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

                          INITIATIVES TO PROMOTE SMALL
                            BUSINESS LENDING, JOBS,
                              AND ECONOMIC GROWTH

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 18, 2010

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-137

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

    58-047 PDF                       WASHINGTON : 2010

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

                     HOUSE COMMITTEE ON 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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 18, 2010.................................................     1
    Appendix:
        May 18, 2010.................................................    57

                                   WITNESSES
                             Tuesday, May 18, 2010

    Atkins, Hon. Paul, Member of the Congressional Oversight Panel,
      and former Securities and Exchange Commissioner................    13
    Brown, Paul, Manager, Capital Markets Development, Michigan
      Economic Development Corporation...............................    11
    Determan, Jim, Hord Coplan Macht, Inc., on behalf of the American
      Institute of Architects (AIA)..................................    16
    Johansson, Hon. Christian S., Secretary, Maryland Department of
      Business & Economic Development................................    10
    MacPhee, James D., Chief Executive Officer, Kalamazoo County
      State Bank, on behalf of the Independent Community Bankers of
      America (ICBA).................................................    18
    Mica, Hon. Daniel A., President and Chief Executive Officer,
      Credit Union National Association (CUNA).......................    15
    Sperling, Gene B., Counselor to the Secretary of the Treasury,
      U.S. Department of the Treasury................................     8

                                    APPENDIX

    Prepared statements:
        Atkins, Hon. Paul............................................    58
        Brown, Paul..................................................    66
        Determan, Jim................................................    71
        Johansson, Hon. Christian S..................................    78
        MacPhee, James D.............................................    85
        Mica, Hon. Daniel A..........................................    94
        Sperling, Gene B.............................................   111

                  Additional Material Submitted for the Record

    Frank, Hon. Barney:
        Written statement of the American Bankers Association (ABA)..   119
        Written statement of Associated Builders and Contractors
          (ABC)......................................................   124
        Written statement of ACCION USA..............................   125
        Written statement of the Financial Services Roundtable.......   126
        Written statement of the International Franchise Association
          (IFA)......................................................   129
        Written statement of the National Association of Federal
          Credit Unions (NAFCU)......................................   130
        Written statement of the National Association of Home
          Builders...................................................   132
    Peters, Hon. Gary:
        Written statement of the Motor & Equipment Manufacturers
          Association (MEMA).........................................   142
        Written statement of various State Governors.................   144

                          INITIATIVES TO PROMOTE SMALL
                            BUSINESS LENDING, JOBS,
                              AND ECONOMIC GROWTH

                                  ----------

                             Tuesday, May 18, 2010

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 1 p.m., in room
    2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Waters, Maloney,
    Velazquez, Watt, Sherman, Moore of Kansas, Baca, Lynch, Miller
    of North Carolina, Scott, Green, Cleaver, Bean, Moore of
    Wisconsin, Perlmutter, Donnelly, Foster, Carson, Minnick,
    Adler, Kilroy, Himes, Peters; Bachus, Royce, Biggert,
    Hensarling, Posey, Lee, and Lance.
        The Chairman. The hearing will come to order.
        We are here today to discuss a very important program which
    has been forwarded to us by the Administration. The lack of
    credit available to smaller businesses has been a serious
    problem in the economy and has concerned the Members here. We
    have had previous hearings on the subject, one in which blame
    for that situation was somewhat passed around. We have had
    arguments that the regulators have been too tough, that the
    banks have not been willing to lend, and that the demand is not
    there on behalf of the small businesses.
        We will continue to deal with this. But today, we will hear
    a proposal that should alleviate the situation from all
    accounts by making more funding available to the small banks in
    a way that includes some serious effort to ensure that money is
    in turn lent. Clearly, getting more funding for small
    businesses that are ready to expand or that need funding to
    even stay where they are is a critical part of our number one
    job right now, which is to continue the recovery.
        We are seeing the beginnings of a recovery. There have been
    very encouraging signs, including very good job numbers last
    week, somewhat obliterated 2 weeks ago by the stock market
    gyrations. But that is an argument for doing more, not less. I
    believe the economy has been responding to a variety of public
    policy initiatives, in addition of course to the dynamism of
    the economy itself and the natural countercyclical efforts; as
    inventory is drained, inventory gets restocked.
        But it is important for us to build on initial successes
    and not in any way be complacent because there are very serious
    needs in the economy and we believe this is a very thoughtful
    approach. I should say at the outset that there is one thing
    which we understand is not here in the bill, and that this is
    how this will be paid for. There is a CBO score, it is an
    interesting situation, which CBO tells us I believe that this
    will cost some money in the first 5 years, but over 10 years,
    will make money for the Federal Government. That is a factor
    that we will be keeping in mind.
        But the bill that we have before us today, which will be
    marked-up tomorrow and could go to the Floor next week, is, for
    that reason, an authorization. If this bill were to pass
    unanimously in the House tomorrow or next week, it would not
    lead to the spending of money until the House says, and the
    Senate and the President subscribe to a way to pay for it. So,
    yes, we understand this is a very important program that should
    be paid for. We will be dealing as a legislative body with the
    mechanism for paying for it.
        I will say this: One proposal early on had been to pay for
    it in the TARP. Nobody likes the TARP at this point. And if you
    were to use TARP funds for this program, you wouldn't have a
    program unless you reinstated the draft. But since we are not
    likely to draft people to be in this program, it is not going
    to be in the TARP. And there will be no TARP trappings, no TARP
    restrictions, and, I believe, no TARP oversight. There will be
    oversight. There will be other requirements, but it will be
    entirely separate from the TARP because we want to get people
    involved.
        With that, I now recognize the ranking member for 4
    minutes.
        Mr. Bachus. Thank you, Mr. Chairman, for calling today's
    hearing to consider these two recently introduced bills
    designed to jump start lending in small businesses.
        While Republicans share the goal of promoting credit
    availability for small businesses, many of us in the Minority
    disagree that the best method for achieving the goal is to
    create a new $30 billion program that is not paid for and that
    follows a model of government investment in private businesses
    that most Americans want to see brought to an end, and that is
    the bailouts. I count myself as one of those who wants to see
    all bailouts come to an end.
        We are told that this new program is not TARP and that no
    TARP funds will be used to pay for it. But the reality is
    considerably more complicated than that. Indeed, Neil Barofsky,
    the Special Inspector General for the TARP, wrote in a letter
    to the Appropriations Committee yesterday that, ``in terms of
    its basic design, its participants, its application process,
    and perhaps its funding source, from an oversight perspective,
    the small business lending fund would essentially be an
    extension of TARP's Capital Purchase Program.''
        While I take Chairman Frank at his word that he has
    rejected the Administration's original proposal to pay for the
    new initiative from repaid TARP funds, the fact that no funding
    source has yet to be identified gives rise to legitimate
    questions about taxpayer accountability that must be answered
    before this committee votes to authorize another $30 billion in
    new spending, particularly on the heels of what we have
    witnessed in Europe over the past 2 weeks, as we call on the
    Greek people and the Greek government to act in a responsible
    manner. We must not ask others to do what we are not willing to
    do ourselves.
        The sponsors of this legislation also assure us that any
    taxpayer losses from new investments in financial institutions
    are likely to be minimal, but it is worth noting that some 90
    institutions that received money under the Capital Purchase
    Program still owe more than $182 million in missed dividend
    payments to American taxpayers, and that some institutions like
    Citigroup have gone bankrupt and will never repay their
    government funds. Why should we have any confidence that
    Treasury can manage TARP II any better than TARP I?
        Additionally, in a report issued just last week, the TARP
    Congressional Oversight Panel chaired by Elizabeth Warren
    raised serious questions about the prospects for success in
    this program. Former SEC Commissioner Paul Atkins, a member of
    that panel, is here with us today at the invitation of
    committee Republicans, and I look forward to hearing his
    insights.
        While I support the Majority's decision to finally focus on
    one of the driving causes of the Nation's 10 percent
    unemployment crisis, lending to small businesses and lack of
    lending to those institutions, I cannot support ill-conceived
    proposals that likely will do little to help the economy but
    continue to drive up the national debt and crowd out funding in
    the private market for small businesses.
        Thank you, again, Mr. Chairman, for holding today's
    hearing.
        I yield back the balance of my time.
        The Chairman. The gentleman has 15 additional seconds,
    which can be added to the time on that side.
        And the gentleman from Kansas, Mr. Moore, is recognized for
    3 minutes.
        Mr. Moore of Kansas. Thank you, Mr. Chairman.
        I am proud to be an original sponsor of H.R. 5297, the
    Small Business Lending Fund Act, and the role that our
    Oversight Subcommittee played in in laying the groundwork for
    this legislation.
        Representative Gary Peters invited our subcommittee to
    visit Michigan last November to hear directly from local
    business leaders, community banks, and credit unions about the
    severe credit crunch facing small businesses, especially in a
    time and a place that desperately needs an economic turnaround.
        I am pleased to co-sponsor a bill Representatives Peters,
    Dingell, and Levin drafted to create a State credit program
    modeled on a successful Michigan program which we learned about
    at the hearing. And we just held a field hearing yesterday in
    Chicago requested by Ranking Member Biggert to focus on the
    problems in commercial real estate. We were joined by Luis
    Gutierrez as well as Representatives Melissa Bean and Bill
    Foster, and we again heard from local businesses and financial
    institutions on the overlapping challenges they face with
    respect to CRE and small business credit.
        As the evidence and facts from these hearings showed,
    restoring responsible credit availability to small businesses
    is crucial if we want a strong economic recovery. I look
    forward to working with my colleagues on this needed
    legislation, ensuring the bill is fiscally responsible by the
    time the full House votes on the measure.
        And let me stress that we will have much more flexibility
    to find offsets after our committee reports out the bill as
    other committees have jurisdiction over a broader array of
    options to pay for the bill. So there is no reason we can't
    move this bill quickly out of committee and work together to
    ensure it is fiscally responsibly before the full House
    considers the measure.
        I yield back my time. Thank you, Mr. Chairman.
        The Chairman. The gentleman has used 1\1/2\ minutes. We
    have another half minute here.
        So now the gentleman from Texas, Mr. Hensarling, is
    recognized for 3 minutes.
        Mr. Hensarling. Thank you, Mr. Chairman.
        It is another day and another opportunity to borrow $30
    billion we do not have, to borrow it from the Chinese and send
    a bill to our children and our grandchildren.
        The American people are increasingly asking, what part of
    broke doesn't this Congress understand? In just the last 2
    years, the deficit has exploded, increased tenfold. The
    national debt is tripling before our very eyes. By the end of
    the decade, under CBO's score, we will be paying almost $1
    trillion in year in interest alone on the national debt.
        We have to go back to World War II to find such debt-to-GDP
    ratios as what we are soon to see in the United States of
    America. By the end of the decade, they will be wider than
    those of Greece, and we know what is occurring in Greece.
        Moody's, not generally known for their pessimism, has
    stated that the United States could soon lose its AAA bond
    rating. In a first, recently the bond markets, during a debt
    offering, seemingly showed that they had greater confidence in
    Warren Buffett's Berkshire Hathaway repaying their debt than
    the United States Government repaying theirs.
        So after a $700 billion dollar TARP program, which has now
    morphed into little more than a revolving bailout fund for the
    Administration; after a $1.2 trillion stimulus plan, which has
    stimulated our national debt but otherwise leaves us mired in
    almost double-digit unemployment, the highest in a generation;
    we have the next idea of the same philosophy that seemingly you
    can borrow, spend, and bail out your way into economic
    prosperity.
        Although the $30 billion proposal is called SBLF, it reads
    like TARP to me. Now, this is TARP's Capital Purchase Program
    without the accountability and with an incentive to lend. But
    we have to look carefully at the incentive. Will taxpayers end
    up subsidizing banks to lend to businesses that they are soon
    to lend to anyway? Or perhaps more ominously, reminiscent of
    the Government-Sponsored Enterprises, is this an incentive to
    lend taxpayer money to marginal borrowers who may not be
    creditworthy?
        The preponderance of the evidence points to a lack of
    creditworthy small business demand, not a lack of community
    bank capital supply, as the primary challenge that we face in
    our Nation. And until the Congress ceases its spending spree,
    its bailouts, its threatened higher healthcare costs, its
    threatened higher energy costs, more small business taxes,
    regulatory uncertainty, and the list goes on, that is unlikely
    to change.
        I yield back, Mr. Chairman.
        The Chairman. The gentleman from Massachusetts, Mr. Lynch,
    for 2 minutes.
        Mr. Lynch. Thank you, Mr. Chairman, for holding this
    hearing.
        And I want to thank our panelists for helping the committee
    with its work. I think we all understand the urgency of this
    issue. Small businesses across the country have struggled since
    the financial crisis began. Banks have retracted lending and
    credit even for otherwise healthy businesses, and many
    businesses have been forced to cut jobs, reducing the size of
    their workforce.
        I believe further efforts are necessary to assist small
    businesses, but they need to be targeted to those small
    businesses which are the backbone of our economy. They are the
    key to a successful economic recovery. Tax credits for job
    creation and improving access to credit for small businesses,
    two main components of the legislation before us will, I think,
    help put more Americans back to work, and that should be our
    number one priority.
        Obviously, we have to be careful and deliberate about how
    we plan to pay for this program. Just 2 weeks ago, in this same
    hearing room, we heard from the Peterson Foundation about our
    ever-increasing national debt and that continuous spending
    outlays with no revenue stream to offset their costs are simply
    not sustainable. Our projected Federal deficit of $1.368
    trillion no doubt is alarming, but also our structural deficit
    and escalating debt levels are even a greater concern.
        We must get our economy back on track while simultaneously
    taking steps to address our Federal budget problems. The small
    business lending program is just one example of how we can
    begin. I look forward to hearing the testimony from our
    witnesses.
        Mr. Chairman, I thank you and I yield back.
        The Chairman. The gentleman from California, Mr. Royce, is
    recognized for 3 minutes.
        Mr. Royce. Thank you, Mr. Chairman.
        Albert Einstein once said, the definition of insanity is
    doing the same thing over and over again and expecting a
    different result.
        We have tried this command-and-control, borrow-and-spend
    approach before, and it has failed us. The more our Nation
    borrows and spends, the closer we get in terms of our policies
    to that of Greece and the less economic growth we will see in
    the future.
        Our Nation does not have $30 billion to give out. Just a
    couple of weeks ago, the Federal budget deficit at $92.7
    billion for the month hit an all-time high for April, and that
    was $53 billion higher than economists had predicted just for
    that month. We will have to borrow that money from China and
    elsewhere, just as we will have to borrow this $30 billion if
    we go forward here elsewhere. And as Chairman Bernanke has
    repeatedly said, this path is simply unsustainable.
        Businesses around the country understand that the wealth
    creators in the economy will be burdened with picking up the
    tab. They see the coming spike in capital gains and dividends
    taxes. They see the potential for a value-added tax increasing
    by the day.
        They also see the new mandates and taxes that were just
    enacted in the health care bill.
        They understand that the cap-and-trade legislation will
    increase the cost of doing business. It will certainly restrict
    future growth.
        They see, throughout the financial system, businesses are
    facing these new hurdles. The Consumer Financial Protection
    Agency is coming down the pike with broad undefined powers.
        And they see the 230 co-sponsors on legislation to abolish
    secret ballot elections for unionization.
        So it is no wonder business confidence is at an all-time
    low. And the NFIB just released the study from last month
    noting that the prolonged pessimism found among business owners
    is unprecedented in survey history.
        Real economic growth will not come from another program run
    out of the Treasury Department, but from Washington providing a
    modicum of certainty for businesses going forward.
        I think we would be well served to take a step back and
    reassess the message coming from Washington, D.C.
        I yield back the balance of my time, Mr. Chairman.
        The Chairman. The gentleman from Indiana, Mr. Donnelly, for
    2 minutes.
        Mr. Donnelly. Thank you, Mr. Chairman.
        There are few things more important than enabling small
    business to obtain credit. What I have consistently heard from
    the small businesses throughout Indiana is that to create
    additional jobs, their ability to obtain credit is critical. If
    they can have the credit, they can create the jobs and put the
    people of this country back to work.
        Their biggest challenge remains; they are good companies
    with good credit ratings who still are not able to get credit.
    My commitment will be to continue to work nonstop so that these
    small businesses with good credit ratings who have struggled so
    hard to get the credit to run their businesses, that they can
    obtain this credit and that they, these small businesses, the
    engine of our economy, can succeed into the future.
        Thank you, Mr. Chairman.
        The Chairman. I now recognize--and let me be clear that
    this is an allocation that I do not make; I simply take what
    the Minority tells me--for 30 seconds the gentlewoman from
    Illinois, Mrs. Biggert.
        Mrs. Biggert. Thank you, Mr. Chairman. I just wanted to
    concur in what Representative Moore talked about, the oversight
    hearing that we had in Chicago yesterday and just a couple of
    things that we learned.
        Number one is that there really is not the demand for loans
    at the community banks, because there is not enough businesses
    that are applying for the loans because of the trouble that
    they are all in. And in addition, we learned that a tax
    increase on income--
        The Chairman. The gentlewoman's time has expired.
        As I said, this is the allocation I was asked to give.
        The gentleman from Michigan is recognized for 2 minutes.
        Mr. Peters. Thank you, Mr. Chairman.
        We all know how important small businesses are to our
    economy. They have generated 64 percent of new jobs over the
    past 15 years. They create more than half of the non-farm
    private gross national product and hire 40 percent of all high-
    tech workers.
        As our economy continues to recover, it is critical that
    small businesses have access to credit so that they can grow,
    add jobs in our communities, and create the innovative
    technologies of the future. I am pleased that today we are
    meeting to discuss two bills that have been introduced with the
    support of the Administration: the Small Business Lending Fund
    Act; and legislation that I introduced, called the State Small
    Business Credit Initiative Act.
        Last November, Chairman Moore traveled with me to Oakland
    County, Michigan, where we held a field hearing to hear from
    representatives of small businesses, particularly small
    manufacturing companies, about the need for increased lending.
    We also heard from community banks and credit unions about
    their ideas of how to increase access to capital for small
    businesses. One of the ideas discussed at the hearing was to
    promote Federal funding for State lending support programs,
    such as the Michigan Supplier Diversification Fund. And since
    that hearing, I have worked with my colleagues from Michigan--
    Chairman Levin and Chairman Dingell and our Governor--to turn
    this idea into one of the proposals that we are debating today.
        I am happy that Paul Brown from the Michigan Economic
    Development Corporation can be with us today to discuss how
    successful this program has been in our State and the support
    that it has received from both the business community and the
    financial industry.
        I am also pleased that James MacPhee can be with us today
    on behalf of the ICBA. He is also a Michigan community banker
    who can speak to the need for this legislation from a community
    banker's perspective.
        I am also pleased that another native Michigander, Gene
    Sperling, could be with us. His work over the last few months
    to turn this idea into a legislative proposal with such broad
    support has been incredible.
        Chairman Frank, I would also like to thank you for holding
    this hearing today and for your continued leadership, and I
    yield back the balance of my time.
        The Chairman. All time has expired.
        I ask unanimous consent to introduce into the record
    statements in support of this bill from the American Bankers
    Association, the Financial Services Roundtable, the
    International Franchising Association, the National Association
    of Federal Credit Unions, the National Association of Home
    Builders, and the Associated Builders and Contractors.
        Hearing no objection, we will enter these into the record.
        We will now begin the testimony. And I also appreciate that
    Mr. Sperling is with us.
        We have one panel that includes the Administration, but
    with this large committee, by the time we go around twice,
    everybody went to dinner, so we will try to get this in, in a
    reasonable time.
        And let me say I appreciate the members showing up today.
    And I just want to address for a minute a question I had, which
    was, why are you having an important hearing on a day when
    there aren't votes?
        And the answer is, this committee has a business agenda.
    Members on both sides frequently ask for hearings. We simply
    cannot accommodate them on 2 days a week. So there will be from
    time to time hearings during times when we don't have votes
    because the alternative is to have hearings 2 days a week, and
    that is why this day is different from all other days, a little
    out of season.
        The first witness is Gene Sperling, Counselor to the
    Secretary of the Treasury, who has been working very hard and
    very cooperatively with us on this bill. Mr. Sperling?

