[Senate Hearing 111-1136]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 111-1136
 
  REAUTHORIZATION OF SBA FINANCE PROGRAMS AND THE IMPACT OF THE SMALL 
                BUSINESS PROVISIONS IN THE RECOVERY ACT

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



                               ROUNDTABLE

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 1, 2009

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                     ONE HUNDRED ELEVENTH CONGRESS

                              ----------                              
                   MARY L. LANDRIEU, Louisiana, Chair
                OLYMPIA J. SNOWE, Maine, Ranking Member
JOHN F. KERRY, Massachusetts         CHRISTOPHER S. BOND, Missouri
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
TOM HARKIN, Iowa                     JOHN THUNE, South Dakota
JOSEPH I. LIEBERMAN, Connecticut     MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHNNY ISAKSON, Georgia
EVAN BAYH, Indiana                   ROGER WICKER, Mississippi
MARK L. PRYOR, Arkansas              JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JEANNE SHAHEEN, New Hampshire
KAY HAGAN, North Carolina
           Donald R. Cravins, Jr., Democratic Staff Director
              Wallace K. Hsueh, Republican Staff Director
                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Vitter, Hon. David, a U.S. Senator from Louisiana................    14
Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana.    21

                               Witnesses

Mills, Edward, Democratic Senior Policy Adviser for Banking and 
  Finance, Committee on Small Business...........................     1
Zarnikow, Eric, Associate Administrator, Office of Capital 
  Access, U.S. Small Business Administration.....................     2
Wojtowicz, Jean, Executive Director, Indiana Statewide Certified 
  Development Corporation and Chair, National Association of 
  Development Companies..........................................     2
Fruge, P. Andre, President and CEO, Louisiana Capital Certified 
  Development Company, Inc.......................................     2
West, Dennis, President, Northern Initiatives....................     2
Garvin, Marianne, President and CEO, Community Development 
  Corporation....................................................     2
Moncrief, Ray, Chief Executive Officer, Kentucky Highlands 
  Investment Corporation.........................................     2
Wasser Gish, Joan, Principal, Policy Progress....................     2
Wheeler, Kevin, Democratic Deputy Staff Director, Committee on 
  Small Business.................................................     2
Lucas, Chris, Republican Counsel, Committee on Small Business....     2
Walker, Matt, Republican Deputy Staff Director and Counsel, 
  Committee on Small Business....................................     2
Heath, Michael, Owner, Ramunto's Brick Oven Pizza................     3
Palmer, Brett, President, National Association of Small Business 
  Investment Companies...........................................     3
Harris, Glenn, Counsel, Office of the Inspector General, U.S. 
  Small Business Administration..................................     3
Crispen, Fred, Executive Vice President, Borrego Springs Bank....     3
Wilkinson, Anthony, President and CEO, National Association of 
  Government Guaranteed Lenders..................................     3
Clarkson, Greg, Executive Vice President, BBVA Compass Bank......     3

                      Appendix Material Submitted

Clarkson, Greg
    Testiminy....................................................     3
Crispen, Fred
    Testiminy....................................................     3
Fruge, P. Andre
    Testiminy....................................................     2
Garvin, Marianne
    Testiminy....................................................     2
Harris, Glenn
    Testiminy....................................................     3
Heath, Michael
    Testiminy....................................................     3
Landrieu, Hon. Mary L.
    Opening statement............................................    21
    Prepared statement...........................................    23
Lucas, Chris
    Testimony....................................................     2
Mills, Edward
    Testimony....................................................     1
Moncrief, Ray
    Testimony....................................................     2
    Prepared statement...........................................    56
Palmer, Brett
    Testimony....................................................     3
Shay, Matthew
    Prepared statement from House Committee on Small Business on 
      October 14, 2009...........................................    83
Vitter, Hon. David
    Testimony....................................................    14
Walker, Matt
    Testimony....................................................     2
Wasser Gish, Joan
    Testimony....................................................     2
West, Dennis
    Testimony....................................................     2
    Prepared statement...........................................    80
Wheeler, Kevin
    Testimony....................................................     2
Wilkinson, Anthony
    Testimony....................................................     3
    Prepared statement...........................................    64
Wojtowicz, Jean
    Testimony....................................................     2
    Prepared statement...........................................    72
Zarnikow, Eric
    Testimony....................................................     2


  REAUTHORIZATION OF SBA FINANCE PROGRAMS AND THE IMPACT OF THE SMALL 
                BUSINESS PROVISIONS IN THE RECOVERY ACT

                              ----------                              


                       THURSDAY, OCTOBER 1, 2009

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
room SR-485, Russell Senate Office Building, Hon. Mary L. 
Landrieu (chair of the committee) presiding.
    Present: Senators Landrieu, Vitter, and Risch.
    Staff present: Ed Mills, Kevin Wheeler, Matthew Berger, 
Chris Lucas, and Matt Walker.

  OPENING STATEMENT OF EDWARD MILLS, DEMOCRATIC SENIOR POLICY 
  ADVISER FOR BANKING AND FINANCE, COMMITTEE ON SMALL BUSINESS

