 6 months that the program was 
open.
    But simply removing TARP restrictions will not be enough to 
ensure participation. Many banks believe there is a stigma 
attached to accepting TARP capital. They fear that competitors 
will question the soundness of their bank if they take TARP 
capital, even though all banks receiving TARP funds have had a 
viability determination from their primary Federal regulator. 
For these reasons, the Administration strongly believes that an 
SBLF outside of TARP and under appropriate oversight would draw 
far greater participation by small financial institutions and 
thus have the greatest chance of increasing lending.
    Small businesses are asking for our help. The Small 
Business Lending Fund can substantially expand credit for small 
businesses across our Nation. Treasury looks forward to working 
with you on this proposal to help small businesses create jobs 
and contribute to a full economic recovery. Thank you.
    [The prepared statement of Assistant Secretary Allison can 
be found on page 93 of the appendix.]
    Chairwoman Velazquez. [presiding] Our next witness is the 
Honorable Karen Mills, Administrator of the SBA.

STATEMENT OF THE HONORABLE KAREN G. MILLS, ADMINISTRATOR, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Ms. Mills. Thank you very much, Chairwoman Velazquez, 
Chairman Frank, and members of both committees.
    Small businesses continue having problems getting access to 
capital. This is a situation that must be fixed. Small 
businesses created 65 percent of the net new jobs over the past 
15 years, so we need a robust small business jobs plan that 
addresses these credit gaps. We have already taken an important 
step forward. I want to thank Congress for passing the Recovery 
Act and for the extension of the 90 percent guarantee and 
reduced fee provisions.
    Over the past year, we have been able to leverage $500 
million in taxpayer dollars into more than $20 billion in the 
hands of small businesses. We have also brought more than 1,000 
lenders who hadn't made an SBA loan since 2007 back to SBA 
lending. Compared to the weeks before the Recovery Act, this is 
a weekly volume increase of more than 90 percent--and we have a 
slide up there to illustrate this--but we need to do more.
    For our small business jobs plan, we have analyzed the gaps 
in the current small business lending market and we have 
constructed proposals that address the most critical problems. 
We are guided by three principles: build on what works; 
maximize limited taxpayer dollars; and make targeted changes as 
quickly as possible. Our plan has five key components:
    First, for community banks that don't have capital to lend, 
we need the Small Business Lending Fund that you have just 
heard described.
    Second, for banks that have capital but are still having 
trouble taking the risk, we have asked Congress for an 
extension of the 90 percent guarantee and the reduced fees 
through September. Those funds ran out at the beginning of this 
week. Already there are 370 loans for more than $140 million in 
our queue.
    Third, for small businesses that need bigger SBA loans to 
create jobs--franchisees, manufacturers and exporters--we want 
to increase our top loan limits from $2 million to $5 million, 
and there is a slide on that.
    Fourth, for businesses that can't find access to working 
capital, they have had their credit lines pulled, we need to 
temporarily raise SBA express loan limits to $1 million. There 
is a slide on that as well, and these are in your packages.
    And fifth, for owner-occupied real estate of small 
businesses whose commercial real estate mortgages need to be 
refinanced, we need to open up our 504 program.
    Finally, we know that the chairwoman and others have asked 
us to look at direct lending. We spent a lot of time working on 
this, and we have found several important concerns and 
unintended consequences. We currently have 75,000 branches 
making SBA loans. Duplicating their reach would require 
significant new SBA staff, and training and hiring this 
workforce would take too long. The approach is costly and would 
increase the subsidy cost from 1 cent to 15 cents per dollar of 
lending, and we would be competing with and even replacing the 
private lenders who have now ramped up our SBA lending, 
including the 1,100 banks we have gotten back.
    The problem we are trying to solve is not that small 
businesses need direct loans. It is that they need direct 
access to banks that are making loans with our 90 percent 
guarantee and direct access to counselors that can help them 
get creditworthy. We today are providing everyone here with 
some information that should help in that manner. These are 
going to be the names and numbers of SBA lenders in your State 
or area and our counselors in your area so that you can help 
refer those who come to you and give them direct access to 
these programs that are working.
    Again, the principles of these proposals are to build on 
what works, to maximize limited taxpayer dollars, and to make 
the targeted changes as quickly as possible. We are confident 
that with these actions, we can move to fill the credit gaps 
and meet the needs of America's small businesses. Thank you.
    [The prepared statement of Administrator Mills can be found 
on page 252 of the appendix.]
    The Chairman. Next, Governor Elizabeth Duke of the Board of 
Governors of the Federal Reserve.

 STATEMENT OF THE HONORABLE ELIZABETH A. DUKE, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Duke. Chairman Frank, Chairwoman Velazquez, Ranking 
Member Bachus, Ranking Member Graves, and committee members, 
thank you for the opportunity to join today's joint committee 
hearing to discuss the availability of credit to small 
businesses.
    The timeliness of this hearing is highlighted by findings 
released just this week in a study by the National Federation 
of Independent Business. They have found that of small 
employers who attempted to borrow in 2009, nearly one-half 
received all the credit they wanted, but almost a quarter 
received no credit at all. This compares to a similar study in 
2005 when nearly 90 percent had most or all of their credit 
needs met and only 8 percent obtained no credit.
    These statistics are concerning to me in my role as a 
policymaker and a bank supervisor, but they are also 
distressing to the part of me that spent 30 years as a 
community banker and a small business lender. I know all too 
well the anguish of businesses struggling for survival and the 
bankers trying to meet the needs of their customers in the face 
of mounting credit losses. While conditions in financial 
markets continue to improve, access to credit remains difficult 
for many smaller businesses that largely depend on banks for 
credit. Risk spreads on small business loans at banks have 
continued to rise, and the decline in loans outstanding has 
been stark. A number of factors are contributing to the 
reduction in bank loans. For instance, in response to rising 
levels of delinquent and nonperforming loans, banks have 
reduced existing lines of credit sharply and have tightened 
their standards and terms for new credit. In addition, banks 
with capital positions that have been eroded by losses or those 
with limited access to capital markets may be reducing risky 
assets to improve their capital positions, especially amid 
continued uncertainty about the economic outlook and possible 
future loan losses.
    The reduction in the availability of credit, however, is 
not the whole story. There is also less demand for credit. As 
businesses reduced inventory levels and capital spending, they 
tend to pay down debt and build cash positions. And while some 
potential borrowers seek less credit, others are ineligible to 
borrow. Weakened balance sheets, reduced income, falling real 
estate collateral values, and in some cases a recent history of 
payment problems, have made it difficult for some businesses 
and consumers to qualify for loans, especially under current 
stricter standards.
    A significant fraction of small businesses rely upon 
personal assets and consumer credit to fund their operations, 
thus small businesses are impacted by tight conditions for 
consumer credit in addition to those for business credit.
    And finally, small business lending is often based on 
relationships that are solidified over time, and when those 
existing relationships are broken, small businesses find it 
quite difficult to establish similar arrangements with a new 
bank.
    Improvement in a number of the conditions that depressed 
lending in 2009, however, lead me to be optimistic that we may 
begin to see an increase in bank loans later this year. 
Economic conditions, the most important determinant in the 
demand for and availability of small business lending, have 
improved considerably since the early and middle part of last 
year. In response, bank attitudes toward lending, including 
small business lending, may be shifting.
    In the January Senior Loan Officer Opinion Survey, the 
number of banks that reported the tightening of credit 
standards for small business lending no longer outnumbered the 
banks that reported an easing of lending standards.
    The Federal Reserve has been working with banks to foster 
improved access to credit and prudent underwriting of new 
loans, and we will continue to do so. I believe that the 
considerable support we gave to bank lending through 
accommodative monetary policy and borrowing facilities has been 
critically important. In addition, to ensure that supervisory 
policy does not inhibit lending, the Federal Reserve joined 
with the other banking agencies and supervisory guidance that 
emphasized the need for banks to continue to meet the credit 
needs of creditworthy borrowers while maintaining appropriate 
prudence in lending decisions.
    Recent guidance covering commercial real estate lending 
also encourages banks to work with borrowers to restructure 
troubled commercial real estate loans in a prudent manner and 
reminds examiners that absent other adverse factors, a loan 
should not be classified as impaired based solely on a decline 
in collateral value.
    The Federal Reserve has supplemented and reinforced this 
guidance through outreach to banks and training for bank 
examiners in a variety of forums. The reserve banks are also 
conducting a series of regional and topical meetings on small 
business access to credit. Some, such as the ones held this 
week on minority entrepreneurship and SBA lending, will focus 
on specific topics. Others will focus on identifying regional 
differences in credit availability. Meetings will be followed 
by a capstone event at the Board of Governors.
    In summary, the Federal Reserve is committed to using all 
available tools to maintain the flow of credit to the economy, 
especially the critically important small business market.
    We thank you for holding this important hearing, and I look 
forward to your questions.
    [The prepared statement of Governor Duke can be found on 
page 188 of the appendix.]
    The Chairman. Next, we have John Dugan, the Comptroller of 
the Currency.

 STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE 
               OF THE COMPTROLLER OF THE CURRENCY

    Mr. Dugan. Chairman Frank, Chairwoman Velazquez, Ranking 
Member Bachus, Ranking Member Graves, and members of the 
committees, I appreciate this opportunity to discuss the 
lending activities of national banks and the OCC's actions to 
maintain a supervisory climate that facilitates sound lending 
to consumers and businesses.
    Access to credit is critical to the health of our Nation's 
economy, and national banks play a vital role in meeting this 
need. The OCC has always encouraged national banks to lend to 
creditworthy borrowers. In fact, banks cannot be healthy and 
profitable if they do not continue to focus on making sound 
loans to businesses and consumers. While there are signs that 
the economy is beginning to recover, significant stresses 
continue to restrain both the demand for credit and its supply. 
The result has been a sharp reduction in the outstanding loans 
of commercial banks of all sizes and across nearly all loan 
categories.
    In terms of demand, businesses have sharply curtailed 
capital expenditures and reduced inventories, the typical 
drivers for commercial bank loans. Indeed, the recent cutbacks 
in fixed investment inventories and accounts receivable by U.S. 
nonfinancial companies is unprecedented in the past 55 years 
for which we have historical data. Consumers, likewise, have 
cut back on spending and are saving a larger share of their 
income.
    The resulting reduction in loan demand has been pronounced, 
including for small businesses. Reports issued by the National 
Federation of Independent Business over the past 2 years have 
consistently shown that underlying business conditions rather 
than access to credit is the primary issue facing many small 
business owners. Still, the decline in loans also reflects the 
reduced supply of credit. As the deteriorating economy has 
taken a toll on consumers and businesses, bankers have also 
become more cautious. Loan underwriting standards generally 
have tightened across the industry, reflecting in part a return 
to more prudent practices and in part becoming more 
conservative. These changes have resulted in higher 
downpayments, additional collateral, and other requirements 
that have clearly affected the ability of some borrowers to 
obtain credit.
    We recognize that this environment presents particular 
challenges to the OCC and the other banking regulators. It is 
imperative that we take a balanced and consistent supervisory 
approach to ensure that our actions do not discourage banks 
from making loans to creditworthy borrowers. Many have 
questioned whether the regulatory pendulum has swung too far to 
the point where regulators and examiners are impeding banks' 
ability to make even prudent loans. This is a matter we take 
very seriously, and we have taken numerous steps and are 
continuing to take such steps throughout this credit cycle to 
ensure that examiners are taking a balanced, fair, and 
consistent approach across the country. These actions have 
included interagency statements on commercial real estate loan 
workouts and small business lending, both of which clarify our 
expectations and underscore that examiners will not criticize 
banks for prudent lending activities.
    We have reinforced these messages through regular and 
repeated communications with our examination staff. For 
example, we have consistently instructed examiners not to tell 
bankers which loans to approve and which to deny and not to 
criticize loans based simply on collateral values or a 
borrower's association with a particular industry or geographic 
location. Instead, we continue to stress that national banks 
should do the following: make sound loans to creditworthy 
borrowers; work with borrowers who are facing difficulties; and 
recognize and address problem credits by maintaining 
appropriate reserves and taking charge-offs when repayment is 
unlikely.
    We also continue to work with Congress, the Administration, 
and the industry on programs that can provide additional 
assistance to the hardest-hit sectors. We support a number of 
small business lending initiatives, and we have worked hard to 
help bankers understand and more fully use the various programs 
offered by the SBA.
    Finally, let me offer one cautionary note. While we should 
be very careful not to encourage the banks we supervise to 
become excessively conservative, we simply cannot turn a blind 
eye to increasing losses and mounting credit problems--185 
banks have failed since the start of the crisis, including 33 
national banks. Estimated losses to the FDIC exceed $57 billion 
already, and we are likely to have even more failures in 2010 
than the 140 that we had last year. In this environment, we 
need to avoid the kind of forbearance that put off problems and 
caused such huge losses in the savings and loan crisis, an 
experience that led Congress to enact the prompt corrective 
action regulatory regime in 1991. That regime reinforced to 
supervisors how important it is for institutions to 
realistically recognize losses and deal with them both to avoid 
further problems, and even more important, to put themselves in 
a better position going forward to make loans to creditworthy 
borrowers.
    Thank you.
    [The prepared statement of Comptroller Dugan can be found 
on page 159 of the appendix.]
    The Chairman. Next, Martin Gruenberg, who is the Vice Chair 
of the Board of Directors of the FDIC.

STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, VICE CHAIRMAN, 
             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Chairman Frank, Chairwoman 
Velazquez, Ranking Member Bachus, Ranking Member Graves, and 
members of the committees. I appreciate the opportunity to 
testify on behalf of the FDIC on the state of lending and 
credit availability for small business and commercial real 
estate.
    Adverse credit conditions and stressed balance sheets have 
created a difficult environment for borrowers and lenders. 
Large banks have significantly cut back on lines of credit to 
consumers and to small business. In addition, small- and mid-
sized institutions who tend to make business loans secured by 
residential and commercial real estate are dealing with the 
effects of large declines in real estate values which tend to 
reduce the collateral coverage of existing loans and make it 
more difficult for household and small business borrowers to 
qualify for new credit.
    In response to these challenging economic circumstances, 
banks are clearly taking more care in evaluating applications 
for credit. While this more conservative approach to 
underwriting may mean that some borrowers who received credit 
in past years will have more difficulty receiving credit going 
forward, it should not mean the creditworthy borrowers are 
denied loans. As bank supervisors, we have a responsibility to 
encourage institutions regularly and clearly to continue to 
make soundly structured and underwritten loans.
    Acknowledging this responsibility, the FDIC and the other 
bank regulators supplemented prior guidance and issued the 
interagency statement on meeting the credit needs of 
creditworthy small business borrowers earlier this month to 
emphasize that examiners follow a balanced approach in 
assessing small business lending. The statement recognizes that 
many small businesses are experiencing difficulty in obtaining 
and renewing credit to support their operations. It is clear 
that for a number of reasons the small business credit 
availability has tightened.
    The FDIC and the other bank regulators believe that 
continued sound lending to creditworthy borrowers is critical 
to the long-term success and health of the small business 
sector and their lenders. This statement indicates that 
financial institutions should understand the long-term 
viability of a borrower's business and focus on the strength of 
a borrower's business plan to manage risk rather than using 
portfolio management models that rely primarily on general 
inputs, such as borrower's geographic location or industry. 
This new guidance states examiners will not adversely classify 
loans solely on the basis of a decline in the collateral value 
below the loan balance or the borrower's association with a 
particularly stressed industry or geographic region.
    I would note that the FDIC has also reached out to the 
industry to help us frame policies and supervisory procedures 
that will help lenders navigate through this credit cycle and 
become more comfortable extending and renewing loans. One of 
the first steps in this process was to establish the FDIC's 
Advisory Committee on Community Banking in mid-2009 to better 
enable our board and senior management to have a dialogue with 
the industry on how we can improve our supervisory programs and 
foster improved availability of credit. The advisory committee 
met most recently on January 28th, where we discussed many of 
the issues we are discussing today in this testimony, including 
credit availability and access to capital markets. The advisory 
committee will continue to meet regularly and provide direct 
input from community bankers on the many critical issues they 
face.
    Over the past year, through guidance, the examination 
process, and other methods, the FDIC has sought to encourage 
banks to maintain the availability of credit while striving to 
balance these considerations with prudential safety and 
soundness requirements. Striking the appropriate balance 
remains our greatest challenge.
    Thank you very much.
    [The prepared statement of Vice Chairman Gruenberg can be 
found on page 219 of the appendix.]
    The Chairman. And finally, John Bowman, Acting Director of 
the Office of Thrift Supervision.