     STATEMENT OF GENE B. SPERLING, COUNSELOR TO THE SECRETARY OF
             THE TREASURY, U.S. DEPARTMENT OF THE TREASURY

        Mr. Sperling. Thank you very much, Chairman Frank, Ranking
    Member Bachus, and members of the committee.
        I appreciate the opportunity to discuss the topic of small
    business lending and small business job creation today. I think
    it is safe to say that small businesses who have been
    responsible have been very deeply hurt in this financial crisis
    by those who were not responsible in their actions, and that
    this has been damaging, not only to those small business owners
    but to our economy, because we need small business job creation
    to help make this recovery a strong job-creation recovery.
        And at this point, small businesses have taken greater hits
    in job loss and have had less recovery jobs-wise, optimism-
    wise, than larger companies, and this is of concern to our
    Administration, and we think it should be of concern to this
    Congress as well.
        We do not believe there is a single silver bullet to
    respond to a single problem on small business lending. Rather,
    we think there are multiple barriers that we need to attack on
    all fronts. So, is it demand? Is it supply? It is all of these
    things. And if we care about getting small business lending and
    job creation going, we need a comprehensive strategy.
        Of course, this Congress, this President, have focused on
    increasing overall demand in the economy through the Recovery
    Act through the financial crisis. As difficult and painful as
    this economy still is, the movement from a contraction of 6.4
    percent in the first quarter of 2009 to averaging 4.4 percent
    growth over the last half year is one of the greatest swings we
    have probably seen in a century.
        This Congress, and this President, have encouraged demand
    in investment by expensing net operating loss, tax cuts, bonus
    depreciation, 75 percent exclusions on capital gains, and a new
    HIRE Act to encourage hiring those who are unemployed.
        We have seen success in the Recovery Act measures that have
    been done by SBA, under Karen Mills, working jointly with
    Treasury to free up secondary markets and see SBA lending
    rebound by 90 percent. These have all made a difference. They
    are all not enough: not enough when unemployment is at 9.9
    percent; not enough when there is a record number of the
    unemployed who have been unemployed for longer than 6 months;
    and not enough when there are 5 unemployed people looking for
    every available job.
        But it is wrong to think that it is just about hitting the
    demand side. The NFIB survey in February 2010 showed that 45
    percent, nearly half of small business borrowers trying to get
    lending, could not access the full credit they wanted, 45
    percent. The last time that study was done, in 2006, it was 11
    percent. That means 4 times more small business owners cannot
    get the full amount of credit that they want.
        So, yes, this is a multi-faceted problem. And that is why
    we are hitting on different levels, and that is why we support
    the efforts to have a strong small business job package, to go
    to zero capital gains for small business investment, to extend
    the Recovery Act SBA provisions, to work with Chairwoman
    Velazquez, as we are right now, on additional measures you
    could do through the SBA to help the early financing of
    companies and to try to bring good borrowers back into the
    picture who might be on the sidelines now. And that is why we
    are also making special efforts to go after programs that are
    for CDFI and new markets.
        I want to stress very clearly on our $30 billion lending
    initiative here a few things. One, despite things I have heard
    already today, these are your community banks. These are your
    neighborhood banks. These are the banks of Main Street, not
    Wall Street. These are not the banks that led the financial
    crisis. They are not the banks doing synthetic CDOs. They are
    not the banks which paid multibillion dollar bonuses. These are
    your small community banks on Main Street that are the ones
    that predominantly lend to small businesses. They were the ones
    that kept lending during the crisis when larger banks pulled
    back. These are the banks we are trying to help in this
    initiative.
        This should be labeled the small business lending fund
    because that is what it is. It will not cost the taxpayers a
    penny, as Chairman Frank said. CBO may estimate that it
    actually raises taxpayer money. But whether it costs or not,
    like every other measure, it will be offset, it will be deficit
    neutral when it is passed, and it will be a very strong bang
    for the buck.
        It is for private sector lending, for private sector banks,
    for the private sector small businesses that will drive our
    recovery. And we are also happy that we are supporting and have
    worked together on this State Small Business Capital
    Initiative. This will help Democrat and Republican Governors in
    States across the country who have programs that are up and
    going, that are being cut back at a time of increased demand
    because of budget constraints. This program we think could spur
    almost $20 billion in additional lending at the State level in
    programs that are up and running.
        There have to be answers. Can our answer really be to just
    criticize any program that is trying to address credit needs
    for small business lending? Haven't we seen the pain? Haven't
    we all gotten enough mail to know we have to put forward a
    constructive program? It is high bang for the buck. It would
    help community banks, and it would help successful State
    programs. It would be deficit neutral, and it would help the
    community and local banks that are at the core of Main Street
    and the core of lending to the small businesses who need credit
    so that they can lend, expand, and create the jobs our economy
    desperately needs.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Sperling can be found on
    page 111 of the appendix.]
        The Chairman. The time has expired.
        Next, we have Christian Johansson, who is the secretary of
    the Maryland Department of Business and Economic Development.
    And he is here at the strong suggestion of Representative Van
    Hollen and other members of the Maryland delegation.

     STATEMENT OF THE HONORABLE CHRISTIAN S. JOHANSSON, SECRETARY,
         MARYLAND DEPARTMENT OF BUSINESS & ECONOMIC DEVELOPMENT

        Mr. Johansson. Chairman Frank, Ranking Member Bachus, and
    distinguished members of the Financial Services Committee, good
    afternoon.
        My name is Christian Johansson, and I am the secretary of
    the Maryland Department of Business and Economic Development.
    On behalf of Martin O'Malley, I want to thank you for inviting
    me to testify in support of the State Small Business Credit
    Initiative Act of 2010.
        I am here today to endorse a key component of this Act,
    using existing State loan guarantee programs to extend credit
    to worthy small businesses. While the lifeblood of every
    American is a paycheck and a job, the lifeblood of every small
    business is access to credit. This piece of legislation helps
    accomplish both.
        Loan guarantee programs are one of the single most
    effective tools we have to restore the economy. By expanding
    the capacity of existing guarantee programs, we truly have a
    shovel-ready solution to restore the flow of credit to small
    businesses crippled by tougher lending standards and devalued
    collateral.
        In Maryland, we have established a loan guarantee program
    that helps banks and businesses bridge the collateral gap and
    address the issue that even if banks have the money, the
    playing field has changed, and many of our borrowers simply do
    not qualify.
        But we are not alone. A nationwide network of 34 States and
    territories have existing loan guarantee programs. These
    programs have the infrastructure and the expertise to
    immediately put operating capital in the hands of business
    owners to hire new employees, to restock shelves, to expand
    locations. Federal support to guaranteed programs will
    significantly leverage multiples of bank lending to spur
    economic recovery.
        You have the power to unlock billions of dollars of private
    bank lending by funding these existing guarantee programs. As
    the State economic development director, I can assure you that
    this legislation offers me and my colleagues sufficient
    flexibility to use our existing, often more nimble, grassroots
    programs to have the quickest, most meaningful impact in our
    communities. Strengthening these programs also serves as an
    important complement to the SBA.
        Let me tell you a little bit about our program. It was
    established 45 years ago to increase capital to small- and
    medium-sized companies. In the first decade, we have done 823
    loans, and in loans and bonds, we total $2.1 billion in credit
    that we have been able to extend. In the last 5 years, we have
    not had a single credit loss.
        This year, we guaranteed $40 million in private sector
    loans, and we have over $150 million in our pipeline. These
    loans represent direct investments in businesses which
    ultimately create jobs, moving our economy from recovery to
    prosperity.
        And while MIDFA historically operated in the $5 million to
    $15 million range, we amended the program this year to be able
    to do guarantees at $100,000 and below. The MIDFA small
    business guarantee would unlock $10 in private sector lending
    for every dollar of Federal funds you inject into the program.
        Even in one of the toughest fiscal environments, Governor
    O'Malley demonstrated his commitment to this program by
    increasing funding and dedicating an additional $10 million to
    small business loan guarantees this past year.
        Mr. Chairman, allow me to introduce Darius Davis, who is
    sitting behind me. He is the executive vice president of Harbor
    Bank, one of the Nation's largest minority-owned community
    banks. And I want to tell you the story of one of his
    customers, Bass Machining, a growing metal fabricator in
    Baltimore. These two businesses, Harbor Bank and Bass, embody
    the success of our guarantee program. To date, their stories
    intertwine.
        Bass Machining was established almost 30 years ago. The
    company recently tripled their factory space and received a
    major contract to build power tools. He needed a line of credit
    support to fulfill his new contract. Harbor Bank was willing to
    fulfill that line of contract if they received support for
    their collateral position. MIDFA's $87,000 guarantee made it
    possible for Bass to obtain $350,000 in financing to fuel their
    expansion.
        Mr. Chairman, Mr. Ranking Member, members of the committee,
    there are many opportunities for States to assist small
    businesses. And as Mr. Sperling said, there is no silver bullet
    to solving the effects of our prolonged recession. But loan
    guarantees are a proven and effective tool. They work. They are
    shovel-ready. And they have an immediate impact.
        We urge this committee and Congress as a whole to pass this
    legislation quickly so our Nation's small businesses can access
    the capital they need to grow and create much-needed jobs.
    Thank you for your time.
        [The prepared statement of Mr. Johansson can be found on
    page 78 of the appendix.]
        The Chairman. Next, is Mr. Paul Brown, the manager of
    capital markets development in the Michigan Economic
    Development Corporation.
        Mr. Brown.

    STATEMENT OF PAUL BROWN, MANAGER, CAPITAL MARKETS DEVELOPMENT,
               MICHIGAN ECONOMIC DEVELOPMENT CORPORATION

        Mr. Brown. Thank you, Mr. Chairman, Ranking Member Bachus,
    and members of the committee. I appreciate the opportunity to
    discuss the topic of small business lending and job creation,
    and specifically the programs we have created in Michigan.
        It is humbling to testify before those who are so dedicated
    to ensuring the opportunities for our small businesses and
    banks.
        I especially would like to thank the Administration,
    specifically Mr. Sperling, and members of our congressional
    delegation, specifically Representatives Peters, Levin, and
    Dingell.
        Unfortunately, Michigan has been dealing with the effects
    of the so-called ``Great Recession'' longer than most. But it
    is because of this long and severe experience that we have been
    able to develop programs which effectively tackle the
    difficulties our small businesses have in accessing capital.
        I want to give you one example of a business in Michigan
    that demonstrates the typical stresses in the banking and small
    business field. Laurie Moncrieff is a third-generation owner of
    Adaptive Manufacturing Solutions. It was founded in 1948 by her
    grandfather. AMS lost their financing because they were in
    technical default of their loan, a term you have probably heard
    a lot of in the last 18 months. Because of this, they had to
    lay off some of their employees, going from 14 to 12 employees.
        But the resilient Ms. Moncrieff has been able to keep her
    business alive by moving out, moving herself and her family out
    of her family home and renting it, and moving her family into
    the small apartment above the shop. Laurie is typical of small
    businesses in Michigan, especially manufacturers. And it is
    because of stories like hers that Governor Jennifer Granholm
    charged the MEDC with investigating and implementing a program
    that would assist companies like Laurie's.
        We spoke to dozens of banks and dozens of borrowers, small
    businesses, and manufacturers, to understand what they were
    facing in the credit markets. There are two main factors a bank
    uses to determine the creditworthiness of a borrower. And these
    factors are getting particular scrutiny in this environment by
    the Feds.
        The first is free cash flow. Typically, banks require 1.25
    free cash flow to debt service. And they do that calculation
    based on a 3-year average. With the ``Great Recession''
    hopefully behind us, there is a large portion of that average
    which is artificially low. So the 3-year average does not
    necessarily represent the ability of a business to pay now or
    in the future on an individual loan.
        We designed what we call the Loan Participation Program to
    attack this issue. The Michigan Economic Development
    Corporation will work with the banks, and that is an important
    factor because the banks are the decision-makers, and they
    perform the due diligence and the administration of the loan.
    We will work with these banks to purchase a portion of that
    loan that is out of formula. And we will give a grace period in
    principal and/or interest for up to 36 months for that
    borrower.
        In theory, they are traditional, in many cases revenue will
    increase during the grace period, as well as their
    diversification plan will come on-line and become profitable.
        The second program attacks the collateral problem in
    Michigan. Many of our manufacturers rely on their property plan
    equipment value to borrow. Banks, in looking at a property plan
    equipment loan, like your typical home mortgage, will loan 80
    percent to value. With many of our small businesses losing a
    huge portion of the value in their assets, they are unable to
    qualify for the current loans, let alone eligible for a loan
    diversification or an increase in their capital needs.
        In this situation, we will work with the banks to determine
    what the gap is. And so as long as the bank has the majority of
    the loan, we will deposit the collateral gap in the bank. We
    get interest on the loan. We get points from the borrower. The
    bank gets a fully collateralized loan so that they can then
    make loans and make money on those loans. They also get
    increased deposits, which is very important in this strict
    regulatory environment.
        One of the greatest examples of the success of our program
    is Mark One Corporation, a company in a small town in northern
    Michigan. Mark One developed a product that cleans metal in a
    green fashion, preparing it for manufacturing. They had
    purchase orders from companies around the world, including
    China, but they were unable to access the capital they needed
    to fill these purchase orders. Because of our loan and our loan
    guarantee in the form of collateral support--I am sorry, my
    time is up--Mark One was able to get a loan from Huntington
    Bank and hire up to 230 workers.
        This is just one example of our State's programs that has
    been successful and we urge this committee and this Congress--
        [The prepared statement of Mr. Brown can be found on page
    66 of the appendix.]
        The Chairman. Thank you, Mr. Brown. We got to the meat of
    it.
        Mr. Brown. We did. Thank you, sir.
        The Chairman. Next, is Paul Atkins, a member of the
    Congressional Oversight Panel on the TARP. He is also a former
    SEC Commissioner.
        And Mr. Atkins, to even out my lapse from before, you are
    going to get 6 minutes and 15 seconds, so, please, go ahead.