    Mr. Mills. Good morning, everyone. Senator Landrieu will be 
joining us at approximately 11:00 a.m., and considering we have 
a pretty robust agenda, I would like to start and get this 
underway.
    My name is Edward Mills. I am the Senior Policy Adviser for 
Banking and Finance on the Senate Small Business Committee 
here. The title of this morning's roundtable is 
``Reauthorization of SBA Finance Programs and the Impact of 
Small Business Provisions in the Recovery Act.'' What I would 
first like to do is explain the agenda and then we will begin.
    The record for this roundtable will be open for 2 weeks, 
until October 15th, so if any of our participants have anything 
to add to the official transcript, please submit that to the 
Committee.
    We will start off by going around the dais and having 
introductions. For the introductions, if you can, please limit 
it to your name, organization, and title.
    What we would like to do for the roundtables, it is a 
pretty informal conversation. We would like to get as robust of 
a conversation as possible, and the goal of this particular 
roundtable is to build a record for the reintroduction of 
legislation to reauthorize a number of the finance programs at 
the SBA.
    To do this, we will be building on the legislation that the 
Committee has considered in previous Congresses, including S. 
1256, which was the Small Business Lending Reauthorization 
Improvement Act of 2007; S. 2920, the SBA Reauthorization and 
Improvement Act of 2008; as well as the child care lending 
pilot that was offered by Senator Kerry and the intermediary 
lending pilot offered by Senator Levin; and, obviously, a big 
part of these discussions will also include initiatives that 
were introduced this Congress, including S. 1615, the Next 
Steps for Main Street, introduced by Senator Snowe.
    In addition to a reauthorization bill, one thing that we 
would like to build the record for is the possibility of 
crafting legislation which would serve as a next steps bill for 
the Recovery Act.
    After introductions, after we go around, I will start by 
introducing each topic, and I will call the subject matter 
expert we have here as well as representatives from the SBA and 
the IG's office. I know a number of participants around the 
dais are well versed in more than the program that they are 
officially representing, so we very much welcome you to 
participate in as much of the conversation as possible. To do 
that, what I would ask you to do is if you do want to talk, 
just put your sign up like this; and if you could, please place 
it where your name is facing up here so I can actually read it, 
or when the Senator arrives, she can read it. Also, if everyone 
could put their placard up here so we can see your names.
    During our discussion I will also be turning to my 
colleagues on Senator Landrieu's and Senator Snowe's staff to 
ensure that they have the opportunity to ask any questions they 
may have. And, finally, when Senator Landrieu arrives, we will 
be turning it over to her. She will make some brief remarks and 
run the roundtable at that point.
    If we could start with introductions, and we will start 
down here with Eric Zarnikow.
    Mr. Zarnikow. I am Eric Zarnikow. I am the Associate 
Administrator of the Office of Capital Access at the U.S. Small 
Business Administration.
    Ms. Wojtowicz. I am Jean Wojtowicz, Executive Director of 
Indiana Statewide Certified Development Corporation and the 
current Chair for our trade association, the National 
Association of Development Companies.
    Mr. Fruge. I am Andre Fruge. I am President of Louisiana 
Capital Certified Development Company, Lafayette, Louisiana.
    Mr. West. I am Dennis West. I am President of Northern 
Initiatives, and we are based in northern rural Michigan.
    Ms. Garvin. Marianne Garvin, President and CEO of Community 
Development Corporation of Long Island.
    Mr. Moncrief. My name is Ray Moncrief. I am Chief Executive 
Officer of Kentucky Highlands Investment Corporation, and I 
manage an SBIC, a new markets venture capital program, and a 
rural business investment company.
    Ms. Wasser Gish. Good morning. My name is Joan Wasser Gish. 
I am Principal of Policy Progress.
    Ms. Wheeler. Kevin Wheeler, Democratic Deputy Staff 
Director for Senator Landrieu.
    Mr. Lucas. I am Chris Lucas. I am Counsel to Ranking Member 
Snowe.
    Mr. Walker. I am Matt Walker, Deputy Republican Staff 
Director and Counsel for the Committee. I want to express that 
Senator Snowe, although this is a staff-led roundtable, always 
attempts to make an appearance to committee events. However, 
today, as I am sure most of you are aware, the Finance 
Committee is tied up on health care amendments, and that is 
where she is. So she apologizes for personally being unable to 
attend this roundtable.
    Mr. Heath. My name is Michael Heath. I am the owner of 
Ramunto's Brick Oven Pizza in St. Johnsbury, Vermont.
    Mr. Palmer. My name is Brett Palmer. I am the President of 
the National Association of Small Business Investment 
Companies.
    Mr. Harris. Glenn Harris, Counsel to the Inspector General, 
SBA Office of Inspector General.
    Mr. Crispen. Fred Crispen, Executive Vice President, 
Borrego Springs Bank. I manage the Small Loan Division.
    Mr. Wilkinson. I am Tony Wilkinson. I am the President and 
CEO of the National Association of Government Guaranteed 
Lenders.
    Mr. Clarkson. I am Greg Clarkson. I am Executive Vice 
President, BBVA Compass Bank, and SBA Division Manager, as well 
as the Chairman for the National Association of Government 
Guaranteed Lenders.
    Mr. Mills. Great. Thank you very much.
    So the first item on our agenda this morning is the 7(a) 
program. Obviously, this is a flagship program of the SBA. A 
number of provisions were included in the Recovery Act, and I 
would like to start off with a brief update from Eric Zarnikow 
from the SBA on how Recovery Act programs are going, especially 
as they relate to 7(a), and I will then move on, starting with 
Greg Clarkson, to get a lender perspective as well as some 
ideas for reauthorization.
    So, Eric.
    Mr. Zarnikow. Well, first I would like to thank the 
Committee for holding this roundtable. I think is a very 
important forum to really discuss what is going on in small 
business and supporting small business lending activity. And 
when you think about the 7(a) and the 504 program and you think 
back a year ago, we really had the credit crunch that hit last 
fall in the marketplace. We saw a significant decline in SBA 
lending volume in both 7(a) and 504.
    When the Recovery Act was passed in February, there were a 
number of important elements that helped support the 7(a) and 
504 program. We had the fee reductions or eliminations for 
borrowers and lenders in the 504 program, fee reductions for 
borrowers in the 7(a) program, and also the 90-percent 
guarantee in the 7(a) program.
    We have really seen a very significant impact from the 
Recovery Act as we see our lending volume in SBA. And if you 
look at that period immediately prior to the Recovery Act being 
signed, the period from the beginning of the calendar year 
until the Recovery Act was signed in mid-February, and you look 
at our weekly average loan volume and then you compare our 
weekly average loan volume subsequent to the passage of the 
Recovery Act, we have seen that our loan volume has increased 
by more than 60 percent when you look at 7(a) and 504 combined.
    So we have seen a very significant rebound in lending tells 
us that the Recovery Act really hit the mark as far as what was 
needed in the marketplace at that time.
    Also, one of the important elements of 7(a) lending is the 
secondary market; 40 to 50 percent of the Government guaranteed 
portion of 7(a) loans each year is sold into a secondary 
market. Last fall, with the credit crunch, we did see a 
freezing of the secondary market where secondary market sales 
volumes were down by 70 to 80 percent in some cases, and we saw 
a substantial reduction in premiums.
    The good news is there has been a very significant recovery 
in the secondary market. Part of that we believe is coming TALF 
and the inclusion of SBA loans as part of TALF, as well as the 
announcement from TARP that was done in March where TARP has 
committed to support up to $15 billion--or provide up to $15 
billion of support for SBA secondary market loans. And we have 
seen over the last 4 to 5 months the secondary market loan 
volume has recovered. It is actually back to the point where it 
is exceeding the levels prior to the credit crunch, and in 
addition, the premium levels that are seen in the market have 
also recovered, and we think that is a very big supporter of 
SBA lending, particularly 7(a) lending.
    In addition, we have seen lenders return to the 
marketplace. Since the Recovery Act was passed, we have over 
1,000 lenders, who had not done a loan since the beginning of 
the fiscal year, have done a Recovery Act loan, and more than 
500 of those lenders are people who had not done a loan in the 
SBA program since at least 2007. So we think getting additional 
lenders into our program is really a critical part of 
supporting access to capital for small businesses.
    The obvious question is what is really next for small 
businesses as we think about the next phase of the recovery, 
what really is needed. So I am very interested to hear the 
discussion here today, hear the ideas that come out of this 
roundtable and what is really needed to help support small 
businesses in the next phase of the recovery.
    Thank you.
    Mr. Mills. Thanks, and if we could have some comments from 
Greg Clarkson.
    Mr. Clarkson. Thanks, Ed. One of the things I am seeing out 
in the marketplace is that the borrowers and small business 
owners continue to have a desperate need for access to capital. 
I think that that need is not only for capital acquisition, 
capital expenditures, but there is a great need for working 
capital. That working capital is not only to grow their 
business, but to sustain what they have lost over the last 
couple of years during the economic issues that we have been 
experiencing.