STATEMENT OF JOHN E. BOWMAN, ACTING DIRECTOR, OFFICE OF THRIFT 
                          SUPERVISION

    Mr. Bowman. Good afternoon, Chairman Frank, Chairwoman 
Velazquez, Ranking Member Bachus, Ranking Member Graves, and 
distinguished members of the committees. Thank you for the 
opportunity to testify today on behalf of the Office of Thrift 
Supervision.
    I think we all recognize that banks and thrifts remain 
under tremendous stress due to the continued declines in home 
prices, high unemployment rates, pressures on commercial real 
estate, and the improving but still hobbled secondary market 
for mortgages. We need look no further than high levels of 
delinquent loans in home foreclosures and the increasing number 
of financial institutions that are troubled or failing under 
this strain.
    As a counterweight to the stress, financial institutions 
are building capital levels and loan loss reserves, thereby 
making fewer dollars available to lend to consumers and 
businesses. No one wants to return to the days before the 
recession when too many loans were made using underwriting 
criteria based not on the borrower's ability to repay but on 
the value of the collateral, value that we now know was 
fleeting. But we also recognize the economy will not recover 
fully until financial institutions resume lending at levels 
that can help sustain a thriving economy.
    Many sources of credit before the recession, such as highly 
leveraged and underregulated nonbank businesses that often 
maintained loose underwriting standards, have gone out of 
business. Their departure from the marketplace leaves borrowers 
more dependent than ever on regulated banks and thrifts, and as 
a result, lending by these institutions is more essential.
    The question before us today is whether banks and thrifts 
are tightening credit to an unreasonable level beyond what is 
prudent for safety and soundness and what regulators can do to 
ensure that the financial institutions that they regulate 
strike the right balance between lending and safety and 
soundness. I have seen some executives at banking institutions 
quoted as saying that they want to lend more but that their 
regulators won't let them. In some cases, that is certainly 
true. An institution with soaring levels of bad loans and 
insufficient capital faces the all too real prospect of failure 
if capital and loan loss reserves do not increase.
    And to state the obvious, a closed institution doesn't make 
any more loans. The regulator might be painted as the culprit 
in restricting lending, but on the other hand, the regulator 
might also succeed in helping the institution return to a 
healthy condition so it can resume meeting the financial 
services needs of families and businesses in its community.
    For healthy institutions, let me make clear that the OTS is 
encouraging all types of loans allowed under the thrift charter 
as long as thrifts follow prudent underwriting standards to 
ensure each borrower's ability to repay. The OTS and other 
regulators have made this position very clear to regulated 
institutions twice in recent guidance, and at the OTS we have 
taken several steps outlined in my written testimony to make 
sure our regional offices and examiners in the field are in 
lockstep with Washington on this issue.
    I also note in my written testimony that small business 
lending is fully consistent with the mission of the thrift 
industry to serve America's consumers and communities. However, 
thrifts are limited by law in the amount of small business 
lending they can do. This restriction makes less credit 
available to small businesses, and although the House Financial 
Services Committee has voted 3 times to remove the cap on small 
business lending, and the full House has passed it twice, this 
provision has never been enacted into law.
    Thank you again for having me here today, and I am happy to 
answer your questions.
    [The prepared statement of Acting Director Bowman can be 
found on page 114 of the appendix.]
    The Chairman. We have 1 hour and 35 minutes with this 
panel, and I am going to forgo my own questions in the interest 
of accommodating other members.
    Next for the Financial Services Committee, we have Mr. 
Foster of Illinois.
    Mr. Foster. Thank you all for appearing today. I will start 
off by saying that I am a big fan of loan incentives. I am for 
viable business in the existing conditions. I think that is 
something we just have to do. And I concur with Administrator 
Mills' conclusion that we must work with existing institutions, 
that there simply is no time to bootstrap a new direct loan 
program because of the staff issues.
    So my first question is, do you think that the programs 
that are being talked about are dealing adequately with a moral 
hazard that particularly when you start getting into issues 
like refinancing, really the 504 program and so on, that banks 
may have an incentive to push off their problem loans onto SBA 
refinancing? And do you think that moral hazard is being 
adequately addressed?
    Ms. Mills. Thank you for your question. We have proposed a 
series of activities that are built on what has been successful 
so far. So in the past year, we raised our loan guarantees to 
90 percent, and we took very seriously this issue, would we 
experience this moral hazard that you described? Instead, we 
have found that there is great demand because banks want to 
make good loans but for various reasons can't take those risks. 
And as their credit box moved up, ours moved up under them, and 
in fact, the credit scores on the loans that we did--this $20 
billion over this last year--are actually higher than the 
credit scores from 2007-2008.
    In the case of the 504 proposal, we are looking at 
refinancing owner-occupied real estate, not commercial real 
estate that has been speculative, but a dentist who owns his 
dentist office, a manufacturer who might own the warehouse, and 
that those loans be in good standing. We know there is a 
significant amount of them that were done in 2005, 2006, and 
2007 with 5-year bullet refinancing provisions that will come 
due in 2010, 2011, and 2012, and this proposal is constructed 
to meet the needs of those which have been owner-occupied and 
not been in default, but for various reasons their banks won't 
be able to take on the refinancing.
    Mr. Foster. Okay. Thank you. Do any of the other panelists 
have comments on the moral hazard problem?
    I guess the second general question I had concerns the 
right sizing of these programs. It is obvious that in an 
efficiently designed program, the larger the program, the 
deeper you are going to have to reach into less creditworthy 
borrowers, and at some point that will increase the risk of the 
government running these programs at a lost. However, strictly 
from the point of view of the greedy taxpayer who wants to 
minimize the national debt when this all plays out, it may make 
sense for the government to operate these at a loss, 
particularly because in the case of refinancing, for example, 
the hole in the economy that exists when a company fails puts 
people onto unemployment, onto food stamps and so on and so 
forth. So that when you do the overall optimization, it may 
make sense for the government to run these at a modest loss.
    Has anyone done that sort of analysis to determine the 
optimal size of these programs?
    Mr. Allison. Perhaps I could respond to your question, 
Congressman. From the standpoint of the Treasury and our 
advocacy of the Small Business Lending Fund, we have sized that 
program at $30 billion. If you look at the total amount of 
small- and mid-sized bank lending on their books today, it is 
about $550 billion. If this program were funded by Congress, we 
could increase lending, we think, by at least 10 percent. We 
think that is a reasonable amount. It is prudent. We think the 
costs of this program--let me stress, this would be an 
investment in banks. We expect to get almost all of that money 
back. The cost to the taxpayer we think will be quite low.
    Mr. Foster. In which case it is too small, put by the line 
of logic that I just went through.
    Mr. Allison. Let me say though that we would be investing 
in viable banks deemed by the regulators to be viable, and that 
is the vast majority of these banks today. We already have 
experience with investing in banks. We have invested through 
the TARP in 700 banks, and to date the taxpayer has obtained a 
profit, even though that was a very large amount of--
    Mr. Foster. Would it be possible for you to get back with 
some sort of estimate of, you know, the other part of that 
equation that I went through?
    Mr. Allison. Certainly.
    Mr. Foster. It would be very valuable in understanding what 
the rights are.
    I guess the third point I would like to raise--
    The Chairman. Your time has expired.
    Mr. Foster. I yield back.
    The Chairman. The gentlewoman from Illinois, Mrs. Biggert. 
In fairness to Members, I can see the clock. I didn't realize 
nobody else could.
    Mrs. Biggert. Thank you, Mr. Chairman. And I thank all of 
you for being here today. I appreciate your testimony, but it 
seems to me--it is unfortunate that what you are saying in 
Washington is very different from what is happening with your 
examiners and regional supervisors on the ground and from what 
I hear from them. Let me just give you a couple of examples.
    One of my constituents has said, ``Overzealous regulators 
have swung the pendulum too far toward regulatory overkill, 
compounding lack of available credit that otherwise would be 
available to the public. The bank regulators are forcing 
arbitrary write-downs on performing loans, excessively high 
loan loss reserve, capital and liquidity requirements. All of 
these actions reduce the amount of available credit that might 
otherwise might be available. Every day, bankers are being told 
by their regulators to not make loans and in fact reduce their 
existing loan portfolios. The only viable and practical way to 
increase bank lending activities is to get the regulators back 
to a commonsense and realistic approach in their 
examinations.''
    And secondly, another bank, ``We have encountered an issue 
during our last exam regarding an unsecured loan that has 
always been and continues to remain current on its payments. 
Due to lack of collateral and the borrower's tight cash flow, 
we had fully reserved for the loan. Thanks to our being so 
prudent, the examiners made us charge the loan off as a 
complete loss because it was fully reserved. So why not? Keep 
in mind we are receiving timely payments but we can't return 
the reserves to capital. As payments are received for the loan, 
we have to wait until the full loan is paid off.''
    And I have heard multiple times about this. Particularly 
the concern that they have is where they are asked to devalue a 
loan where they are receiving full payment on the loan and 
continuing, and the regulator will say, ``Well, it is going to 
go down maybe next year. So you need to devalue it now.'' And 
then put that on top of the increase for the FDC in the 
assessments. We are seeing so many banks that then their 
ratings are lowered.
    So if you could just briefly comment on that. Maybe Ms. 
Duke or Mr. Dugan?
    Ms. Duke. Thank you, Congresswoman. I hear the same stories 
over and over and over again, and we are incredibly focused on 
trying to run down specific instances to make sure that we are 
communicating with the examiner in the field to make sure that 
the examiner in the field knows what to do. That was one of the 
reasons there were so many examples in the commercial real 
estate guidance. And in fact, I sat down with examination staff 
and played the part of the banker, and we argued each one of 
those loans as if it were a loan in my bank.
    I think we have to communicate with it. To the extent that 
you hear that from people in your district and you can identify 
who the regulator is, we would very much like to know the 
specific instances so that we can follow them up.
    Mrs. Biggert. Good. When will we receive the results of the 
guidelines and the work that you have done recently? I mean, 
these are not old but they are not yesterday. Will we see a 
change?
    Ms. Duke. It is very difficult to measure, and we are 
working on ways that we might be able to measure it. But we do 
have one sort of preliminary thing, and that is troubled debt 
restructurings, which are loans that have been restructured, 
shown on the balance sheets of the banks, increased 32 percent 
in the fourth quarter of 2009, and this guidance came out in 
October. So that is one very small encouraging sign that at 
least some workouts are taking place.
    Mrs. Biggert. And there was one case too that I have where 
the field operator okayed everything that they did and then the 
supervisor came in and changed it, taking away the capital that 
they had. So I am concerned about that.
    Can anybody really define ``creditworthy?'' Is there a 
standard definition? You all mention it. But is there? Okay. 
Well, I won't waste time then.
    Mr. Dugan, could you respond, and maybe Mr. Gruenberg, to 
the question that we have been discussing?
    Mr. Dugan. Yes, to the more general question, not the 
definition of creditworthy. I agree with Governor Duke's 
remarks. We have spent an awful lot of time trying to walk 
through the individual examples with our examiners. And let me 
say, we have been spending an awful lot of time not just now 
but coming into the crisis, on dealing with, anticipating, and 
then working with our examiners to work through the problems. I 
can't emphasize enough, however, that individual circumstances 
really do matter.
    Remember, we have a ton of banks failing now, and the 
number on the problem bank list of the FDIC is now up over 700 
banks. So you really do have to look hard at the individual 
circumstances to figure out which are places where there might 
be some undue stress on the examiner, or where the bankers are 
not realistically recognizing the problems that they are 
confronting.
    The Chairman. I am going to ask unanimous consent for 1 
minute. The ranking member and I just had a conversation. Mr. 
Bowman, you jogged our memory. You are right. This committee 3 
times--twice under a Republican Majority and once under a 
Democratic Majority--voted to give an additional 10 percent 
lending under the qualified thrift lender if it was just small 
business, the additional 10 percent. We have passed it twice 
through the committee. It went through the House. We neglected 
to get to it. I have just spoken to the ranking member and we 
are going to give that very favorable consideration.
    Mr. Bowman. Mr. Chairman, I would suggest the bill that 
passed providing for unlimited small business lending. There 
would be no cap on it.
    The Chairman. Right. That may be more than we can do, but 
we will certainly increase--I think there is an agreement that 
we will, as we have done 3 times before--in fact, the ranking 
member was chairman of the subcommittee when it was done in the 
committee in one case. So an increase in the small business 
lending cap for thrifts will be given very serious 
consideration.
    I thank you for calling this to our attention. The 
chairmanship has just moved.
    Chairwoman Velazquez. Thank you. Comptroller Dugan, I am 
curious about Administrator Mills' response to Congressman 
Foster from Illinois when she emphasized that the 
Administration's CRE refinancing proposal would only be for 
performing loans. Thus, a loan's past performance fully 
indicates a borrower's ability to repay, particularly on CRE 
loans.
    Mr. Dugan. Okay. I am sorry. And the question is whether--
    Chairwoman Velazquez. If past performance by itself will 
indicate a borrower's ability to repay, so that they could use 
the 504 to refinance?
    Mr. Dugan. I don't know the particulars of the 504 
standards. But at least the way we look at loans, it is 
certainly very relevant what the past performance has been, but 
it is not the only thing. It has to do with what is the current 
projection of the cash flows to support repayment on the 
project, which is critical to understanding whether it is a--
    Chairwoman Velazquez. Ms. Duke?
    Ms. Duke. I would agree. The standards for the 504 program 
are very different from the way we look at it. But there are 
some provisions in the CRE guidance to take a loan--say you had 
a loan for $1 million. The cash flow would support $800,000, to 
refinance that loan into a performing piece, the A piece, and 
then the less performing piece, the B piece, and treat those 
two pieces separately.
    Chairwoman Velazquez. Well, in addition, I will remind the 
Administration that the 504 loans cannot be used for the 
refinancing of maturing debt.
    Mr. Allison, we are here because the banks are saying that 
you, the regulators, are responsible for the lack of financing 
provided to small businesses by financial institutions. Under 
the Administration's $30 billion proposal for small business 
lending, should we all expect that this is going to trickle 
down and that it will incentivize institutions to lend to small 
businesses?
    Given that in the past when we discussed the TARP money, we 
didn't see the results of that money trickling down to small 
businesses, what would keep lenders from hoarding this money or 
using it to cover potential losses from commercial real estate?
    And I guess that you were all looking and listening to 
Chairman Bernanke when he talked about the next wave of 
defaults in the real estate area.
    Mr. Allison. Yes. Chairwoman Velazquez, thank you very much 
for that very important question, your first question being, 
why will banks lend more under this new Small Business Loan 
Fund than they did under the TARP capital programs?
    One very important difference is that TARP was intended to 
provide capital for banks to assure their viability going 
forward under stressful conditions. This program has been 
designed to provide a powerful incentive for banks to lend 
because, as you know, the dividend rate on this new capital can 
drop dramatically if and only if the banks lend incrementally 
beyond where they are today.
    A couple of other points, the small banks we are talking 
about have done a pretty good job of maintaining lending 
balances during this very difficult recession. We think many of 
them are eager to lend, and by providing them with more 
capital--in this case, capital that could increase their Tier 1 
capital by 30 to 50 percent--they should be more confident 
about being able to support their existing assets and increase 
their lending at the same time.
    Chairwoman Velazquez. You know, it just brings back 
memories of when Chairman Paulson was sitting right there, 
telling us, don't worry, don't put any restrictions on any of 
these funds, because I can guarantee that lending from 
financial institutions will happen for small businesses. And 
today, a year later, we are seeing the consequences.
    Let me ask you, what will be plan B if the $30 billion 
doesn't produce what you are expecting?
    Mr. Allison. Chairwoman Velazquez, we have designed this 
program after consultations with many banks around the country 
and with banking associations, and we have been assured by them 
that they would view this plan as quite different. Now what is 
very important is that this lending fund be authorized outside 
of TARP because, as I mentioned in my testimony, many banks are 
extremely reluctant to take part in any TARP program because of 
what is called a TARP stigma. I am the person who is 
responsible for the TARP. I can tell you that a TARP program 
would not be nearly as effective to achieve your goal of 
stimulating lending as a program would be outside of TARP. So I 
would urge respectfully the Congress to enact new legislation 
so the banks would be willing to take the money.
    Mr. Bachus. Mr. Chairman, could I just ask for a 
clarification?
    The Chairman. Sure.
    Mr. Bachus. You were talking about being responsible for 
the TARP. Are you talking about the Capital Purchase Plan? Are 
you talking about the whole TARP?
    Mr. Allison. Sir, I manage the Office of Financial 
Stability within the Treasury which oversees all of the TARP 
programs.
    Mr. Bachus. Okay.
    The Chairman. The Republican side on Small Business.
    Mr. Graves. Mr. Coffman?
    Mr. Coffman. Thank you, Mr. Graves. My question is--well, 
let me express a concern first. I think some of you have stated 
that we have to achieve a regulatory balance, and that is very 
difficult to do. But it seems as if we have shifted in a way 
where we are trying to establish a risk-free environment, and I 
am not sure in a free-market system if you can do that. And I 
think that, you know, when I hear from some of you about the 
range of options available, that when the underlying asset has 
gone down in value, but the loans are performing loan, that you 
don't need to write down that loan. But a lot of the regulators 
from my understanding--at least in my congressional district--
are.
    Congressman Perlmutter and I did a kind of joint roundtable 
with a lot of our community bankers, and they certainly 
expressed concerns for the regulatory environment in terms of 
their ability to loan in particular to small business. I would 
like to defer the balance of my time to Congressman Perlmutter 
to talk about what we are working on here.
    Mr. Perlmutter. Thank you. Mr. Dugan, you hit right on it, 
about forbearance. We have one bill that would allow--if 
somebody has continued to pay on time and hasn't missed 
anything but their collateral has been written down--that they 
still continue to--that there be forbearance against the banks 
so the bank can forbear with its customers so they can get to 
the light at the end of the tunnel. I will just say to you, if 
we were operating under the same standards in the 1980's, which 
you mentioned, in Colorado that we are today, we wouldn't have 
any banks in Colorado. They would have all been gone. There was 
a forbearance opportunity. We ended up with half of our banks. 
We lost half our banks. We kept half our banks.
    So I think Congressman Coffman and I, based on our 
roundtable and what we have experienced here, is that we think 
that there ought to be some kind of forbearance. So I am going 
to let you respond because I know you don't agree, but let the 
committee know why you don't agree.
    Mr. Dugan. Okay. I am happy to do that. I guess I disagree 
with the conclusion that you wouldn't have had any banks. I 
think the conclusion that most of us took who lived through 
that time in the 1980's was that the forbearance caused 
problems to be delayed and not resolved on time. And as a 
result, the costs escalated dramatically to over $200 billion.
    Mr. Perlmutter. But I would respond and say that virtually 
every bank that stayed alive was operating under a memorandum 
of understanding. So there was forbearance. Then you had your 
RTC costs, but we have already put $700 billion through the 
TARP program to try to keep things alive so that we can get to 
the light at the end of the tunnel.
    Mr. Coffman and I had a little company called Big Papa's. 
They had two restaurants, and they were going for a third 
restaurant. They went to 40 banks to just get a $250,000 line 
of credit, and they couldn't get it because of tightened 
regulations. And I would turn to Ms. Mills, even under the SBA, 
for whatever reason, they couldn't get it. Eventually, because 
of the work that we did, they got it. We got 50 new jobs. This 
isn't just a credit cycle issue. This is a demand cycle jobs 
issue, and we have to get our people back to work. And I know 
you and I have had this debate probably over the last year now, 
the balance between prudence and lending. But there is a whole 
another thing that the Congress has to consider, and that is 
getting people back to work.
    So Ms. Mills, have your SBA guidelines tightened up over 
the last year-and-a-half? Or have they eased up at all?
    Ms. Mills. Our job at the SBA is actually to provide credit 
elsewhere. So we come in when a bank can't make the loan 
without a little bit of help. We have continued to do that and, 
as you can see from our charts, expanded to really fill a large 
part of the gap as banks have pulled back on their credit.
    The second thing, I would just say in answer to your issue, 
is that we share your concern that banks at the ground level 
need to fully know these communications that we are hearing 
here because we hear the same issues and confusions. But we 
stand ready to help them mitigate the risk because with a 90 
percent guarantee, that portion is not considered to be risk 
capital on the bank's books, and therefore with an SBA 
guarantee, they can take a lot of that risk out. We just need 
to be able to--with the increased loan size--do something, for 
instance, for a third restaurant. That is usually a loan size 
issue for us.
    The Chairman. Does the gentleman want another 15 seconds?
    Mr. Perlmutter. I will yield back to my friend from 
Colorado.
    The Chairman. You yielded him back nothing.
    Mr. Perlmutter. When it comes back to my time, then I will 
yield to him.
    The Chairman. I will now recognize the gentlewoman from 
Illinois. But I just have to say two things. First of all, I 
know people are coached from time to time to say, oh, thank you 
for that question. If all the witnesses would stop saying, 
thank you for the question, we would get another 20 minutes. 
Because we don't believe you anyway that you are really that 
grateful, and you shouldn't be.
    But more importantly, I tell you this is my frustration, 
when we raise anyone's question, you are there running your 
agencies. We are listening to people. You can make a very good 
defense of every single thing you did. But if all we are 
getting is a defense of every single thing you have ever done, 
there is no change in the status quo, and we have a problem. So 
I urge you not to be totally defensive. It is entirely possible 
that you have done very good things in a very difficult 
situation, but we still need to do a little extra. And the 
frustration is, when we get it, as I said, issue by issue, 
decision by decision, a perfectly plausible defense of what has 
happened. But then people go away saying, I guess there is no 
change.
    The gentlewoman from Illinois?
    Ms. Bean. Thank you, Mr. Chairman. Thank you all for 
sharing your expertise and your experience with us today on 
such an important topic. I particularly want to acknowledge the 
great work and efforts that you have done at the SBA to Karen 
Mills, and your staff does a really good job in Chicago and in 
Illinois. When we have done--even in the suburban district that 
I represent--forums, which I regularly do with our area 
businesses, we have invited the SBA to participate. They 
educate people on the loan programs that are available. They 
direct them to the increasing number of banks that are now 
participating in the SBA loans. I have been advocating for a 
new and improved SBA since I came to Congress. I think you are 
really delivering against that, and I am glad you are asking 
for additional resources.
    What was most disconcerting about your testimony was when 
you talked about the $90 million that has already been approved 
in the queue but you are running out of funds. So we need to 
continue to provide that support so those loans can continue.
    Now in your testimony, you talked about your principles for 
supporting job growth and economic growth, build on what works, 
maximize effectiveness, protect taxpayer dollars, and make 
targeted changes quickly. Given that my understanding is that 
to build the type of infrastructure that you would need to 
support the direct loan program that some are advocating for 
would not only take longer--in other words, to establish the 
necessary organization--but that it would cost 15 times more. 
Am I correct on that? How does that align with what we are all 
trying to do in getting--as you have already gotten $20 billion 
of loans since the stimulus--out to small business? Does this 
align with those goals?
    Ms. Mills. As you mentioned, our principles are to try to 
build on what works. And what has been working is the Recovery 
Act, 90 percent guarantee, and the fee reductions. But there is 
still a gap. And that is why we have taken each piece of the 
gap and tried to fill it with a program that addresses what we 
have heard as we have gone around the country and gotten the 
problems from the banks.
    So there are still gaps out there, and we have an array of 
things that we want to get at. We have a pretty good track 
record so far in going through our 75,000 banks. We have 1,000 
of them that stepped back up. That is why we are saying, we can 
get out faster using the tools we have.
    Our issue is not really direct lending. A borrower doesn't 
care where the money comes from. They care that they are not 
getting it right now. So we want to really push the throttle 
forward on this direct access issue, which is we need to get 
those borrowers connected to the bank networks that are lending 
in the communities. That is why the capital helps us. That is 
why the increased guarantees help us. That is why the increased 
loan sizes help us. And if we do that and we still have 
somebody who is not bankable, we want to get them into our 
network of counseling.
    We found in North Carolina that 60 percent of the people we 
got into our Small Business Development Centers who were 
rejected from the banks, we could actually get them bankable by 
helping them with their package. They might not have done their 
business plan so correctly, and maybe 2 years ago you didn't 
need a business plan to get a loan. Well, now you need that.
    So we are going to accelerate those efforts.
    Ms. Bean. I have one other question for you, and then I 
would like to go to Comptroller Dugan. My other question for 
you is, it is estimated SBA-backed loans account for about 10 
percent of the small business lending marketplace. How would 
you categorize recent changes with your plan of what overall 
share of lending in the small business marketplace has been in 
the past year and moving forward?
    Ms. Mills. Well, as Chairman Frank has suggested--and I 
take this opportunity to identify something that we would like 
to have that we don't have today, which is more data. We 
actually have very little data to size the small business 
lending market. That said, we estimate that we used to be about 
10 percent. We think we are a much greater share at this 
moment. And with these programs as--it is hard to differentiate 
what is demand-driven and what is supply-driven. But we 
estimate that with these programs, we should be able to close 
those gaps and be a larger share of the market.
    Ms. Bean. Thank you.
    For Comptroller Dugan, the Administration has proposed 
temporarily opening up the SBA 504 program to commercial 
mortgage refinancing. Given the growing concerns over what is 
happening with the commercial real estate market, and the 
number of maturing loans on the books about to come due, many 
of which have fallen in value and may continue to fall, is 
there more that we should be doing to address that?
    Mr. Dugan. Congresswoman, I do think there is more. The 
bankers that we talk to think that increased SBA lending 
limits, on the 504 program in particular, would be something 
that would cause them to do more lending than they otherwise 
would. We have gotten our bankers together to sit down with 
Treasury as they have tried to suggest what are real-world 
practical issues with the current SBA program that could be 
addressed. I think that was a helpful set of discussions that I 
think led to some productive, proposed changes.
    Ms. Bean. I appreciate it. I yield back.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Mr. Chairman, I was going to ask Mr. Gruenberg a 
question. I have heard from several banks out in California 
that they are concerned with the treatment of commercial real 
estate loans, and I think we are talking about roughly $3 
trillion in commercial real estate loans right now that are 
either on the books of the banks' balance sheets or securitized 
through MBS. And if the figures are right, I think roughly $1.4 
trillion across the country is scheduled to roll over between 
now and 2013?
    Mr. Gruenberg. I don't know that number, Congressman.
    Mr. Royce. Maybe Mr. Dugan would know.
    But what I have heard from local banks is that once the 
term of a loan rolls over, let's say typically 5 years, the 
lender is required to do a new appraisal of the property's 
value. And some of the banks have conveyed to me that, while 
they would like to roll the loan over, because the revenue 
coming from the property remains strong, they are being 
discouraged from doing so by the examiners because, frankly, 
the appraisal value obviously of the property is not coming in 
at what it was. And I would like to get your assessment of this 
potential dilemma here.