         STATEMENT OF THE HONORABLE PAUL ATKINS, MEMBER OF THE
       CONGRESSIONAL OVERSIGHT PANEL, AND FORMER SECURITIES AND
                         EXCHANGE COMMISSIONER

        Mr. Atkins. Thank you, Mr. Chairman. Chairman Frank,
    Ranking Member Bachus, and distinguished members of the
    committee, I am Paul Atkins, a member of the Congressional
    Oversight Panel for the TARP.
        I appreciate this opportunity to testify about the Panel's
    recent work assessing small business lending initiatives. I
    should note that the views expressed in my testimony here today
    are my own.
        I will do my best to convey the Panel's views, but my
    statements cannot always reflect the opinions of five very
    diverse thinkers on our Panel. I should also emphasize that the
    Congressional Oversight Panel has taken no position on whether
    any of the programs discussed today, including the Small
    Business Lending Fund or the State Small Business Credit
    Initiative, should be implemented.
        During the Panel's recent field hearing in Arizona, a local
    bank president laid out the problem in stark terms, ``We could
    grow the bank by $100 million in new assets and not need any
    new capital. Our lack of loan growth is a reflection of the
    impact of the recession on the small businesses in this State.
    We will do more, but it is difficult to find anyone who is not
    being impacted and remains creditworthy.''
        Another concern is that the current regulatory climate may
    make it extremely difficult for banks to increase their small
    business lending. There have been anecdotal reports that bank
    examiners have become more conservative and have required
    increasing levels of capital in the last year.
        The balance between sufficient regulation and
    overregulation is a fine one. In an overly permissive
    regulatory environment, banks may tend to make riskier loans.
    In an overly restrictive regulatory environment, however, banks
    may become too conservative, and there will be insufficient
    credit available to help pull the economy out of the recession.
        The SBLF's prospects, we think, are far from certain. Even
    if it is established by Congress immediately, it may not become
    fully operational for some time. It could arrive too late to
    contribute meaningfully to economic recovery.
        Moreover, banks may shun the program in order to avoid the
    stigma of government funding. As Assistant Secretary Allison
    recently acknowledged before this committee, the TARP recipient
    label in negative advertising resonates with the public.
        I recently took a photograph of this billboard held up
    behind me in Winchester, Virginia, which I think really says it
    all.
        Even if the SBLF's incentive is sufficiently strong, the
    program may produce one key unintended consequence. A capital
    infusion program that provides financial institutions with
    cheap capital, along with penalties for failing to increase
    lending, runs the risk of creating moral hazard by encouraging
    banks to make loans to borrowers who are not creditworthy. The
    stronger the incentive, the greater the likelihood that the
    program will spur some amount of imprudent lending activity.
        In my personal view, the Administration's proposal appears
    to share much of its design and business model with those
    adopted by Fannie Mae and Freddie Mac. Treasury should have
    learned from Fannie and Freddie that the combination of easily
    accessible below-market credit, matched with pressure to lend,
    regardless of credible demand or the employment of prudent
    underwriting standards, serves as the perfect recipe for
    extension of problematic loans and the creation and implosion
    of asset bubbles. That was the essential cause of the recent
    financial crisis.
        Through my years in public service, I have been a big
    advocate of easing regulatory burdens on small businesses which
    get hurt in a one-size-fits-all regulatory scheme, such as the
    Sarbanes-Oxley internal control provisions. Because small
    businesses play such a critical role in the American economy,
    there is little doubt that they must be part of any sustainable
    recovery. It remains unclear however whether Treasury's
    programs can or will play a major role in putting small
    businesses on the path to growth.
        In my opinion, the Administration and Congress could
    encourage the robust recovery of commercial credit and small
    business lending markets, as well as the overall U.S. economy,
    by sending an unambiguous message that the government will not
    directly or indirectly raise taxes or increase the regulatory
    burden of commercial credit in small business market
    participants and other business enterprises. Without that
    action, the recovery of the commercial credit and small
    business lending markets will most likely proceed at a sluggish
    and costly pace.
        Thank you very much.
        [The prepared statement of Mr. Atkins can be found on page
    58 of the appendix.]
        The Chairman. Next, we will hear from a former colleague,
    and the departing, very able chief executive of the Credit
    Union National Association, Dan Mica.

    STATEMENT OF THE HONORABLE DANIEL A. MICA, PRESIDENT AND CHIEF
      EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION (CUNA)

        Mr. Mica. Thank you, Mr. Chairman, and Ranking-Member-in-
    attendance Hensarling.
        It is good to be with you, and I will try to make this very
    brief to get straight to questions here, but there is a need
    for the Congress to act, absolutely, without a doubt. And you
    heard it from this committee to my right just last week.
        Something has to be done. We will follow the judgment and
    leadership of this committee on some parts of the legislation
    you have here before you today. But I would tell you that
    credit unions want to be a part of the solution. Credit unions,
    for 100 years, have been a part of the solution, and we want to
    continue that fine tradition.
        All we need to do, as far as credit unions are concerned,
    is change a statutory limit on lending, and we can participate
    in this recovery. We are not asking for a government agency. We
    are not asking for a penny of U.S. Government dollars. All we
    are saying is, raise the limit on our lending from 12\1/4\
    percent to 25 percent or so, and we can put $10 billion into
    the economy, and we can create 100,000 jobs, and we can do it
    with safety and soundness. And we have a track record of 100
    years to prove it. More recently, going through the last few
    years of this financial crisis, not only have we done it, but
    our default losses were one-sixth the rate of commercial banks.
    So we can do it. We are looking for that. I will come back to
    that in a second.
        The State Small Business Initiative, as we understand it,
    34 States have this initiative. It is aimed at those States
    that are hurt the worst in the recession, need help, have high
    unemployment, and we support that. We support trying to help in
    any way you can. Each State has a little different program, a
    little different approach, but any way that you can put the
    guidelines in place to help, and this is a loan, a loan
    guarantee fund, we think would be helpful.
        With regard to the Administration proposal before you, a
    $30 billion bailout fund, credit unions are not eligible for
    that. Credit unions were not technically eligible for TARP. And
    frankly, we are not asking to be eligible. We are simply
    saying, give us that other opportunity by giving us some
    regulatory relief with zero cost to the taxpayers. We don't
    need $30 billion to make us do what we are already chartered to
    do and what we have a great track record to do.
        We do understand this is a difficult decision for the
    committee. We understand that the committee has some very tough
    questions to answer about funding and so on. But we will
    support the committee on this, whatever decision they make. We
    are asking the committee to look a step beyond it and do
    something for 93 million Americans that doesn't cost the
    taxpayers a dime, doesn't create a government agency, and puts
    $10 billion in new loans out there. And generally, these loans
    average less than $200,000. Our loan portfolio, when others in
    the commercial sector were saying it was drying up in the last
    year, our increase in net portfolio was 20 percent.
        There is a need. It is not drying up, and we can meet that
    need. We have 26 percent of our assets in cash and investments,
    so we could do it without even hurting the bottom line on
    credit unions.
        So the only group in America to oppose it is the group that
    is about to get $30 billion. And we find that a little ironic
    in that we don't come up here, and we haven't for 100 years, to
    oppose what they want. But they have come up here and opposed
    every single thing we have ever asked for, and now we are
    asking for some relief to help America, to help credit unions,
    and we hope we can get some attention here.
        In closing, Mr. Chairman, I would just say this: We have
    had tremendous support on that proposal, both on the House and
    the Senate side, working with you and your staff, with Mr.
    Kanjorski, with Mr. Royce, with Mr. Udall, with Mr. Schumer,
    with Mr. Reid, and with dozens of other Members. We think we
    have an agreement with the other body to get this thing moving
    if we get something from this committee. And I would just like
    to thank you all for this opportunity.
        As you said, Mr. Chairman, I spent 40 years on Capitol
    Hill; I have done every job in the congressional office, from
    intern to legislative assistant to Congressman to chairman of
    the committee, so I know this. I love this institution, but I
    love credit unions. They need an opportunity to help lead this
    country, and they are not asking for any kind of a bailout. So
    I appreciate your attention, your support, and we hope you can
    help us. Thank you.
        [The prepared statement of Mr. Mica can be found on page 94
    of the appendix.]
        The Chairman. Next, will be Mr. Determan from Hord Coplan
    Macht on behalf of the American Institute of Architects. And I
    should note that he was the witness suggested by our colleague,
    the gentlewoman from New York, Ms. Velazquez, who chairs the
    Small Business Committee. So he is here at the particular
    urging of the Small Business Committee.
        Mr. Determan.

     STATEMENT OF JIM DETERMAN, HORD COPLAN MACHT, INC., ON BEHALF
             OF THE AMERICAN INSTITUTE OF ARCHITECTS (AIA)

        Mr. Determan. Chairman Frank, Ranking Member Bachus, and
    members of the committee, I am Jim Determan, an architect at
    Hord Coplan Macht of Baltimore, Maryland. I want to thank you
    for the opportunity to testify today on behalf of my firm and
    the American Institute of Architects.
        I want to use my 5 minutes to make a few key points that I
    raise in my written statement. The design and construction
    industry accounts for $1 in $9 of gross domestic product and
    created over $1 trillion in economic activity in 2008.
        But today, my industry is suffering to a degree we have not
    seen since the Great Depression. According to the Labor
    Department, the unemployment rate in the construction industry
    in March was 24.9 percent; that is 1 out of 4 workers out of a
    job. And that is not counting those of my colleagues who are
    underemployed or who have been working without pay for as long
    as 18 months.
        If you ask architects across the country today why
    conditions are so bad, you will inevitably hear the same two
    responses: One, firms are unable to secure credit to keep
    operations going; and two, clients are unable to secure the
    financing needed to get construction projects started.
        Architecture firms in general, and in particular smaller
    firms, rely heavily on short-term lines of credit to finance
    their operations. However, lending to small businesses has
    dropped severely. As banks restrict lending it has become
    increasingly difficult for firms to continue to make payroll
    and fulfill benefit obligations for employees, let alone expand
    and pursue new projects.
        More problematic is the lack of access to capital for
    design and construction projects, which has depressed demand
    for our services to historically low levels. The pendulum has
    swung so far in the direction of restricted credit, that even
    worthy, well-secured projects are being denied access to
    financing. The mentality appears to be, since financing
    everything didn't work, let's finance nothing.
        Last year, this reduction in work forced my partners and me
    to close the doors on our firm, a firm that had weathered
    previous recessions for over 60 years. A significant
    contributing factor was the lack of credit available to our
    clients to finance their projects. Projects stopped dead in the
    water. We couldn't move fast enough to shed employees or office
    space. And near the end, the bank called in our credit line.
        Over 100 people lost their jobs, some of whom had been with
    the firm for 30 years. My story is hardly unique. No region in
    the country and no sector of our industry is immune from
    crisis. That is why I am pleased that this committee is
    considering legislation that would help small businesses
    weather the economic storm.
        The Small Business Lending Fund Act and the State Small
    Business Credit Initiative both would inject billions of
    dollars into the small business market, thus providing vital
    relief for millions of small entrepreneurs who are struggling
    to make ends meet. I would urge the committee to ensure that
    the funds provided to small community banks under this
    legislation are lent to small businesses at rates and under
    conditions that make them attractive and useable.
        These proposals will address some of the main causes of
    small business failure we are facing. However, I urge the
    committee to address the second problem I raised, the lack of
    demand for design and construction services caused by a lack of
    access to financing for our clients. Members of this committee
    have introduced numerous bills to address this issue, and they
    deserve serious consideration.
        The bottom line is this: Until we find a way to get
    financial institutions to move the pendulum back to the center
    and begin to providing credit for worthy and vital projects, we
    are not going to see a broadbased recovery. Every idle
    construction site represents jobs lost and our Nation's
    competitive edge weakened. I call on Congress and the
    Administration to use every tool at its disposal to address the
    profound challenges that the lack of credit is presenting to
    our communities and our Nation.
        I wish to thank the committee for its hard work in
    addressing these complex issues, and I look forward to
    answering any questions committee members may have.
        [The prepared statement of Mr. Determan can be found on
    page 71 of the appendix.]
        The Chairman. Thank you.
        And finally, Mr. James MacPhee, the chief executive officer
    of the Kalamazoo County State Bank, and he is here on behalf of
    the Independent Community Bankers of America.

        STATEMENT OF JAMES D. MacPhee, CHIEF EXECUTIVE OFFICER,
       KALAMAZOO COUNTY STATE BANK, ON BEHALF OF THE INDEPENDENT
                  COMMUNITY BANKERS OF AMERICA (ICBA)