    So a borrower's needs are greater, and I think that that 
borrower's needs are greater in a time when banks are 
constricting their lending standards. And one of the things in 
looking at a bank's analysis for identifying qualified 
borrowers, they are not only looking at historical performance, 
but also looking at the information available as it relates to 
geographic diversity, industry diversity, and spending more 
analysis or determining whether that borrower can not only 
continue to pay but grow the business as they continue to 
succeed. And we are seeing that it is critical that we have 
programs that support the small business' needs. We are also 
seeing that the needs are greater. The size of the loans, the 
size of the requests are expanding, especially in light of the 
ability for small businesses to continue to meet conventional 
lending standards. So we are seeing a need for larger loans as 
one item.
    One of the things that I have noticed also is just making 
sure that borrowers, as they are looking for additional 
capital, they have access not only to the SBA programs 
throughout our institution, but also through other 
institutions. Very excited that the information that Eric gave 
with regards to increased participation. We want that as an 
industry to continue to expand and grow and have more lenders 
participating, because that does create more opportunity for 
small businesses to obtain capital.
    One of the things from the SBA perspective that I look at 
is ensuring that the requirements of the SBA program can be met 
and that the guarantee that we are relying on as a lender is a 
good guarantee and we can use that as an opportunity to 
diversify our risk in any individual lending situation.
    So the 90-percent guarantee has greatly assisted us in 
being able to reach more small businesses. I do have a concern, 
as the stimulus money and provisions expire, what is going to 
happen to lending and to capital access for small businesses 
once those provisions expire and the economy has not recovered 
enough to be able to sustain continued access for small 
businesses.
    Mr. Mills. Thanks. And we will get into that a little bit 
more, but before we do that, I just wanted to call on Michael 
Heath. He is a small business owner who has received a 7(a) 
loan, and I would like to ask him to explain his experience 
with the program.
    Mr. Heath. Yes, if it was not for the 7(a) loan, I do not 
think we would have been able to purchase the business. It was 
awesome. With the fee reductions and things, it left us enough 
capital to sustain operations and keep growing.
    Mr. Mills. Prior to applying for it, did you know that 
there were going to be some fee reductions or that----
    Mr. Heath. I had no idea, starting into the process, that 
there was even this program out there. Our banker led us in the 
direction and helped us along in the process.
    Once everything came out in the wash and we realized what 
was going to be happening as far as finance goes, they really 
made it clear that if it was not for the program, it probably 
would not have been able to go.
    Mr. Mills. So if you had to pay the fees, would you have 
been able to afford the loan?
    Mr. Heath. Probably not.
    Mr. Mills. Great. And one thing I would like to talk about 
here is that there are some concerns out there in terms of this 
Recovery Act authorization going through September 31, 2010; 
however, the funds that have been put in to support the higher 
guarantees and the lower lender fees are scheduled to run out 
maybe as early as September. I just wanted to get--maybe we can 
have some cross-conversation about what would happen if in 
December it does run out, what you think might happen to loan 
volume and access to capital for small businesses. I would love 
to hear from the SBA about some steps that it anticipates 
making to ensure that there is an orderly wind down if there 
are not any additional funds available to continue those 
guarantees and fee reductions.
    I do not know who wants to start.
    Mr. Wilkinson. May I?
    Mr. Mills. Sure, Tony. You can start and then we will go to 
Marianne.
    Mr. Wilkinson. Well, we are definitely concerned what is 
going to happen when the stimulus funds do run out. The 90-
percent guarantee and the borrower fee reductions have clearly 
helped drive loan volume. We are just now getting back to the 
same daily loan volumes we had last year. I think we are pretty 
close on a daily loan volume in September as we were in 
September of 2008. But to get there, it took quite a bit of 
stimulus. It took the 90-percent guarantee. It took the 
borrower fee reductions--the fees being waived. So we would 
anticipate that, as the funds run out, we would see a softening 
in loan demand.
    The 90-percent guarantee is important to the banker 
community today. It is no secret that banks have capital 
issues, and this is a way that we can leverage the limited 
capital that is out there and still serve the small business 
community. So the extension of the guarantee in our opinion is 
critical.
    I do know that the SBA has been guesstimating an end-of-
the-calendar-year running out of funds. Our guess is that the 
closer we get--or the farther we get into this last quarter, 
the faster those funds are going to get utilized. And I would 
not be at all surprised if our funds are used up by 
Thanksgiving.
    Mr. Mills. Marianne.
    Ms. Garvin. I wanted to make a comment about Mr. Heath's 
remarks. He is a small business owner, and as a practitioner in 
the field that makes capital available to businesses, what his 
experience was is what I see, which is a business needs 
capital. They come to a source. They do not know the programs. 
They do not know that there is a micro loan program or a CDFI 
or a 7(a) program. And so there needs to be this range of 
products out there, and it is not really necessary or important 
for the business to know which bucket they fit into. But that 
kind of flexibility of products and capital access is important 
for us to be able to then respond to all the different types of 
businesses that come to us and the different types of capital 
needs that they have. And I think, given the range of programs 
that this roundtable is going to be responding to, I just 
thought that highlighting Mr. Heath's comment was important.
    Mr. Mills. Thank you.
    Eric.
    Mr. Zarnikow. Sure. When we rolled out the fee reductions 
and the higher guarantees back in March, we estimated at that 
time that we would expect that the money would run out sometime 
around the end of the calendar year, but also recognizing that, 
depending on loan volume, that date could either move up or be 
pushed back.
    At this point I would say, based on the volumes we are 
seeing, that it is likely that 7(a) would run out late November 
or early December; 504 would maybe run out mid-December to late 
December. Obviously, that can and will change depending on what 
happens with loan volume.
    As we talk with lending partners, there have been concerns 
expressed that as we get closer to that date, we will see a 
surge of volume and that that might cause that date to move in 
closer.
    At SBA we do have a team and have had a team for a while 
working on how do we thoughtfully wind down the fee reductions 
and the higher guarantees. And, obviously, when you think about 
the structure out there, we have over 2,500 lenders who make an 
SBA loan in any given year. They work with small businesses. 
Clearly, communications of that is going to be a critical item 
in figuring out a thoughtful plan and how to wind down the 
program in a way that makes sense and can be communicated out 
to our lending partners and to small businesses as critical.
    We do have a team working on that and are hoping to be able 
to announce that here in the next weeks or a month to be able 
to communicate that out to the community on how we are going to 
wind down the fee eliminations and the 90-percent guarantee.
    Mr. Mills. Thanks. I know, Greg, you have your card up. We 
have a couple more minutes that we can spend on 7(a). We do 
have a pretty ambitious agenda. If I could ask you to talk a 
little bit about if we do move a reauthorization bill when we 
are looking for reintroductions, what are some of the key 
points you think that we need to address, especially loan size, 
and if you have any ideas in terms of what loan level in the 
7(a) program you would like to see?
    Mr. Clarkson. Sure. In response to Marianne, it is about 
choices. As a lender, I want to have choices to give to you as 
a small business owner. Whether it is a conventional loan, 
whether it is a 504, 7(a), or any other loan, I want to have 
choices for you, and based on your risk tolerance, based on 
your needs, for you to be able to make an informed decision.
    Anytime that we limit participation in any of the programs, 
it makes it more difficult for you to have a wide range of 
options, and conventional lending is constricted by the 
requirements of a bank's lending policy, but then also 
regulatory. And then if we have loan limitations, size 
limitations, anything of that nature, with regards to some of 
the other guaranteed programs, then we have limited your 
choices.
    So in regards to the reauthorization bill, one of the 
things that is important, in my opinion, is increasing the loan 
size, and increasing that--I had originally thought that $3 
million was the right size, and the reason why I thought that 
was because that would take into account inflationary activity, 
rises in real estate costs, things of that nature, just normal 
business. But what I am seeing recently is not only the need 
for the capital expenditures which bring them up to the larger 
loan size, but also businesses needing not only to take care of 
their capital asset requirements, but then also the working 
capital is becoming very important--not for start-up 
businesses--I mean, it is important for start-up businesses, 
but the size that we are talking about, having the larger loan 
for existing job preservation businesses, job creation 
businesses, really the things that drive the economic recovery.
    So, in my opinion, looking at a $5 million loan size to be 