    If a property has dropped in value but the revenue stream 
coming from the property is consistent, how should the loan be 
treated? I understand these loans need to be treated on a case-
by-case basis, but, in general, I would like to ask Mr. Dugan 
and Mr. Gruenberg of the FDIC, should the bank make that 
assessment? Or is that a question for the bank's judgment? Or 
do we suggest instead that, because of the current appraisal, 
that we basically have the regulators lean in and send the 
message to the bank that--
    Let me just ask you forthrightly, how do you think that 
should be resolved, if you have that judgment question?
    Mr. Gruenberg. Well, in the first instance, on an 
individual loan we would defer to the judgment of the bank. It 
is really the bank's responsibility to make an assessment on 
the quality and creditworthiness of the loan and a judgment as 
to how to proceed if the term is expiring.
    As a general matter, and this is really one of the key 
issues in the guidance that we have issued, we have tried to 
send a clear message to examiners that if there is a drop in 
the collateral value, but the borrower is otherwise in a 
position to carry the loan, the guidance is very clear that the 
collateral alone should not be the basis for evaluating the 
borrower's position. That is a message we have gone to great 
lengths to communicate to our examiners across the country. 
There may be individual cases where that is not being followed. 
But the final impression is that examiners are trying hard to 
work with bankers on that issue.
    Mr. Royce. There are certainly some individual cases, or at 
least as represented to me there were. And I don't know 
exactly--I wasn't there to hear how it was communicated, but 
maybe there was just an insistence that things be better 
capitalized in there. But the representation I heard was that 
there was this message.
    I would ask Mr. Dugan for his thoughts on this, too.
    Mr. Dugan. I agree with what Mr. Gruenberg said. I think 
the issue that we will always look at and we expect the banks 
to look at in the first instance is, is the cash flow adequate, 
accompanied by the secondary sources if there are guarantors to 
repay the loan. That is the key issue.
    Mr. Royce. But let me give you an example. Because in 
talking to one banker he said the theory was that the cash flow 
was currently adequate, but in that particular market the 
presumption was that in the future it might not be adequate. 
And the question to me was this: Does the banker get to make 
that decision, or is that suggestion being made to the 
regulator?
    Yes, currently--currently, indeed, you have a performing 
asset--or whatever terminology is used. You have the income 
flow. But we anticipate that with the implosion, let's say, in 
the Inland Empire in California, that come next year you may 
not. And, therefore--this is what I am trying to discern. 
Because we all hear anecdotal information about this, and 
getting to the root of it is interesting.
    Mr. Dugan. And we hear that anecdotal information as well, 
as you might imagine.
    There certainly is no policy to say that because of a 
speculative future drop in income that the examiner says that 
that is the cause of why you have to write this down. But we 
also do expect our banks to stress their portfolios and make 
sure they are taking into account potential real-world issues 
that are going on currently in the marketplace. It is hard to 
respond without having the particular instance in front of us, 
but I would say we welcome that discussion. And if it is not 
happening at the field level, we welcome them taking it up the 
chain, both informally and also, if necessary, to our 
ombudsman.
    I hear the same issues, and I am constantly talking to our 
supervisors and examiners: Are we getting this right? And we 
constantly then will go back and ask questions. This recent 
guidance did try to get at a number of these specific issues 
with real-world examples that I hope would be good ones.
    If I could just say one other thing. I think we have a hard 
time getting across the message that even if a loan is 
criticized, it doesn't mean you still don't continue to work 
with the borrower. We expect criticism of loans--that is a 
technical term--to go up during tough times. But it doesn't 
mean that we expect bankers and borrowers not to work through 
those loans.
    Mr. Royce. Thank you.
    The Chairman. Thank you. And I thought we would let that 
one go because it is at the heart of it.
    I just want to report--I double checked. Mr. Bowman, you 
were correct in your recollection. In the 109th Congress, under 
Republican Majority with a bill of Mr. Hensarling's, we took 
the cap off small business lending entirely. It was a 10 
percent business cap but none for small business, and that 
passed the House in the 109th Congress when the Republicans 
were in the Majority.
    And then in the previous Congress, with the Democrats in 
the majority, Mr. Kanjorski was the sponsor of it, and it also 
passed the House.
    So the House has twice now sent to the Senate legislation 
to remove that cap, and maybe the third time will be the charm. 
I think we might get bipartisan efforts to do that. As Members 
know, charm is not my special area, but we will see if it 
works.
    I believe we are now up to Mrs. Dahlkemper.
    Chairwoman Velazquez. Mrs. Dahlkemper?
    Mrs. Dahlkemper. Thank you, Madam Chairwoman.
    Thank you to the witnesses for being here today.
    Certainly this is an issue of great importance to my 
district in Pennsylvania and to small business access to 
capital across this country. During these difficult times, I 
think it is paramount to the American economy to help our small 
businesses access capital.
    Ms. Mills, as you are aware, I, along with Congresswoman 
Bean, recently introduced legislation aimed at increasing 
access to capital through the Small Business Administration's 
7(a) Express Loan program, and I want to ask you a couple of 
questions regarding that program.
    First of all, what is the SBA's view on increasing the loan 
size for the 7(a) Express Loan program and how do you see this 
as fitting into the larger picture of the SBA lending programs?
    Ms. Mills. The SBA Express Loan program is designed for 
businesses to give them working capital; and, as you know and 
as in the bill you introduced, one of the most severe problems 
right now is that small businesses have had their lines of 
credit withdrawn or cut back. And now, as they begin to see 
that next order come, they don't have the inventory and they 
don't have the cash flow to expand and take that on without 
working capital lines.
    The SBA Express program is very popular because it actually 
allows the bank to use its own paperwork. There is no 
incremental paperwork, and that allows a much faster result for 
the borrower. So we see that as a very good vehicle that is up 
and ready today. It is currently about 55 percent used by 
community banks, and we see community banks as a very important 
conduit to these small businesses who are growing. We asked for 
an increase in size to $1 million. The current cap is $350,000.
    I want to point out that the default rates on the SBA 
Express are higher than usual in the small amounts, and they 
are actually lower than usual in the larger loans up to the 
$350,000. So the modeling and expectation is that these 
actually will have lower default rates than our 7(a) program.
    Mrs. Dahlkemper. Where is the cutoff that you are seeing 
the difference in terms of the default rate?
    Ms. Mills. There is a chart in your materials, and I think 
we had it up on the screen earlier. And I think, if we look at 
that, we can see it is about in the middle. So it is below--we 
have data up to the $350,000. But this is the chart, and the 
sort of line going down is the--and it is about--it looks like 
it is about at the $100,000 level.
    Mrs. Dahlkemper. So moving up from the $350,000 up to the 
$1 million, which is what our legislation has, would be 
actually--you would see a lower default rate, according to your 
research?
    Ms. Mills. That is what the data indicates.
    Mrs. Dahlkemper. One other question on that. Is there 
anything that would keep our community banks or credit unions 
from fully participating in the 7(a) Express loan, should they 
choose?
    Ms. Mills. No. They participate very robustly now. And 
particularly in 2009, as we have brought these thousand 
community banks back to lending, they participated in this as 
well.
    Mrs. Dahlkemper. And is there a need, an outcry for the 
larger amounts?
    Ms. Mills. Absolutely. There is a real gap in the credit 
market right now for working lines of credit and there is 
demand there. We are seeing it both in our SBA Express increase 
in volumes and in our 7(a) increase in volumes.
    Mrs. Dahlkemper. I have one final question, for whoever 
would like to answer this, but it is about credit unions. And I 
have certainly talked to the credit unions in my area who are 
very well capitalized, and they would like to see their ability 
to lend go from 12.5 to 25. Would somebody like to address that 
in terms of what you think that could do in terms of getting 
credit out to our small businesses throughout our communities?
    Mr. Allison. Speaking for Treasury, we are in a dialogue 
with the credit unions right now to understand their needs 
better, and we are going to continue that dialogue in the days 
to come, and then we can get back to you about that.
    Mrs. Dahlkemper. Well, my credit unions tell me that they 
have billions of dollars that they are ready to lend to 
businesses today, if allowed to.
    So thank you. I yield back the remainder of my time.
    The Chairman. Mr. Luetkemeyer is next.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I appreciate the opportunity to discuss with you this 
afternoon something that I think is very important with regards 
to our small business folks being able to have access to 
capital. As a former regulator myself, a bank examiner--I saw 
heads turn when I said that; that is interesting--I understand 
what you are talking about, I think, and I have some concerns 
from the standpoint that it is nice to see that you finally 
acknowledged that we have a huge disconnect between what is 
going on here in D.C., and what has actually been going on in 
the field. Because I brought this matter to the attention of 
all three regulators last spring and asked for a meeting with 
all three--Comptroller, Fed, and FDIC--and FDIC was the only 
one who accepted my invitation to come to our office and 
discuss this matter with our entire banking organization and 
the Bankers Association.
    I thank you, Mr. Gruenberg, for showing up. The other ones 
didn't take advantage of that.
    I am very disappointed from the standpoint that Congressman 
Royce made a very good point a while ago and was pretty 
articulate about explaining the problem that we have which is 
going on still today, which is that the examiners are coming in 
with little or no forbearance and taking a look at the thing we 
are talking about today, which is commercial real estate 
lending, and just blanket classifying everything there. And you 
guys know that if you are on a watchlist--you know what a 
watchlist is--automatically you are going to have to include 
more capital, which means it takes money out of the profits, 
has to be stuck away in loan loss reserves or in additional 
capital itself to be able to keep the bank afloat. This is 
devastating to the small businesses, which banks are, as well 
as small businesses to lend to.
    I think that it is very concerning to me. And, Mr. 
Gruenberg, if you would answer, please, how are we addressing 
this right now?
    Mr. Gruenberg. Congressman, there is nothing we spend more 
time on than trying to work with and communicate with our 
examiners in the field. It is not a perfect process because we 
have a couple thousand examiners to deal with.
    The FDIC has 85 field offices around the country. Last 
week, we brought the supervisor of each of those offices to 
Washington for a week. We spent time working through with them 
all the directives and guidance that we have issued to our 
examiners, particularly in regard to CRE and commercial loans. 
We directed them to exercise flexibility and judgment and, as 
best they can, assist in the workouts of these loans.
    Now, you can't always get the results for the institution 
and the borrower that you would like. But this issue about the 
disconnect between Washington and the field, that is something 
we always hear. And I guess I have been on the FDIC Board now 
for almost 4 years. To a certain extent, it is in the water. 
This is always a sort of part of the nature of having a large 
national operation.
    But I can tell you we have really made every effort to 
communicate and work on a regular basis to make clear to our 
examiners what they are supposed to be doing.
    Mr. Luetkemeyer. I am sure you are aware that, as an 
examiner myself, I know you are very responsive to supervisors 
over you all the way up the line from the standpoint that if 
you don't do a good job of examining this institution this time 
and you miss a lot of stuff, it is a reflection on your ability 
to do your job.
    Right now, with the economy the way it is, going in the 
wrong direction, it is pretty easy to go in there and see what 
you anticipate happening rather than what is actually happening 
right now. And I think that is one of the problems, is we are 
doing a lot of anticipating, which is very concerning to me 
from the standpoint that you have--anecdotally, there has been 
a lot of this already discussed with regards to folks who are 
already doing a good job with regards to their business. They 
are hanging on. Lifetime depositors or borrowers of the bank 
and no problems in the past. Now, all of a sudden, they are in 
trouble because of collateral values.
    And, to me, without a little forbearance and a little 
discretion on the part of the examiners, you exacerbate the 
problem from the standpoint that, by going in and restricting 
the ability of these folks to lend, you cause less lending to 
happen which causes less demand for the real estate which 
lowers the price, which suddenly now the collateral value of 
everything goes down, and you have a spiral going the wrong 
direction and, quite frankly, you guys are a part of the 
problem.
    And it is very concerning to me that if we don't have some 
sort of effort to try and work out a program--I hope that you 
guys are doing this. I am concerned because I keep following up 
on local institutions at home, and the examiners have still not 
really gotten to the point where they are actually working with 
the banks in what in my judgment is in the best interest of not 
just the banks but the community and the whole economy as a 
whole here. So I am very concerned.
    Ms. Mills, one of the statements you made a minute ago was 
with regards to the SBA's job is to make credit available 
elsewhere. One of the earlier witnesses--
    The Chairman. The gentleman's time has expired. So if we 
can get a quick response.
    Mr. Luetkemeyer. My question just simply was one of the 
witnesses a while ago made a comment that they liked direct 
lending from the SBA. And, obviously, from your comment, you 
would rather be guaranteeing the loans versus direct lending. 
Your response?
    Ms. Mills. Yes. Our job is to make loans and loan 
guarantees when the market is not providing it. So, therefore, 
there are a number of market gaps that are out there today.
    As I said earlier, we did assess direct lending. It ended 
up with a cost 15 times as much, and we would have to train a 
new force. It has been suggested we use our disaster force, but 
our disaster force is actually not trained for business loans 
and is busy doing disasters. So we have looked at that option 
fairly closely but believe that we have a very strong 
infrastructure in our network of banks. And if we can increase 
our ability to do credit elsewhere, we can meet the gap.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, for your 
forbearance.
    The Chairman. The gentlewoman from Florida. Well, at least 
you got forbearance somewhere.
    Ms. Kosmas. Thank you, Mr. Chairman. Thank you to the 
presenters today.
    I, too, am concerned about the issues raised about 
forbearance and particularly the impending $1.4 trillion of 
commercial lending that much of which is performing and 
compliant and is stuck in the gap that has been earlier 
discussed. So I certainly hope that--
    I know, Mr. Dugan, you said avoid forbearance. The 
economists we talked to yesterday said forbearance is 
necessary. Somewhere along the way, we have to find the right 
balance.
    But I have a specific question for you, Mr. Dugan.
    In October 2008, you advised the National Bank Examiners 
along the following lines--and this is a quote from you: ``I 
think it is just wrong to say that any bank that fails and 
costs the deposit insurance fund money could have been closed 
sooner at less cost. While the assertion could be true with 
respect to a particular bank, it is just as possible and, 
frankly, more likely that the latter option of letting a bank 
remain open sometimes produces a positive result that avoids 
failure and loss altogether.''
    I just want to suggest to you that I have been hearing 
reports in my community and throughout the State, frankly, 
that, in practice, the OCC has not been exercising discretion 
not to close banks whenever they fall into the gray area of 
capital deficiency. With the escalation of the number of banks 
on the FDIC trouble list now totaling 702 and with many of 
them, if not most of them, community banks and with the 
recognition that community banks are the main source of small 
business lending, how can we be sure that those who actually 
make the life-or-death decision for a bank are following your 
advice to weigh both options?
    Mr. Dugan. We have spent an awful lot of time on this. We 
have had 183 banks fail; 33 of them have been national banks.
    The quote that you referred to was a notion that there is 
judgment at times because there are circumstances in which even 
a very troubled bank may have potential buyers. We try to find 
a circumstance in which we can control the risk of that 
institution when they are in strained circumstances. One lesson 
we did learn from the S&L crisis was when institutions have 
little capital and not much downside risk from taking risk, 
that is when you have to be most careful with those 
institutions.
    Sometimes buyers can come in and will help the bank turn 
around. But if they are not available, it is the policy of the 
agency to close the institution. It is a judgment call. We have 
a lot of experience in this. We work very closely with the FDIC 
and their Division of Resolutions when we do this. We try very 
hard to call them as we see them.
    Ms. Kosmas. I guess, as a follow-up either to you or Mr. 
Gruenberg, when you find a bank in this situation and they are 
required to raise capital within certain timeframes, how much 
flexibility do you actually use in determining other factors 
for their potential to succeed rather than to be bought out or 
to be closed out? Because there are many who feel that their 
operations are good. They might have a quarter during which 
their capital drops below some standard, which also is a 
problem, because sometimes it seems arbitrary and hard to 
determine what is the factor that you use to determine the 
capital requirement.
    And so I guess the question is two-part: What is the 
criteria that you use in order to determine that capital 
requirement, and why is it different in some places for some 
institutions than for others? And how much discretion do you 
use really in analyzing other operating procedures and income 
streams and assets that would, given a little bit of time, 
allow these banks to continue to operate, to be profitable, and 
to succeed?
    Mr. Dugan. I will start, and then I will be be happy to 
turn it over to Director Gruenberg.
    When in 1991 Congress passed FDICIA, the Federal Deposit 
Insurance Corporation Improvement Act, they put together and 
put in place a statutory regime to force regulators to take 
action when capital drops below certain levels called the 
Prompt Corrective Action.
    Ms. Kosmas. Is this something you think maybe should be 
updated?
    Mr. Dugan. We have people criticizing us for not going fast 
enough. As for going too quickly, all the way from inspectors 
general to others. So we do try to call this.
    But in answer to your question, we look at all different 
ways with the FDIC at viable plans to see if there is some way 
to get the institutions to survive without FDI assistance and 
potentially other kinds of government assistance. We exhaust 
all of those remedies on a routine basis and work very hard and 
closely with the FDIC to do so.
    The Chairman. Time is up.
    Mr. Gruenberg, we probably would like to have you comment 
on this as well.
    Mr. Gruenberg. As John points out, there are statutory 
requirements relating to when a bank falls to a critically 
undercapitalized position. We don't have a lot of discretion in 
that scenario.
    I will tell you that closure of the bank is the last 
recourse as far as the FDIC is concerned, because an open-bank 
solution will avoid a loss to the Deposit Insurance Fund. We go 
to exceptional lengths in working with the institution to see 
if there are investors available on an open-bank basis to raise 
the capital to keep the institution functioning. If the 
institution is not in a position to raise the capital, if it 
has really reached a critically undercapitalized position, then 
the law is clear and there is a public interest in moving 
directly to address this situation.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you.
    Let me ask the regulators this. You heard a statement I 
made a little earlier that we are hearing from the banks that 
their job is being complicated by examiners. And I know you are 
folding your arms, Mr. Gruenberg, but we hear this every day. 
And, as ranking member, our members refer bankers to me or 
small businessmen, and they actually--
    The Chairman. One of the most of fun parts of the job.
    Mr. Bachus. Right. You know, I had three yesterday, one 
from Mr. Mica's office, one from an Iowa Congressman, and they 
mentioned various things. Like, for instance, one banker--and I 
have heard this twice in the last week--said that the examiner 
said you have too many owner-occupied loans. Another one: You 
have too much commercial real estate. Different things of that 
nature. But, generally, if they have it, they have it.
    And the other thing that I have noticed is that you 
actually say they are not healthy so you restrict their 
lending. But I am just wondering, if they are not healthy--and 
I guess by ``not healthy''--I don't know what CAMEL rating you 
are assigning them, whether that would mean whether that is a 
four or five. But, generally, there are areas of the country 
where there are a tremendous amount of banks. I would say in 
Florida there are not that many one or two rated banks, are 
there?
    But my question, I guess, is, you all are now saying--and a 
lot of the things you said today will be very helpful where you 
said we ask that they not--if the appraisal is dropped on the 
property, that we won't call that loan or whatever. But how are 
you communicating that to the examiners to show some leniency? 
Because I think it is very, very, very important.
    Mr. Dugan. Well, I will start, Mr. Bachus.
    We get on nationwide conference calls on a frequent basis 
with our examiners to go over very significant nuts-and-bolts 
issues about exactly the kinds of questions that you are 
getting. Because, just as you get all these questions, I get 
them, too, and I do my own set of banker outreaches to banks of 
all sizes and get a number of these questions. So we try to 
structure the calls to reflect the kinds of questions we are 
getting, to give the advice, to communicate the message of 
balance as best we can.
    And, as I said before, it is not something new that we have 
been doing. We have really been concerned about the build-up of 
commercial real estate and the risk that would happen if we 
started to have a real estate recession like we are having now. 
So we started down the path several years ago to try to get 
banks to be aware that they are going to need to do more things 
to get ready for what was coming.
    As the problems have hit and as we get issues, we have a 
very quick system for getting it back up the chain, collecting 
information about what are problems, and then having a call to 
talk about the issues. I don't know any other way than the hard 
blocking and tackling of just keeping at it, hearing the 
things, going back to them and trying to get--
    Mr. Bachus. But I am talking about with your own examiners.
    Mr. Dugan. Correct. This is with our own examiners.
    Mr. Bachus. With your own examiners.
    Mr. Dugan. With our own examiners.
    Mr. Bachus. And are you getting feedback from some of the 
banks? Are they able to call you and say, look, I am talking 
with this examiner. I don't want you to tell him--
    Mr. Dugan. I welcome that.
    And, as I said, I just went to a meeting with 20 bankers in 
Denver a few weeks ago from our western district where we had a 
very good, candid discussion with them about some of the 
problems. It was a mixture, frankly, of stronger and less 
strong banks, and we had quite a robust discussion. I always 
get things out of those meetings that I try to bring back to 
the supervisors and incorporate into what we tell our 
examiners.
    Mr. Bachus. Let me ask one other thing. The small business 
lending fund, Mr. Allison, again, there are regions of the 
country where many of the banks are fours and fives, and those 
are probably the regions where the small businesses are hurting 
the worst. I would imagine there is probably some correlation 
there. What banks will be eligible for these funds?
    Mr. Allison. Congressman Bachus, all the banks are eligible 
to apply. They have to apply through their regulator, and the 
regulator makes a determination as to whether that bank is 
viable and can be then referred to Treasury for funding.
    Mr. Bachus. With some of the largest institutions, we 
injected money into them or loaned them money because they were 
failing. Some of the smaller institutions, they didn't get 
money because they had problems. I think there is a feeling out 
there that there was a double standard, and I wish you all 
would look very carefully at it if you are going to do that. 
Some of the banks that need the most help are those that are 
not healthy.
    Chairwoman Velazquez. Ms. Clarke?
    Mr. Allison. May I just quickly respond to the Congressman? 
Very quickly. Actually, the overwhelming majority of the banks 
that did receive funding are small banks and mid-sized banks.
    Mr. Bachus. I am just talking about percentage-wise.
    Chairwoman Velazquez. Ms. Clarke?
    Ms. Clarke. Thank you very much, Madam Chairwoman, Mr. 
Chairman, ranking members, and thanks to each of the witnesses 
on the panel for being here today. This topic is clearly a very 
crucial topic and crucial to a solid and healthy economic 
recovery, and I appreciate the spirit of cooperation between 
the Administration and the Congress in finding solutions to 
this lending freeze. I look forward to working with each of you 
as well as my colleagues in Congress to pursue policies that 
will improve the lending environment for American small 
businesses.
    My first question is, of course, to Administrator Mills. I 
want to thank you for being here. In your testimony, you 
expressed your central principles related to improving access 
to capital. You said that we should: one, build on what works; 
two, maximize limited tax dollars; and three, make targeted 
changes as quickly as possible.
    As we have discussed previously, I am a great proponent of 
CDFIs. The CDFI fund, which was established in 1994, has been 
instrumental in supporting institutions that operate in 
underserved areas, and I would argue that it has been working 
well despite limited funding. It has maximized limited taxpayer 
dollars by leveraging 15 to 19 for each dollar of taxpayer 
capital. And there is also pent-up demand for CDFI fund 
assistance, and more resources could quickly be deployed to 
where it is sorely needed.
    So I am saying all of this to ask--and we have spoken about 
this before--has the SBA begun the process of exploring 
partnerships with CDFIs for its lending programs and teaming 
with the CDFI fund at Treasury to explore ways that we can work 
together better to serve small businesses in underserved areas?
    Ms. Mills. The SBA is actively engaged right now with about 
30 percent of the CDFIs. We find those relationships very 
beneficial, and we are looking to expand. We are currently in 
discussions with CDFIs in Treasury about how to increase the 
overlap. We believe one of--well, one of our missions is to 
serve underserved communities. Our network into underserved 
communities is in part through the CDFIs, and we think they are 
very strong and potentially good partners to increase.
    Ms. Clarke. And then this question is for whomever on the 
panel. I am just wondering, going forward, how we can better 
serve the CDFI fund together? What can Congress do to increase 
more lending to minority- and women-owned businesses in 
underserved areas through CDFIs? And what is being done in the 
Administration to better serve CDFIs and promote lending in 
underserved areas?
    Mr. Allison. Let me address your question, Congresswoman.
    The Treasury, of course, has worked very closely with Ms. 
Donna Gambrell in the CDFI Fund. We have recently established a 
facility exclusively for CDFIs to provide them with capital at 
very low rates. In fact, the dividend rate is only 2 percent.
    The response from the CDFI community has been tremendous 
across the country. We are anticipating very high 
participation, and I think this is going to go a long way to 
assuring that the CDFIs during this very difficult time are 
able to survive and serve their communities.
    Ms. Duke. If I could, the focus of the Federal Reserve is 
on a very wide basis, and so we brought together the 
researchers that are in the Fed as well as our community 
affairs people who have the relationships with the CDFIs. And 
the series of meetings that we are doing are actually going to 
very specific communities to find out what very specific needs 
on underserved areas, working with CDFIs, working with 
borrowers, working with lenders, and trying to get pictures of 
all the different ways, and then blue sky that into whatever 
thoughts we can come up with on ways to solve it.
    Ms. Clarke. I want to thank all of you for your efforts in 
this regard. This is music to my ears. I serve a district where 
these institutions have been really just sort of lifesavers for 
many of our small mom-and-pop businesses, many who are actually 
poised for growth if they can access the type of capital that 
CDFIs afford them. So thank you all very much.
    Madam Chairwoman, I yield back the balance of my time.
    Chairwoman Velazquez. Mr. Bartlett?
    Mr. Bartlett. Thank you. Several years ago, before his 
retirement, I was talking with my friend Nevin Baker, president 
of a small community bank, who had been in that banking 
business for more than half a century, and he was lamenting 
what he saw as the stifling presence of the bank examiners and 
the regulators. And he told me about banking in bygone days, 
when he would meet Joe on the street corner in Frederick, 
Maryland. Joe would say, ``Nevin, I need some more money and 
this is how much and this is what it is for.'' And Nevin would 
say, ``Joe, I will put that money in your checking account. 
When you have a chance, come by the bank and sign the papers.''
    Now, Nevin could do that because he knew Joe and he knew 
Joe's business and he knew Joe's father who had started the 
business, and he knew that if Joe dropped dead of a heart 
attack, that Joe's wife would come by the bank and sign the 
papers. I think that kind of personal knowledge and judgment 
may be more meaningful in deciding who is a good credit risk 
today than your regulatory checklists. And I guess my question 
is, there is really not much of a role for that kind of 
knowledge and judgment in today's world, is there?
    You don't need to answer the question, because I think the 
answer is very obvious. So let me yield the rest of my time to 
my good friend, Don Manzullo.
    Mr. Manzullo. Thank you, Roscoe.
    We have three different panels representing three different 
interests. The guys who need the money testified. They are 
gone, or some are back there. You are the ones who do the 
regulations. You will testify, and you will be gone. And the 
guys with the community banks will come in and testify. And the 
problem is that the three groups need to get together. Let me 
give you an example.