        Mr. MacPhee. Thank you. Mr. Chairman, Ranking Member
    Bachus, and members of the committee, I am James MacPhee, CEO
    of Kalamazoo County State Bank in Schoolcraft, Michigan, and
    chairman of the Independent Community Bankers of America.
        I am pleased to represent community bankers and ICBA's
    nearly 5,000 members holding $1.1 trillion in assets at this
    important hearing on initiatives to promote small business
    lending.
        Small businesses create jobs when they have access to
    credit, and they will play a leading role in the economic
    recovery. In my State of Michigan, we face the Nation's highest
    unemployment at 14.1 percent. For me, this discussion is not in
    the least abstract. It is personal and close to home. My
    customers, friends, and neighbors have felt the full impact of
    the recession. The need for resolution is urgent.
        ICBA strongly supports the proposed Small Business Lending
    Fund Act because it will help community banks do what they do
    best, support small business lending. Community banks are
    prolific lenders to small businesses. We continued to lend
    during the economic crisis, while the megabanks cut back most
    dramatically. Our business model is built on longstanding
    relationships with our customers, and we stand by them in good
    times and bad.
        My bank survived the Great Depression and many recessions
    in its more than 100-year history. We are proud to continue
    serving our community through this difficult economic climate.
        The SBLF is a fresh, bold program with the incentives
    needed to get credit flowing to many thousands of businesses,
    using community banks as conduits. TARP and other emergency
    capital programs were enacted in the urgency of the crisis and
    were used primarily by the mega banks. The SBLF would target
    community banks and is structured to incentivize small business
    lending.
        ICBA is pleased to see that the proposal has many of the
    features we have recommended, features that will make the
    program attractive to community banks and successful increasing
    lending.
        First, it appears to completely avoid the onerous TARP
    restrictions such as warrants, compensation restrictions, bank
    dividend restrictions or restrictions on net operating loss
    carryback. Such punitive conditions would only discourage
    participation.
        Second, we support appropriate Treasury oversight of the
    plan which will give the public confidence of the funds being
    well used. However, oversight should not be so overbearing that
    it would discharge participation.
        Third, we are pleased that no applicant will be denied
    based solely on its CAMELS rating. This will ensure that the
    broadest possible number of community banks can participate and
    the small business customers of these banks will have access to
    SBLF-financed loans. Interest at community banks should be
    evaluated with the inclusion of capital provided by the
    program. This will give a fuller picture of the bank's position
    under the plan.
        And, fourth, we are pleased that agricultural loans are
    explicitly eligible. Farms are an important component of this
    small business sector.
        Though we await the final legislative outcome on various
    aspects of the program, we believe that it could attract broad
    participation by banks and result in more lending to small
    businesses. Notably, $30 billion in SBLF capital can be
    leveraged by community banks to support $300 billion in new
    lending. The plan would have tremendous bang for the buck.
        In addition, Mr. Chairman, no one program in isolation is
    going to do the job of restoring credit to small businesses. To
    maximize its impact, the SBLF should be considered with other
    initiatives. These include: one, restoring the value of GSE
    preferred shares. The banking sector, including many community
    banks, lost an estimated $15 billion to $20 billion when the
    Treasury Department took Fannie and Freddie into
    conservatorship in September of 2008 and destroyed the value of
    their preferred shares.
        Two, moderating an aggressive exam environment.
    Overreaching exams are exacerbating the conditions, the
    contraction, and credit for small businesses. The SBLF program
    will only work if bank regulators do not choke off lending with
    overly aggressive bank regulation.
        Three, extending the FDIC's Transaction Account Guarantee
    Program, TAG, gives the assurance to small businesses that the
    payroll accounts are guaranteed and provides community banks
    with liquidity to make additional loans.
        Lastly, recognizing State programs that have been
    successful in increasing credit to small businesses.
        In conclusion, ICBA strongly supports the SBLF proposal,
    which has the potential to increase the flow of credit to small
    businesses. We look forward to working with the committee to
    make the program a success. Thank you very much.
        [The prepared statement of Mr. MacPhee can be found on page
    85 of the appendix.]
        The Chairman. I have a couple of quick questions, and then
    I will give some time to the gentlewoman from New York, who has
    an important role here.
        Mr. Sperling, as you said, you talked to Mr. Kanjorski, who
    is very interested in this. I am told that the Administration
    is essentially supportive of the provision that Mr. Mica talked
    about to increase the possibility of credit union lending; is
    that correct?
        Mr. Sperling. The Administration, having worked with
    Congressman Kanjorski in the House, and Senator Udall and
    Senator Schumer in the Senate, believe that we could support--
        The Chairman. No, not could you, would you? Do you?
        Mr. Sperling. We do support--
        The Chairman. Thank you.
        Mr. Sperling. --a compromise expansion of the credit union
    business loan program.
        The Chairman. All right. I wanted to get that on the
    record. It is not germane to this bill, but I have talked--I
    gather there is a proposal, but I did want to clear that up.
        Mr. Sperling. Mr. Chairman, I just want to make clear so
    there is no confusion, we do support an expansion on the member
    business loan limit, but we do have stronger safety and
    soundness safeguards we believe that are in--
        The Chairman. So will there be a proposal coming forward
    with your support?
        Mr. Sperling. We have been working with Congressman
    Kanjorski.
        The Chairman. That is not what I asked you, Gene. Come on.
    Are you going to be giving us a proposal that you support?
        Mr. Sperling. Yes, we have a--
        The Chairman. Thank you.
        Mr. Sperling. I am willing to discuss it now and willing to
    send it up to you, Mr. Chairman.
        The Chairman. Five minutes are up. I thought that ought to
    be clear so everyone would know where we are.
        One more question, for Mr. Determan, people have said, no,
    the problem is not that there isn't enough lending capacity in
    the banks, but that there is no demand by small businesses.
    Your answer to that?
        Mr. Determan. Not accurate. There are a lot of laid-off
    architects these days who are starting their own businesses.
        The Chairman. To speed this up, as I heard you, you said
    you are aware of people who have projects they could do if they
    could get the lending, the loans; is that correct?
        Mr. Determan. Correct.
        The Chairman. Thank you.
        Let me ask Mr. MacPhee, the characterization from your
    members, is it a lack of demand or is there also--is there a
    demand that could be better met if you had more capital?
        Mr. MacPhee. There is definitely starting to--we are
    showing demand in the marketplace right now.
        The Chairman. I think that is important, both from the
    lender and the borrower, we have an acknowledgement that there
    is a demand out there that is not being met at the current
    level of available funds.
        I yield back the balance of my time to the gentlewoman from
    New York.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Mr. Sperling, the proposal from Treasury at this point does
    not specify how a small business loan should be defined; is
    that correct?
        Mr. Sperling. What it does, chairwoman, is that--
        Ms. Velazquez. Just tell me yes or no.
        Mr. Sperling. It uses what we believe is the single-best
    proxy that we can for whether a small bank is increasing their
    lending to small businesses.
        Ms. Velazquez. What is that?
        Mr. Sperling. We rely on four criteria: CNI loans; owner-
    occupied CRE loans; loans that support agriculture production;
    and loans secured by farmland, of which, in small banks, 80
    percent--70, 80 percent of those tend to be small loans to
    small businesses. So that is the baseline.
        Ms. Velazquez. My question to you now is, how can we make
    sure that large businesses do not benefit from this program and
    that banks are not provided with incentives for making loans
    that they are no relation to small businesses?
        Mr. Sperling. I think if you look at small banks, community
    banks, first of all, they have concentration limits, limits of
    how much they can give on a single loan as a percentage of
    their assets or a percentage of their capital. I think it is
    definitely the case that people may be giving loans to over a
    million or to companies that employ a couple of hundred people.
    But we still think that these are the type of small- and
    medium-sized businesses that are very important--
        Ms. Velazquez. What about if banks participate in making
    loans that are syndicated loans?
        Mr. Sperling. I think that we would be open to discussion
    on that. Right now, what we are doing is looking at what their
    baseline is for 2009 in those four areas. If they are expanding
    above that, then they would be meeting the test.
        Ms. Velazquez. So why is it so difficult to include in the
    proposal that loans will be made that fit the definition under
    the Small Business Act?
        Mr. Sperling. Well, I think Mr. MacPhee would back me up on
    this as well, that if you are doing a proposal that is
    performance-based, in other words, it is showing the increase
    from 1 year to the next, you have to use what is the existing
    data. You are stuck with the existing data. So we couldn't go
    back and tell a bank, small community banks, which average $200
    million in assets, that they have to reconstruct a new
    baseline.
        Now, going forward, maybe we should have better data to do
    that. But I think if we want to focus on performance, which so
    many people do, we have to use the data that exist right now
    and do the best proxy for small businesses.
        Ms. Velazquez. Which is not the best data.
        The Chairman. The gentlewoman will have her 5 minutes in
    turn.
        The gentleman from Texas.
        Mr. Hensarling. Thank you, Mr. Chairman.
        During your time I heard earlier, I listened carefully to
    the various banking organizations and financial institutions
    that have endorsed this particular bill. I am not sure that you
    needed unanimous consent to enter it into the record. I would
    be very happy to stipulate that most people, if they had an
    opportunity to get a taxpayer subsidy with few if any strings
    attached, would probably sign up for that deal. So, in the
    future, I am not sure that we need unanimous consent to enter
    that into the record. I think it is a great deal for everyone
    except perhaps for the taxpayer.
        Now, we are having a debate somewhat on whether or not when
    we look at small business lending, is the greatest challenge
    from a bank capital insufficiency or from a lack of
    creditworthy loan demand. Mr. Atkins, I think I read in the
    Congressional Oversight Panel--and, again, I congratulate you
    for your service and I am personally happy I don't have to do
    it anymore, but I believe I read in the Congressional Oversight
    Panel, you alluded to a report from the Fed, I think dated in
    February, that said the ratio of cash on bank balance sheets to
    corporate loans outstanding has more than quadrupled since mid-
    2008. And I think this was in your report--if not, it was in a
    press report--that in an April survey of the Federal Reserve, a
    senior loan officer says that loan demand has generally
    weakened further. Is that correct, and is that what the panel
    has observed?
        Mr. Atkins. Yes. In fact, sir, we have a couple of charges
    here that I think have been taken from our report that
    demonstrate this. The first one shows cash as a percentage of
    total assets, and you can see how here during the last few
    years since 2007, 2008, they have really--it spiked as a
    percentage approaching 8 percent from down at a low of 4, you
    know, and a half or so.
        Secondly, the second chart here shows the outstanding
    commercial industrial loans at commercial banks since 1980. And
    so you can see in the various recessions that we have had here,
    first in the 1987 one and then also in the 1990's, the early
    1990's and then now, you can see how in each instance, CNI
    loans have decreased at the commercial banks. So I think the
    data does support what you are saying, and that has been in our
    report.
        Mr. Hensarling. I have another question for you. In the
    time that I served on the Congressional Oversight Panel, which
    consists of three Democrats and two Republicans, frankly,
    getting a unanimous report was greatly the exception and not
    the rule, although it did happen from time to time. As I
    understand it, your most recent report was a unanimous
    decision, although I don't have the language right in front of
    me, or perhaps this is it: ``After a thorough review, we found
    little evidence that these programs--referring to the TARP
    programs dealing with small business lending--have had a
    noticeable effect on small business credit availability.'' Is
    that correct? Is that what the Congressional Oversight Panel
    reported unanimously?
        Mr. Atkins. Officially, we found that the Capital Purchase
    Plan and the other programs have not had any discernible
    effect. Part of it is there is just hardly any information out
    there, and Treasury could do a lot better job of keeping
    information. But there is a real dearth.
        But you are right. We found hardly any evidence of that.
        Mr. Hensarling. Mr. MacPhee, I have a question for you
    about bank capital. If I have this correct--and correct me if I
    am wrong--that based on the call report for the first quarter
    of 2010, your bank reported a Tier I capital ratio over 23
    percent, and to be well capitalized I believe you need capital
    over 6 percent. Doesn't that suggest that your particular bank
    is sitting on a lot of untapped lending capacity?
        Mr. MacPhee. Actually, our Tier I capital is 13.1 percent.
    That is total risk base, I think you are looking at. But we are
    well capitalized. We saved our money during the good times so
    we could withstand this downturn. So we are one of the
    fortunate ones.
        Mr. Hensarling. Ostensibly, a number of banks are in that
    condition. Some aren't.
        My time's running out, but, Mr. Sperling, you recently had
    a number of bank failures, as you are aware of. Just recently,
    Midwest Bank and Trust on May 14th; Southwest Community Bank,
    May 14th; New Liberty Bank. These are in Illinois, Missouri,
    and Michigan. Is there anything in this proposal, in the
    underlying legislation that would have prevented these banks
    from accessing SBLF funds?
        Mr. Sperling. Congressman, I think that the record on the
    overall Capital Purchase Plan so far is that it has actually
    been profitable for the American taxpayer. Whatever the wisdom
    that you--our support for the program is, we still support the
    idea that they have to apply to the regulators. You have to--
        Mr. Hensarling. Is that a yes or a no?
        The Chairman. The gentleman's time has expired.
        Mr. Sperling. I'm sorry. I don't know what the yes or no
    question was.
        The Chairman. The gentleman's time has expired.
        The gentlewoman from California. But I will ask her for 10
    seconds in order to--I think my colleague said that the TARP
    Small Business Lending Program had not worked. It had not
    worked because it doesn't exist. I am not aware of any TARP
    Small Business Lending Program. There was a TARP program. This
    is the first effort I have seen to focus on small business.
        The gentlewoman from California.
        Ms. Waters. Thank you very much, Mr. Chairman.
        Let me thank the panelists for being here today, and it is
    good to see Mr. Gene Sperling. He has been around working on
    these issues for a long time. I am very pleased about the two
    initiatives that we are talking about today.
        I don't know, Mr. Sperling, whether or not you are aware
    that this committee worked very hard on the Wall Street reform
    bill that left here and passed out on the Floor, now being
    discussed, its counterpart, on the Senate side, that the costs
    we discovered and we know that only 2.4 percent of all
    minority-owned firms and 2.6 percent of women-owned firms are
    in the finance and insurance industry.
        So we also know that, according to a 2006 GAO report,
    minority-owned businesses have a higher rate of having their
    loans denied or paying higher interest rates even after
    controlling for creditworthiness and other factors and on and
    on and on, that we need to do something, and we need to stop
    lamenting this year in and year out. So we created in that
    legislation the offices of--minority and women-owned offices
    minority assistance, and we are not getting any help from the
    Administration.
        The Congressional Black Caucus and, I believe, the Latino
    Caucus, we are focused on trying to create some real
    opportunities for minorities in funding and finance. And so I
    want to know what you know about it and whether or not the
    Administration is going to help us on the Senate side.
        Also, I would like to basically know, we talked about
    eligible banks. What we find is, oftentimes, the eligibility is
    such that it denies the very institutions that need help--the
    small banks, the community banks, the CDFIs.
        For example, in one initiative, the President's Community
    Development Capital Initiative does not include the nonprofit
    CDFIs, which make up 50 percent of the CDFIs. So quickly, your
    response on the offices of minority assistance and women-owned
    business assistance; and, secondly, on the Community
    Development Capital Initiative that cuts out the nonprofits;
    and, thirdly, the criteria for eligibility. We really want to
    understand it. Can you help me?
        Mr. Sperling. Congresswoman, on the first issue, I guess I
    would get back to you, just in that we have a team who is
    working on the Senate side. The amendments are fluid right now.
    I would rather to get back to you later today than
    inadvertently interfere with any negotiations going on.
        On the CDFI initiative, I want to stress that was an issue
    we were able to do through TARP, because the CDFIs, unlike the
    community banks, were willing to partake in this program. This
    was, I think, a very strong program in that it allows them to
    get capital for 8 years at 2 percent, a low rate. It also
    allows them to get--
        Ms. Waters. What about the nonprofits?
        Mr. Sperling. You are referring to, I think, the CDFI loan
    funds; and I think it is true that, while our initiative deals
    with the CDFI credit unions and the CDFI banks that make up 80
    percent of the assets in the CDFI community, it was not
    something that could be used for the CDFI loan funds. I think
    that is a shortcoming, and I am not sure what the best vehicle
    is for that. But we think there are excellent CDFI loan funds.
    We are trying to do more just through the appropriation
    process, but that is something we would be very interested in
    working with you on, because we do think CDFI loan funds--
        Ms. Waters. That is very good.
        Let me just say, before you try even to attempt to talk
    about the criteria, my time is up, that we want to send a
    serious message, a serious message about the recovery bill that
    the African American, Black Caucus, Latino Caucus, we are going
    to seriously take a look at what the Administration is doing to
    give some assistance to us; and we are not poised to support
    that unless we do.
        And, thirdly, these minority--these small banks, these
    community banks, we have to make sure that you don't have
    criteria that is going to prevent them. They should not have to
    jump through a lot of hoops. We want them to have the money. If
    they put the money out there, it will help to stimulate the
    economy. The small businesses need it. How are you going to
    expedite it and make sure it happens?
        Mr. Sperling. Well, I want you to know that one of the
    first groups that we did consult with in doing this was the
    National Banking Association. Michael Grant brought in banks;
    and they were very supportive of the fact that having an
    initiative that was supported just on smaller banks, where the
    focus was just for banks under a billion with somewhat less
    from a billion to $10 billion, would very much target the
    minority banks around the country. And several of them are
    also--a few of them are trying to apply to be CDFIs now,
    additional CDFIs, to access the more generous terms because
    they fit the criteria of lending 60 percent below moderate-
    income communities. So I do think we have made some process,
    although not enough.
        Ms. Waters. All small banks, all.
        The Chairman. The gentleman from Florida, Mr. Posey.
        Mr. Posey. Thank you, Mr. Chairman.
        Now, Mr. Sperling--you seem to be the popular one today, so
    I will ask you--when discussing how they arrived at the
    decision to request $700 billion from the American taxpayers--
    and Secretary Paulson, as you may remember, made the infamous
    statement: ``It is not based on any particular data point; we
    just wanted to choose a really large number.'' At least for
    some of us on this committee, $30 billion is also a pretty
    large number. Would you please describe in detail for us how
    you arrived at the $30 billion number you are asking us to
    authorize?
        Mr. Sperling. I think that $30 billion reflected the best
    efforts of the people at Domestic Finance in Treasury having
    consulted with different community banks as to what we thought
    the maximum amount of participation would be. You try to get
    the best amount.
        I think the important--
        Mr. Posey. Okay, okay, that is good. So, in other words, it
    is another ``Hail Mary.''
        Mr. Sperling. No, I didn't say that, sir.
        Mr. Posey. All right, I said it. That is what we have done
    so far.
        What gives the Administration confidence that the $30
    billion will succeed where $700 billion failed?
        Mr. Sperling. So here are some very, very important
    differences. One, this is targeted just to small banks. You can
    only get the 5 percent of risk-rated assets if you are a
    community bank under $1 billion. Those are banks that average
    about $200 million in assets. They are the Main Street banks,
    the community banks, the neighborhood banks, the banks that do
    relationship lending to small businesses that I think many
    people in this body have asked us repeatedly to focus on.
        Secondly, this is performance-based; a lot of what people
    were upset about was the idea of a perception of benefit
    without proof of an increase in lending. So we have an
    initiative where it only costs the taxpayers, only a benefit
    going--in the dividend if you are increasing your small
    business lending over the past year. And, in fact, if you
    don't, the rate actually goes higher, making it even that much
    more performance-based. So I think it is very different in that
    it is for small businesses and performance-based.
        Mr. Posey. So you are trying to get some more money out
    there. Mr. Mica has a proposal to get some more money there
    without the Federal Government pouring it out of their bucket.
    What you do think of that?