able to accommodate the borrower's needs in this economy is 
important. That is one of the most important things that I see.
    Mr. Mills. Thanks. And at this time, I want to turn it over 
to Senator Snowe's staff to have an opportunity to ask a few 
questions, then I am going to see if Kevin has any questions 
before we move on to the next topic.
    Mr. Walker. Sure. I just wanted to follow up on that 
because the increased loan size is something that has been a 
priority of Senator Snowe's for quite some time now, and 
something she has been pushing for. She believes that many 
small businesses are, unfortunately, priced out of the SBA's 
lending market because the loans just are not ones that will 
suit their needs, given the type of business that they do.
    I am going to ask a question that I believe I already know 
the answer to, but I still want to ask it in this sort of a 
format, so that we continue to get the response on the record. 
That is, isn't it true that in the SBA's portfolio, the higher 
loans are actually better-performing loans with a lower default 
rate?
    Mr. Zarnikow. In the 7(a) program, we do see that the 
larger loans tend to perform better than smaller loans. In the 
504 program, it is actually the opposite. The larger loans do 
not perform quite as well as smaller loans.
    Mr. Walker. So relative to the 7(a) loan program, would it 
then be presumed that the subsidy rate would be lowered, if 
higher loans were allowed?
    Mr. Zarnikow. You know, based on the information we have in 
our existing portfolio, that would be correct. Obviously, the 
unknown question is when you go to a higher loan limit above $2 
million, will those loans perform similar to the larger loans 
in the existing portfolio or not, and that is obviously a 
question we cannot answer until we actually get some experience 
with it.
    Mr. Walker. Okay.
    Mr. Lucas. Also, I had an additional question. One of the 
things that you touched on was that you were not aware of the 
7(a) lending program. And it is a wonderful program, yet I 
think one of the problems is that people do not always look at 
it when they look at their lending options.
    One of the provisions that Senator Snowe has in her Next 
Steps Bill is an online lending platform, and I just wanted to 
ask Mr. Wilkinson and Mr. Clarkson what your thoughts are about 
an online lending presence. In the general perspective, is it a 
good idea to raise the visibility of the 7(a) program, so that 
when borrowers are considering their options, the 7(a) program 
is something that they consider?
    Mr. Clarkson. Well, I think anything that gets the word out 
on the program to small businesses is a good thing. I think if 
it provides information as it relates to what lenders are 
actively participating in the program, that is a good thing. I 
think if it includes what lenders--I do not know that you can 
do it the same way you would interest rates as far as mortgages 
or something like that, but give the small business the 
opportunity to direct their focus, to direct their opportunity 
to go to a lender that is participating in the type of loan 
that they need, the type of--whether it is geographic, 
industry, anything of that nature, to be able to do that.
    So I would be in favor of any sort of informational process 
that gets the word out.
    Mr. Lucas. Great. Thank you very much.
    Ms. Wheeler. I just want to ask a few questions. Eric, the 
answer to the question on the record is that raising the 7(a) 
loan limit from $2 million to, say, $5 million does not have a 
cost and it could even have savings?
    Mr. Zarnikow. Yes, what I would say what we see in our 
existing portfolio is larger loans tend to perform better than 
smaller loans. We obviously do not have any experience in our 
portfolio, or limited experience, for loans about $2 million.
    Ms. Wheeler. Okay. To the industry, what are the industries 
that you are seeing that need these larger loan sizes or the 
areas of the country? Is it limited to certain areas of the 
country?
    Mr. Wilkinson. I would say that small businesses throughout 
this country are finding it difficult to access conventional 
credit. The conventional credit window, while it is still open, 
is not open very much, and that we are seeing many more small 
businesses whose really only option to get financing is through 
the SBA programs. And we are seeing a whole host of industries 
that could benefit from a much larger loan size. For instance, 
the Automobile Dealers Association, you know, the $2 million 
limit today really does not satisfy many dealers' needs. A $5 
million loan size would help, and there is a whole list of 
industries that could benefit from the increased loan size.
    Ms. Wheeler. And for the SBA, have you found that that is 
one of the obstacles to the lenders using--or even the 
borrowers using--the floor plan financing that you put through?
    Mr. Zarnikow. We have received feedback from lenders that 
the $2 million loan limit that we have currently is a barrier 
to their use of the dealer floor plan loan from a couple 
standpoints. One is many of the national dealer floor plan 
lenders tend to have a $5 million minimum that they do on a 
dealer floor plan. Then, obviously, many dealers have a need 
that would be greater than $2 million.
    Ms. Wheeler. So then we would fill that gap if we were to 
raise the limit from $2 million to $5 million. If we were 
thinking about this change, it would be very appropriate to do 
it as part of a follow-on targeted recovery piece, separate, 
because it needs to move faster than, say, regular 
reauthorization? SBA is seeing that need?
    We received a letter from ten associations in support of 
the change. Many of them are associated with automobile dealers 
and vehicle dealers, in addition to trade associations, like 
the National Small Business Association and the Chamber of 
Commerce.
    That is what we are hearing from the Committee, but it 
sounds like you are hearing that at SBA, too.
    Mr. Zarnikow. We have definitely heard from lenders that 
there is a need for larger loans. We have seen in our portfolio 
that the percentage of loans in excess of $1.5 million has been 
increasing over time. However, you would keep in mind that 80 
percent of the dollars are for loans less than $1.5 million, 
and our average 7(a) loan is about $200,000.
    So I think it is important to be thoughtful about, you 
know, how does that fit into the overall lending market, making 
sure that as a Government we are not pushing out the private 
sector, that we are supporting access to capital for small 
businesses. So I think that is an important thing to consider.
    Ms. Wheeler. Along those lines, there was a question raised 
about whether this would crowd out the businesses needing 
smaller amounts of capital, the smaller businesses. Would 
anybody like to answer that?
    Mr. Wilkinson. I do not believe it would.
    Ms. Wheeler. I know we are not near the program level, but 
does anyone have an answer as to why it would not crowd them 
out, aside from the fact that we are not exhausting the 
program?
    Mr. Clarkson. Well, I think from a lenders' perspective, we 
look at all borrowers, look at all types of loans, and, you 
know, it gets back to just having another option.
    With regards to the large loans, here is a prime example, a 
really quick example. I have a borrower that I looked at just 
this week that needs $2 million on a debt refinance of their 
existing real estate for their manufacturing plant. They also 
have a line of credit to the same lender for a million and a 
half. The lender is not willing to take those loans and 
refinance them, renew them under favorable terms. So they are 
asking that borrower to move their loans, and without the SBA 
program, there is really not an option for that borrower. And 
since their need is greater than the $2 million, you cannot do 
one or the other in that instance, and we are seeing that with 
several of those types of borrowers that have never considered 
SBA in the past.
    Ms. Wheeler. Okay. Thank you.
    A last question for SBA. How much money would we need if we 
were to do the 7(a) piece to continue the guarantee or to do 
the loan fee waivers? Do we have numbers on those?
    Mr. Zarnikow. We can provide you those numbers. I do not 
have them here with me, but we can provide those to you.
    Ms. Wheeler. If we did not have money, is there anything we 
could do within the program that might help keep lending 
together without touching it, for example, I know we do not 
like it and it has high defaults, but changing the Express 
program, would that be an alternative if we did not have money?
    Mr. Wilkinson. You know, we have had a pretty long wish 
list of things that would be helpful to the program, and to 
their credit, the SBA has been checking them off, the things 
that they could do through their own regulations. Interest rate 
indexes, we have been after them; today they have got a new 
fixed rate index that is going to be very helpful. And they 
have already taken a lot of those steps.
    Absent an appropriation to continue the 90-percent 
guarantee and the fee waivers, you know, I would say we do need 
the larger loan size. I think that is critical to a number of 
borrowers. And then, you know, we need to be prepared that 
there probably will be some slackening of demand. But from 
there, the other issues would be to focus on the lender 
oversight functions that we still find problematic and 
expensive and inefficient. And then some of the repair and 
denial issues that have driven a lot of lenders away and that 
will not be back regardless. I think that is something that we 
need to keep in mind that as we do some of these things, that 
we have--yes, we have got 1,000 new lenders that have not made 
loans in the last year or two. We have lost a lot of lenders 
for a whole variety of reasons, and oversight in denials and 
repairs are a big part of those. And I can tell you that the 
institution I used to work at has left the program and they 
will not be back. I think they have closed their division. And 
there are other institutions out there just like that.