    Here's the guidance interagency statement. It says: ``Banks 
are becoming overly cautious with respect to small business 
lending. Financial institutions that engage in prudent small 
business lending after performing a comprehensive review of 
that borrower's financial condition would not be subject to 
criticisms for loans made on that basis.''
    And the next panel of community bankers will testify, 
``While Washington policymakers exhort community banks to lend 
to businesses or consumers, banking regulators, particularly 
field examiners, place restrictions on banks well beyond what 
is required to protect bank safety and soundness. The banking 
agencies have moved the regulatory pendulum too far in the 
direction of overregulation at the expense of the lending.''
    And then you have the little guys out there, Steve Gordon 
who testified from INSTANT-OFF. He says, ``I can create 25 
green jobs right now and 25 percent of those would be for 
people with disabilities, etc., etc., but nobody will lend to 
me.''
    You know, this is not a situation where you have good guys 
and bad guys. You have three groups of totally honest people 
who are working very diligently, who returned calls of Members 
of Congress very diligently, and everybody has a great desire 
to get involved.
    But here is the problem. The choke-point for recovery in 
this Nation is this: The Institute for Supply Management now 
says it is above 50 and climbing for the 7th month in a row. 
This is the natural recovery of manufacturing.
    And I know of firms back home, a food processing--there is 
a company back home, Ibsen. They make the world's only portable 
vacuum heat processing machine. If you want it high end, it is 
lined with libidon. If you want it low end, it is lined with 
carbide. It sells for less than $250,000. People are itching to 
get it. It is already programmed in a hundred languages. People 
are itching to get their hands on it. And the manufacturers go 
to the banks, and the banks say, you know, it is the 
regulators.
    But let me tell you what one bank told a constituent of 
mine who has about 8 to 1 of equity to debt. He said, ``We 
can't lend to you because your sub-S is not showing a profit.'' 
Now, I want you to think about how stupid that statement is. 
But the bank that had been with this family for 30 years said 
the regulator told them that the sub-S is not showing a profit; 
therefore, I am going to classify the loan.
    Sub-S companies are not supposed to show profits. They are 
all pass-throughs. And the two brothers who ran the business 
said, ``Congressman, what is going to happen to our family 
business?''
    I would like to see this panel--and I know you have been 
here a long time. When the guys come up, I would like to see 
you sit behind them and listen to what is going on. Because you 
sat and listened to the first group.
    And now, here we are. We are on the brink of recovery. We 
are right at the edge of recovery. Orders for manufacturing are 
coming in. I have probably 2,000 manufacturers in my district. 
I am probably the only Member of Congress who has ever gone to 
warehousing school to learn supply chain management. We are 
right there. We are at the recovery. We don't need more 
government programs to create jobs. These guys want to go back 
to work. Something has to be done, and I don't know what it is 
going to take.
    And, John, you called me back immediately. Sheila Bair 
called me back. And Chairman Bernanke here this week said we 
will meet with your people. But you have to have some plan, and 
I don't hear it. And it is not because of lack of--bad faith. 
It is just--it is not getting done.
    Thank you, Mr. Chairman.
    The Chairman. I extended. I think the gentleman from 
Illinois was speaking for a very large number of Members of 
Congress in that and not pointing fingers negatively but 
expressing the anguish people feel. And let me say, I do 
appreciate it. We structured this hearing precisely so that the 
regulators would be the sandwich.
    I apologize that because of prior commitments, I am going 
to have to leave shortly. I just want to announce that at 2:00, 
the bank panelists will come in. So other members here or other 
members who are listening, we will have time to have that 
additional panel.
    We will finish up with more questions here. But I think the 
gentleman from Illinois has done a pretty good summary of what 
is the prevailing sentiment that I hear in the Congress.
    The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman.
    I would to associate myself with the comments from the 
gentleman from Illinois as well. I have had similar 
circumstances, and I fully understand.
    Quickly, if we assume that the question is which is best 
suited to use this $30 billion to increase lending to small 
businesses, banks or the SBA, I want to get some clarity to 
make sure we all understand where we are.
    Mr. Allison, would you say banks or the SBA?
    Mr. Allison. I would like to turn to my colleague, 
Administrator Mills, for her answer first. And I will be happy 
to--
    Mr. Green. Because time is of the essence, I am going to 
have to ask that you answer, please.
    Mr. Allison. I believe, for a program of this scale, it can 
best be administered through this--
    Mr. Green. Sir, I hate to press you, but I have many 
questions. Banks or SBA? That is what the public wants to know. 
Banks or SBA?
    Mr. Allison. For a program of this scale, I think the banks 
are best to get the money to businesses quickly and--
    Mr. Green. I understand. The rationale is great. I just 
need to know whether you are saying banks or SBA. I take it you 
are saying banks?
    Mr. Allison. I am saying banks.
    Mr. Green. All right. Ms. Mills?
    Ms. Mills. Both banks and the SBA loan guarantee programs 
are needed. There are two reasons.
    Mr. Green. For this $30 billion--because we need some 
clarity from you as to where you are--are you saying banks or 
the SBA for the $30 billion?
    Ms. Mills. There are two problems we are trying to solve.
    Mr. Green. I understand the problems. Can you give me--what 
I want is your position on whether the banks--this is what we 
are trying to come to some conclusion about. Banks or SBA? If 
you give me nebulous notions, when you leave I won't know 
exactly where you are. So would you kindly tell me, banks or 
SBA?
    Ms. Mills. We support $30 billion from Treasury to banks--
    Mr. Green. I am going to take it that I cannot get a direct 
answer. Let's go on to Ms. Duke, please.
    Ms. Duke. I believe that the biggest problem is the credit 
risk the banks aren't willing to take. And, therefore, I will 
say SBA.
    Mr. Green. SBA.
    Ms. Duke. SBA, and particularly the 504 program--
    Mr. Green. That is fine. You are an SBA person.
    Mr. Dugan?
    Mr. Dugan. SBA.
    Mr. Green. Mr. Gruenberg?
    Mr. Gruenberg. I don't think I am in a position to make a 
judgment on that.
    Mr. Green. No position.
    Mr. Bowman?
    Mr. Bowman. Banks and thrifts.
    Mr. Green. Banks and thrifts. All right. Thank you very 
much.
    Now, let me come back to you, Ms. Mills, for something 
else. And I am not badgering you. I have learned that if I 
don't ask questions that give me a yes or no answer, I 
sometimes assume people mean yes when they actually have been 
trying to communicate no in a very nice way.
    So now, with this said, you mentioned a 90 percent loan 
guarantee. Is it important to indicate and let the public know 
that this is not a 90 percent guarantee of the loan but rather 
90 percent of the loss? Because if there are assets to cover 
losses that may make the loan totally covered with the assets, 
the losses, then the government doesn't lose any money, the 
taxpayers don't lose any money. Is that correct?
    Ms. Mills. It is 90 percent of the loan.
    Mr. Green. Of the loan. Not of the loss.
    Ms. Mills. Correct.
    Mr. Green. So if the loan defaults and the borrower has 
assets that are going to be used to satisfy some portion of the 
loss, don't you subtract that from the loss itself?
    Ms. Mills. It is pari passu for the whole loan. So we take 
90 percent and the bank takes 10 percent.
    Mr. Green. I understand. But I am talking about how it 
actually works. Won't the assets that are available be taxed as 
well as a part of the loss?
    Ms. Mills. Yes. And--
    Mr. Green. As an offset?
    Ms. Mills. As an offset for 90 percent going to the SBA, 
guaranteed 10 percent to the bank.
    Mr. Green. So what I am trying to communicate is that there 
are assets that will be used to offset some of these losses as 
well.
    Ms. Mills. Correct.
    Mr. Green. That is important. Because it can come across as 
though we are talking about 100 percent of the 90 percent being 
used and that there will be no offsets with assets. That is 
what I am trying to get into the record. All right. Thank you 
very much.
    Now, Mr. Allison, you mentioned that Tier 1 capital would 
be used--some of this $30 billion could be used for Tier 1 
capital. Is it true that Tier 1 capital is not capital that you 
lend but rather capital that you maintain to be fully 
capitalized?
    Mr. Allison. Tier 1 capital refers to the amount, the base 
of the--
    Mr. Green. Do you lend Tier 1 capital?
    Mr. Allison. You can lend Tier 1 capital. But Tier 1 
capital can be leveraged to support a great deal more lending.
    Mr. Green. I understand. When we capitalized the big banks, 
they took that money and they did not use it for lending. They 
used it to become fully capitalized to help prevent runs on 
banks. Is this true?
    Mr. Allison. In some cases, yes.
    Mr. Green. Okay. Is this money that, the $30 billion, will 
the banks be able to lend it, or will they be able to--will 
they use it to become fully capitalized or will they use it for 
both?
    Mr. Allison. We have talked to many of the banks. We are 
confident that if they receive this capital, given the 
incentives in this program where the dividend rate drops 
dramatically if they use the money for lending, we are 
confident that they are going to use this money and help to 
lend to small businesses. We expect a significant increase in 
their lending, because this amount of capital can increase 
their total capital by 30 to 50 percent.
    Mr. Green. My time is up, and I don't want to encroach. 
Thank you, Mr. Chairman and Madam Chairwoman.
    Chairwoman Velazquez. Mr. Manzullo?
    Mr. Manzullo. Thank you.
    The National Association of Manufacturers commissioned the 
Milken Institute to do a report on the impact of manufacturing 
and the recovery. It is nothing less than staggering. We can't 
buy our way out of this recession. We have to manufacture our 
way out of it. We have to restart the supply chain. We have to 
get people back to work to the jobs they had before, in many 
cases.
    I know of situations where manufacturers have gone to banks 
with an order from a manufacturer offering to let the bank 
factor to pay for their own materials, to pay the 
subcontractors, and then to receive the check from the final 
manufacturer and make distributions, taking out, of course, the 
proceeds of the loan. But even then, the examiners balk.
    I guess you have to visit--and I know many of you have--the 
factory floors that I have to see the total frustration of 
people who have been in manufacturing for years, see orders 
coming in, and--listen to this very clearly--because they can't 
get operating capital, those orders are going to China. And 
jobs are being lost as a reduction of our manufacturing defense 
base because the capital simply cannot come.
    I know in the guidance it says examiners will not classify 
loans solely due to the borrower's association with a 
particular industry or geographic location that is experiencing 
financial difficulties. This is the last sentence in the 
November 12th guidance. But that is not what is taking place 
out in the field. And, you can bring in all the people you want 
from around the country for a week of training in Washington, 
but unless they understand the sweet smell of machine oil, you 
will never be able to get these manufacturers going.
    The question is, it is a fact, is it not--and the examiners 
can answer the question--that decisions are being made that a 
bank may have too many commercial real estate loans, too many 
manufacturing loans, too many agricultural loans; and then the 
examiners will say, well, you have to balance this because we 
know that manufacturing is sliding, those jobs are going, and 
this loan may not perform.
    Would that be correct? Does anybody want to touch that?
    Mr. Gruenberg. It is fair to say that if a bank is 
concentrated in a single line of lending, concentrations in a 
particular loan category can pose a risk.
    Mr. Manzullo. But at what point are manufacturing loans a 
risk? Is it 25 percent? Is it 50 percent?
    Mr. Gruenberg. I think the concentration would require the 
examiner to review the book of loans and make a judgment.
    Mr. Manzullo. But, see, that is the problem. The problem is 
this. You read manufacturing is on the demise--because people 
don't understand. They don't know what the Institute for Supply 
Management--and probably neither do the examiners. They can't 
read trends. They can't take a look at an order from somebody 
like Ford Motor Company, for example, that pays its bills. And 
here you have a supplier begging, just begging to get the 
money, offering to factor it, and the examiners are saying no. 
That can't continue.
    Mr. Gruenberg. I will make this point, Congressman, in 
regard to the guidance. One of the things the guidance points 
out is that 90 percent of the reduction in lending in the 
fourth quarter of last year was from institutions with assets 
over $100 billion. Many of those large institutions utilize, in 
effect, models to make judgments about how they provide credit 
to certain communities. So rather than examining the actual 
creditworthiness of the borrowers, you have models making 
judgments about credit availability. And one of the things the 
guidance specifically addresses is that--and you pointed it 
out--that should not be the basis on which lending decisions 
are made.
    Chairwoman Velazquez. The gentleman's time has expired.
    Mrs. Halvorson?
    Mrs. Halvorson. Thank you, Madam Chairwoman.
    I am going to try to make a complicated issue as 
uncomplicated as I can. And I doubt if that is possible.
    First of all, I would like to make an observation, Mr. 
Dugan and Mr. Gruenberg. At one point during our panel--because 
I have been here the entire time--I saw you folding your arms. 
Now I know that you are not sending any body language issues or 
anything. You are probably just making yourselves comfortable, 
right?
    I want to tell you a story of somebody in my district, the 
nicest man in the world, a banker. He was there with an 
examiner, sitting there, just folding his arms because he was 
comfortable. The examiner sitting there across from him 
demanded that he stop being on the defensive and unfold his 
arms. Now, come on. They just demanded that he unfold his arms. 
Well, that is not something I think is their job to say, and 
that is just kind of what is happening.
    I also heard during this that you have absolutely no 
discretion, that you are pretty much--your hands are tied. But 
yet I am also hearing that everything that your examiners and 
your regulators are doing is all subjective. It is not 
objective.
    Everybody wants to blame somebody else, and we are here 
because we have to stop blaming other people because we want to 
come out of this.
    The stories I hear as I cover my eight counties in my 
district are all the same. I don't care if it is the rural, the 
urban, or the ex-urban. The bankers want to help our small 
businesses. The small businesses have never missed a payment. 
They are doing everything they can. They are good people in 
their communities. But their lines of credits are being pulled, 
and they are having to go find credit somewhere else, and they 
can't. And these are people who want to invest in their 
companies. Most of them have made a profit, and now they are 
going to have to shut their doors because they can't even find 
a way to completely pay their bills or their employees.
    So we are sending these double messages that we want our 
companies to invest, we want our local banks to lend, and, no, 
we are not doing anything.
    So then we want to talk about the fact that we are helping 
our SBA, Small Business Administration, loan more. Well, our 
banks don't want to work with the Small Business Administration 
because of the paperwork. So we say that we are fixing the 
paperwork.
    But then my bankers say that takes 4, 5, 6 months to get a 
loan and who wants to wait that long for a loan. Now, it 
doesn't matter if any of this stuff is true. If it is 
perception, it becomes reality. So what I am looking for here 
is flexibility. Again, I hear there is no flexibility. 
Everybody's hands are tied. So, okay, you don't have 
flexibility.
    Tell us, what can we do? This is ridiculous. If we are 
American and we want to invest in our company, we want to 
recover, we are right there, tell us, help us how we can 
recover, how we can provide our banks, our small businesses 
with some flexibility that is not tied up in all this 
bureaucracy. I may be new. I am in my first term, but I am more 
commonsense. I just want to do it. I want to tell my small 
businesses you can invest, that we are going to help you with 
your loans and I want to tell my banker, you weren't the 
problem, you didn't cause this problem.
    And I want to tell all of you, please help us through this 
because we are the ones who are on the ballot. We are the ones 
who are out there listening to our constituents, morning, noon, 
and night, and yet we are having to deal with this bureaucracy 
everywhere we go. So the only thing I want to do is maybe--I 
don't know if it is Ms. Duke, Mr. Gruenberg, but who can help 
us, where can we find the flexibility, and where can the three 
of you groups work together so that we can make this all work? 
Otherwise, you are going to put businesses out of business; 
there are going to be more people out there looking for health 
care because they are not going to have a job and they are 
going to be strapped to the rolls of government.
    So we have to do something and, please, if there is anybody 
there who can help me with a little of this commonsense that we 
need? Who wants to start?
    Mr. Allison. May I please start?
    Ms. Halvorson. Yes, please.
    Mr. Allison. Let us assume that the businesses want to 
borrow, the banks want to lend, and the regulators want to make 
sure that the banks are lending responsibly and have adequate 
capital to support their lending. We can solve all three if the 
Congress will approve and increase this new capital fund so 
that we can provide this capital to banks so that they can 
increase their capital base dramatically. I think without being 
presumptive of my colleagues, who are the regulators at this 
table, that should make regulators more comfortable about the 
strength of the banks and they will be able to lend more.
    I think we have to act quickly and I think that it is 
important that leaders in Washington and the governors offices 
and the mayors make the point to the banks that they should 
look carefully at taking this capital and fulfilling their 
responsibilities to their communities by lending.
    Chairwoman Velazquez. Time has expired. Let me take this 
opportunity also to remind Mr. Allison that back in 2008, there 
was an interagency memo that Mr. Manzullo made reference to and 
apparently the banks and examiners didn't get the memo because 
here we are--3 weeks ago, another interagency memo was sent, 
and that is my concern. If we are going to put all the eggs in 
one basket and give all this money to the banks without any 
strings attached to it, that will require for the banks, if you 
take the money that is supposed to be used for lending for 
small businesses, it has to go for that. But we are providing--
what we are doing is giving a blank check again. Mr. Posey?
    Mr. Posey. Thank you, Madam Chairwoman. You and your agents 
probably, to a greater degree than that of the banks 
themselves, will determine how many more survive and how many 
more fail. Following up on the comments of my colleague 
previously, most of the bankers that I talk to--and we have had 
numerous financial roundtables in the counties I represent and 
surrounding counties--would actually prefer a little dose of 
commonsense to the infusion of more money, believe it or not.
    They mostly swear to me that if they are allowed to work 
through some issues without some monolithic bureaucrat beating 
them over the doggone head, they can work out of this thing. 
They are very confident about it. And they are very confident 
there are going to be massive failures if they are not allowed 
to do that and let me add that you are giving quite a few mixed 
signals here today. You are all against forbearance, but you 
are in favor of using common sense. I don't know where you draw 
the line there. I really don't. At every roundtable they have 
also mentioned, and it has just about been unanimous, that they 
heard the rumor that the Fed wants to dramatically reduce the 
number of small banks in this country so there would be a more 
manageable number, easier to regulate and probably to 
manipulate.
    So I would like each one of you who has heard anything like 
that to raise your hand right now. And let the record show that 
none of you have heard that and none of your raised your hands. 
Just to make sure that I have this on record perfectly, if you 
have not heard that, please raise your hand, you have not heard 
anything like that ever one time signal. And two of you are 
absolutely stone deaf. You have not heard and you haven't not 
heard. That is, I think, what Mr. Green was getting to a little 
while ago. That is very unfortunate. In your interagency 
statement, you all said for most small business loans, the 
primary source of repayment is often the cash flow of business.
    Let me drop down to examination reviews. Examiners will not 
discourage prudent small business lending by financial 
institutions, nor will they criticize institutions for working 
in a prudent and constructive manner with small business 
borrowers. That really sounds great. And again, that would 
appear to invoke common or uncommon sense as the case may be. 
But on the ground, the reality is clearly different.
    I think we have heard that, every member of this committee 
has heard that, I am sure. A question that I would like to ask 
each of you, and if time runs out on me as it probably will, I 
would like to ask each of you to please respond directly if the 
Chair has no objection.
    To the Chair, I am going to copy the members. We certainly 
want to avoid more after-the-fact hearings about community 
banks which could have or should have been saved if only 
additional time had been provided for some of these problems to 
resolve themselves to full financial stability. And so I want 
to know what your plans are specifically, not generally, we are 
going to be helpful. I want to know what your specific plans 
are for helping institutions other than closing them or forcing 
them to be purchased by larger institutions, which, in many 
cases have received TARP funds and are now being given FDIC 
assistance in the form of loss coverage on the acquired assets 
of those transactions.
    I want to know what policies you have in place to make sure 
examiners take into account the short-term and long-term impact 
on the communities, the businesses, and the households served 
by these locally oriented institutions and ultimately to the 
taxpayers of this great country. How do you make sure these 
policies are being effectively implemented as well? Anybody can 
jump in there. I see you are all anxious.
    Ms. Duke. First of all, I would like to say categorically 
that the Federal Reserve does not have a plan to reduce the 
number of banks in the country. We are working not only with 
the guidance but also looking at gathering data within the 
institutions to find out what troubled debt restructurings are 
working, what workout practices are working, looking for 
statistical ways to measure the impact of guidance and to look 
for call report changes that we can do. The most important 
thing to do is to improve the economy.
    Mr. Posey. How are you doing that? How are you going about 
it? Are there bureaucrats out there who are tasked in the next 
couple of years to figure this out? What is an action item? How 
do they really get rolling? How does the real world tell you 
what they need and then you accept that this is realistic where 
it is a commonsense approach? For example, they tell me, almost 
every banker, they have a loan, it has never not been current. 
But if the father-in-law makes a payment or another company 
owned by the same principal makes a payment, it is off the 
books.
    So that is collateral that they can't make money on. They 
have to make a higher interest more loans there and it is money 
now that cannot go into the community and help another 
business. So it is a cycle that just perpetuates the downfall 
of our economy. How would you suggest we address an issue like 
that?
    Ms. Duke. Again, by making our expectations clear, by 
communicating those to the frontline level of the examiners by 
talking to bankers, by talking to borrowers, by talking to 
examiners, by gathering information on what things are working 
and looking at the overall impact because the idea is not 
necessarily forbearance, but to get the businesses and the 
banks to the point where the economy has improved.
    Mr. Posey. Thank you. Madam Chairwoman, I look forward to 
the written response of all of them.
    Chairwoman Velazquez. Without objection. Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Madam Chairwoman. 
I was very skeptical a year ago that this stress test for the 
19 biggest financial institutions would be seen as credible as 
a rigorous test of their soundness and when some of those 
institutions were told that they had to raise more capital 
after the stress test, I thought good luck with that. But I was 
very surprised at how easily and quickly they did raise the 
additional capital. We have heard that regulators are telling a 
lot of the smaller banks, the regional banks and communicate 
banks to raise more capital and it appears not to be happening. 
What is the difference? Are they trying? Are there questions 
about what is really on their books? Chairman Bernanke said 
yesterday that part of it is their commercial real estate 
exposure, but the 19 big institutions obviously have some 
problems with their assets too. Why are they not raising 
capital? How important is that to dealing with the supply side 
problem with credit? Anyone who wants to answer that.
    Ms. Duke. I think, first of all, the smaller the bank, the 
less access they have to capital markets. There is another 
piece where there is in some cases concern about putting 
capitals into the banks and the banks fail and the capital gets 
lost. Or in cases where banks are trying to really just sell 
themselves, there is a concern that perhaps if they wait long 
enough depending on the stress of the bank, they may be able to 
buy the bank cheaper after failure.
    Mr. Miller of North Carolina. Is that because they are 
small enough to fail? Is that one difference between the 19, is 
they were seen as ``too-big-to-fail'' and the others are small 
enough to fail?
    Ms. Duke. I am not certain that all of the 19 were 
considered to be ``too-big-to-fail,'' but they were certainly 
large enough to have access to a wider spectrum of investors to 
put capital into them.
    Mr. Miller of North Carolina. Governor Duke, I should note 
for the record that despite your unfortunate name, you are a 
graduate of the University of North Carolina.
    Ms. Duke. Yes, I am.
    Mr. Miller of North Carolina. The 19 banks, the biggest 
banks that were subject to the stress test, they represent 
something like 80 percent of the banking system's assets and 
they appear not to be--they say they are lending, they say the 
problem is all on the demand side with respect to them and not 
on the supply side. That seems to be a questionable claim. What 
is the problem there? Why are they not lending and some of them 
took the TARP funds, which is a capital infusion and used it 
for paying cash bonuses, paying dividends, even buying back 
their own stock, which is going 180 degrees in the wrong 
direction. Why are they not lending? Or are they lending?
    Ms. Duke. The decrease in the loans outstanding has been 
more pronounced in the large banks than it is in the small 
banks. But it is not clear with the larger banks who have 
larger customers, how much of that is due to the fact that 
their customers also have access to the debt markets and have, 
in some cases, issued debt and paid down on the loans that they 
have with the banks. We don't have good data on the breakout 
between loans to smaller businesses and loans to larger 
businesses. We only have data on small loans, not necessarily 
loans to small businesses, and historically, we only have that 
once a year. We are now putting into place a process where we 
will get that information on quarterly basis.
    Mr. Miller of North Carolina. Mr. Dugan?
    Mr. Dugan. Yes, if I could add to that. That is right. As 
you said, they have the biggest chunk of the assets in the 
banking system, also have the biggest chunk of the decline and 
disproportionately it is somewhat larger for larger 
institutions than smaller. What the larger institutions tell us 
is what you said: number one, demand has significantly 
weakened; and number two, they have tightened their 
underwriting standards because they believe in this climate of 
recession.
    Mr. Miller of North Carolina. They want to get paid back. I 
want them to get paid back.
    Mr. Dugan. What we don't tend to hear from the larger 
institutions is that there is a regulatory component.
    Mr. Miller of North Carolina. Is there anything we can do 
to help the smaller banks attract more capital? Not just the 
$30 billion in the Treasury's proposal, but attract private 
capital. I have heard from investors that there is money out 
there and they don't feel the confidence to invest it in 
community and regional banks.
    Mr. Dugan. One thing I think that the regulators have 
looked at--and this is a controversial area--is that they have 
relaxed the rules to let private equity come in and purchase 
institutions. There are issues associated with that, both at 
the holding company level, whether it is the Federal Reserve or 
the OTS or if it is an assisted transaction from the FDIC. But 
there has been absolutely an exploration in trying to widen the 
circle of potential capital investors with some success so far.
    Mr. Miller of North Carolina. No one else? I will yield 
back.
    Chairwoman Velazquez. Time has expired. Mr. Lance?
    Mr. Lance. Thank you, Madam Chairwoman. Good afternoon to 
you all. I have no questions. I just wish to associate myself 
with the comments of Mr. Manzullo and with Chairman Frank. And 
I think, Governor Duke, you have hit the nail on the head in 
your testimony on page 5 where you state, ``Some banks may be 
overly conservative in their small business lending because of 
concerns that they will be subject to criticism from their 
examiners. While prudence is warranted in all bank lending, 
especially in an uncertain economic environment, some 
potentially profitable loans to creditworthy small businesses 
may have been lost because of these concerns, particularly on 
the part of small banks. Indeed there may be instances in which 
individual examiners have criticized small bank loans in an 
overly reflexive fashion.''
    This is certainly true in the district I represent as it is 
true I believe of almost every member of this committee I have 
had in my office in New Jersey small businessmen and women who 
are on the verge of tears because they cannot receive 
appropriate amounts of loans. And I commend all of you for your 
fine work and we have to work together out of this crisis 
particularly for the small business community which I believe 
is the engine of the creation of jobs in a revitalized America. 
I yield back the balance of my time.
    Chairwoman Velazquez. Thank you. That concludes this panel. 
And I want to thank all of you for your insight and for the 
great exchange that we have been able to have today. With that, 
we excuse the witnesses, and we will ask the third panel of 
witnesses to please come forward.
    Mr. Dugan. I promise I won't fold my arms again, Madam 
Chairwoman.
    Mr. Minnick. [presiding] Gentlemen, please take your seats. 
The committee is still in session. We appreciate all of you 
being here and apologize for the congressional schedule 
deferring your appearance. I appreciate you staying here.
    And we will begin our testimony of this, the third panel, 
with Mr. Andrews.