        Mr. Sperling. I think that--as I said, I think we have been
    working with Mr. Mica, with Congressman Kanjorski, Senator
    Udall, and others and think that we can support going to a
    higher member business loan limit. In fact, we are willing to
    go as high as 27\1/2\ percent for some banks, credit unions
    which are approved by their regulator. However, we want to make
    sure they have been doing at least 5 years of member business
    lending. We want to make sure they have 7 percent capital,
    equivalent ratios.
        Mr. Posey. I am surprised that wasn't part of this plan. I
    mean, here we have money already out there without throwing any
    more taxpayer money at it. They want to help solve the problem,
    but you apparently don't think that is a good idea, where at
    least that is on the back burner right now. Why don't we put
    some of the public money up, some of the people who want to
    help solve this thing without more taxpayer help? Why don't we
    give them a little bit more priority?
        Mr. Sperling. We actually believe that the terms of the
    Small Business Lending Fund that we put down, as Chairman Frank
    said, may not cost the taxpayers a penny, may even raise
    potential money, and they address 8,000 community banks in our
    country. And if we do not make an effort on the community
    banks--
        Let me say something about community banks. Community banks
    may make up 20 percent of the assets. They probably hold 60
    percent of the small business loans. An average community bank,
    80 percent of their lending is in either agricultural--
        Mr. Posey. We know most of that. That is why we wonder why
    you excluded them previously from funding. If they are so
    important, why weren't they given any help before?
        Mr. Sperling. This is a very important point: They were
    eligible, and more than 600 of them who applied backed off
    because they felt that the TARP stigma discouraged them from
    doing that. Even though in this context, it is not a bailout;
    it is not to bail out the bank. It is to encourage more small
    business lending because we want small businesses to expand,
    get credit, and create jobs.
        So by taking away the TARP stigma and offering them an
    opportunity to get more capital performance-based for the
    purpose of increasing small business lending and creating small
    business jobs that this was a cost-efficient, high-bang-for-
    the-buck method to do that.
        But we support--as I said in my testimony, this is a
    multifaceted problem. It needs a multifaceted answer on the
    demand side, the credit union side, the community bank side.
        Mr. Posey. This is TARP with lipstick.
        The Chairman. The gentleman's time has expired.
        The gentlewoman from New York, Mrs. Maloney.
        Mrs. Maloney. Thank you very much, Mr. Chairman, for having
    this very important hearing.
        On the Joint Economic Committee, some of the studies that
    are coming forward from the Treasury Department, and the Labor
    Department are showing that, unlike prior recessions, small
    businesses usually hire very quickly, but we are not seeing
    that. They are very steady, and the hiring that is taking place
    is taking place with larger and middle-sized banks. When you
    talk to small businesses, they inevitably say it has been lack
    of access to capital. So I strongly support the chairman's bill
    that would target lending and that these dollars would get into
    lending, into the pipeline to help small businesses.
        If we were able to do this, how quickly could we expect
    increased capital to flow through to hiring, to be realized in
    hiring in small businesses with this $30 billion bank working
    through the community banks and the regional banks? Anyone?
        Mr. Sperling. Our belief is that we could get this up and
    running very quickly, within a couple of months. And that we
    also do believe that--I know this committee has focused a lot
    on the strain from commercial real estate loans on community
    banks. And one of the things you don't want is for community
    banks to respond to that by conserving capital by pulling back
    on their small business lending. So our hope is, as soon as
    this passes, community banks would understand that they do have
    a potential capital cushion that would be an alternative to
    restricting their small business lending.
        Mrs. Maloney. Would anyone else like to comment on it?
        Mr. Atkins. I think we are a bit more sanguine about that.
    I think we have doubts that programmers can get up and running
    very quickly or that it would be effective once it is.
        Mr. Mica. I would like to say our program is up and
    running. A recent NFIB study said that, right now, 40 percent
    of all lending needs are unmet; and it was--they couldn't make
    loans to 40 percent--I am sorry--40 percent were not getting
    the loans. But throughout the 2000's up until now, 90 percent
    were getting loans. So there is a disparity in those who need
    loans, and we are ready to do it. Our program is up and
    running, wouldn't cost a penny, and we are ready to go.
        The Chairman. Would the gentlewoman yield to me for a
    minute?
        You strongly disagree with those who say the problem is
    simply a lack of loan demand.
        Mr. Mica. Now, I would say it is both. There is a lack of--
    loan demand has gone down, but meeting the loan needs of those
    who want it has also restricted tremendously.
        The Chairman. I thank the gentlewoman.
        Mrs. Maloney. There has really not been a lot of data
    compiled on small businesses, but it is certainly something
    that all of my colleagues are talking about in their districts
    across the country. People cannot get access to capital. And
    how fast do you think conditions would improve if we could get
    this out to the small businesses so that they are hiring and
    moving forward?
        Mr. Johansson. I was going to say we have $150 million in
    backlog right now for our loan guarantee program. We can put
    this money to work tomorrow, and those are thousands of jobs
    that the State of Maryland would retain and create. There is a
    network of 34 other States and territories that have these. So
    there are active programs in place that have backlogs that can
    use the money right now.
        Mrs. Maloney. Okay. Any other comments?
        Mr. MacPhee. On the eastern side of the State of Michigan,
    we have a lot of small community banks that are financing Tier
    II and III auto suppliers that make about 3,000 parts for the
    auto industry that aren't made at the factory. Many of those
    small companies are out of capital; and many of the small
    banks, due to the tremendous deflation in property values, have
    had to write down property. On the margin, these banks are
    making money. They are second- and third-generation banks,
    well-managed, 30-year CEOs, but they can't track private
    capital. And this program would go a long way towards helping
    them reestablish, get these suppliers back into good shape and
    get things moving for the State of Michigan.
        Mr. Brown. I would like to point out the demand letter is
    somewhat misleading in that it represents those who are
    eligible under the current criteria, and it is precisely those
    loans that are just outside the margins that the State programs
    aim to support and, therefore, make eligible.
        The Chairman. The gentleman from New York, Mr. Lee. Mr.
    Royce, I'm sorry. Mr. Royce, the gentleman from California.
        Mr. Royce. Thank you, Mr. Chairman.
        I was going to ask a question of Mr. MacPhee, and this goes
    to a concern that we often hear out in California from our
    banking community. The basic gist of it is there is $3 trillion
    in commercial real estate loans out there that are on banks'
    balance sheets or they are securitized through NBS, and we are
    going have $1.4 trillion of that roll over between now and
    2013.
        This is what banks communicate to me. They say, we have to
    go out there and get a new appraisal on property value. These
    are performing loans. In many cases, they are performing loans.
    But we can't roll these loans over because even though the
    revenue coming from the property remains strong, we have
    overzealous regulators leaning on us. And so we cut off the
    credit, and we are creating in that process--according to any
    number of bankers that I have talked to, we are creating
    something of a vicious circle. Because the more we close down
    access, the more we refuse to roll over these loans that are
    performing, the more we are impacting these communities; and it
    will become a self-fulfilling prophecy if we continue to do
    enough of this.
        And so the question they have is, do we have to be so
    doctrinaire in terms of this concept that--we know the value of
    the property. There is no market out there for the property.
    So, by definition, we can't meet that test.
        Now, we have had a number of discussions back here with
    regulators in Washington, but their point is the discussions we
    have with regulators in Washington never seem to reach the
    front, never seem to reach out in at least the Southwest where
    they are dealing with very overzealous regulators telling them
    that this is the way they have to do business.
        Again, their point is, let us be bankers. Let us make these
    judgments on our own. You are creating this lack of liquidity
    in the system. And I was wondering, Mr. MacPhee, have you heard
    a certain number of these complaints? I would suspect you might
    have.
        Mr. MacPhee. Yes, sir. Being a community banker in any one
    of these States like Michigan, California, Georgia, or Florida
    is like being a candle in a hurricane. It has been a difficult
    process to keep the flame lit.
        I only point back to the farm crisis, and I lived through
    that farm crisis. When the income stream was steady, payments
    were on time, but property values had dropped drastically, and
    there was forbearance. And through that forbearance, rather
    than write down property values to some ridiculous level that
    we were never going to get back, we were able to hang in there
    with our customers, accept payments on a timely basis; and,
    sure enough, property values came back over time. I think that
    is a really important lesson during this critical time.
        Mr. Royce. Well, I would hope, in my frame of reference
    here, instead of putting more taxpayers' dollars at risk, if we
    would first pursue efforts to have field examiners implement
    their authority maybe in a more balanced manner, that would, I
    think, address part of the problem.
        Another part of the problem--and this goes to legislation
    that I and the ranking member have on--Mr. Kanjorski and I have
    on the issue of trying to expand the 12.25 percent cap, it
    seems--and I was going to ask Mr. Mica this question. It seems
    that we could also provide some liquidity by raising the
    statutory limit on credit unions for member business lending at
    this time; and, again, that would have no cost to the American
    taxpayers.
        I was going to ask you, Mr. Mica, considering that getting
    into the business of lending into the market requires quite a
    bit of capital expenditure. For one thing, it requires hiring
    and training personnel. So many credit unions probably don't
    believe it is a worthwhile endeavor if they are going to
    quickly hit that 12.25 percent cap. Whereas if that is raised,
    it might be worth making the investment rather than--you know,
    if you are just going to handle five or eight loans in your
    portfolio for your local business, for your small credit union,
    that is one thing. If you know that cap is going to be raised.
    I was going to ask you, do you agree with that?
        The Chairman. The gentleman's time has expired, but the
    question has been thoroughly discussed, so I don't think we
    have lost anything. Mr. Mica and Mr. Sperling have talked about
    it significantly.
        Mr. Royce. I appreciate it, Mr. Chairman. Thank you.
        The Chairman. The gentlewoman from New York, Ms. Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Mr. Sperling, last week, the Congressional Oversight Panel
    released a report where, basically, they criticized Treasury's
    proposal, saying that he raised a question about whether the
    capital infusion program that focused on the supply side
    solution is good enough or do we need more to incentivize small
    businesses to get them off the sideline to spur demand on
    loans? And are you considering any incentives?
        Mr. Sperling. Yes. As I think I said at the beginning, and
    as I think we have discussed, I think you have to look at the
    demand and the supply side. As we said, we are seeing 45
    percent of small businesses who want lending can't get the
    lending they need.
        The Congressional Oversight Panel, I will also mention, in
    May put out a report in which they stressed that raising
    capital has been difficult in the last year even for healthy
    banks. It went on to say that uncertainty which is making
    raising capital difficult can also lead banks to conserve
    capital instead of making loans. So we want to make sure the
    banks have the loans, the capital, and the incentive.
        But I think, as you have discussed with us, we also could
    face an issue where there are creditworthy borrowers who are
    just a little uncertain about the economy at this moment; and I
    do think, as you have suggested to us, that there may be ways
    that we could have a temporary program that would help get some
    good borrowers who are uncertain about the economy to increase
    their demand going forward. That is something we look forward
    to working with you on, not just in the long term but in the
    next several days as to whether that could be part of this
    small business jobs bill.
        Ms. Velazquez. Thank you.
        Mr. Determan, in your opinion, what will encourage a
    creditworthy business person to get off the sidelines and apply
    for loans?
        Mr. Determan. Very simply, growth. We have a lot of
    architects, for example, right now, who have been laid off
    because of the economy, and are starting up their own
    businesses. You have to have money to start that business, to
    get office space, to hire employees, to pay payroll for the
    first 3 months before you get your first dollar in. So you have
    to have the loans to support that. At the same time, you have
    to have the projects to do. The biggest problem we are seeing
    is that there is no financing for construction.
        Ms. Velazquez. Thank you.
        Mr. Atkins, we have heard repeatedly here today and in
    previous hearings conducted by this committee and the Small
    Business Committee especially from small banks that an overly
    restrictive regulatory environment is a significant factor in
    the credit crunch that is affecting small businesses. Does the
    data reviewed by the Congressional Oversight Panel bear out
    this perspective? And I would like to ask you, you are a former
    regulator, in your opinion, how should we address this issue?
        Mr. Atkins. Well, first of all, the data is mixed. I think
    there are a lot of anecdotes about how bank examiners are
    tightening down a lot, just like they did back in previous
    recessions as well. After you have had an asset bubble and
    there is a lot of scrutiny being paid--
        For example, with respect to architects, we just came
    through a huge real estate housing and we still have a
    significant commercial real estate overhang. So there just is
    not the demand for new projects. And even if you had money you
    have to have revenue to support these projects from rent and
    everything else. I mean, that is a big--sorry to say,
    unfortunately, for architects, that is a big problem right now.
        Ms. Velazquez. Mr. Atkins, in previous recessions we saw
    that people who were laid off created the startups. They
    created new businesses. We are not seeing that now. How can we
    get the startups and small businesses that are struggling to
    cope with the consequences of this economic downturn to be able
    to get credit?
        Mr. Atkins. Well, in order to have credit and to be able to
    pass the scrutiny of bank regulators and everything else, you
    have to have the anticipation of being able to have that loan
    pay off, so that you are going to be able to sell services or
    products or whatever once you make that loan. That is the
    crucial thing when you have a economic downturn, whether or not
    you have the consumer demand out there to support the business.
    That is why, again, you have a structural situation here in the
    economy to look at taxation, regulation, and those other sorts
    of things that inhibit businesses.
        The Chairman. The gentlewoman from California is recognized
    to make a unanimous consent request.
        Ms. Waters. Thank you very much, Mr. Chairman.
        I am requesting unanimous consent to insert into the record
    for purpose of disclosure the fact that my husband, Ambassador
    Sidney Williams, is an investor in OneUnited Bank, a small
    minority community bank in Los Angeles.
        The Chairman. The gentleman from New York is now recognized
    for 5 minutes.
        Mr. Lee. Thank you, Mr. Chairman.
        I appreciate everyone coming in today. This is an important
    issue.
        In fact, I just had--the President of the United States was
    in Buffalo, New York, this past week, and it was nice to have
    him there. What I wanted to have him do was to sit and listen.
    The people who are going to get us out of this recession are
    the people outside of Washington, D.C. In my mind, it is
    bringing back a level of certainty to this economy.
        You talk to people throughout my district--it is a very
    Midwestern-type community; and what I hear, loud and clear, is
    people are tired of the taxpayers' subsidies, tired of it. We
    are fortunate that the local banks and community banks have
    actually flourished during this period. They were responsible
    lenders. We had people who didn't overreach. But what they are
    tired of--and we talk about in this case another $30 billion. I
    hate to tell you the revenue of Microsoft Corporation last year
    was about $60 billion. We are just going to throw another $30
    billion--we throw numbers around with no regard when we are
    criticizing countries like Greece. We have to get our fiscal
    house back in order.
        What I have seen--I am a new Member to Congress, having
    been here about 16 months, and I came out of the private
    sector. Certainty into the marketplace is what is going to get
    investors back in there. But all I have seen in 16 months is we
    have a health care legislation we are still trying to
    understand, small business owners are afraid to go out and
    reinvest until they know the repercussions of that. We have tax
    cuts from 2001 and 2003 that are sitting out there. We have
    potential with a cap and trade. We have the President's Debt
    Commission. We have issues on carried interest. There are
    dividends, capital gains.
        These are what--to my mind, these are the issues that are
    helping to keep people off in investing. But surely I can tell
    you people in my district only want bankers to lend to those
    who are creditworthy. They are tired of the bailouts.
        With that being said, maybe I can go over to Mr. MacPhee.
    As I said, many people believe the issue is a lack of demand
    from creditworthy borrowers brought on by the adverse economic
    conditions. To what percent do you think that is versus this
    issue and the lack of demand right now?
        Mr. MacPhee. Let me just say this, community bankers are
    commonsense lenders. We have to live with our decisions every
    day because these people are our neighbors. We didn't create
    this mess. We have always been steady lenders to our
    communities. And if we don't loan within our communities, we
    don't have a market.
        For anyone to insinuate that we are going to take this
    money and just go out and gamble it after what just happened, I
    just can't believe that would ever happen in a community bank
    environment. That is not how we work. That is not how we
    function. We are part of our communities. We have to do the
    right thing by our customer or we are out of business.
        Mr. Lee. Well, let me shift gears and go back to Mr.
    Sperling.
        Elizabeth Warren has criticized TARP for not requiring
    banks to lend the capital they received from the taxpayer. I am
    still trying to understand this. Maybe you can help clarify it
    in terms of what provision of this bill requires banks to lend
    the funds that they are receiving?
        Mr. Sperling. What it does is it builds in a very strong
    incentive. So when you get--if you are a bank--
        Mr. Lee. There is an incentive, not a requirement.
        Mr. Sperling. That is right. And if you were to do a
    requirement--
        Mr. Lee. I appreciate that.
        Mr. Sperling. --then you would be in danger of--
        Mr. Lee. Mr. Sperling, I only have a minute--
        The Chairman. The gentleman from New York's time--
        Mr. Lee. Thank you, Mr. Sperling.
        Understand, again, I am getting back to the point that it
    is a nice thing to do potentially, but there is not a
    requirement for them to lend and taxpayers surely have had
    enough.
        Last question, I would love to go back to--where am I
    here--sorry. One more to Mr. Brown. What are you hearing from
    local businessmen? I know you have from your--based on your
    background, given that commercial banks--as the reasons given
    by the commercial banks for this denial of credit.
        Mr. Brown. I think it goes back to the temporary downturn
    in the economy which affects their 3-year average of free cash
    flow, which, frankly, we at the MEDC don't believe is a true
    measure of their ability to pay going forward, as well as the
    decrease in the collateral value.
        As I said, I think the demand numbers are misleading,
    because many borrowers are not looking for capital, merely
    because they have been turned down so many times they have just
    shrunk and almost browned out their businesses. And the ones
    that we are lending to are putting them to work.
        Mr. Lee. Thank you.
        The Chairman. The gentleman from North Carolina.
        Mr. Watt. Thank you, Mr. Chairman.
        I was here for the testimony on both of these legislative
    proposals, H.R. 5297 and H.R. 5302, proposals of the
    Administration. So I presume Mr. Sperling is here in support of
    these; and it sounded to me like everybody else on the panel,
    with the exception of Mr. Atkins, thought that both of those
    legislative proposals were good ideas. If I have misread that,
    please raise your hand if you disagree with what I just said.
        Okay, then I want to focus on the two pieces of legislation
    for everybody other than Mr. Sperling and Mr. Atkins. Mr.
    Atkins, I understand, disagrees with the proposals, but, for
    the other people on the panel, are there things in either of
    these proposals that need--specific things that need to be
    tweaked to make the proposal stronger? Does anybody have any
    suggestions to make the proposal stronger or more effective?
        I am not talking to you, Mr. Atkins. You already told me
    you disagree with the proposal.
        Mr. Atkins. I could suggest something.
        Mr. Watt. Okay. Mr. MacPhee?
        Mr. MacPhee. Yes, sir.
        Well, I think the key to this proposal is that it is
    different in purpose and structure than TARP was. This is not a
    bailout bill. This is a bill to help create lending by small
    banks for small business. That is what we do best. And I think
    if we can not overregulate this, it can certainly go a long way
    towards freeing up this capital and getting--
        Mr. Watt. Are there things in either of these pieces of
    legislation that you believe to be overregulating it?
        Mr. MacPhee. Not at this point, not that I am aware.
        Mr. Watt. All right, I am just--I guess I am just baffled
    at the amount of opposition. I think a number of my colleagues
    on the other side have just reached a conclusion that it is
    more prudent for them politically to just say no to everything,