    Mr. Mills. We will get into lender oversight in just a 
little bit. I do want to stay to the schedule as much as 
possible, so are you okay or did you want to make one quick 
comment?
    Mr. Moncrief. I would like to make one quick comment to 
Greg about the size of the SBA 7(a) loan. I have several 
companies that exactly fit the format of just what you said. 
They heretofore had been borrowers from large regionals, had a 
line of credit, had fixed-asset financing through real estate, 
et cetera. And all of a sudden, because of capital requirements 
at the large banks, the companies, because of the downturn, had 
had marginal years, and all of a sudden they are not a viable 
part of that portfolio.
    So what is happening, they are coming to practitioners that 
are doing 7(a)s or people who can originate 7(a)s, and it would 
be absolutely critical for that loan limit to rise above that 
$3 million--above the $2 million to perhaps the $5 million, 
because there are a host of small manufacturing concerns that 
employ 200 to 250 people in rural environments that are 
desperate for that type financing. So I echo you and support 
that greatly.
    Mr. Mills. Next is the Community Express Program. This 
program has been around for a while as a pilot. Some of the 
conversation has been: is it time to move it beyond a pilot or 
is it time to keep it as a pilot in any reauthorization? This 
is a program that has had some concerns raised about it due to 
the high default rate.
    To start off this discussion, I would like to call on Fred.
    Mr. Crispen. I definitely think it needs to be continued, 
preferably as a permanent program, for several reasons, the 
first of which would be it is hard to get your board to commit 
assets to invest in infrastructure, people, systems, to do a 
small loan program when it is still a pilot program. You do not 
know if it is going to be here today or tomorrow. So I think by 
making it a permanent program, I think you will actually get 
more lenders involved in the program from that standpoint.
    Under today's current economic conditions, without a doubt 
there is a drastic need for the program. We are seeing more and 
more every day existing borrowers along the same lines you are 
talking about that have been cut off by their large regional 
bank, and they are coming to us under the Community Express 
Program for small working capital loans.
    One of the other things I think we need to do is to raise 
the limit that encompasses everybody. Right now anybody in the 
country is eligible for a loan up to $25,000. Above $25,000 it 
is a targeted market. Now, I understand targeted markets, but 
in today's environment, that base rate needs to be raised to at 
least $50,000 or higher so that we can make working capital 
available to borrowers out there in the community.
    Mr. Mills. If I could call on Glenn with the IG's office, 
if you can express your thoughts on this?
    Mr. Harris. Sure. And for those of you who do not know, the 
Office of Inspector General is a statutorily created 
independent office whose mission is to deter and detect waste, 
fraud, abuse, and inefficiency. And we have a team of criminal 
investigators and auditors, so we look at all aspects of all of 
SBA's programs, including the 7(a) and 504 and financial 
assistance programs.
    Community Express I think is a program that potentially has 
a lot of merit, and I think it helps SBA to move to more of a 
qualitative type of lending rather than quantitative; in other 
words, not just looking at the quantity of loans that are made, 
but also looking at, you know, targeting loans to 
underprivileged areas that really need that lending assistance. 
So I think theoretically it has a lot of potential merit.
    We have concerns about a pilot program that has now been in 
existence for, I think, about a decade and that some decision 
should be made either way, either to make the program permanent 
or not.
    I think what would be necessary is some kind of analysis, 
which I believe SBA is doing, to determine whether this program 
is really working. They have given it a lot of thought. They 
have recently reengineered the program. But I think before they 
make a decision whether it is permanent or not, they have to be 
able to do that analysis and say this program is really working 
as it is supposed to do to try to provide the assistance to 
these needy borrowers.
    We are currently conducting an audit. It is not done. We 
have not briefed the agencies so I really cannot get into the 
details of that. But, generally speaking, you know, we do have 
some concerns with the way the program is being administered, 
and we do have some concerns with the technical assistance 
requirements and whether those are, in fact, effectively 
providing borrowers with the assistance they need to be 
successful.
    Ms. Wheeler. Glenn, when we looked at this last time in the 
Committee, we wrote to the IG and asked what would be its 
recommendation. The recommendation came back as--it is 
premature. Is that still the position of the IG, that it is 
premature?
    Mr. Harris. I think it is; at least, you know, we would 
certainly like to have our audit be completed and have the 
recommendations that result from that audit for the agency to 
consider that. I guess if you do not mind, Eric, I would like 
to see if I can ask him a question as to whether, you know, SBA 
has undertaken that analysis. We were told when the program was 
going to be reengineered that SBA was going to look at whether 
this program was really effectively reaching this borrower. So 
if that analysis is close to completion, hopefully, I would say 
that it is premature until that analysis has been done. But I 
do not have any independent information as to where they are.
    Ms. Wheeler. Do you want to give us the status of the 
analysis?
    Mr. Zarnikow. Sure. Let me talk just quickly on Community 
Express. It is really a program that is intended to match 
financial assistance, the loan, with technical assistance and 
is focused on serving underserved communities.
    We did a pretty major revamp of the program about a year 
ago. Our thought was make changes to the program. We will see 
how the program does. We had goals also to increase the number 
of lenders in the program, to broaden out the diversification 
of lenders because we saw a high concentration of loans being 
made in Community Express by just a handful of lenders.
    Obviously, the revamp that we made to the program coincided 
with a big credit crunch in the marketplace, a very deep 
recession, so the changes to the program we have not really 
seen how they work in kind of a normalized lending environment 
and a normalized economy.
    So at this point, we feel as an agency that it is probably 
premature to make a decision about Community Express. Our plan 
would be to extend it again, recognizing that it is a pilot 
program that has been around for a long time, but feeling that 
it is premature at this point given the changes we made to the 
program. We had actually asked for the audit that Mr. Harris 
referred to, so we are interested in seeing those results as we 
think about, you know, how does the program fit into our 
overall portfolio and the effectiveness of the program.
    Ms. Wheeler. Which leads me to a question: Would it be 
acceptable to the IG and to the SBA if we were to do a targeted 
recovery bill to just give it a year authorization? I know that 
that is tantamount to permanency, but not giving it a long 
leash.
    Mr. Zarnikow. I guess our thought has been to extend the 
pilot program for another year, which would give us additional 
time to get information about the performance of the program 
and then look at that point to finish the analysis and make a 
recommendation about whether to make it permanent or not.
    Ms. Wheeler. Are these Community Express lenders hitting 
their caps right now? Last year, the concern was that they 
could not do as much as they wanted. Is that problem still here 
since the regular program is back up and 10 percent 
proportionately creates a lot more latitude?
    Mr. Zarnikow. We have been managing the loan volume, and 
what we did is we set loan caps on the largest lenders to allow 
also room for additional or new lenders to come into the 
program or to expand. We have found really that only one of the 
large lenders has been hitting their loan caps, so the other 
lenders, it has not been a constraint.
    Ms. Wheeler. Mr. Crispen, did you want to comment on that?
    Mr. Crispen. Yes. We have a much higher actual loan volume 
in our program. We are averaging right now around $38,000 per 
loan made. So right now today I do not have a problem with a 
cap, although this month we funded like 95 loans with an 
average balance of around $38,000. So it really is going to 
depend on where that loan cap goes to. Right now it has been 
raised to 200 a month, but that was through the end of the 
year. So what happens today? Does it revert back to 100 loans 
per month? If that is the case, then, yes, I am bumping close 
to the cap because my volume continues to go up as we continue 
to push the program.
    Mr. Zarnikow. We expect that as the year begins to continue 
at the 200 level. We will obviously have to monitor that as we 
see what happens with our overall 7(a) volume and the Community 
Express volume, but we would expect to retain that cap going 
into the fiscal year.
    Mr. Crispen. And one other comment I would like to make 
regarding technical assistance, because Glenn touched on that a 
second, we use strictly what I consider the SBA partners--Small 
Business Development Centers, SCORE Chapters, and Women's 
Business Centers--as our technical assistance (TA) providers 
for the most part. There are a few municipal-backed nonprofit 
organizations that are approved by individual districts that we 
would consider using, but our go-to, our main TAs are the three 
partners. And I would like to see the program tweaked to the 
standpoint--right now we are required to have a separate TA 
provider agreement with those SBDC or SCORE Chapters or Women's 
Business Centers that I think is totally unnecessary. If we are 
using those partners, I think that could be eliminated, because 