STATEMENT OF STEPHEN G. ANDREWS, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, BANK OF ALAMEDA, ON BEHALF OF THE INDEPENDENT 
              COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Andrews. Mr. Minnick, thank you very much for the 
opportunity to come here today. I am Steve Andrews, president 
and CEO of Bank of Alameda. It is a bank in the San Francisco 
Bay area of Oakland. I am a State-chartered bank operating in 
the State of California with roughly $250 million in assets. I 
am pleased to be here today to address the panels as well as 
the committees with respect to the state of small business and 
real estate lending in local markets. I am also very pleased to 
represent 5,000 community bank members and the Independent 
Community Bankers of America. Bank of Alameda is like most 
small banks. We specialize in small business lending, we 
specialize in real estate lending, we specialize in 
relationship lending. Community banks across the Nation, some 
8,000 community banks stand ready and prepared to continue to 
lend into their communities and support those businesses that 
require stimulus and recovery. My bank faces serious 
challenges. We just heard from a series of regulators up here 
about their work trying to mitigate some of those challenges. 
But the fact remains that community banks are operating in the 
toughest economic climate and the most severe regulatory 
climate we have seen in over 2 decades.
    We have heard about the pendulum, if a puny bank's 
perspective, that pendulum has moved too far into the category 
of overregulation alter the expense of lending. And we see the 
result of that with many of your constituents coming into your 
offices and worrying about the allocation of credit. The 
regulators are questioning real estate values. They are making 
subjective calls on the street and in community banks. And that 
is creating an atmosphere where many banks are reticent to make 
viable commercial small business loans.
    While the economy has suffered, and certainly some of those 
CRE borrowers you see out there are having trouble financing 
and making their payments, regulatory burden has added another 
category of stress to the situation. We also have fairly 
healthy economies that exist in the United States, but even in 
those areas, community banks are suffering because regulatory 
constraints are asking them to reduce overexposure in the CRE 
area. The regulatory environment is tough. Some of our best 
clients in the Bay Area come into us and cite it is not only 
that, it is that we are concerned to invest today.
    So yes, there is an element of our borrowers who are 
concerned to invest and take out additional credit because they 
are not sure as all of us here today are when this recovery 
will take effect. I want to concentrate the balance of my 
remarks mostly with the regulatory environment. I do see, and 
believe me I represent 130 bankers in California, I represent 
the CIB, California Community Bankers, Independent Community 
Bankers and the ICBA that banking regulators are making tough 
decisions in the field. This guidance is relatively new out in 
November, but anecdotally, I am seeing that the regulators do 
have their feet on bankers' throats in some cases, as we heard 
from the first panel.
    In my specific example, regulators came into the bank, they 
raised our leverage ratio from the 5 percent statutory minimum 
to 10 percent. In that case, what happens is you have to adhere 
to those agreements and it inhibits our ability to lend. Our 
bank has had to reduce its balance sheet, loans outstanding at 
the end of 2007 were roughly $248 million, today they sit at 
$200 million. That is not a way to make the economy recovery.
    Although my bank meets the higher 10 percent thresholds, it 
does come at a heavy toll. Field examiners, when they come out 
today, are getting mixed messages. They are hearing from 
Congress, they are exhorting the banks to lend. I think 
sometimes they are also hearing that they need to remain tough 
and make sure that they have a tough regulatory environment so 
we get through this rough patch. It is not an easy job and I 
felt a little sorry when the regulators were in the room, but 
the reality is that they are making it very tough on community 
banks to lend.
    And banks are reticent, especially when they have these 
high capitals imposed on us and also when we are asked to bring 
our loan loss reserves to exceedingly high thresholds, that 
impairs our ability to allocate capital into lending.
    In closing, I would like to say that the Independent 
Community of Bankers fully endorses the $30 billion fund we 
have chatted about. We think that is a very prudent idea. At 
the same time we also want to make sure that some of the 
stigmas attached to the TARP financing is not placed with this. 
I think Herb Allison when he spoke, spoke correctly that there 
is reticence upon bankers to jump into a fund like that if 
there is going to be a lot of looks into that. Bankers do not 
want to see the deal change after it is out. Thank you for your 
time.
    [The prepared statement of Mr. Andrews can be found on page 
99 of the appendix.]
    Mr. Minnick. Thank you, Mr. Andrews.
    Mr. Bridgeman?

