[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

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel























                            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.]
















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                              May 18, 2010

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