if we run into a problem, most of the SBDCs are associated with 
colleges and universities. Trying to get a TA provider 
agreement through their legal counsel at the university level 
is a nightmare. I think it is an unnecessary burden.
    Ms. Wheeler. But will changing that TA--yes, I want to 
recognize Senator Vitter of Louisiana. Did you want to make 
some comments?
    Senator Vitter. Why don't you finish the discussion? Then I 
will jump in.
    Ms. Wheeler. This program has a very high default rate, 
higher than the other programs. My question is: Do we know why 
it has a higher default rate?
    Mr. Crispen. I think part of that is you have got to look 
at the public policy initiative that got us into the program to 
begin with. Look at the market we initially targeted and went 
after. It is an underserved market.
    Now, is that the case generally today? Yes, we are still 
pushing that underserved market. But right now today we have a 
huge demand for loans from just the general business community, 
because they have been cut off from loans by their local banks 
and by their regional banks. They need access to working 
capital more today than they have at any time in the past.
    Ms. Wheeler. Glenn, before I turn to you, I just want to 
say one thing. It was interesting to the Committee that when we 
looked at the data from one of the largest lenders in this 
program, their average credit score for borrowers was 710. To 
me that is not the targeted market that we were trying to get 
to, and I do not see if that average credit score is so high--
in my mind, that is a pretty good credit score--why the default 
rate is almost--what--double what the regular program is? Does 
that make sense?
    Mr. Crispen. I think once again you have got to look at the 
market and look at the economic conditions we have been through 
for the last year, 2 years really--it started a couple of years 
ago--and look at the targeted market initially so that that 
loan base was in a tough market.
    Ms. Wheeler. I think there would be more agreement that 
this program was meeting its mission if it was really digging 
down in that credit box, but that is a pretty high credit 
score.
    Mr. Crispen. Well, we use the Fair Isaac small business 
credit scoring model, which is a model that SBA is familiar 
with. I think they use it as well. And I would sit here and 
tell you right now today our average credit score is not 710, 
because that model looks at a broad perspective. And it is 
looking at more than just personal credit scores. It is looking 
at industry. It is looking at percentage of revolving available 
to that borrower, how long they have been in business. There 
are a lot of things that go into that scoring model, and I 
think it is a very fair model.
    But, I mean, you know, if you want to tweak the program, if 
you want to tweak lenders, give us some additional guidelines 
as to where you want to see default rates, and we can make 
adjustments within the model. But when you do that, tell us 
what you are going to do. You are going to cut out a broad 
spectrum of people that are looking for capital. And a lot of 
them are existing. Two years ago, if you had asked me what the 
percentage of my portfolio was start-up, I would have told you 
probably around 65 percent. Right now today, I would tell you 
that 65 percent or more of our borrowers are existing 
borrowers. A lot of them have been in business 10, 15 years, 
and they got cut off by their local bank. They need working 
capital. That is why we need to keep this program and why we 
need to really increase the base on it to allow me to be able 
to reach out to more borrowers.
    Ms. Wheeler. Okay. Thank you.
    Did you want to turn to Glenn for one last comment?
    Mr. Harris. Just very quickly, I think that you would 
expect the higher default rate given the nature of the 
borrowers in this program. The question that I have is: Is this 
default rate consistent with the riskier borrower base or are 
there other explanations for this default rate? We are 
concerned about the high historic default rates in this 
program, and part of that has been that there is a 
concentration of lenders who are making these types of loans. 
But I would hope that that would be part of the analysis that 
SBA would undertake.
    And what we have said for all of these pilot programs is 
consistently come up with benchmarks as to what the 
expectations are, then evaluate the program against those 
benchmarks, and to make a determination whether the pilot 
program should be extended as a permanent program or not. And, 
frankly, and with all due respect, we have not really seen that 
type of program implementation analysis going on.
    So we would like to see that, and we would like to see an 
analysis that shows that this is a justifiable program before 
the decision is made whether to make it permanent.
    Mr. Mills. Thank you very much. We do want to move on to 
the next topic. Did you have any final questions?
    Mr. Lucas. No.
    Mr. Mills. My understanding is that Senator Vitter and 
Senator Risch wanted to have a conversation related to the 
certified development companies and the 504 loan program, so I 
will turn it over to Senator Vitter for that.
    Senator Vitter. Thanks very much, Ed. Thanks to all of you 
for being part of this roundtable. This is really important for 
us, and I think it is a lot more relaxed and flexible mechanism 
to get a lot of good input and ideas from the real world versus 
a formal hearing. So thanks for being here. And a special 
welcome to my friend Andre Fruge from Louisiana, which is a 
great way to turn to the 504 program because Louisiana Capital 
that Andre heads is the most active 504 lender in Louisiana.
    I wanted to hear Andre's and everyone's comments about that 
program, what do you see in it during this recession, and I 
know there are two key proposals out there: one, to increase 
the lending limit; and, two, to use the USDA rural definition 
versus the presently used rural definition. So I particularly 
wanted to hear what those changes would do to the usefulness 
and effectiveness of the 504 program.
    Andre, do you want to start us off?
    Mr. Fruge. Thank you, Senator. I also want to extend my 
thanks to Donald Cravins for inviting me up here today, to 
Kevin Wheeler and Ed Mills and all of the staff of the Senate 
Small Business Committee. I am happy to be here.
    I have a list of things that I was going to comment on, but 
thank you for that segue opportunity. Really, there are three 
real important issues for us as an industry--reauthorization, 
of course. I believe and my colleagues believe that, you know, 
hopefully we are on the threshold of coming out of this 
recession. We believe that we are going to be--small business 
is going to be a driving force behind that recovery. For that 
reason, we need to be reauthorized, number one. And we have 
presented our ideas about reauthorization levels. We believe 
that level should be at the recommended level because, as 
things do get better, we are going to need a higher 
reauthorization.
    A second big issue is we would like, as Tony mentioned, to 
extend the Recovery Act fee assistance. Statistically, it has 
been big for our business.
    And, thirdly, as Senator Vitter mentioned, we would like to 
have an opportunity to have a larger debenture size. You know, 
there are several reasons--and earlier, when Eric was talking 
about default levels and how 7(a) and 504 worked opposite 
relative to the larger loan size, I think, you know, the fact 
that 504 larger loans have had statistically in the last couple 
of years maybe a worse performance than the smaller loans I do 
not think is inherent--there is no inherent idea about greater 
default just because the loan size is bigger. I think it is 
inherent what we do. We do commercial owner-occupied real 
estate. And we are in an environment where real estate, as all 
of you know, has taken some big hits in value. So that has a 
lot to do with larger loans having higher default rates.
    But, importantly, we need a larger loan size so we can do a 
couple of things. Number one, the million and a half on our 
side is not enough. I mean, we can go up to 2 million if we 
meet SBA public policy goals. Well, Senator Vitter, let me give 
you a couple of examples of names that you might recognize or 
industries certainly that you might recognize, one being the 
Don's Seafood people. We have been involved in two projects so 
far with that family, their restaurants, and we are maxed out 
on our limit with them. They have had just kind of cursory 
talks with us about another deal, but we cannot do it. We 
cannot help them expand. I do not think there are a lot of 
conventional loans out there for restaurants these days, 
particularly these days. So that is one reason, some repeat 
business. I mean, and they are good-paying folks. We have had a 
good history with them.
    Another piece of repeat business, a guy by the name of Joel 
Broussard, who is the offshore vessel business, and he is a 
solution provider in the Gulf of Mexico, done a 504 loan for 
one of his supply vessels. And it was a maximum debenture from 
the get-go. He about 8 months ago had a contract with an oil 
company to do--it was like a 4-year contract that was going to 
provide plenty of cash flow for us to do this deal. But, again, 
we are maxed out.
    I guess what I am saying is that in today's world our loan 
size is too small, and certainly those two examples are some of 
America's----
    Senator Vitter. Just to take those two examples, is there a 
huge need there specifically because of the credit crunch in 
this recession? Or would there be that need under more normal 
times?
    Mr. Fruge. I think there would be that need always, 
obviously because we did these loans before the credit crunch, 
but even more so today. I mean, banks' credit has tightened. 
There are many banks that are not looking for new deals. They 
are certainly not looking for conventional deals in higher-risk 
industry like the restaurant business, you know, like the 
commercial offshore oil and gas vessel business. So they need 
our assistance, and we cannot do that for them if we cannot 