STATEMENT OF DAVID BRIDGEMAN, CHAIRMAN AND CEO, PINNACLE BANK, 
                      ORANGE CITY, FLORIDA

    Mr. Bridgeman. Thank you. Chairman Frank, Chairwoman 
Velazquez, Ranking Member Bachus, Ranking Member Graves, and 
members of the committees, it is an honor to be here today. I 
am sort of the poster child of SBA lending of community 
banking, and I am also a receiver of TARP funds. So I am a 
rarity in community banking. Ladies and gentlemen, I have never 
been to Wall Street, but I have lived and I work on Main 
Street. I have never made a subprime loan. I can barely say 
derivatives, let alone put it on my books. We do not compete 
with loans at the local level with our ``too-big-to-fail'' 
banks. We do not. They do not come into our communities and ask 
for loans, but they do come into our communities and they ask 
for deposits. Currently, community banks make up 11 percent of 
the total financial network.
    We at community banks make 38 percent of the small business 
loans that fuel our economy. It is the small business loans and 
the small businesses that put 60 percent of the new jobs 
together for this country. You have asked the question as to 
why we are not lending to small businesses. There are two 
primary factors.
    First, small businesses have taken a pounding in the last 2 
years. Their financial statements are in chaos and they do have 
a tough time qualifying for credit under prudent policies and 
practices. Additionally, the businesses that do qualify are 
very concerned about their future and whether they should be 
lending--whether they should be going out and seeking credit or 
not. Small businesses are currently concerned about the 
economy, what is happening with health care and taxes. The 
other side of the problem is the regulatory burden as has been 
mentioned here today several times. Regulators are taking a 
myopic view of every bank they look at. When they look at a 
bank, they are looking at it as if it is an independent 
institution without regards to what is going on in the larger 
picture of the country and the economy. I would point out that 
the letter written by Congressman Frank, chairman of this 
committee, and also Congressman Minnick, that I have here 
spells it out very, very clearly what your problems are.
    And I would tell you that every banker who read this letter 
stood up and applauded because it is dead on as to what the 
problems are from the regulatory point of view. There are two 
primary hindrances that are affecting what banks can do in 
lending. One is the higher capital ratios. They have 
arbitrarily and unofficially raised the capital ratios in this 
country in community banks to 12 percent; it used to be 8 
percent and a 10 percent minimum. With these excessive ratios, 
we are not able to lend. It hampers the ability of us to loan.
    Second, they have decided that reserves need to be raised 
to excessive levels, ratios that are therefore taking capital 
out of the ability to lend. They are also asking us to write 
off credit, they are making us take impairments that are 
excessive and basically reducing portfolios is a real result of 
that. I have had to shrink my bank, even though I am well 
capitalized. I have shrunk my bank on the loan side. And we are 
working diligently to get our capital ratios which are very 
well capitalized by all regulatory standards. We are well 
reserved by all standards and we are taking those up. Some 
comments that I have had in my recent examination from the 
examiners are TARP funds are used for the purposes of 
increasing capital and increasing loan loss reserve.
    That is not the reason that TARP funds were ever created. 
They were there for lending. And we did loan. We created almost 
$20 million in new credit. And we were criticized by the 
regulators for growing our institution. We were criticized for 
having a concentration of owner-occupied credit, commercial 
credit. We were criticized for that. We were also criticized 
for having troubled debt restructured loans. Those loans, TDRs 
as they are referred to, are how we are helping our customers 
continue to operate and keep people employed.
    Some of the concerns I have are that lending has ceased and 
that no jobs are going to be created right now. Our economy is 
struggling and I will tell you my community is struggling as 
well. My concerns are also that if we continue to run again 
into the commercial real estate problems, we are going to have 
a second dip in the economy. I will tell you that the 
regulators have a lot of control at this point with community 
banks in determining where the economy will go. In conclusion, 
I am a community contractor. I build communities and that helps 
build our country.
    [The prepared statement of Mr. Bridgeman can be found on 
page 129 of the appendix.]
    Mr. Minnick. Thank you very much.
    Mr. Bartlett, do you want to introduce the next witness?
    Mr. Bartlett. It is my honor and privilege to introduce our 
third witness, Mr. William B. Grant. He is from Garrett County, 
Maryland. If you rolled the mountains flat in Garrett County, 
it would be the biggest county I have the honor of representing 
and it has the smallest population. So you know that Garrett 
County is a rural county, and Mr. Grant really understands 
community banks. We are glad you made it here, sir. Your county 
has had 20 feet of snow. The snow in his yard is above his 
waist and he is pretty tall. And they are currently in the 
midst of another 2-foot snowstorm. We are glad you made it out. 
Thank you for coming.

 STATEMENT OF WILLIAM B. GRANT, CHAIRMAN, CEO, AND PRESIDENT, 
 FIRST UNITED BANK & TRUST, ON BEHALF OF THE AMERICAN BANKERS 
                       ASSOCIATION (ABA)

    Mr. Grant. Thank you very much, Congressman Bartlett. It is 
a real pleasure to be here. Congressman Minnick, Chairman 
Frank, Chairwoman Velazquez, Ranking Members Bachus and Graves, 
and members of the committees, as Congressman Bartlett noted, 
my name is Bill Grant, and I am chairman and CEO of First 
United Bank & Trust. My bank is a 109-year-old community bank 
located in the Appalachian Mountains serving 8 counties in 
Maryland and 4 counties in West Virginia.
    This recession is one of the worst we have ever faced. 
While the statisticians will say that the recession has ended, 
that is of little comfort to our region and elsewhere in the 
United States, which still suffers from high levels of 
unemployment and business failures. The impact of the downturn 
is being felt by all businesses, banks included. The cumulative 
impact of 8 straight quarters of job losses over 8 million jobs 
nationwide since the recession began is placing an enormous 
financial stress on many individuals and many businesses. This 
has caused business confidence to drop and loan demand to fall. 
Many businesses either do not want to take on additional debt 
or are not in a position to do so, given the falloff of 
customer business
    There are, however, some positive signs. We have heard from 
bankers that small businesses are now returning to test the 
market for loans. It will, of course, take time for this 
interest to be translated into new loans. Previous recessions 
have shown it takes generally 13 months for credit to return to 
prerecession levels. Banks have many pressures to face in the 
meantime.
    The commercial real estate market will pose a particularly 
difficult problem for the banking industry this year. The CRE 
market has suffered after the collapse of the secondary market 
for commercial mortgage-backed securities, and because of the 
economic slowdown, that has caused office and retail vacancies 
to rise dramatically. This has made CRE takeout financing very 
scarce and leaves banks with loans that are stressed. 
Regulators will continue to be nervous about the trends in CRE 
lending and will continue to be highly critical of back CRE 
portfolios.
    We have heard anecdotes from our members about examiners 
who take inappropriately conservative approaches in their 
analysis of asset quality and who are consistently requiring 
downgrades of loans whenever there is any doubt about the 
loan's condition. This is especially true of CRE loans. 
Examiners need to understand that not all concentrations in CRE 
loans are equal and that setting arbitrary limits on CRE 
concentrations has the effect of cutting off credit to 
creditworthy borrowers exactly at the time this Congress is 
trying to open up more credit.
    The American Bankers Association appreciates the initiative 
of President Obama, which he outlined in his State of the Union 
address, which would provide additional capital to small banks 
who volunteer to use it to increase small business lending. A 
key factor to this proposal is removing it from the rules and 
regulations of the TARP stigma that we have talked about. As 
this program is developed, ABA recommends that Congress and the 
Administration create criteria that will allow all viable 
community banks to participate. Further, we propose that 
Treasury offer assistance to those banks that did not qualify 
for the Capital Purchase Program fund, but that can demand the 
ability to operate safely and soundly and survive if given a 
chance with this necessary capital. The focus should be on 
whether the bank is viable in an investment basis, otherwise 
Congress will miss the opportunity to help the customers and 
communities of many banks across this country.
    We also appreciate the work this Congress has done to 
increase the guarantee of the SBA's 7(a) loan program. 
Subsequently, the SBA expanded eligibility to small businesses 
by applying the broader standards used currently in the 504 
program. These very positive changes mean that an additional 
70,000 businesses will be eligible to participate in the 7(a) 
program. The success of small businesses in local economies 
depends in large part on the success of the community banks. We 
must work together to get through these difficult times. And I 
would be happy to answer any questions you might have. Thank 
you very much.
    [The prepared statement of Mr. Grant can be found on page 
206 of the appendix.]
    Mr. Minnick. Thank you very much, Mr. Grant.
    Mr. Covey?

   STATEMENT OF RONALD COVEY, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, ST. MARYS BANK CREDIT UNION, MANCHESTER, NEW 
 HAMPSHIRE, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION 
                             (CUNA)

    Mr. Covey. Mr. Chairman, members of the committees, thank 
you. My name is Ronald Covey, and I am president and CEO of St. 
Mary's Bank Credit Union in Manchester, New Hampshire. I am 
testifying on behalf of CUNA. St. Mary's Bank Credit Union is a 
member-owned, not-for-profit financial cooperative and was the 
first credit union established in the United States. We are 
very, very proud of our heritage. For just over a century, we 
have been helping New Hampshire residents with a full range of 
affordable financial services. The idea behind the credit 
unions is very simple: People pool their savings and make loans 
to neighbors and co-workers in order to help each other achieve 
a better standard of living. That is why we help out small 
business owners.
    Our credit union involvement in small business lending 
dates back to the first days of our movement. It is in the 
credit union's DNA. St. Mary's has a track record of granting 
member business loans that dates back to our early years. We 
provide business loans for working capital, inventory, accounts 
receivable, equipment loans, seasonal loans, commercial real 
estate loans, and energy loans. We are an approved SBA lender 
and active in all their programs. We also use several State 
programs through the business finance authority in the State of 
New Hampshire. The average business loan size at our credit 
union is under $200,000. We have 960 business loans totaling 
$75 million and 2,200 business members.
    Our potential to make more small business loans is much, 
much greater. Business loan demand does exist, but credit 
unions are subject to a statutory cap on business lending. Our 
cap at St. Mary's is $85 million. Currently, we have a business 
pipeline and a new business loan request of about $15 million 
that if approved we would exceed our cap by $5 million. Let me 
emphasize that. I do not see a scarcity of creditworthy 
borrowers. I have the funds to lend and nearly $5 million of 
loan requests that may go unfilled because of an arbitrary cap 
enacted 12 years ago without any economic or safety and 
soundness rationale. Given the demand we see, it is difficult 
to understand why we should not be able to put more money back 
into the community into the hands of hard working business 
owners so they can employ more people and create more 
opportunities.
    There are several hundred letters here that I have from 
small businesses across the country who have received loans 
from credit unions, many after having been rejected by banks, 
big banks and community banks. These members have experienced 
firsthand the value in credit unions providing business loans. 
Restricting our business lending does a great disservice to 
business owners everywhere and stymies job growth.
    Some have suggested that an increase in credit union 
business lending could increase the risk of the National Credit 
Union Share Insurance Fund. However, the facts are otherwise. 
First, our business loan loss rate is just one-fifth that of 
loss rates at banks and lower even still than our own losses in 
residential mortgages and consumer loans. Second, increase in 
the business lending cap gives well capitalized credit unions a 
way to further diversify their portfolio, ultimately lowering 
the overall risk.
    Third, the NCUA has full authority to supervise credit 
union business lending as the NCUA chairman recently emphasized 
in a letter to the Treasury Secretary. And from my own 
experience, the NCUA and State examiners thoroughly review my 
business loan portfolio annually. For us, increased business 
lending would be a very, very low risk. The President has 
proposed giving community banks access to $30 billion in TARP 
funds to encourage additional lending to small businesses. 
Credit unions have not sought inclusion in this program. That 
is because the chief impediment to credit unions increasing 
availability of small business credit is not the lack of 
capital. The chief impediment is a statutory cap on business 
lending. There is no economic or safety and soundness rationale 
for the cap when it was enacted and there is none that exists 
today.
    The small businesses need credit unions today. Banks that 
have been serving them in some cases for years are pulling back 
access to credit. This is leaving many creditworthy business 
owners high and dry, unable to get funds they need to operate 
and expand. Representatives Kanjorski and Royce have introduced 
legislation that would increase the credit union member 
business lending cap from 12.25 percent to 25 percent of 
assets. This legislation would add an additional $100 million 
of business lending capacity to my credit union. Nationally, we 
estimate that credit unions could lend an additional $10 
billion to small businesses in the first year of enactment and 
help them create over 100,000 new jobs. H.R. 3380 is a smart 
bill that will help small businesses and support communities 
and I encourage Congress to enact this legislation as soon as 
possible. Mr. Chairman, I thank you for being here and I look 
forward to questions.
    [The prepared statement of Mr. Covey can be found on page 
137 of the appendix.]
    Mr. Minnick. Thank you, Mr. Covey.
    Mr. Wieczorek?

  STATEMENT OF RICK WIECZOREK, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, MID-ATLANTIC FEDERAL CREDIT UNION, ON BEHALF OF THE 
     NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)

    Mr. Wieczorek. Good afternoon, Chairwoman Velazquez, 
Chairman Frank, Ranking Members Graves and Bachus, and members 
of the committees. My name is Rick Wieczorek, and I am 
testifying today on behalf of the National Association of 
Federal Credit Unions. I serve as the president and CEO of Mid-
Atlantic Federal Credit Union headquartered in Germantown, 
Maryland. NAFCU and the entire credit union community 
appreciate the opportunity to participate in this discussion 
regarding the condition of small business and commercial real 
estate lending in local markets. At Mid-Atlantic, we are proud 
of our track record in helping our members and their small 
businesses. We have been an SBA-approved lender since 2004 and 
just last year became an SBA express lender.
    We currently have closed or have pending 12 SBA loans that 
total approximately $8 million. Mid-Atlantic has just over $28 
million in member business loans, putting us at or very near 
the credit union member business lending cap. We believe that 
the success of our member business lending program is because 
of the expertise we have on staff at our credit union. Our top 
business lending personnel have over 85 years of combined SBA 
business and commercial loan experience, including receiving 
awards from the SBA. Credit unions believe that we can play an 
important role in the economic recovery. Credit unions have 
fared well in the current economic environment and as a result 
many have capital available. A number of small businesses who 
have lost lines of credit from other lenders are turning to 
credit unions for the capital that they need. With this in 
mind, NAFCU strongly supports the passage of H.R. 3380, the 
Promoting Lending to America's Small Businesses Act of 2009. 
This bill would raise the member business lending cap to 25 
percent of assets while also allowing credit unions to supply 
the much needed capital to underserved areas. The legislation 
would also change the definition of a member business loan from 
$50,000 to $250,000. This is a significant step for as this 
panel knows, one of the biggest declines in lending has been 
for loans under $250,000. Credit unions have been making 
business loans for decades.
    However, the Credit Union Membership Access Act established 
a statutory cap for the first time in 1998. The same bill also 
directed the Treasury Department to study the need for such a 
cap and in 2001, the Treasury Department released its study in 
which it included credit unions business lending currently has 
no effect on the viability and profitability of other insured 
depository institutions. The National Credit Union 
Administration has a strong track record for overseeing credit 
union business lending. Just 2 days ago, NCUA chairman Debbie 
Matz wrote Treasury Secretary Geithner to assure him that if 
the arbitrary cap was modified, NCUA would promptly revise 
their regulations to ensure that additional capacity in the 
credit union system would not result in unintended safety and 
soundness concerns.
    Finally, while some have falsely tried to tie the arbitrary 
member business lending cap to the credit union exemption, I 
would point out that credit unions were tax exempt for nearly 
80 years before any cap was put in place. So there is no 
correlation. Additionally, we also support the continuation of 
a 90 percent guarantee in fee waiver on SBA loans through at 
least the end of 2010. While some have proposed raising the 
maximum SBA 7(a) loan amount from $2 million to $5 million, we 
do not believe that this is a good idea. Maintaining the $2 
million limit allows the SBA to guarantee a greater number of 
loans, thereby helping more lenders, small businesses, and 
communities. As this panel is aware, earlier this month, the 
President proposed creating a new $30 billion with money 
remaining from the TARP to make capital infusions in the 
community banks to encourage loans to small businesses. As a 
program is currently proposed, most credit unions would be 
eligible and statutorily unable to participate in it due to how 
capital is defined in a Federal Credit Union Act.
    We applaud the Administration for its focus on increasing 
job growth and small business lending and we believe that the 
Administration should also find ways to include credit union 
business lending in its efforts. Raising the arbitrary credit 
union member business lending cap would make it easier for 
small businesses to have access to loans. Furthermore, this 
could be done without costing the American taxpayer a time. 
Many credit unions such as mine are approaching the cap and 
have the funds available. In conclusion, the current economic 
crisis is having an impact on America's credit union, but they 
continue--and we continue to provide superior products and 
services to their members. Credit unions stand ready to help 
our Nation's small businesses recover from the current economic 
downturn. Legislation before Congress such as H.R. 3380 and the 
proposals to extend the fee waiver and 90 percent SBA loan 
guarantee would aid credit unions in their efforts to help our 
Nation's small businesses.
    Additionally, as new programs are proposed, we hope they 
are designed to include credit unions. I thank you for the 
opportunity to appear before you today on behalf of NAFCU, and 
I welcome any questions that you may have.
    [The prepared statement of Mr. Wieczorek can be found on 
page 312 of the appendix.]
    Mr. Minnick. We thank you, Mr. Wieczorek.
    Ms. Nash?