    rather than trying to be constructive in trying to evaluate
    what is being proposed. They say they support small businesses,
    they say they support community banks, they say they trust
    community banks, and we come with a proposal that seemingly
    would be the exact kind of thing that they would be supporting
    and they say no, no, no, no, no, this is terrible. I just don't
    understand.
        Now, Mr. Atkins, maybe you can explain that to me. If you
    want to try to explain how somebody can tell me out of one side
    of their mouth that they trust community banks and they trust
    people in the community to be responsible lenders and then when
    you try to provide funds to them to do exactly that, if you can
    explain that to me, I would love to hear your answer to that.
        Mr. Atkins. I think part of the disagreement here is we are
    talking about--
        Mr. Watt. I just want an answer, if you could explain that
    particular disconnect to me. I don't really need you to
    describe part of the problem again. I am just looking for what
    the disconnect is, other than this is a political year and it
    is politically expedient for some of my colleagues to say no to
    everything.
        Mr. Atkins. I think it comes down to looking at the data.
    And I think when you look at whether a capital infusion program
    actually will result in increased lending, I think that is
    where we part ways. You are talking about using $30 billion of
    taxpayer funds where there are not very--to disagree with Mr.
    Sperling, there are not huge incentives for banks to lend this
    out. There are a lot of incentives to keep it in.
        Mr. Watt. You were getting ready to tell us why there is
    not a requirement. I thought I understood that if you required
    a bank to loan--
        Mr. Sperling. I have to--
        Mr. Watt. --you would do exactly what Mr. MacPhee said was
    detrimental. You would create a situation that required people
    to make bad loans. So--
        Okay, I yield back. Thank you.
        The Chairman. The time has expired.
        Members on the panel who have other things they want to
    say, somebody asked a question, at some point later on, you
    will be able to get it in there.
        The gentlewoman from Illinois, Mrs. Biggert.
        Mrs. Biggert. Thank you, Mr. Chairman.
        I would like to commend Chairman Moore for the hearing that
    we had yesterday in Chicago on commercial real estate. We spent
    a lot of time talking about a lot of things that are here
    today, and I was really sorry that Treasury could not find one
    staff member to be there for that hearing. We had most of the
    other regulators--the SEC, the Federal Reserve, the OCC, the
    FDIC, and a couple others.
        What we heard was--and, as you know, this was to be the
    regional regulator, so we got to those that were on the ground
    to compare with what we are hearing in Washington. And one of
    the things that troubled me was that--obviously, Chicago and
    the surrounding area has a very high deficiency and default
    rate for these banks; and one of the things that came up was
    the Federal Reserve talked about how they had been really
    looking at for almost 16 years--looking at the fact that there
    was a severe concentration in commercial real estate by many of
    the banks there and all over the country.
        Just recently, last week, we had--one Midwest bank failed
    in Chicago, and the week before there were seven banks that
    failed, including the Broadway Bank, which was owned by our
    State Treasurer; and all of these involved overconcentration of
    real estate.
        Now, you are talking about putting money into these banks
    to be able to loan to small businesses; and, in the hearing, we
    found that there wasn't an overabundance or plea for loans
    because--for the small businesses was because they are really
    looking for certainty in the market. If there is no certainty,
    they don't know whether they can have the ability if they do
    get a loan to do what they want to do.
        And they talked about how what they need are expanding
    ideas for more than 1 year. It doesn't help if you increase
    section 179, expanding amounts that only last until the end of
    2010. And having the 5-year net operating loss carrybacks, and
    that is going to expire. The accelerated depreciation, I think
    that is expired. These would immediately inject small
    businesses with the money to expand and create the jobs, not
    looking at just what--the loan they can get. There is no
    certainty in what is going to expire and what is going to be
    available to them.
        And the high concentration of these real estate loans that
    are going to come due, does this mean--and I was looking at
    page 11 of one of the bills, that it says that the Secretary
    may not deny an application for a capital investment of the
    program solely on the basis of composite rating of the eligible
    institution and the uniform financial institution rating
    system. So I don't know where, if you have a 1 or a 5, if they
    are going to be able to get these loans and is this a basis for
    disqualification.
        So I think we really need to look more in--rather than just
    saying here is another $30 million--$30 billion that we are
    going to give to those banks and yet the small businesses don't
    have that certainty. If anybody would like to speak to that?
        Mr. Atkins. I could add one thing. I think we have to
    remember these loans are not pennies from heaven. Basically,
    you have to have a business person who has a business plan that
    he thinks is going to make money. Then you are going to have
    the flinty-eyed banker looking at that business plan to see is
    that going to yield any money. And that flinty-eyed banker
    needs to know that there is a flinty-eyed regulator in back of
    him to look and see if this loan is going to pay off or not.
    Because, ultimately, we are talking about capital infused into
    a bank and it is not otherwise a subsidized loan.
        Mrs. Biggert. Do you think that if it is infused and yet
    this might keep that bank just barely qualifying, while if they
    didn't have that money they would go under as so many banks
    are?
        Mr. Atkins. There is a huge incentive in this program--
    because the incentives are so weak, there is a huge incentive
    for the banks to hold this capital in, to bolster--especially
    for poorly rated CAMEL rated banks to hold this in as capital
    and not lend it out.
        The Chairman. The gentlewoman's time has expired.
        The gentleman from California, Mr. Sherman.
        Mr. Sherman. Thank you.
        Mr. Sperling, it is good to see you again.
        One approach is that we buy the stock and subordinated debt
    of healthy insured financial institutions. The second approach
    is that we buy the toxic assets gathering mildew in the back of
    bank safes. The third approach is that we just give the
    Administration total authority to do either. Would we achieve
    the intended purpose if this bill required that we--it is
    limited to the purchase of stock and subordinated debt of
    healthy insured financial institutions on terms that represent
    fair value?
        Mr. Sperling. Congressman, all I can do is comment on the
    proposal that we have before us. We think--and this goes to the
    point just being made--this would be capital for--in the form
    of preferred stock--for banks that were viable, where the
    regulators stated they were viable, that they had enough
    capital without the government assistance and that this would
    provide a cushion that could allow for them to increase their
    small business lending, to give them an incentive and only get
    the incentive if they are actually lending more than they were
    in 2009.
        Mr. Sherman. So, if I can interrupt, your plan is to buy
    preferred stock in healthy financial institutions. Does your
    plan involve doing this only on terms that represent fair value
    or does the Administration want to be free to overpay for the
    securities received?
        Mr. Sperling. Again, we are offering people capital in
    terms of preferred stock. They would pay back at 5 percent. If
    they increased the small business lending, that dividend rate
    could go down as low as 1 percent. If after 2 years they had
    not increased the lending, it would go to 7 percent. We think
    that provides a strong incentive structure to lend. I
    completely disagree with Mr. Atkins. It does not in any way
    encourage somebody to get involved--
        Mr. Sherman. If I could interrupt, I want to thank you--
        Mr. Sperling. --not be sound and credible--
        Mr. Sherman. Reclaiming my time.
        Mr. Sperling. --to have a loan--
        Mr. Sherman. Reclaiming my time.
        The Chairman. Mr. Sperling, it is the member's time. There
    was nothing in our oath of office that says we have to let
    other people talk.
        Mr. Sherman. I want to thank you for your answer; and if
    you want to comment on someone else, you can do that on another
    member's time.
        Now Republican friends have rejected the idea--and it is a
    controversial idea--that we put public cash, public capital
    into private institutions. Mr. Mica, is there a way for credit
    unions to help the small business credit crunch without us
    having to take that highly controversial step of putting
    Federal capital at risk? What impediments do you see for
    increasing small business lending by credit unions?
        Mr. Mica. There is only one impediment right now, and that
    is that one group of financial institutions is opposing raising
    our limit on the amount of money that we can put into these
    loans. For 100 years, we have made these loans, for 90 years
    with zero restriction. And for the last 10 years, we have
    outshined them one-sixth of the default rate of banks. We are
    often told we are not sophisticated enough; you don't know how
    to do it. We know how to do it. We have done it for 100 years.
    We only had artificial restrictions for about a decade. We can
    put $10 billion into the economy right now, create 108,000
    jobs, and we will not impact safety and soundness. Our records
    shows that. We are willing to work that compromise that Mr.
    Sperling said, and we can do it tomorrow.
        Mr. Sherman. So you are not looking for Federal dollars to
    be placed at risk or you are just looking for us to take the
    handcuffs off at least partially off?
        Mr. Mica. No government money, no new agency, nothing is
    needed, and our regulatory is ready to go.
        Mr. Sherman. Now, the Administration bill involves boosting
    bank capital by putting in Federal dollars. Are there steps
    Congress could encourage that would boost credit union capital
    without our having to put in any Federal dollars, and with this
    additional capital, could you do even more for small
    businesses?
        Mr. Mica. For the last 5 years, we have been asking for the
    opportunity to have alternative capital, get additional capital
    from our members with full disclosure so that we can grow and
    do a better job. It wouldn't cost the taxpayers. It would be
    fully disclosed, and our regulator supports that plan. That is
    the other--one of the two items we have asked for, for 5 years,
    that have been totally opposed by that group.
        The Chairman. The gentleman's time has expired.
        The gentleman from Kansas Mr. Moore.
        Mr. Moore of Kansas. Thank you, Mr. Chairman.
        Mr. MacPhee, as Mrs. Biggert mentioned yesterday, we had a
    field hearing in Chicago. We heard from Greg Ohlendorf, who
    represents the Community Bankers Association. Something you
    both stress is that community banks support the proposed Small
    Business Lending Fund as long as it is free from TARP
    restrictions that may have been more helpful in keeping a tight
    leash on large banks who received TARP funds. Would you please
    elaborate on why keeping this proposed fund TARP-free is
    important to ensure participation by community banks?
        Mr. MacPhee. Yes, sir, I will try. Community banks--this
    fund for community banks is not TARP. This fund for community
    banks is about creating small business loans to help get this
    economy rolling, and I think there is a distinct difference in
    how community banks run on a local board versus large
    institutions that run international corporations and what they
    have done.
        I don't think it's going to take the type of--well, we want
    oversight. Don't make any mistake about that. We don't want to
    do anything that we shouldn't be doing here, and we won't.
    Community banks by and large have been the commonsense lenders,
    and we will continue to be.
        Mr. Moore of Kansas. Thank you.
        Mr. Sperling, as we have heard from Mr. MacPhee, I think it
    is important that this new fund be TARP-free, but we also need
    to ensure the bill is fully paid for by the time the House
    considers the measure. Do you believe there are modifications
    or offsets that can be identified by the time the full House
    considers the bill to ensure that we are being fiscally
    responsible?
        Mr. Sperling. Not only can we, it is the only condition we
    should go forward. We are completely, 100 percent committed, as
    is the leadership in the House, that this will be deficit
    neutral. And, indeed, it may be that the Small Business Lending
    Fund as constructed would actually over 10 years save taxpayers
    money. The State initiative will leverage, we believe, $10 of
    lending for each dollar.
        We already believe there are measures that have passed
    through the Ways and Means Committee, others that could be used
    to afford the small costs that this bill would cause for the
    bang for the buck it would create. But, one, again I repeat I
    do not believe this program, the Small Business Lending Fund,
    will have a long-term cost at all to the taxpayer, and whatever
    costs that will happen will be offset. It will be deficit
    neutral.
        And I just want to say that while people have tried to
    suggest why capital, the reason why you support a capital plan
    is the capital plan paying dividends is capable of getting 20-,
    $30 billion from capital. That is leveraged to create multiples
    of that in lending. If you told the average American taxpayer
    you had a plan where you could provide capital that would
    basically be paid back in a way that wouldn't cost the taxpayer
    a penny, but could allow community banks to increase their
    lending to the small businesses that they are relying on for
    job growth and might not cost the taxpayer a penny, and any
    small cost would be paid for so it didn't cost the deficit a
    penny, I think, correctly described that way, which is the
    correct description, it would have very broad support.
        Mr. Moore of Kansas. So is there any legitimate reason in
    your estimation to oppose this bill if other committees would
    be able to help ensure the final bill of the House is fiscally
    responsible?
        Mr. Sperling. No. I think there is every reason to support
    these measures and additional measures that might be packaged
    together to support small business job growth in our country
    right now. It is desperately important.
        Mr. Moore of Kansas. Thank you. I yield back.
        The Chairman. I will take the gentleman's time briefly if I
    can, if he would yield to me.
        Mr. MacPhee, I heard your answer regarding the TARP. The
    Inspector General of the TARP, who has done a very good job
    over there, has asked that this bill be amended to put it under
    the jurisdiction of the TARP Inspector General. Would your
    comment about the problems that would cause apply to that?
        Mr. MacPhee. I am not sure of the answer, Mr. Chairman, but
    I would be willing to find out and get back to you.
        The Chairman. All right. Because I would say that I think
    there are ways to provide oversight, and I understand the TARP
    issue, and I would not want to see this in any way compromised.
    So I am skeptical.
        The gentleman from California, Mr. Baca.
        Mr. Baca. Thank you very much, Mr. Chairman, and Mr.
    Ranking Member, for having this hearing, and I thank the
    witnesses for being here.
        The first question is to Mr. MacPhee, you stated earlier
    that we did not create this mess. What do you mean by that, and
    who created this mess?
        Mr. MacPhee. I was speaking of the subprime debacle and the
    economic crisis that we are in today.
        Mr. Baca. So who created that?
        Mr. MacPhee. Well, in my opinion, it was the nonregulated
    and Wall Street.
        Mr. Baca. Because we weren't regulated, we didn't have
    oversight; is that correct, that caused some of the problems?
        Mr. MacPhee. That is correct.
        Mr. Baca. And now we are trying to do the right thing in
    creating jobs and creating opportunities and creating
    incentives for businesses to operate, especially to provide
    small business loans to individuals. This bill is creating
    incentives for banks to level, but even with these, little is
    done to break down the barriers of credit and capital that
    banks require of borrowers to make the loans. How does this
    bill work to alter the landscape of eligible borrowers and in
    turn increase eligibility for small businesses? I would leave
    it to any one of you to answer.
        Mr. Atkins. I think you hit the nail on the head that this
    is looking at the supposed supply side, but as we were talking
    before, the demand coming from small businesses, we think,
    because of all the other aspects of the current situation in
    the economy, inhibits that demand from banks.
        Mr. Baca. Mr. Sperling?
        Mr. Sperling. I don't understand why there is this constant
    desire to determine whether there is a single solution to the
    lack of small business loans. There is clearly a demand side.
    And I should point out that a program like ours encourages a
    bank to actually lower interest rates, which could help
    increase the demand for lending.
        But, again, I am going to go back and say the NFIB study in
    February 2010 of this year showed that 45 percent of small
    businesses that sought credit could not get the full amount of
    credit that they needed. The last time that survey had been
    done, in 2006, it was 11 percent. It is 4 times greater the
    number of small businesses, and I would expect that most of the
    members here, like the President, could rely on their mail
    alone to know that there are creditworthy small businesses who
    cannot get the credit they need to expand, meet payroll, create
    jobs--
        Mr. Baca. And that seems to be an ongoing program. I know
    in the Inland Empire where I come from, the hub for major
    industry is the small businesses, but they are unable to obtain
    loans, and that seems to be a major problem where we have to
    break down the barriers and provide them an opportunity for
    them to exist, as all of you indicated, that jobs could be
    created immediately.
        One of the other areas that I want to address in doing
    something, we recently saw what happened with the dealers, the
    auto dealers. Where do the auto dealers fit into this bill? A
    lot of small dealers have been forced to close their doors, not
    because of their own actions, but because of the mistakes of
    corporate parents like Chrysler and GM; they were once part of
    a thriving auto industry, and now little thought has been given
    to them to survive, and yet the majority of them provided a lot
    of jobs, and they were the last to be hired. Minority dealers,
    Black and Brown, were the last to be hired, first to be fired,
    and yet a lot of these have lost their dealerships. They
    created a lot of jobs, created a lot of philanthropy, gave a
    lot back to their communities. But what is this bill doing to
    help small businesses, especially the automobile industry?
        Mr. Sperling. I might defer to Mr. Brown, who has been
    someone we have talked to often, and part of the inspiration
    for the State option that Congressman Peters, Congressman Levin
    and others have inspired is not only the manufacturers, but the
    credit issues for auto suppliers. So--
        Mr. Brown. Yes. If your question refers to the auto
    suppliers, they have been the major recipients of our program,
    and I think, to Mr. Atkins' point, it is the--
        Mr. Baca. We want to make sure that it gets down to
    minority dealers, though, because the auto dealers are getting
    them up at the top, but the minority dealers, who were the last
    to receive their ownership, were the first to be closed. And we
    want to make sure that these minority dealers--and they are the
    ones that are actually selling a lot more vehicles than some of
    the others as well.
        Mr. Brown. I think what we have found in Michigan is that
    dealers, like suppliers, it is particularly the minority
    business owners who don't have the capital and have built that
    business over the years to act as a borrowing base, and it is
    often those minority business owners who are most in need of
    these types of support.
        Mr. Baca. So will this be able to provide assistance to
    them?
        Mr. Brown. Absolutely, which in turn attacks the demand
    issue.
        Mr. Baca. Okay. Good.
        One of the other areas, because I know my time is running
    out, but I also wanted to talk about the minority underserved
    communities and the impact of this bill. It has been well
    documented that these communities and minority-owned businesses
    were struggling before the economic crisis, and from what it
    looks like, they will be the last to recover.
        The Chairman. The gentleman's time has expired.
        Mr. Baca. Hopefully, we can address that, too, as well.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from North Carolina.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman.
        I have agreed with some of the observations of my
    colleague, Mr. Watt, that the criticisms of this program are so
    mind-bogglingly inconsistent from the other side that it is
    hard to imagine that the real objection is not that it is a
    proposal of the Obama Administration: There are too many
    strings attached.
        There are no strings attached. It is designed to subsidize
    failing banks; it won't keep banks from failing. The purpose
    that I understand is behind the bill I support is to encourage
    small business lending, to put money in the hands of community
    banks that will in turn lend it out to creditworthy borrowers.
    I agree with Mr. Sperling that the incentives to do that for a
    bank not worried about its solvency are strong. There is a
    strong incentive to lend. There is a strong disincentive for
    not lending. But Mr. Atkins points out for those banks that are
    perhaps on shaky ground, the incentives aren't strong enough,
    and they will hold onto their capital.
        The FDIC--I know the legislation says that there is
    supposed to be consultation with the regulator, they are
    supposed to have small business lending, but why should we lend
    this money to shaky banks? It seems like there is a lot that
    could go wrong. They might not lend it out. We might not get
    our money back. They might not make the kind of sensible loans
    we want them to make. They might make loans that have higher
    interest rates if they are trying to get back in the game that
    might, in fact, be more likely to go into default.
        There is a list--the FDIC maintains a list, a private list,
    the problem bank list, those who score 4 or 5 on their scale.
    Why should those banks on double secret probation be eligible
    for this lending at all? Mr. MacPhee, I know you were just
    consulted, but why should this not be limited to those banks
    that the FDIC feels very confident are solvent and will make
    sensible lending decisions and will lend it?
        Mr. MacPhee. My understanding of the procedure for this
    draw on this program is that Treasury would consult with the
    prudential regulator for that bank and get approval before they
    would be allowed to take a draw on this fund. So I think there
    is a safeguard in place for those banks that have not been
    running well on the margin and maybe had some history. Those
    banks that have always been strong community banks, well-run
    community banks, again, maybe have taken some hits on property