make a larger loan.
    You know, I think repeat business in any business is what 
you look for, and we would like to be able to accommodate those 
customers, particularly those that have a history of paying us.
    Senator Vitter. Just in your business, what percentage of 
the 504 activity do you think is ``rural''? And do you know 
what sort of positive impact it would be specifically to move 
to the USDA definition, which most people seem to think is more 
accurate?
    Mr. Fruge. I could not give you a percentage. If I had to 
guess, it would probably be somewhere along the lines of 20 
percent, maybe 25 percent. But, yes, I mean, it would help us 
to be able to meet that SBA public policy goal, which would 
then allow us to make from $1.5 million to a $2 million loan.
    I am trying to think of an example of who we had, and it is 
not that important. I am just in my own mind. But I do know 
that the definition that we use today of what defines a rural 
area is a lot more cumbersome than that that the USDA uses, and 
it would benefit us.
    Senator Vitter. Does anyone else have any comments to those 
same topics or questions?
    Mr. Mills. If we could also hear from Jean, who is also 
here representing the 504 loans.
    Ms. Wojtowicz. Thank you, and actually a wonderful segue as 
we look at that rural definition specifically, and my CDC is in 
Indiana. And I would say probably 40 percent of our portfolio 
is in rural areas.
    As we look at the potential to go to the USDA definition, 
if nothing else, it gets rid of some of the confusion. What is 
so difficult when we work with our bank partners to provide 
solutions to small businesses is when you have multiple 
programs that all have different definitions. Something like 
``rural'' should be a pretty standard definition, and we 
certainly think going to the USDA definition would eliminate 
some of the confusion and make it easier to market and to 
provide that assistance to small businesses.
    A couple of other points I just wanted to make on these 
topics, both specific to the Recovery Act provisions as well as 
the reauthorization.
    First, let me say we are so hopeful that we will get a 
reauthorization bill this year. We have many improvements 
suggested in our draft legislation that we think would be 
significant assistance to small businesses, knowing, again, 
that small businesses are going to drive that recovery. And in 
our case, because the 504 program is specifically an economic 
development program, we track jobs, we actually over the period 
of this program have created over 2 million jobs. That is huge. 
All we hear about are job losses, and this program actually 
tracks and verifies employment increases that have occurred as 
a result of the financing that we provide to those small 
businesses.
    As we look at the Recovery Act provisions specifically, we 
are very concerned that with the fee relief that we expect to 
run out before the end of the calendar year, we are going to 
see a significant drop-off. These businesses are kind of 
stepping out, willing to take some additional risk as they 
expand their businesses, and the fee relief has really helped 
them gain some confidence to go forward. Difficult to give them 
fee relief on the one hand when today, October 1st, we are 
hitting them with an increase in fees because of the subsidy 
rate.
    So if there is consideration at the appropriation level to 
actually get some funds appropriated to extend fee relief, we 
would certainly like to see that coupled with an appropriation 
to cover that increased subsidy cost, at least temporarily 
until we get this recovery on a little more stable footing.
    The other item I would like to mention--and we have had a 
lot of difference here about it--is the possibility of 
increasing the loan size. As Andre pointed out with some very 
good examples--and every 504 company you would talk to would 
have more examples in their portfolio--it is not so much that 
we want to go out and do the next very large single plant 
expansion. Those are nice. But the real benefit of our program 
is that we have multiple expansions in multiple communities 
that do not have the kind of risk associated with a single 
plant expansion for those communities.
    So I have a borrower that is in the cheesecake 
manufacturing business. I have done four loans for them. I 
cannot do their fifth and sixth. And because it is fairly 
specialized equipment, lenders are not very interested in 
continuing to help them expand. They are a very large employer 
in a very small community.
    So we have lots of anecdotal stories about why the larger 
loan size would be important to this part of the business.
    We also think there are some opportunities to not only 
allow borrowers to access the maximum amount of 504 lending, 
but separate and apart access the maximum 7(a) participation. 
We should not have to aggregate those to have a single loan 
limit when there are very different needs and uses for those 
capitals. Growing businesses obviously have growing working 
capital needs as well, and we need to help those businesses 
continue to expand.
    As we have studied business ownership in this country, we 
also know that there are going to be even more business 
ownership changes occurring over the next decade. We would like 
to see in the 504 business the expansion to be able to finance 
stock purchases where the stock prices are supported by 
specific fixed assets. It just makes sense to give businesses 
the flexibility to structure a transaction that makes the most 
sense for them in the way that they need to structure their 
business for long-term benefit.
    Mr. Mills. Jean, I want to also include a conversation 
about the child care lending program, but before we do that, 
one question we have is: Is there a dollar amount on the higher 
loan limit that you want to recommend?
    Ms. Wojtowicz. We think a $5 million limit on the normal 
debenture makes sense, and then with appropriate increases for 
public policy and manufacturing that we have had in the past.
    Mr. Mills. So you can wrap up, and then we are going to 
turn to Joan to discuss the child care lending pilot program.
    Ms. Wojtowicz. That would be fine. I did want to comment; 
there were some discussions about higher default rates perhaps 
in larger 504 loans. I think if you really dig down and look at 
some of the specifics there, a 7(a) loan is liquidated and 
collected by the local lender, feet on the street, access to 
information, and we think that has a huge effect on what your 
recovery rates are.
    In the 504 business, we are relying on the central 
liquidation efforts of the SBA, which are doing a great job. 
But we in our legislative package have asked that CDCs actually 
not only have the opportunity but be required to be active in 
that liquidation process.
    I certainly have a better idea of how to collect that loan 
down the street than somebody half a country away. Coupled with 
I cannot liquidate a loan if I do not have access to 
information. And once a loan is repurchased in the 504 
business, our access to that data is gone.
    So if I wrestle a borrower to get a payment or if I find a 
buyer for that piece of equipment or that real estate, I cannot 
even get him a payoff number that day. It may take multiple 
days. And so our legislation requires--it has a recommendation 
that we require that that loan accounting continue to be done 
through the central servicing agent so that I can pull it up at 
midnight if I need to, if I am negotiating on a sale of fixed 
assets.
    Mr. Wilkinson. Thank you. And we have now been joined by 
the Chair, Senator Landrieu. We are going to start with going 
to Joan to discuss the child care lending pilot, and if you can 
do that, and then we will turn it to Senator Landrieu.
    Ms. Wasser Gish. Thank you, and good morning. I want to 
thank Chairwoman Landrieu, Ranking Member Snowe, Senator Kerry, 
and Senator Vitter for the opportunity to make the case for 
inclusion of the child care lending pilot program in the SBA 
reauthorization bill.
    My name is Joan Wasser Gish, and I come from a family of 
small business owners, and I own and operate my own small 
business known as Policy Progress. I am also an attorney and a 
former senior product adviser to Senator Kerry, and that is 
basically why I am here.
    While working with Senator Kerry, I spearheaded a child 
care small business initiative. We assembled a statewide 
advisory committee, which included representatives of the small 
business community. These were the U.S. Small Business 
Administration's Massachusetts District, the Massachusetts 
Small Business Development Centers, Massachusetts Association 
of Community Development Corporations, Seed Corporation, the 
Center for Women and Enterprise, lenders such as ACCION USA, 
and the Western Massachusetts Enterprise Fund.
    The advisory committee also included a cross-section of 
stakeholders in the early education or child care industry. 
These representatives reflected the array of service delivery 
providers spanning the economic sectors: sole proprietor home-
based child care providers, for-profit centers, and also 
nonprofit providers.
    Senator Kerry charged this group with making 
recommendations to better connect entrepreneurial resources 
with child care providers, many of whom are women and minority 
business owners, in order to strengthen the local economy and 
improve the overall quality of child care programs.
    One of the central conclusions reached by this advisory 
committee was the dearth of lending and other financial 
resources available to nonprofit child care centers, which 
disproportionately serve low-income children while their 
parents or guardians are working. Nonprofits, even during times 
of free-flowing credit, have barriers to accessing loans 
through traditional lending institutions. They operate on slim 
financial margins and often lack the capacity to make a sizable 
downpayment for capital investments.
    Advisory committee members noted that this lack of access 
to capital had broader economic implications because of the 
direct relationship between child care, economic growth, 