 STATEMENT OF CATHLEEN H. NASH, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, CITIZENS REPUBLIC BANCORP, MICHIGAN, ON BEHALF OF THE 
               CONSUMER BANKERS ASSOCIATION (CBA)

    Ms. Nash. Good afternoon, members of the committees. My 
name is Cathy Nash and I am president and CEO of Citizens 
Republic Bancorp. We are are a $12 billion institution 
headquartered in Michigan and serving the upper Midwest. In 
2009, we approved $2.9 billion of loans, and we are very proud 
to have been named the number one SBA lender in Michigan for 2 
years in a row. I am also a member of the board of directors of 
the Consumer Bankers Association, and this association, for 
more than 90 years, has been the recognized voice on retail 
banking issues in our industry, including small business 
lending.
    Our members collectively hold two-thirds of the industry's 
total assets. I am pleased to have the opportunity to appear 
before you today to discuss the issues surrounding small 
business and commercial real estate lending. As we seek to 
continue to move our economy and indeed our country back on the 
path of stability and prudent growth. It is important to seek 
input and engage in vigorous debate with focus on those who are 
most able to influence that path.
    In my positions with Citizens Republic, as well as with the 
CBA, I see the challenges we face in serving our clients, 
protecting our depositors and navigating through the current 
economic climate. Those problems have been magnified. As a 
bank, we ask how much capital is enough. Some would say in view 
of the crisis we have experienced that a bank can never have 
too much capital. With an uncertain view of the near future, 
regulators must focus on protecting banks' depositors. The best 
way to do that is to require banks to hold more capital. Every 
dollar of capital a bank requires to cover a potential bad loan 
is a dollar that cannot be lent to a business owner. It is a 
dollar that cannot help a community recover and grow jobs. It 
is exactly the holding of more capital that adds to this 
cycle's length and severity.
    By holding capital and therefore making fewer loans or 
actively shrinking a bank's balance sheet to preserve even more 
capital, businesses cannot grow and hire because their capital 
access has been restricted. As banks have navigated through 
this cycle, it is clear that some of the practices of the last 
decade must be curtailed and this impacts those businesses 
seeking to borrow today. In the past, banks competed vigorously 
for new loan clients. While most banks have strong credit 
criteria and policies, too often those were overridden to win a 
deal.
    In today's environment, we have not loosened nor tightened 
our standards. We are holding every loan opportunity against 
those standards. This may feel to a borrower as if a bank is 
getting more restrictive when in fact we are following long-
established policies. In our markets, we saw some banks close 
credit lines via letters that clients brought into our 
branches. We have seen competitors exit industry segments and 
geographies.
    For business clients, we look at each borrower discreetly. 
Based on their plans and forecasts, we have tried to size our 
lines of credits based on their business needs. For example, 
for a long standing client with a $2 million line of credit 
that they have never used, we might work with that client to 
reduce that line of credit to a more reasonable level based on 
their business plans and forecasts. To some clients this feels 
like a significant reduction, but our goal continues to be that 
we meet our clients' needs and manage our capital requirements.
    Commercial real estate lending is driven by lower occupancy 
and lower rents paid by tenants. Or on the building side, 
slower sales that result in lower prices. These factors in turn 
drive the appraisal of the properties and our ability to lend 
to the level that we originally thought we could. For example, 
we have a client who wants to build an office building and it 
is a $10 million project. Presales did not come through and 
those that did were at lower rent rates. Our clients believe 
the market will come back but as yet are unwilling to put in 
additional money to maintain the loan-to-value that we look for 
in our credit policy.
    And this is a typical example for us. Recent changes in 
proposal have been made--should have a positive impact and we 
support the SBA proposals both in the express loans, the 504 
program and the 7(a) loans because we believe they will help 
our industry. The ARC loan program was well intended, but it 
may not be enough to get bankers to use it, because it 
essentially asks bankers to certify that borrowers are in 
financial hardship at the same time they need to certify that 
they are able to pay back the debt and most bankers won't be 
willing to do that.
    In your invitation, you asked how banks can, as a practical 
matter, best fulfill their fundamental role as intermediaries 
in the credit market consistent with prudent lending standards 
and strong capital requirements. In a period of extreme 
financial economic stress, this is indeed the key question, 
good borrowers who have the willingness and capacity to repay 
will always find a loan. Those borrowers with weaker financials 
will find it more difficult in this environment to obtain 
financing. The fundamental capacity and willingness to repay 
must be established once again as a hallmark of lending 
activity. This will happen, one borrower at a time, by bankers 
who know and understand them. We thank you as you continue to 
look for ways to improve small business and commercial real 
estate lending and the CBA is committed to working with members 
of both committees to meet that goal.
    [The prepared statement of Ms. Nash can be found on page 
256 of the appendix.]
    Mr. Minnick. Thank you very much.
    Mr. Hoyt?

STATEMENT OF DAVID HOYT, HEAD OF WHOLESALE BANKING, WELLS FARGO 
                           & COMPANY

    Mr. Hoyt. Madam Chairwoman, Mr. Chairman, Ranking 
Republican Members, and members of the committees, I am David 
Hoyt, head of wholesale banking at Wells Fargo & Company. Thank 
you for the opportunity to be here today to discuss lending and 
credit, topics that are critical to business owners, or 
business at Wells Fargo and economic recovery. Wells Fargo is 
the number one small business, middle market, and commercial 
real estate lender in America serving more than 2 million small 
businesses, and 15,000 middle market basis nationwide. We bank 
approximately 1 out of every 10 small businesses and 1 out of 
every 3 middle market basis in this country.
    In many cases, we have had banking relationships with 
customers that have spanned multiple economic cycles. We 
proactively work with borrowers who may be experiencing 
difficulties and encourage them to have conversations with us 
as early as possible so that we are able to explore 
alternatives.
    Many business owners in America are hurting. At Wells 
Fargo, we are doing our part to get businesses back on their 
feet. In 2009, we extended over $40 billion of new credit to 
our business borrowers. We continue to read media stories and 
hear directly from business customers who are concerned about 
being able to obtain the credit they need to run their 
businesses. We also see that the demand for business credit has 
remained soft through the fourth quarter of 2009.
    In our opinion, the reality of weaker loan demand as well 
as the perception of a lack of availability of credit is rooted 
in several factors: First, the economy has taken its toll on 
the credit and financial capacity of many businesses reducing 
the cash flow and the capacity to repay debt. Second, asset 
values have declined from much higher levels which existed at 
the top of the economic cycle; businesses that relied on the 
value of these assets to borrow can't borrow as much against 
them today. Third, given the uncertainty of the economic 
environment, we see our borrowers being more conservative, 
stocking less inventory, and making few capital investments, 
which reduces the need to borrow.
    And finally, loan structures and terms are more 
conservative now than at the peak of the economic cycle, and we 
believe rightfully so. The increasingly aggressive extensions 
of businesses credit were partially responsible for the current 
financial crisis. Borrowers that access credit on those terms 
find the terms of credit extended today to be more restrictive.
    Turning to the commercial real estate market, asset values 
have decreased significantly, leaving many borrowers and 
lenders in a position where the loans exceed the value of the 
property securing them. During the last decade, commercial real 
estate saw a substantial amount of liquidity enter the market, 
reaching an all-time high in 2007. As a result, valuations 
increased. As the economy slowed, returns reverted to normal 
levels. Adding to the problem, weaker tenant demand and tenant 
failures are resulting in declines in cash flow generated by 
individual properties. The combination of these issues has 
resulted in declining property values, in many cases 40 to 45 
percent. Our recent experience is that there is substantial 
liquidity available in the market to deal with these issues on 
a macro level, although these resolutions are often 
economically painful to individual owners and lenders.
    In our opinion, this is not a short-term problem and our 
expectation is it will take some time for the problem of the 
overvaluation of commercial real estate to work its way through 
the system. We want to be part of the solution, so we are 
hiring bankers, providing educational tools to customers, doing 
outreach to women and diverse business owners, and extending 
SBA loans.
    When lending to small businesses, we are taking the time to 
reevaluate the loans we declined. We take a second look at 
declined loans because we want to make every good loan we can. 
There are positive signs in the market. While loan demand is 
soft, it has improved over the last several months. Businesses 
applying for credit are stronger, competition for well 
underwritten loan opportunities is increased, and liquidities 
in the market have also improved.
    As we all travel along the road to economic recovery, Wells 
Fargo maintains our commitment to help businesses owners, large 
and small alike, succeed financially. Madam Chairwoman, Mr. 
Chairman, and members of the committee, thank you, and I will 
be happy to answer any questions.
    [The prepared statement of Mr. Hoyt can be found on page 
238 of the appendix.]
    Mr. Minnick. Thank you, Mr. Hoyt.
    We will now hear from Mr. McCusker.

  STATEMENT OF CHARLES McCUSKER, CO-MANAGING PARTNER, PATRIOT 
               CAPITAL, L.P., ON BEHALF OF NASBIC

    Mr. McCusker. Chairwoman Velazquez, Chairman Frank, Ranking 
Member Graves, Ranking Member Bachus, and members of the Small 
Business and Financial Services Committees, thank you for the 
opportunity to testify today on behalf of the National 
Association of Small Business Investment Companies regarding 
the state of small business lending.
    My name is Charles McCusker, and I am a founder and 
managing partner of the Patriot Capital family of investment 
funds. Patriot Capital holds three small business investment 
company licenses. Non-bank lenders such as small business 
investment companies, or SBICs are an important and often 
overlooked part of the small business equation. Patriot 
Capital, for example, has provided investment capital, long-
term investment capital to 64 businesses, small businesses. And 
the Patriot Capital portfolio companies employ over 10,000 
people in 23 States. Seventeen of these investments have been 
made since mid-2008. Six thousand of the 10,000 people we 
employ were--jobs were created as a direct result of our 
investments.
    SBIC is a very small, highly regulated, private investment 
fund that invests exclusively in domestic small businesses 
primarily through long-term capital investments. Under the 
program SBIC funds raised private capital from institution and 
individual investors, and upon licensure from SBA can access 
low-cost leverage to multiply the amount of capital available 
for small business investment. The program is getting capital 
to the market.
    When the Treasury and the Small Business Administration 
held a summit on small business financing in November, the only 
small business participant at the small business forum who said 
he had adequate access to capital was a small business 
investment company backed company.
    At Patriot Capital, for example, we have a recycling 
company in the Midwest that has struggled, but survived the 
economic downturn, met every expectation laid out to the bank, 
and yet the bank continues to reduce the amount of credit 
available to this company. And while debt capital would be 
available if the company were a larger scale, small businesses 
like this recycler are having serious problems accessing 
capital. Patriot Capital provided capital when the bank would 
not.
    SBICs can and do fill the capital void in the marketplace, 
function in the symbiotic relationship with the banks. Banks 
are not competitors but are major investors in our funds and 
are sources of daily credit for the businesses in which we 
invest. SBICs fill an important and unique role in providing 
capital to small businesses. SBICs generally provide long-term 
non collateralized investment capital in the 500,000 to $5 
million range, a range in which banks often are not comfortable 
lending particularly smaller community banks.
    SBICs also invests in small businesses which, despite being 
solid companies, have collateral considered too risky for banks 
to consider worthy of credit.
    In addition, in Fiscal Year 2009, SBICs made over 20 
percent of their investments in low- and moderate-income areas, 
and over 90 percent of investments held by SBICs were in 
smaller enterprises. Furthermore, related banks, banks are 
often more comfortable lending to small businesses with SBIC's 
as long-term capital investors.
    Patriot Capital has businesses in multiple industries and 
very few are immune to the current lack of liquidity in the 
marketplace. Several very solid, well-managed companies in our 
portfolio from the Midwest paper recycler I mentioned to a 
southeastern trucking company, to a woman-owned and managed 
East Coast telecom manufacturer, to a rural provider of natural 
gas would have been put out of business and liquidated, put out 
of business and liquidated by their banks if not for the banks 
and the FDIC program and the capital to support these 
businesses.
    In approximate numbers, these four companies alone 
represent over $100 million in revenue and 600 American jobs. 
These may not seem like large numbers, but they are huge 
numbers to their employees and their hometowns. Also when you 
consider that these four companies represent only 4 percent of 
our port and Patriot Capital while collectively one of the 
largest SBICs is only 2 percent of program, you have to 
multiply those numbers by a thousand to understand the impact. 
600,000 American jobs.
    Stories like this can be told by every one of the SBICs in 
the marketplace. It is definitely a fact that it is faster and 
easier to save and create jobs in a solid small business than 
to create them from scratch. Recent actions by--and proposed 
actions by banking regulators and the Administration are 
cutting off capital to SBICs and small businesses.
    The day after the President proposed the Volcker Rule, many 
banks suspended investments in SBIC formation, even before 
Gramm-Leach-Bliley banks were allowed to invest in SBICs. A 
clear message needed to be sent to banks that they are not only 
allowed but encouraged to invest in SBICs. Also, recently 
inexplicably banking regulators, particularly the OCC have 
inadvertently cut off new investments in SBICs by removing 
certainty that the banks will receive CRA credits for investing 
in small business investment companies. There has been no legal 
or regulatory change, but the actions of a few examiners are 
cutting off capital to small businesses. CRA credit for SBIC 
investments needs to be explicitly memorialized.
    On the incentive side, the $30 million of TARP capital if 
just 3 percent of that were allocated to community banks to 
invest directly in SBICs that capital can be leveraged by the 
SBA and, in turn, invested in companies for providing long-term 
investment capital.
    Finally we do encourage--
    Mr. Minnick. The gentleman's time has expired.
    Mr. McCusker. Thank you for the opportunity to testify 
today, and I welcome any questions.
    [The prepared statement of Mr. McCusker can be found on 
page 246 of the appendix.]
    Mr. Minnick. Ms. Robertson?

STATEMENT OF SALLY ROBERTSON, PRESIDENT & CEO, BUSINESS FINANCE 
GROUP INC., FAIRFAX COUNTY, VIRGINIA, ON BEHALF OF THE NATIONAL 
          ASSOCIATION OF DEVELOPMENT COMPANIES (NADCO)