    values and have drawn down their capital because of it, should
    be able to work through the regulator to be--
        Mr. Miller of North Carolina. It appears to be about 1 of
    11 are on this double secret probation list, problem list. Why
    not simply limit this program to the 10 out of 11 banks that
    are not, that we know will not feel a need to hold onto capital
    rather than lend it out? Why not limit it to those banks that
    the FDIC is not worried about?
        Mr. Sperling, time yielded to you has proved to be a black
    hole, but go ahead.
        Mr. Sperling. We agree with you. That is the way the
    legislation is drafted. The bank would have to apply to the
    regulator, who would have to determine that they were viable,
    thus they had enough capital at that time on their own to be
    sustainable. That would be the conditions. We would not imagine
    that a bank with a CAMEL 4 rating would be eligible for this.
    So I think that we believe the legislation is written in
    support of what you are suggesting here.
        Mr. Miller of North Carolina. Is there an outright
    prohibition or just a general kind of viability standard?
        Mr. Sperling. It is a viability. And one of the few--one of
    the suggestions that we have refused to incorporate that has
    come from some people is for us to somehow mandate to the
    regulators that they lower their viability standard. We think
    that would be a bad idea. It would drive the costs of this
    program up. So that is why we are keeping the stance with the
    regulator to recommend to us that the bank is viable, meaning
    they have enough capital without the government assistance to
    be viable going forward, and this is providing additional
    capital that would be fully to support lending. The increment
    would all be there to support additional lending to small
    businesses.
        Mr. Miller of North Carolina. Why not an outright
    prohibition if they have a CAMEL 4 or 5 that they not be
    eligible for this lending program?
        Mr. Sperling. I think that is--as written, I believe it is
    an effective prohibition on a CAMEL 4 or a CAMEL 5, so I am not
    sure that it would be necessary to intrude on the regulators by
    doing that. But I think what we have is the equivalent of an
    outright ban on a 4 or 5.
        The Chairman. I just want to congratulate all of us for
    making no obvious camel metaphors.
        The gentleman from Texas.
        Mr. Green. Thank you, Mr. Chairman.
        Mr. Atkins, you spoke of a moral hazard, and rather than
    state your position, tell me what your position is again with
    reference to the moral hazard.
        Mr. Atkins. Well, just that by providing very cheap credit,
    and that is what this essentially is to banks, cheap capital,
    that they will be--and then just spurring them to go out to
    lend maybe to less than ideal credits, that that will create
    some of the same sorts of situations that we have seen in the
    past that led to this financial crisis.
        Mr. Green. And, Mr. Sperling, I would like to ask you to
    respond, please, to Mr. Atkins' contention with reference to
    the moral hazard.
        Mr. Sperling. I simply don't agree. In fact, I am having a
    hard time knowing which way he is criticizing it. At one point,
    he has said the incentive is not strong enough. Then he has
    said it is so strong, there will be moral hazard.
        The fact is that the economics of this, which is that it
    would never make sense for a bank to do a loan that they
    thought was going to fail under this--what would make more
    sense, the more economic logic of this program, is since that
    you would get a lower dividend rate by increasing your lending,
    you would have an incentive to seek out creditworthy borrowers
    and perhaps offer them lower interest rates to encourage them
    to take lending. So this plan is actually designed to pass on
    some of the benefit.
        And I can't understand how this could be analogized to
    Fannie and Freddie, which is about the implied subsidy and
    ``too-big-to-fail.'' These are small banks, as Mr. MacPhee will
    tell you, that do not--that are never considered ``too-big-to-
    fail,'' don't have an implied subsidy, and this provides a
    reasonable benefit for them to increase their small business
    lending with--without, I think, any economic logic that would
    suggest there would be moral hazard.
        Mr. Green. Mr. MacPhee, would you kindly respond to the
    moral hazard argument?
        Mr. MacPhee. Yes, sir. I have been a community banker for
    41 years. I can honestly look anyone in the eye and say I have
    never made a bad loan. Now, loans have gone bad after I have
    made them, but I have never made a bad loan. We don't do that
    on purpose, squinty-eyed or not, and I can tell you that from
    the standpoint of any banker that--I think it is pretty much a
    standard in this industry that community bankers have skin in
    the game. Most of us are shareholders. Many are second- and
    third-generation family-owned banks. They don't make bad loans
    in good or bad times. They always try to make good loans. So
    they don't--to suggest that the moral hazard is that it gives
    us incentive to make loans that will go bad just isn't
    reasonable.
        Mr. Green. Mr. Mica, I want to thank you for your testimony
    as well, and I do look forward to working with the credit
    unions to see if we can reach some sort of amiable, amicable
    conclusion. I think that Mr. Sperling has indicated a
    willingness to work with you. Obviously, the ranking member,
    Mr. Kanjorski, and the others have indicated such, so I look
    forward to working with you as well.
        My final comment is simply this: I do understand the moral
    hazard argument, but there is also the moral hazard associated
    with doing nothing and simply allowing things to unfold at a
    time of crisis. Things have gotten better, but they are not
    where we have to ultimately try to get, and until we get there,
    we do have to try as best as we can to help this economy turn
    around.
        I marvel at how people say, we want you to do something,
    and then they can never agree with anything that you try to do.
    There has to be some way for us to reach across and come to
    some consensus on some of these things.
        I clearly believe that this is a good piece of legislation.
    Maybe we have to tweak it, but I think it is a good piece of
    legislation, and I am honored to support it. My hope is that it
    will help those small businesses in communities where we have
    high levels of unemployment, help those capable, competent, and
    qualified businesses, because that is what bankers, the bankers
    that I have dealt with, do. They look for capable, competent,
    qualified businesses to do business with. And hopefully, this
    will help us to create some jobs and turn this economy around.
    It is not a panacea, but it is another step in the right
    direction, and I want to compliment the President for following
    through on this commitment that he made, and I believe it was
    in his State of the Union Address he announced this. Is that
    right, Mr. Sperling?
        Mr. Sperling. Yes.
        Mr. Green. Thank you, Mr. Chairman. And I thank the
    President.
        The Chairman. Your time has expired.
        I am going to ask unanimous consent to make a statement. I
    think it is important for people to know this. The credit union
    issue has come up. I had been made aware that there were
    conversations going on, negotiations with Mr. Kanjorski and Mr.
    Royce, the credit unions and the Administration. I have heard
    what Mr. Sperling has repeated. I know--let us be clear. People
    in my line of work hate to have to choose between their friends
    when they are fighting. This is the classic case where Members
    of Congress have friends on both sides, but I can, as chairman
    of the committee, suppress this.
        The Administration supports this. And I just wanted to put
    people on notice. Sometime soon, this committee is going to be
    dealing with this issue in a markup. Members will be free to do
    what they want, and I just put everybody on notice. There
    apparently is a revised version of this that is coming forward,
    and I just want to put everybody on notice that sometime fairly
    soon we will be dealing with this issue of an expansion of
    credit union business lending, and I just want to put everybody
    on fair notice of this. And that is about as neutral as I am
    capable of stating anything, and I am not going to say any
    more.
        The gentlewoman from Wisconsin.
        Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
        I would like to address my first question to Mr. Sperling
    with regard to something the Honorable Paul Atkins and
    Representative Velazquez and others have talked about. They
    have talked about the regulatory climate as being one that
    perhaps is overly restrictive, and in such an environment it is
    impossible to pull out of this recession. And you also talked
    about the regulatory framework in response to, I believe it was
    Mr. Green's questions.
        Do you think that we are in an overly restrictive
    regulatory environment? The anecdotal evidence out there is
    perhaps that as a result of some things that the ``too-big-to-
    fail'' companies have done, that this has fallen mighty heavily
    on community banks, and that these restrictions are arbitrary,
    and they have caused a great deal of havoc.
        Mr. Sperling. It is certainly the opinion of many community
    bank CEOs that we have spoken to that their examiners have been
    overly rigorous. It is--I think, as Secretary Geithner says, it
    is always a bit of human nature when you have had a financial
    crisis that you go from taking way too little risk to perhaps
    becoming too restrictive.
        Ms. Moore of Wisconsin. Can I ask this, then: Is it
    inappropriate for the Treasury Department to make some sort of
    audit, examination, guidance as to what is scientifically or
    reasonably appropriate? Because what I am hearing is this is
    rather arbitrary, and it is more than just a failure of human
    nature. It is really causing the collapse of many businesses
    and the loss of jobs.
        Mr. Sperling. One area where we have spoken with the
    regulators, and it is related to some of the State programs we
    have, is the idea that you do not want--when you are coming out
    of a recession into recovery, you do not want people to
    discourage lending to a small business that has positive cash-
    flow prospects simply because their collateral has
    deteriorated. We have tried with regulators to pass that
    message down. In other words, if you are a good business, and
    your commercial real estate has gone down in Michigan or Ohio
    just because of the property values or the economy is weak, but
    your business would be good, you want that loan to take place.
        It does not always work, and one of the reasons, for
    example, the program in Michigan is important or other
    Midwestern States are interested in it is that in the absence
    of that happening, they provide collateral support. They
    provide a bit of a guarantee. The SBA loans that do the 90
    percent guarantee do the same thing. They say to that bank,
    even if the collateral is deteriorated, we will protect you.
        Ms. Moore of Wisconsin. Mr. Sperling, I get the point, but
    it is also with regard to the capital requirements of the
    banks. Do you feel they are being too stringent?
        Mr. Sperling. No--
        Ms. Moore of Wisconsin. And can Treasury do anything other
    than just sort of nudge them and beg them to be less human and
    be a little bit more scientific and businesslike about it, not
    arbitrary?
        Mr. Sperling. It is actually very hard for us to control
    the bank examiner of--
        Ms. Moore of Wisconsin. Thank you.
        I would like to ask the Honorable Paul Atkins a couple of
    questions.
        I enjoyed listening to your testimony and reading it as
    well. I just was a little bit confused about your conclusions.
    You say that the CPP, which, of course, took $205 billion and
    gave it to the largest banks, had a very poor performance in
    lending to small businesses, but you also acknowledge that
    small businesses, in fact, historically were provided loans--
    that small banks provided loans to small businesses. So your
    conclusion that there was no evidence that this program would
    be helpful in terms of getting that money to small businesses
    based on the model of the big banks not doing it, I didn't
    quite understand how you reached that conclusion.
        Mr. Atkins. Well, you have to remember the CPP didn't just
    go to big banks; it also went to hundreds of small banks,
    including in my neighborhood a bank of maybe $500 million of
    assets, a community bank. So it is a broad-based program, but a
    lot of people, of course, decided not to--
        Ms. Moore of Wisconsin. Okay. But then they also had these
    increased capital requirements that we just discussed, Mr.
    Sperling just discussed. So I think--Mr. Chairman--
        Mr. Miller of North Carolina. [presiding] I am sorry.
        Ms. Moore of Wisconsin. Okay. I had time. I had about 10
    seconds left.
        Mr. Miller of North Carolina. Go ahead.
        Ms. Moore of Wisconsin. Thank you.
        I just wanted to talk about something that my colleague
    talked about with respect to the moral hazard. Is it your view,
    Mr. Atkins, that--we have talked about a whole lot of these
    small businesses really being very creditworthy, and because
    the capital requirements and collateral requirements have
    increased arbitrarily, that there are plenty of creditworthy
    businesses that are going under for lack of capital? And so how
    did you reach the conclusion that this, not being a permanent
    program, but a short, temporary program, could create moral
    hazard when there is, in fact, plenty of evidence that there
    are very worthy, credible businesses that have been run very
    well but for the fact that they have not been able to get the
    short-term credit that they rely upon to conduct their
    business?
        Mr. Atkins. Well, from my testimony and also from our
    study, the Oversight Panel--and I disagree with Mr. Sperling,
    the NFIB survey actually did say that small businesses have not
    found that they have had a lack of credit. It seems like banks
    do have capital out there to lend, but the real question is,
    why are they not lending it? Is it because of regulatory
    reasons? Is it because of lack of the underwriting aspects of
    these particular people who are searching for loans, and do
    they need them?
        Getting to the moral hazard like with the SBA before you
    all here on this panel, you had an SBA official who said, ``an
    extra incentive for risk-averse lenders to lend to small
    businesses is provided by the SBA guarantee.'' That is what we
    are talking about with respect to moral hazard, that they have
    to bolster it to--
        Ms. Moore of Wisconsin. I yield back.
        Mr. Miller of North Carolina. The gentlelady's time has
    expired. Because the Chair almost shortchanged Ms. Moore 3
    seconds, she got 2 minutes extra. I will not make that mistake
    again.
        The Chair yields 5 minutes to Mr. Lance.
        Mr. Lance. Thank you very much, Mr. Chairman.
        Good afternoon, gentlemen. I think we are entering an
    interesting time in the congressional year between now and
    Memorial Day, or perhaps between now and the Fourth of July. It
    seems to me we ought to address some of the budgetary issues.
    We do not yet have a budget, and there is a debate as to
    whether or not we are going to have a budget act, and as I
    understand it, if we don't have one, it would be the first time
    since the 1974 act that we do not pass a budget. In the next
    several weeks, we are supposed to consider unemployment
    benefits, money to continue funding for our troops in
    Afghanistan, etc.
        Mr. Sperling, regarding the $30 billion that would be the
    basis of this program, does the Administration yet have an
    indication of where the money would be identified to pay for
    the program?
        Mr. Sperling. Congressman, as you know, what is required to
    meet the PAYGO scorecard is what CBO will say the cost is. So
    we will be looking for the score of this proposal both over the
    5-year and the 10-year level. We think that over 10 years, as
    Chairman Frank said, the $30 billion initiative will actually
    not cost the taxpayer any money. There could be a small cost in
    the 5-year window. It will be a small fraction. And if that is
    the case, then when we are putting together the offsets for the
    overall small business jobs package, we will have to ensure
    that it is deficit neutral over 5 years and deficit neutral
    over 10 years.
        So I think everybody who has spoken on this bill so far,
    whatever their philosophy, whatever their differences, agrees
    this must be passed in a way that does not add 1 penny to the
    Federal deficit. And, of course, your goal is if you can do
    something deficit neutral that is creating jobs and activity
    and revenue, that it will actually have a positive impact.
        Mr. Lance. And if I might continue, Mr. Sperling, what
    would be the timeframe for a determination that would be
    deficit neutral?
        Mr. Sperling. I think we have already gotten a preliminary
    report that it would be deficit neutral, the $30 billion fund
    over 10 years. I think we are looking at the design timing over
    the 5-year amount. But I think, you know, as you think about
    the extenders bill, you obviously are, I am sure, for extending
    the R&E tax credit, but you want to pay for that overall
    package when it comes through in the extenders.
        In this case, a bill will come together that pays for an
    overall jobs tax credit bill--I mean, jobs bill, which will
    include the tax cuts as well as this measure, and I think what
    Chairman Frank and the leadership has made a commitment to is
    that that package as a whole will be deficit neutral, and we
    will be working with the committees, including House Ways and
    Means, to make sure--
        Mr. Lance. Our staff indicates to me that the CBO indicates
    that the cost would be $10 billion over 5 years and a savings
    of $1 billion over 10 years. At least, those are the current
    figures.
        Mr. Sperling. That is because the program as initially put
    forward lasted 5 years until a lot of people would pay back the
    capital right after the 5-year window. So we have sent that
    back to the Congressional Budget Office at 4\1/2\ years. It is
    our understanding that would bring the 5-year costs down to
    just $1 billion or $2 billion, but that is what I don't know
    for certain at this time, Congressman.
        Mr. Lance. Thank you.
        I raise this in the context that the CBO has recently
    indicated the additional costs in part of the health care
    proposal. This is an ongoing debate, and obviously we are
    concerned on our side of the aisle related to whether or not
    there will be a budget act this year. I know that is not
    specific to the discussion today, but there is an overall theme
    that is of great concern to our side of the aisle.
        Very briefly, as I understand it, the legislation says that
    for each eligible institution that applies to receive a capital
    investment under the program, the Secretary shall consult with
    the appropriate Federal banking agency for the eligible
    institution to determine whether the eligible institution may
    receive such capital investment. That impresses me as being
    broad language, and perhaps that is appropriate. But, Mr.
    Sperling, could you indicate what your views are regarding that
    legislation and whether that is specific enough? Does it need
    to be that broad given that we are trying to help the economic
    situation?
        Mr. Sperling. I think Congressman Moore has asked the same
    thing. I think we believe it is, because we believe that the
    process of going through the regulator, they are the ones with
    the expertise, access confidential information to make the
    judgment that that firm is viable without existing capital.
    Therefore, the new capital would be simply additional capital
    to increase lending.
        So it is our understanding that language is strong enough,
    but if there were concerns about that, that would certainly--
    you know, that would certainly be the type of thing we would be
    willing to discuss.
        Mr. Lance. Thank you, Mr. Sperling.
        I believe my time is up.
        Mr. Miller of North Carolina. Thank you, Mr. Lance.
        The gentleman from Missouri, Mr. Cleaver.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Mr. Sperling, I want to follow up, if I might, on the
    exchange you had with Ms. Waters regarding--as she talked about
    the CDFIs. Is there a reason we aren't doing more to assist the
    community development loan funds, who are actually doing some
    of the most difficult work in disadvantaged communities, and do
    you think that we should make them eligible under the Small
    Business Lending Fund? For example, this would be a way for
    them to meet increased demands they are facing with regard to
    the small business loans in lower-income communities all across
    the country.
        Mr. Sperling. I think we should--we are actually at this
    point still trying to see if, through the existing TARP
    authority, there is a way that we could help the CDFI loan
    funds as we have done an initiative to help CDFI banks and CDFI
    credit unions.
        We agree with you. The question is finding the right
    vehicle. The Small Business Lending Fund is obviously designed
    more to bring capital to a regulated financial institution.
    CDFI loan funds, which we strongly support and agree with you,
    don't fit that description.
        So I think the short answer is, we ought to be doing more,
    and we ought to work on that. And this may not be the best
    vehicle, but it doesn't mean we shouldn't find a vehicle to do
    more for CDFI loan funds. Certainly, having strong
    appropriations for our CDFI program is the most certain way of
    doing that, but there could be others.
        Mr. Cleaver. Does anybody differ with that?
        Thank you. I have no further questions, Mr. Chairman.
        Mr. Miller of North Carolina. The gentlewoman from Illinois
    Ms. Bean.
        Ms. Bean. Thank you, Mr. Chairman.
        And thank you all for your testimony today and for sharing
    your expertise with us on this important subject.
        I happen to be a vice chair of the New Dems, which is a 70-
    member coalition that very much sees themselves as a voice for
    small businesses, which are so important to our economic
    growth. We were very involved in some of the stimulus
    provisions that made sure that we went further than just
    providing tax cuts to 95 percent of Americans on the consumer
    spending side, but to make sure the B2B space was addressed by
    including the NOL carryback. Over $9 billion has gone back into
    the hands of small businesses, taxes they had paid in previous
    profitable years, to help them weather through unprofitable
    ones. We encouraged the SBA loan guarantees, which have allowed
    $23 billion to go into the hands of small businesses when they
    need it, recognizing access to capital is important. We fought
    to include health IT initiatives, smart grid technology, the
    first-time homebuyer tax credit to bring 700,000 new buyers
    into the market at an important time. I think that is why the
    Chamber and the National Association of Manufacturers endorsed
    that important stimulus to our economy.
        But we recognized more needed to be done. So that was done
    in February of last year. In March, we came to the White House.
    We met with the President. The number one issue we raised with
    him at the time was access to capital for small businesses. He
    committed at that time to putting $18 billion into the
    secondary market should it be necessary so that small community
    banks that were lending to small businesses could recycle those
    loans. It turns out we didn't have to do that because the
    guarantees in the stimulus had already helped create a
    secondary market.
        But there is certainly more to do since then. We had the