    Ms. Robertson. Good afternoon. My name is Sally Robertson, 
and I am a board member of the National Association of 
Development Companies. Additionally, I am the president of 
Business Finance Group, it is a Virginia-based, nonprofit 
provider of SBA 504 loans--504 is a public private partnership 
that leverages 40 percent Federal loan guarantees to induce 
commercial lenders to provide 50 percent financing for long-
term commercial real estate projects. Those projects are job 
creators and are done at no cost to the Federal Government.
    I am pleased to provide comments this afternoon on the 
state of commercial real estate lending and the need to improve 
access to capital for small businesses. NADCO applauds both 
committees for examining CRA issues before the pending crisis 
overtakes us.
    Independent studies by Deutsche Bank, Credit Suisse, and 
the Congressional Oversight Panel reveal that at least 1.4 
trillion NCRE will mature in the next 5 years. Of this, about 
750 billion is held by small and medium community banks, 
representing as much as 300 percent of their main capital and 
reserves.
    The recession and pressures from bank regulators have 
forced smaller banks to focus on rebuilding capital rather than 
on making small business loans. The loss of the CMBS market for 
the sale of CRE loans has added to the liquidity issues for 
those banks. If steps are not taken soon, the rate of bank 
failures is predicted to increase as the crisis worsens. 
Without capital even successful businesses cannot grow. Without 
new sources of long-term capital, businesses that cannot 
refinance their commercial homes will risk shutting their 
doors, adding their employees to the ranks of the unemployed.
    One of the larger loans we have done is for a second 
generation commercial laundry facility. The project financed 
equipment while the borrower financed the building through a 
conduit as the equipment loan maxed out their SBA eligibility. 
The conduit will mature shortly, and if a renewal is not 
available conventionally, our business may fail since the 
equipment cannot be readily moved causing the loss of 131 jobs.
    Through two rounds of stimulus, Congress and the 
Administration have worked hard to put more fixed asset 
financing and working capital into the hands of small 
businesses. A 50 percent increase in 504 volume through January 
31st of this fiscal year over last fiscal year speaks to its 
success, but the current stimulus package is ending. An 
extension of the stimulus provisions is critical to access to 
capital for small business and has been supported by AD 
organizations in a letter to Congress, but we must all do more 
to expand capital sources and induce community banks to get 
back in the lending business.
    We believe that many small businesses either need access to 
larger guaranteed amounts or have already used up their 
allocated maximum for 504 under current law. The Credit Suisse 
study cited above indicates that the majority of CMBS loans 
coming due are between $2 million and $5 million, demonstrating 
a disproportionate impact on small business. And the current 
loan size limits are frequently too low to assist many 
successful small businesses that can expend and create the most 
new jobs.
    We recognize the House Small Business Committee for passing 
H.R. 3854 and the SBA Programs Reauthorization bill with 
numerous beneficial program changes. Foremost among these 
changes is the proposal to increase the maximum 504 loan size 
from $1.5 million to $3 million and the limit for critical 
public policy loan would increase from $2 million to $4 
million. However, the expanding CRE financial crisis has 
increased the demands for capital beyond the House passed new 
504 loan limits.
    As President Obama has advocated, and small business and 
lending associations have endorsed, we support the urgent need 
to provide even greater levels of capital access to healthy 
growing small businesses.
    As stated in H.R. 4302, we urge support for a total credit 
limit tomorrow a single borrower $5 million for regular 504 
projects and public policy projects at a $5.5 million limit for 
manufacturers and energy efficient projects. Our industry also 
strongly recommends that the committee support H.R. 4302 for 
the proposed temporary expansion of 504 refinancing provisions.
    There are three distinct needs each of which affects of 
jobs outlook. Maturing debt, small businesses even those who 
can make their payments may be unable to renew their loans for 
their business real estate which could lead to foreclosure. 
Losing 504 to attract a commercial lender to the refinancing 
project could save those jobs.
    High cost debt. Many small businesses have older loans done 
when rates were high. By refinancing these loans at today's 
lower interest rates, the savings on debt cost can be used to 
expand inventories and hire more workers.
    Access locked up real estate equity. In spite of the 
decline in real estate values, many small firms have 
significant equity in their business real estate. Refinancing 
those existing mortgages while providing them with more 
operating cash will enable them to reinvest it in business 
operations, expand and create jobs for their communities. 
Again, thank you for the opportunity, and I look forward to 
your questions.
    [The prepared statement of Ms. Robertson can be found on 
page 264 of the appendix.]
    Mr. Minnick. Thank you, Ms. Robertson.
    I would like to thank all of you on the panel for your 
thoughtful comments. The favor we have done all of you by 
asking you to come late Friday afternoon is that our questions 
will be mercifully brief. I would like to start by turning the 
committee over to the ranking member, Mr. Bachus, for 5 
minutes.
    Mr. Bachus. Thank you. Let me ask, I guess particularly the 
bankers on the panel, have the recent policy statements and the 
guidelines that have been issued jointly by the Federal 
regulators provided you any clarity or maneuverability in 
making loans?
    Mr. Andrews. I will address that, Mr. Bachus. I believe 
there is some clarity in those guidelines. But at the same 
time, I do have a lot of peers that I speak with and that 
clarity is not fully disseminated yet to the field examiners. 
And so within those guidelines, there also remains a fair 
amount of examiner discretion and so that is a problem from 
time to time that we have not seen the problem mitigated and we 
still see a severe regulatory environment. There is some 
clarity in there in the spirit of that, but the implementation 
is still lacking a little bit.
    Mr. Bridgeman. Congressman Bachus, I would say that having 
recently experienced an examination in the month of December, 
there is a disconnect between what is being put out from 
Washington in the form of the guidances and what is actually 
being delivered to the community bankers at the grassroots 
level. There is clearly some subjectivity that seems to be 
going to the excessive overzealous side.
    Mr. Bachus. Mr. Grant?
    Mr. Grant. I would just like to echo what Mr. Bridgeman and 
Mr. Andrews said. There still is that message out in the field 
that hasn't gotten through yet. We heard some comments about 
the examiners today that certain things that just don't 
generally apply in practice once you get out in the field. So I 
would just echo what has just been said.
    Mr. Bachus. Mr. Hoyt?
    Mr. Hoyt. Yes, we would view that as being--the guidance as 
being a reiteration of some long-standing guidance that the OCC 
has had. And I would take a bit of different of a different 
view, I think our examinations have been consistent with the 
guidance that has been provided.
    Mr. Bachus. There does seem sort of a disconnect between 
your experiences, that the lending needs of small businesses 
are being meet, is that what I heard you say?
    Mr. Hoyt. I can't speak for the needs of all small 
businesses, but I can certainly tell you that it is something 
that we are trying very hard to meet. We are hiring more 
bankers, we are making more loans and we are clear in the fact 
we want to do every good loan we possibly can.
    Mr. Bachus. Do you think there is an unmet need among 
credit or the small businesses for loans or for refinancing or 
among developers, say, for refinancing? Do you think--I mean, 
you have heard what some of your fellow panelists have said?
    Mr. Hoyt. We have seen, I would say, an increased 
competition for lending particularly over the last few months. 
And in most cases, we are seeing competition between multiple 
financial services providers competing for individual loan 
opportunities.
    Mr. Bachus. As opposed to--are the loans available or are 
they just at a higher rate than small businesses want to pay?
    Mr. Hoyt. I would say that the loan availability harkens 
back to a number of the issues that I mentioned in my testimony 
which relates to the fact that I think small businesses are 
under more stress. I think that in many cases, borrowers, or 
most cases, borrowers aren't able to access credit on the same 
terms that they were able to access credit on 2006, 2007 
creating the perception of a change. So I believe the credit is 
available.
    Again, we are trying very hard to find all the 
opportunities and who want to do more in the small business 
area, but there clearly is an availability issue relating I 
believe to the creditworthiness in some cases, and rates and 
terms available to small businesses owners. And many small 
business owners are under a lot of economic stress.
    Mr. Bachus. Let me ask you this, and I am particularly 
interested in, say, a bank the size of Wells, and this is 
anecdotal evidence, but from time to time we do hear small 
businesses, and when I say ``small,'' I am talking about those 
employing maybe 100 employees, saying that some of the banks, 
the larger national banks are not that interested in making 
small loans. Would maybe any of the panelists like to comment 
on--Mr. Hoyt, is that--
    Mr. Hoyt. I don't think anything could be further from the 
truth for our institution. As I mentioned, we now bank about 1 
out of every 10 small businesses in the United States. Last 
year, we hired an additional 1,500 bankers to fund small 
business loans, and we intend to hire at least another 700 this 
year. As I mentioned before, we made $40 billion in new loans 
to our business customers last year.
    Mr. Bachus. Are those small businesses?
    Mr. Hoyt. Small business, about $13 billion.
    Mr. Minnick. Thank you, Mr. Hoyt. The gentleman's time has 
expired. I call on Chairwoman Velazquez for 5 minutes.
    Chairwoman Velazquez. Thank you, Mr. Minnick. I would like 
to ask Mr. Andrews, Mr. Bridgeman, and Mr. Grant the following 
questions and I would like yes or no answers.
    If the Treasury's proposed $30 billion small business 
lending fund were enacted today, would you apply for funding?
    Mr. Andrews. Yes.
    Mr. Bridgeman. Yes.
    Mr. Grant. Yes.
    Chairwoman Velazquez. I would like to ask you whether you 
will commit to using the money you receive solely for the 
purpose of small business lending, Mr. Andrews?
    Mr. Andrews. Yes.
    Mr. Bridgeman. Yes.
    Mr. Grant. Yes, we will.
    Chairwoman Velazquez. Will you also be supportive of fees 
or other penalties for banks who take the money and do not use 
it to make small business loans? Mr. Andrews?
    Mr. Andrews. I would be supportive of how Herb Allison 
outlined it in his testimony.
    Chairwoman Velazquez. I am sorry.
    Mr. Andrews. I would be supportive of how Herb Allison 
outlined his testimony with the incentives.
    Chairwoman Velazquez. Is that a ``no?''
    Mr. Andrews. Would you rephrase the question for me?
    Mr. Bridgeman. That would be a no.
    Mr. Grant. No.
    Chairwoman Velazquez. Mr. Wieczorek, there currently are 
some, but let me ask you, you want to do more small business 
lending, both of you, Mr. Covey and Mr. Wieczorek, right?
    Mr. Wieczorek. That is correct.
    Chairwoman Velazquez. What would be your answer if you are 
allowed to receive money from the $30 billion, will you take 
it?
    Mr. Wieczorek. Well, we can't, this is all.
    Chairwoman Velazquez. I know, I know, but let's say you 
can.
    Mr. Bachus. Some of these are sort of theoretical 
questions.
    Mr. Wieczorek. Yes.
    Mr. Covey. No, we would not.
    Chairwoman Velazquez. Mr. Wieczorek, there are currently 
some who are proposing that we increase the maximum size on 
7(a) loans as much as 2\1/2\ times the size to $5 million. Have 
you seen any real demand for loans this large from small 
businesses, or is this something that is more likely to benefit 
large banks?
    Mr. Wieczorek. I have not seen that demand, but I agree 
that it would be more in tune with larger institutions.
    Chairwoman Velazquez. Mr. McCusker, equity capital can be a 
vitally important part of the small business capital structure. 
Do you think that the Administration has missed an important 
part of the solution by focusing only on lending programs?
    Mr. McCusker. Thank you for the question. I believe that 
both equity and long-term investment capital, whether it is in 
the form of equity or long-term debt, is a vital solution to 
the growth of the American economy, absolutely.
    Chairwoman Velazquez. Let me ask you, Mr. McCusker, have 
you seen a demand for loan sizes as much as $5 million?
    Mr. McCusker. We invest in the areas of $500,000 to $5 
million, so we do see a demand for loans in those areas. Mostly 
in longer term investment categories though, either equity or 
unsecured debt. Not so much in terms of short-term capital.
    Chairwoman Velazquez. Do you think the proposal to increase 
the 7(a) loans to $5 million is duplicative of what the SBICs 
already do?
    Mr. McCusker. Well, I am not exactly an expert on what that 
SBA loan program is. But I do know it takes the same amount of 
time and effort to do a $5 million loan as it does a $50,000 
loan. So I am afraid the result may be more money but less 
loans to less small businesses. As I understand it, I am not as 
supportive of it.
    Chairwoman Velazquez. Okay, thank you.
    Mr. Minnick. Mr. Bartlett?
    Mr. Bartlett. Thank you. Increasingly, small businesses 
will be coming to the traditional lenders, the community banks 
and credit unions. If this recession is like past recessions, 
the companies that will lead us out of the recession will be 
small companies. Maybe for the last recession, I think said 
more than 90 percent of all the new jobs were created in the 
companies of 1 to 4 employees, those are really small 
companies. They will be coming to the community banks and 
credit unions. Community banks and credit unions, as far as I 
know, have made few or no subprime loans, they are financially 
sound. You are different than the banks that have made this 
plethora of subprime loans that are in financial difficulty. 
And yet you are burdened by what may be excessive response to 
this crisis with the regulatory changes.
    You are different, why shouldn't you be treated 
differently? If you aren't, I am afraid that this recovery is 
going to be stifled because you will not be able to make the 
loans that you know would be good loans to the people that you 
know could repay them that would create jobs and that would 
bring us out of this recession. If you are different, why 
shouldn't you be treated differently?
    Mr. Andrews. I think we should be treated differently. I 
think that there should be a 2-tier system of sorts that favors 
community banks. I think community banks did not create the 
problems of Wall Street and we would be in favor of regulatory 
relief. And we would be in favor of a change in the attitude as 
far as capital ratios are concerned too.
    Earlier in the panel, we heard a situation where how come 
community banks can't attract capital, it is because the 19th 
largest banks in the world were backstopped by the U.S. 
Government and there is a disparity of ``too-big-to-fail'' out 
there, you create an unlevel playing field and I think that 
needs to be addressed.
    Mr. Grant. I would like to respond also, and say that I 
think in our economy, we need banks of all sizes. In reality, 
an awful lot of the misery that was caused by the recession was 
really from nonregulated financial institutions. And to a great 
extent, regulated financial institutions, regardless of their 
size, really do not contribute significantly to the downturn. 
Having said that, we certainly applaud appropriate financial 
regulations. I don't think that the current regulated 
institutions--be they large banks, small banks or credit 
unions--in my opinion, there is more than adequate regulatory 
supervision of those institutions. We would apply some sort of 
regulatory scheme that is placed on the nonregulated financial 
institutions that really brought about this problem.
    Mr. Bridgeman. I would say that the number one thing that I 
would like to see is consistency in the regulations because 
with the current environment right now we are getting mixed 
signals on capital ratios, reserves, they are inconsistent. 
There is differences in capital ratios even between States what 
are being considered the new thresholds, so to speak, even 
though they are unofficial.
    So there needs to be consistency and there also needs to be 
an understanding that a lot of examining body at this point has 
never been through this kind of downturn. A lot of the bank 
examiners are very young.
    As a matter of fact, I have been a banker in many cases 
longer than some of the bank examiners have been alive. So when 
you take that into consideration there needs to be some common 
sense applied, some reason. I not saying that we have to be 
regulated differently, just fairly.
    Mr. Covey. Congressman, credit unions are being treated 
differently now because we have an artificial cap on how many 
loans we can do as a percentage of our assets. And as we 
approach that cap, we have capital and resources but the cap is 
preventing us from doing more business lending.
    Mr. Wieczorek. I agree that I think we should--we are being 
treated differently and one of the things that I wanted to 
clarify about, a hypothetical question about--
    Mr. Bartlett. To the detriment of the borrower, are you 
not?
    Mr. Wieczorek. I feel it is benefiting the borrower. We are 
out there lending.
    Mr. Bartlett. I said there were caps you were up against 
that prohibited you from making loans you would like to loan.
    Mr. Wieczorek. That is correct, let me say one thing really 
quickly about the hypothetical, though, question about the TARP 
funds, and I just wanted to make sure that my intention there 
was that because we can't raise capital, it would be nice if we 
could get that capital injection. And I think that is how we 
getting treated, that is also preventing us from growing and 
going out and doing what we need to be doing.
    Mr. Minnick. The gentleman's time has expired.
    Mr. Bartlett. Thank you, Mr. Chairman.
    Mr. Minnick. Mr. Luetkemeyer?
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I think all the 
regulators have left, which is disappointing to me from the 
standpoint that all of you sat through their testimony. I think 
it would be important of them to listen to you. It reminds me 
of a headline I saw in The Washington Times today with regards 
to the health care summit, so I will paraphrase. They were 
listening, but they were only listening to themselves. So along 
that line, I am just kind of curious the bank folks I know that 
you have been hammered with an FDIC insurance premium. How 
impactful has that been to your ability to lend?
    Mr. Bridgeman. Well, I will tell you that any time you lose 
earnings, you lose the potential to lend. My FDIC insurance 
premium from 2006 to 2009 at the same level of ratings that we 
had went up 1,205 percent. It went from $36,000 annually to 
$444,000 annually, and that is a significant impact. It 
impacted me in my ability to lend into my community. So that is 
how it affects us.
    Ms. Nash. Yes, from our point of view, we had to cut 
expenses to pay that FDIC premium. It hasn't really impacted 
our lending ability or our willingness to lend, we simply had 
to cut expenses to pay the premium.
    Mr. Andrews?
    Mr. Andrews. We have been able to absorb that, but at the 
same time the industry stands behind the insurance fund and it 
was probably necessary.
    Mr. Luetkemeyer. Mr. Grant?
    Mr. Grant. I would echo similar remarks. I do think the 
FDIC took pains to make sure the impact was spread over a 
number of years. To emphasize what Mr. Andrews said, the FDIC 
fund has always been funded by banks; it has not cost the 
taxpayer any money at all. And so this is the same as property 
and casualty: when the losses go up, the premiums go up. It 
certainly was a tough nut for us, and like Ms. Nash, we have 
had to cut expenses. We just sent a $10 million check off to 
the FDIC at the end of last year. And that hurts your earnings 
a little bit but you carry on from there.
    Mr. Luetkemeyer. Just a little? Okay.
    Mr. Andrews, in reading through your testimony, I notice 
that you had a couple of ideas there about net operating loss, 
carry back and sub-tip duress, income tax cap at 35 percent. 
Would you like to elaborate on that just a little bit of how 
important you think that is to the viability of community banks 
and how it impacts lending?
    Mr. Andrews. Well, I think you find a lot of community 
banks right now in a lost position. So earlier in panel one, we 
actually had a question regarding accounting. And we had net 
loss operating carry backs. If I think we were to extend that, 
it would be very beneficial. Another thing that has come up to 
bite banks has been deferred tax assets where you have a 
difference between accrual accounting on your annual statement 
plus your tax returns. And a lot of those tax deferred assets 
that had built up over the years were being wiped out and that 
is a direct hit to capital.
    But in my written statement yes, we are in favor of 
extending the net loss carry backs, I think that would be very 
beneficial.
    Mr. Luetkemeyer. Can you explain the income rate cap on sub 
S?
    Mr. Andrews. On sub S, sure. On sub S, I think that there 
are a lot of small community banks that are out there that will 
organize themselves as sub S. And you obviously have Tax Code 
issues with the corporations that you heard earlier where you 
had a borrower that was in a loss position. And so we think we 
are to provide relief for these small businesses in the form of 
sub S accounting and tax breaks that that would help stimulate 
and make the franchise more valuable and also lend in the 
community. So we are in favor of some relief on the tax side.
    Mr. Luetkemeyer. Okay, the examiners who were here a while 
ago made comments to the effect they were concerned about or I 
think a discussion held anyway with regards to their--the way 
that they were being advised to do things and I think that one 
of you, a number of you made the comment about the disconnect. 
I was curious about regards to the examiners that you are 
experienced with have experiences with, are they looking--
whenever they review your loan portfolio, are they looking at 
what is going on now, trying to guess what is going to happen 
in the future or are they looking at your loan portfolio now, 
and what the environment is today, and how you need to be 
looking at that and trying to succeed in that environment?
    Mr. Grant. I think it is a combination of both.
    Mr. Luetkemeyer. You don't have a crystal ball, is that 
what you are saying?
    Mr. Grant. And there is an awful lot of that they utilized 
the world, while we want you to stress current situations. So, 
as I think was indicated earlier, you get a situation where 
things may be okay now, but as you go through various stress 
tests, then all of a sudden they deteriorate. And then they 
take the position, well, because of that prospect of 
deterioration we want you to go ahead and classify the asset 
and possibly take charges or allowance for it.
    Mr. Minnick. Thank you, Mr. Grant. The gentleman's time has 
expired.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Minnick. I would like to ask the community bankers here 
a question, and I will start with Mr. Andrews. We had testimony 
in the first panel from at least two of your customers, 
collective customers that the inability of their lenders to 
make loans was not just a function of lack of demand, but was 
very importantly influenced by a combination of procyclical 
regulation by the regulators wanting more than minimum capital 
requirements and reducing their lending based on experience 
that in many cases they had caused, combined with illiquidity 
portfolios, asset portfolios, combined with inadequate capital 
that was caused importantly by appraisals based on distressed 
sale values that had caused loans to be classified and reserves 
to be created that were not necessary based upon any 
intelligent valuation of the assets used as collateral.
    I would like to ask you to what extent is--are those three 
factors influencing your and your members ability to function 
in this difficult environment?
    Mr. Andrews. Well, included in my written and oral 
testimony, I touched on those areas. I do think that we are in 
a tough regulatory environment as I mentioned the roughest we 
have had in over 2 decades. You are seeing loan loss reserves 
increase with dramatic rates. Many of my peers will consider 
them to be excessive levels. You also are seeing capital ratios 
being raised by the examiners in the field.
    In my oral testimony, you heard my leverage ratio went from 
5 percent to 10 percent. That limits our ability to lend, it 
forces us to look at our balance sheet and possibly shrink 
that. You heard in my oral testimony loans of $248 million 
which shrunk to $200 million.
    Mr. Minnick. And what is happening to you is typical of 
what is happening to all your members and the community 
bankers?
    Mr. Andrews. I think that it is typical of what happens in 
various regions of the country, the west coast, Oregon, 
Washington, Florida. Certainly, there are States that are 
suffering more than others. All my peers have certainly 
happening with that they are crying the blues, it is difficult.
    Mr. Bridgeman. I would mirror Mr. Andrews in a lot of his 
comments. I would tell you that the regulatory environment is 
significantly impacting our ability to lend. And I think that 
some of the write downs that are being placed on banks for 
because of the appraisals dropping, the real estate is going 
down significantly. And because of that we are taking more 
money into reserves. We have very, very strong reserve at our 
bank along with very good capital ratios, but to keep those and 
maintain those and work through the problem credit is going to 
impactability of us to borrow--excuse me, to lend to qualified 
borrowers.
    Mr. Minnick. So if the bank examiners were to value assets 
at approximating fully functioning market values and were not 
to insist on excess capital over and above the regulatory 
requirements you would be making more loans?
    Mr. Bridgeman. I would be able to make more loans, yes, 
sir.
    Mr. Minnick. Thank you. I would like to ask you the same 
question, Mr. Grant.
    Mr. Grant. Yes, I would respond in total agreement with Mr. 
Andrews and Mr. Bridgeman and add a few other things. The 
illiquidity--we have circumstances, the regulators come in and 
say here are the classified loans. They are impairing your 
ability to lend, but yet there is really no avenue for off 
placing those loans. You have to work through them, and indeed, 
I think the tenor of the entire day has been an attitude of 
working with the small customers.
    The other thing I would also add is the concentration 
levels. The regulators now require a significant amount of 
slicing and dicing, if you will, of the loan portfolio and will 
suggest that you must not lend any more of this type of loan or 
that type of loan. And sometimes based on the markets you serve 
that certainly could impede it. Some of the criterion that they 
use with the levels of capital they indicate are guidelines, 
but by the time it comes into the field, they are pretty much 
requirements.
    Mr. Minnick. Thank you. Ms. Nash, I only have another 40 
seconds.
    Ms. Nash. I will be quick. We have a little bit of 
different experience. Our regulators have been quite 
complimentary of us in terms of building our loan loss reserves 
and the way we take and analyze our risk. I think what we do 
see though is we understand we are in Michigan which has 
experienced probably the worst part of recession of any State 
in the country. I will give maybe a little bit to California on 
the other end of table there. But the fact is what we see is 
there is a future uncertainty risk and I think Mr. Grant 
mentioned in his comments as well that we do see a little more 
emphasis on that. We have quite frankly a lot of support about 
our credit analytics and our approach around our credit to 
date.
    Mr. Minnick. My time has expired. Others can respond in 
writing, if you wish. I ask Mr. Bachus for a concluding 
comment.
    Mr. Bachus. I appreciate that. One of the things we were 
talking about is the gaps and the regulations and the fact that 
many of the banks did not engage in subprime lending. One thing 
that we were--I won't say misled by, but we did talk to several 
large banks and they said we are not doing subprime lending, 
but their unregulated affiliates were. So I think it is one of 
the things important about any bank reform is that we do close 
those gaps and regulation. And if they regulate it, an 
institution is going to have to buy an unregulated affiliate 
which can engage in all sorts of risky behavior. I don't mind 
risky behavior unless you are going to bail folks out. But that 
obviously is problematic. So I think we--and I think had we 
passed in 2005 which some of us proposed that we license and 
register all mortgage brokers we would at least solve some of 
the later problems that we see because there was a lot of 
fraud.
    My second comment, Mr. Hoyt, I want to convey my 
appreciation to Wells Fargo for your purchase of Wachovia which 
included SouthTrust Bank in Birmingham, Alabama, one of the 
largest banks. You did so at 3 times the purchase price that 
the Federal regulators had engineered and agreed to by city. 
And you did so without any Federal loan guarantees and that is 
something that has never really been looked into. It would be 
an interesting hearing for this committee, that the Federal 
regulators actually came to an agreement to sell a bank for 
basically a third as they were liquidating a third of what 
Wells came in and offered. And then you did so without any 
Federal guarantees and that I commend you, but boy that really 
is troubling, that whole deal.
    And then I think Wells was threatened with a lawsuit for 
``interfering with that federally insured purchase.'' So I do 
appreciate that. A lot of people in Alabama ended up with three 
times as much money in their pockets as they would have. They 
still took a tremendous loss with that. I thank you for that.
    And I thank all the members of the panel for their 
attendance today. We are--obviously the country is in a 
difficult economic atmosphere. And the only thing we had not 
mentioned is that as we move forward, I do think that in many 
cases, attempts by this Congress and even the regulators to 
micromanage the economy and institutions has been 
counterproductive because banks are going to make decisions 
that they think are best for themselves and their customers, 
and are only going to lend money when they think there is a 
promise of being repaid which good for the banks and lenders.
    I think we are going to see some unintended consequences of 
these--not only have we seen it from the TARP thing where we 
put all sorts of restrictions on it and made it pretty 
unbearable, but we are seeing it maybe from the credit card 
legislation. And depending on what we pass--what the Senate 
sends back to the House and was passed on financial regulation, 
I think you are going to see some that the Congress may do more 
harm than good, which is often the case. But I do appreciate 
your attendance and wish you well because of the viability and 
strength of the financial industry is essential for properly 
functioning economy. So thank you.
    Mr. Minnick. I would like to echo the ranking member's 
comments and to thank all of you for being here. We are sorry 
we didn't have a fuller panel, maybe there aren't many people 
here asking you questions, but we very much appreciate you 
being here, and your thoughtful comments. I ask unanimous 
consent that all members have 30 legislative days to submit 
statements and other extraneous material for the record. With 
that, I thank you all again. The hearing is adjourned.
    [Whereupon, at 3:31 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           February 26, 2010


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