    ARC loans, which had the smaller loans that allowed companies
    to restructure debt. There is a proposal to expand the 504
    program, which would allow refinancing for the commercial real
    estate market, which right now is hampering the balance sheets
    of so many of our community banks. They want to lend in many
    cases, but they can't because they have an examiner over their
    shoulder saying, your balance sheet is just not going to allow
    that given your exposure.
        So my question is, I guess, for Mr. Sperling. The
    Administration is proposing to increase both the SBA and 504
    loan sizes to $5 million. There are a number of measures in
    Congress, some of them bipartisan, to support that; but some
    also expressed concerns that increasing those loans obviously
    increases taxpayer exposure. Why do you feel that is a sound
    approach?
        Mr. Sperling. Actually, the experience on the SBA side has
    been that the larger loans have actually performed better. So
    by going to the $5 million, we believe that will be very strong
    for the economy.
        It was interesting, if you were to ask--I know they aren't
    represented here--the franchisers, they would consider that to
    perhaps be their number one agenda item, and the reason why is
    because some of the most promising people who had opened new
    franchises often want to open several at one time, or they
    don't go in. Those are obviously clear job-creating, small
    business-owning-type situations. So we feel that it is a good
    complement to what we have now to offer those loans up to $5
    million, and that they actually perform well and have low
    subsidy costs.
        I know Chairwoman Velazquez has also been concerned that
    that doesn't take away focus on the smaller loans, and that is
    why I think we could also imagine including in a jobs package
    something that made loans under $250,000 more attractive in
    this period as well.
        Ms. Bean. How quickly do you think, assuming these
    proposals move forward, would the moneys from the Treasury be
    available to those community banks?
        Mr. Sperling. Well, in the SBA program, that would just
    happen--that would just be part of the SBA's relationship with
    the banks forward. In terms of the programs we have here, one
    is that the good part about the State option, and we have two
    representatives here, is that these are programs that are up
    and going. We know what has been frustrating is when there has
    been a Recovery Act, we had to start brand new. This is trying
    to get funding to programs that are up and going and having
    higher demand as they are getting budget cuts.
        So I think on the State programs, money could go very
    quickly. And then on the capital program, it is our opinion
    that we could get this up in a couple of months at most. So we
    feel that we have learned some lessons in the Recovery Act, and
    one of the focuses we have had is on being able to implement
    quickly under these initiatives.
        Ms. Bean. I thank you, and I thank you for your efforts on
    behalf of our small businesses. We feel the Administration has
    been working closely with those of us who don't want to just
    talk about supporting small businesses, but actually act to do
    so. Thank you.
        Mr. Sperling. Thank you.
        Mr. Miller of North Carolina. The gentleman from Colorado,
    Mr. Perlmutter.
        Mr. Perlmutter. Thank you, Mr. Chairman.
        I am going to hold up a couple of charts for you all, but
    basically from 2008 to the beginning of 2009, we had a falloff
    like we have never seen, none of you sitting at that table or
    anybody sitting up here has seen. Since President Obama took
    office, with the Recovery Act, we finally have crossed the axis
    to the point we are adding 290,000. We had been losing 780,000
    jobs. The area in the middle of this ``V'' is 8 million jobs.
    So I think everybody, Democrat or Republican, wants to put
    those people back to work, and the question is, how do we do
    it?
        Our principle is that small business, once it is back on
    its feet, is going to be the primary generator of those jobs.
    And as we put people back to work, then the budget deficit
    solves--there are a lot of problems solved by an improving
    economy and a reduction of people on the unemployment rolls.
        So, Mr. Determan, I want to start with you. You talked
    about one of the things that I think we have to address in any
    of these bills, and you said you all lost your line of credit.
    So--and a number of the Members have talked about this, but as
    part of this process, we have the old borrowers; we have, we
    hope, new borrowers; and I personally want to see competition
    so that we maintain community banks. Maybe we add credit unions
    to that mix. So in your situation, would some of the people for
    whom you did business, if there had been the opportunity for
    them to keep their lines of credit or you to keep your line of
    credit until you see the light at the end of the tunnel, which
    is coming here--go ahead, if you could respond to my sort of
    general statement.
        Mr. Determan. Yes. Thank you for the question.
        We closed our business in October of 2009. We were waiting
    for a project to begin, and it went for years without being
    financed, and our fees were deferred until the project closed.
    We were expecting $1.8 million. Our credit line was finally
    called in. We had to pull the plug on the firm. In November of
    2009, that project closed, a month after we ended the firm.
        Mr. Perlmutter. Okay. So that is my point here. As we get
    to the light at the end of the tunnel, I want people to be able
    to get there, to maintain competition, to maintain good
    borrowers. I have a bill I am going to raise either tomorrow or
    at some point that does, Mr. MacPhee, one of the things you
    were talking about, which is to take a loss now and amortize it
    over 7 years so that you don't have to take the entire loss to
    capital--the bank doesn't have to take the entire loss to
    capital--right now it is H.R. 5249--and spread it out over 7
    years, which is what we did in Colorado so that the
    agricultural banks could stay in business. And we didn't close
    everybody, because as you close those banks, you are going to
    dry up credit.
        I agree with my friend from North Carolina, you don't want
    the bad banks staying in business, but I want to have
    competition when we get to the end of this thing. And that may
    be that we do some--we have new lending money, but we give some
    opportunity to amortize, because I don't want the architectural
    firms, the small businesses that are going to put all those
    people back to work, I don't want them going out of business.
        Now, Mr. Atkins, I have to quarrel with you for a second.
    You used the word ``anecdote'' twice, that it is anecdotal that
    the regulators have been harsher. We have had about a million
    hearings in here. It is no longer anecdotal for me. We have
    heard from too many people. And it is natural; Secretary
    Geithner says it is human nature where the regulators tighten
    up because they don't want to lose a bank or a credit union on
    their watch, and the bankers tighten up. So in Congress, we
    need to do some things to tell them we want to be
    countercyclical. We want small businesses to survive and then
    thrive and put people back to work. So I will give you a chance
    to respond to my quarreling with you about anecdotes.
        Mr. Atkins. I agree. All I meant was that there is no real
    survey data to support it, but we hear the same sort of thing
    as you that you are hearing in the hearings as well, and it
    frankly has existed in past recessions as well. We heard it
    when I was a staffer at the SEC back in the early 1990's,
    basically that bank examiners are being, you know, much too
    particular.
        Mr. Perlmutter. And I think the bankers are, too.
        And I will make just this last point. We had a company, a
    little restaurant, that wanted to franchise, that had two
    little barbecue franchises. They wanted a $250,000 operating
    line, not much. They went to 18 banks and were denied at all 18
    banks. We intervened a little bit and said to some bankers,
    check this out. But 18 banks for a $250,000 line of credit?
    That is not right.
        The Chairman. Time has expired.
        The gentleman from Indiana.
        Mr. Carson. Thank you, Mr. Chairman.
        Mr. Mica, what did you mean when you earlier stated that
    your regulator is prepared to take on the Member business
    lending efforts that we have discussed today? Does it support
    these efforts?
        Mr. Mica. Yes, absolutely. Our regulator has sent a letter
    to Treasury and to the Congress indicating they would support
    this. They, too, want to make sure, and we agree with that,
    that there are proper safety and soundness guidelines, that
    they continue to have proper oversight. We have no problem with
    that. Our record is very strong.
        Mr. Carson. Thank you.
        Mr. MacPhee, while the size gap is narrowing between men-
    and women-owned businesses, it is clear we still have a long
    way to go in terms of the current number of women-owned
    businesses. With regards to the banks that will receive funds
    pursuant to the Small Business Lending Fund, will they be
    required to report how they plan to increase lending
    opportunities for women and minority-owned businesses and
    aspiring entrepreneurs?
        Mr. MacPhee. I do not know the answer to that. I can get
    back to you on it, though.
        Mr. Carson. Thank you.
        And, lastly, Mr. Atkins, for those States that apply for
    funds made available by the State Small Business Credit
    Initiative program, will they be required to submit a business
    strategy for how they plan to allocate funding to lending
    institutions that are most in need?
        Mr. Atkins. That is a good question. I don't think that the
    legislative language necessarily covers that, but I can get
    back to you on that as well.
        Mr. Carson. Thank you, Mr. Chairman. I yield back.
        Mr. Peters. [presiding] The Chair recognizes the
    gentlewoman from Ohio, Ms. Kilroy.
        Ms. Kilroy. Thank you, Mr. Chairman.
        Thank you to all the panelists for joining us this
    afternoon.
        As my colleagues have indicated, I have heard also from
    people from central Ohio about their issues with access to
    credit, and many small business people tell me that they could
    expand, they could hire, they could invest in a building
    opportunity or a commercial opportunity if they had access to
    capital. And at the same time I hear from the small community
    banks that they are lending, that capital is going out there.
    And from some of them I am also hearing the issue that has also
    been raised here this afternoon that the regulators are holding
    them back from making those loans or requiring them to call in
    even loans that are productive.
        So given all the allegedly anecdotal reporting, are there
    going to be provisions that will require data be kept so that
    we actually know who is trying to access capital, and who is
    getting access to the loans, and who is being turned down for
    those loans, and also how many jobs are being created?
        Mr. Sperling. I don't know that--you know, right now on the
    Small Business Lending Fund, we are relying on the existing
    data sets that are out there, so we look at the--we look
    basically at the C&I loans, and the owner-occupied real estate
    loans, and the agriculture loans of small banks, which
    obviously are small and go to small businesses, and we are
    looking at how much they are increasing.
        You are asking another question, which is a good question,
    which is do we have a way of getting data as who is applying?
    And I don't know that there is anything in this legislation
    that would be asking for kind of a new data set. I think the
    issue that anybody dealing with this deals with, that there is
    not perfect information at all. I think Chairwoman Velazquez
    was getting to that, too, on small business lending, and you
    are forced to use the best proxies that you can.
        The only thing I would just want to say is that, you know,
    while the examiner issue is controversial, it is difficult,
    when they classify a loan and make you give more capital or
    they worry about your collateral, some of these programs we are
    dealing with now do directly deal with that. If you can get
    more capital through the Small Business Lending Fund, that
    could give you--puts you in a stronger position to keep
    lending, even if you feel your examiner is unfairly classifying
    one or two loans. If you have things like the collateral
    support program that the Michigan and others are doing, those
    are things that could more directly affect you and allow you to
    give a loan even if you felt a bank examiner was
    mischaracterizing a loan you are giving.
        Ms. Kilroy. And yet, though, to be devil's advocate here,
    there is a value in having underwriting standards so that bad
    loans aren't being made, so that the program is being
    productive, and that the taxpayers are being protected. So
    should we have some minimum underwriting standards that are
    required in this bill?
        Mr. Sperling. Well, I don't think--and I think--as Mr.
    MacPhee said, I don't think there is anything here that would
    encourage anybody to loosen their underwriting standards, nor
    should they, not just for the taxpayer, but to be honest, bad
    loans, like subprime loans that shouldn't have been given, can
    make people lose everything and go into bankruptcy. We wouldn't
    want to encourage those bad loans not only--
        Ms. Kilroy. But aren't we putting in incentives to provide
    loans here?
        Mr. Sperling. But the incentive is--what you really want is
    a combination of things that will make banks who have maybe
    pulled back categorically from small business lending go back
    into lending. You know, the Recovery Act that many of you voted
    for encouraged 1,300 banks who hadn't been doing SBA lending to
    come back, to set up shops and hire people to start doing small
    business lending. So by offering an incentive, you give an
    encouragement to do more in that area, and you make the lending
    performance-based, which was one of the big complaints about
    CPP.
        But, again, I don't see any economic incentive that would
    make you actually give a bad loan. The loss you would suffer
    would be much greater than any incentive you would get if you
    had a loan that completely failed.
        Ms. Kilroy. We have all been very interested in helping
    small business, as you suggest, the Recovery Act; and the HIRE
    Act; the Worker, Homeownership, and Business Assistance Act;
    tax credits for small business for health care. But how do we
    make sure that this is targeted towards those small businesses?
    The definition of lending seems pretty broad there to me, but I
    am deferring to you as the expert here.
        Mr. Sperling. Well, again, the President is supporting a
    comprehensive approach. So we are supporting the expansion of
    the SBA recovery provisions which go--which, by definition, go
    only to certain small businesses of certain sizes. The
    expansions on the SBA program go to the small businesses. The
    State program also is there. This one program goes to small
    banks and uses the best possible proxy that exists that we
    could possibly use today to measure whether a small bank has
    increased their lending to small businesses and farmers.
        Mr. Peters. [presiding] The gentlewoman's time has expired.
        Ms. Kilroy. Thank you, Mr. Chairman.
        Mr. Peters. Thank you.
        I am the last questioner for you, and you will be on your
    way shortly. We certainly appreciate all of you being here and
    giving this testimony on a very, very important topic, one that
    we had been dealing with for quite some time here.
        Before I ask a few questions, I want to make a unanimous
    consent request to those of us who are still here. I have two
    items to put into the record: I have a letter in support of the
    State Small Business Credit Initiative, signed by 13 Governors;
    and a letter of support from the Motor & Equipment
    Manufacturers Association. I would like to enter them into the
    record, with unanimous consent.
        Before I ask some questions, it certainly has been
    interesting in hearing the comments of some of our colleagues
    here on the other side that there is a lack of demand for this
    lending. Certainly, that is not what I hear. We have certainly
    been hearing from many folks on this side of the committee room
    as well. That is not what we are hearing from our small
    business owners. In fact, I had a meeting just yesterday with
    small business owners, and I had a gentleman who has the top
    credit rating, an outstanding entrepreneur in my area, who was
    attempting to expand his business in the local town, and he
    said he has been to eight banks and has not been able to get
    the loan, and he is now on his ninth bank, and he thinks that
    hopefully he will be able to get it. And he said he wouldn't
    have gotten it except for incredible perseverance to do it. It
    is a job that can immediately lead to the creation of
    additional jobs.
        So we definitely have an issue out there. We definitely
    have to be working on that. And I think that perhaps maybe the
    definition of ``demand'' is one in which demand is not there
    from what is considered creditworthy, because the standards
    have changed as to what is creditworthy, which I think is why
    it is so important that we have these State programs. And I
    want--Mr. Brown, if you could just comment on that. Is it lack
    of demand from creditworthy? It is not that we have good
    companies that can immediately put people to work, it is that
    the goalposts have changed basically, and that is why these
    State programs are necessary? Is that an accurate statement?
        Mr. Brown. I think that is a perfectly accurate statement.
    And, in fact, the existence of our program has created a huge
    pool of demand, basically pulling in loans that would otherwise
    have not been considered eligible. So its very existence is now
    bringing people back to the credit markets and encouraging them
    to expand their businesses.
        Mr. Peters. Mr. Johansson, you are also heading a State
    program. Is that an accurate statement for your organization as
    well in Maryland and what you are doing?
        Mr. Johansson. Congressman, I think your statement is right
    on. And the evidence we have in the State of Maryland is that
    last fiscal year, we did $40 million in loan guarantees. At
    this point in time, we have $40 million already done, and we
    have $150 million in the pipeline. If that is not a signal of
    an uptick in demand, I don't know what is.
        Mr. Peters. And what sort of jobs would be created by that?
    Do you have any idea?
        Mr. Johansson. Well, it would be everyday businesses. We
    were talking a company that manufactures tools, Bass
    Manufacturing, and we gave them an $87,000 guarantee. They got
    a $350,000 loan as a result.
        These are small businesses that are throughout the State of
    Maryland, and we are talking about thousands and thousands of
    jobs that can be impacted by this.
        Mr. Peters. The other complaint that I have heard, or I
    should say criticism of the potential, is the cost to the
    taxpayers. If I recall in your testimony, you mentioned that
    there has not been a loss. What would we expect the cost to the
    taxpayers would be from additional resources from your fund in
    Maryland?
        Mr. Johansson. Well, we haven't had a single loss in the
    last 5 years, and we expect that record to continue.
        Mr. Peters. And the resources that would be put into your
    program, how would that be leveraged with private resources?
        Mr. Johansson. We are estimating a minimum of 10 to 1. So
    for every dollar that you inject into a fund like the MTFA
    fund, you get $10 of private sector lending.
        And I think what you brought up before about the goalposts
    being changed, the fact is you are dealing with stricter
    lending standards. And the collateral, people's houses,
    people's equipment, the commercial land that they own, and so
    forth, the commercial real estate, all of that has been
    reassessed, and so that gap even when they are creditworthy,
    that is a gap that we need to help plug, and we can do it.
        Mr. Peters. Mr. Brown, is that a similar experience in
    Michigan?
        Mr. Brown. Yes, it is quite a coincidence that actually our
    hard pipeline in terms of deals that have already been brought
    to us and our already under underwriting and due diligence by
    the banks is also $150 million. And our program right now has
    also, although it has only been in existence about a year, has
    never had a default. We expect that the portfolio theory will
    prevail, and there will be some defaults, but overall, we
    expect our fund to return 5 percent on invested public dollars.
        The Peters. Mr. Atkins mentioned in his testimony that we
    should not have a one-size-fits-all plan with this legislation.
    But it seems to me the small credit business initiative is
    exactly the opposite. It is not a one-size-fits-all plan, but
    really is tailored to the unique needs of States, and they are
    going to be different. We have two for Michigan and Maryland.
    Your plans are going to be different, but you have different
    States and different needs. Is that an accurate assessment, Mr.
    Johansson?
        Mr. Johansson. Most definitely. If you look at loan
    guarantees, there are 34 States that have these. These are
    shovel-ready solutions that are ready to go, not tomorrow, but
    are ready to go today if they have the necessary capital to put
    to work. And this isn't capital that will sit on the sidelines.
    For a loan guarantee, by its very nature it has to unlock
    private sector lending. So every dollar that someone puts in it
    effectively unlocks private sector lending.
        Mr. Brown. I think one of the particularly elegant parts of
    this plan is that it relies on the States to develop their own
    programs. Michigan, I think it is not surprising that our
    program right now is reserved for Tier II, III, and IV auto
    suppliers who are diversifying into four of our targeted
    industries. We have identified that manufacturing is something
    that we have a core competency in. We would like to continue
    it. We risk losing it and losing it permanently if we don't get
    the capital to these companies. And every State may be
    different. It both allows, this program both allows the States
    to tailor theirs to their specific need as well as allows a
    diffuse pipeline to get those moneys out on the streets
    quicker.
        Mr. Peters. I know my time has expired, but it is rare that
    I can have a chairman's prerogative and take a little extra
    time. I will just ask one question, and that is, we are in 34
    States. Are these programs that it is not just about those 34
    States, these are State programs that can be replicated fairly
    easily? Based on the success of those 34 States, would you
    expect any problems for the other States?
        Mr. Brown. Not at all. In fact, we have looked at this
    issue and have spoken to some States that currently don't have
    a loan support program. Most of their economic development
    agencies, whether it is the Department of Commerce or something
    more similar to the Michigan Economic Development Corporation,
    are able to do that administratively.
        Mr. Peters. Great. Thank you.
        Are there any other members who wish to be recognized?
        With that, the Chair notes that some members may have
    additional questions for this panel which they may wish to
    submit in writing. Without objection, the hearing record will
    remain open for 30 days for members to submit written questions
    to these witnesses and to place their responses in the record.
        This hearing is now adjourned.
        [Whereupon, at 4:05 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                  May 18, 2010

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]