community development, and work availability and productivity. 
It was the recommendation of this committee that Congress 
extend the 504 loan guarantee program to nonprofit child care 
facilities, which is the purpose of the child care lending 
pilot program.
    This program is consistent with the purposes of the 504 
loan guarantee program because it meets three core goals:
    First, it helps to maintain and strengthen the overall 
economy. Nonprofits comprise 35 percent of all child care 
establishments with employees and provide care that allows 
millions of parents to work in our Nation's 6 million small 
businesses with employees. In Louisiana, for example, the child 
care services sector cares for the children of 136,000 working 
parents.
    Second, it supports community development. Nonprofit child 
care centers typically locate in low-income urban and rural 
areas. In many communities they are the sole source of center-
based early education and care. They play a vital role in 
helping low- and moderate-income workers participate in the 
labor force. In Massachusetts, for example, where I am from, 90 
percent of subsidized child care purchased by the State is from 
nonprofit providers, and in York County, Maine, about half of 
all subsidized child care is provided through nonprofits.
    Thirdly, nonprofit child care centers promote job creation, 
worker productivity, and job retention. Nonprofits, as I 
mentioned, comprise 35 percent of all firms that hire, but they 
actually hire disproportionately 50 percent of all child care 
workers. The Bureau of Labor Statistics seasonally adjusted 
employment numbers are turning upwards since June of 2009 and 
are significantly exceeding hiring levels in both 2006 and 
2007. Job growth in the industry is projected to be 2\1/2\ 
times that of the national rate.
    In regards to worker productivity, it is estimated that 
breakdowns in child care arrangements cost American businesses 
$3 billion annually. Studies have shown that availability of 
quality child care can reduce employee turnover by 37 to 60 
percent. They also reduce absenteeism, tardiness, and enhance 
productivity. Moreover, child care is a needed corollary to 
economic recovery. Parents cannot work or look for work without 
child care for their children.
    These benefits accrue across the Nation, and so as this 
reauthorization bill is considered, I respectfully recommend 
that you remove the limitations for eligibility to the 18 
States represented on this Committee and instead allow the 7-
percent cap on loans and other lending criteria to more 
appropriately limit the pool of eligible entities.
    In general, thanks to the able work of this Committee, 
there are numerous safeguards in place to ensure that the 
integrity and purpose of the 504 loan guarantee program is 
preserved through the child care lending pilot program. And 
with these safeguards in place, I respectfully urge the 
inclusion of the child care lending pilot program in the SBA 
reauthorization bill, and I welcome any questions that you 
might have.
    Chair Landrieu. Thank you so very much for that wonderful 
presentation, and I thank all of you for joining us today. I 
apologize. I was chairing another meeting earlier this morning, 
so I was just available to get here at 11:00. I really 
appreciate the staff and the good work of Ed Mills and Kevin 
Wheeler for leading this discussion. I thank Senator Vitter for 
coming, and I understand Senator Risch was here as well, and I 
really thank you all. And, particularly, it is wonderful to see 
you, Andre. I know Senator Vitter introduced you already. And 
also, Ray, I understand you are a Louisiana Tech graduate.
    Mr. Moncrief. I am, Senator.
    Chair Landrieu. Good. So we are going to adopt you anyway, 
even though you are from Kentucky.
    [Laughter.]
    Or you are now in Kentucky. I just want to say how 
important the reauthorization of these lending programs is. We 
have been delayed for several years in their official 
reauthorization. They are ongoing programs that are generally 
broadly supported. But, obviously, there are some issues 
because we have been unable to resolve getting them 
reauthorized. This roundtable is part of an effort to really 
flesh out what some of those obstacles or challenges might be, 
as well as to hear from you all broadly about how they can be 
strengthened.
    I know that Administrator Mills and President Obama and his 
Administration feel very, very, very strongly about 
strengthening access to capital for small business in America. 
And while I do not speak directly for the President, or for the 
Administrator, I will speak for myself--and I have heard them 
say basically the same--the recession we are all painfully 
experiencing will be brought to an end when small businesses 
can step up and start hiring, because it is going to be the 
small, innovative entrepreneurs. And so getting access to 
capital and to financing is critical. It is critical year in 
and year out, but it is very, very critical now. Through the 
programs of the SBA, we think that we play a significant--not 
controlling, but a significant role in that.
    That is why we are spending some time reviewing possible 
changes. I know that Kevin and Ed have led a very robust 
discussion, so I do not want to interrupt it, and we will be 
able to stay for a few minutes more before having to leave for 
another meeting.
    Let me sit back and listen to questions and comments, and I 
think maybe we will continue on the subject that we are now 
visiting. Thank you all so much. I will submit my full 
statement for the record.
    [The prepared statement of Chair Landrieu follows:]
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    Mr. Mills. If we could do some questions on the child care 
lending program. Do you know--if I could ask this to Joan as 
well as the Eric--if the SBA allows any other nonprofits to 
receive loans?
    Ms. Wasser Gish. Do you want to take that?
    Mr. Zarnikow. I do not believe that SBA does lending to 
nonprofit organizations other than potentially in our disaster 
loan program.
    Mr. Mills. How about the intermediaries in the micro loan 
program?
    Mr. Zarnikow. We do make loans to nonprofit intermediaries 
as part of the micro loan program, so that is sort of a 
fundamental piece of that program as our delivery mechanism is 
through nonprofit micro loan intermediaries.
    Mr. Mills. And then do we know if there has been a CBO 
scoring on this provision?
    Ms. Wasser Gish. There has. CBO has scored it at nothing.
    Mr. Mills. You know, we have some 504 lenders here, and, 
obviously, this pilot could have an impact on your program. 
Could we get some comments from you in terms of your kind of--
--
    Ms. Wojtowicz. We have reviewed the language that was put 
into a couple of the prior reauthorization bills, and as an 
industry, we would certainly have no objection to the pilot as 
it is proposed.
    Ms. Wheeler. May I just add for the record, in fact, we 
worked very closely with NADCO to address any underwriting 
concerns so that it would have all the integrity of the regular 
loans. Senator Kerry has not reintroduced the bill, but it is 
my understanding that he would retain all of those protections.
    Joan, could you please state again for the record what the 
need is for child care in states like Louisiana and 
Massachusetts and how the 504 program helps address access to 
quality child care?
    Ms. Wasser Gish. Sure. Thank you. Fundamentally, within the 
child care industry, there is a need for both for-profits and 
nonprofits to serve countless numbers of children who are 
waiting, and there are certain States that maintain wait lists 
that effectively try to capture what the gap is between supply 
and demand.
    In Massachusetts today, there are 20,698 children on a 
waiting list in Massachusetts. In Maine, it is estimated that 
only one child care slot is available for every four children 
who need it so that a parent can work. And according to the 
American Community Survey of the U.S. Census Bureau, we are 
able to get sort of a rough estimate. We know, for example, 
that there is a gap of about 250,000 between the number of 
children who we believe are in need of care and the 
availability both--across all sectors in the child care 
industry. In New York, that gap is about 166,000. In Louisiana, 
the gap is more than 30,000 children who are in need of space. 
And in South Dakota, the gap is about 3,800 children.
    So we know that undoubtedly there is pent-up demand, and if 
that demand continues, the real challenge is that families are 
having a harder and harder time purchasing it. And both for- 
and nonprofits are going to play a very important role in 
supporting families in heading back to work.
    Chair Landrieu. Joan, let me ask you this, because I have 
been on this Committee for quite some time and now chairing it, 
I am interested in this discussion. Is there some fundamental 
reason why the SBA has not traditionally lent to nonprofits? Is 
it just the nature of the way the agency was created and we are 
making a reach here? Does anybody know?
    Kevin.
    Ms. Wheeler. Well, SBA's regulations define small business 
as a for-profit business, but as was noted, there is precedent 
for doing it. In the disaster loan program, they do it, and in 
the micro loan program, there is a program that was put in 
place for welfare-to-work which said that micro loans could go 
to nonprofit child care providers. So it was not only to the 
intermediaries, to expand upon what Eric said; it was 
specifically for child care providers.
    And this issue first came to the Committee in about 2000. A 
504 lender from Texas named Julie Cripe, I believe--I do not 
know if she is still with OMNIBANK--brought this to us. It was 
the only way that they could get financing for a child care 
center in an African American community in Houston. A church 
would do it. And we went to the SBA, and it was not allowed. 
Years later Senator Kerry did a study in Massachusetts that 
identified a need for capital to child care centers, and the 
committee has been working on this bill since 2002.
    Chair Landrieu. I want to say I think it is a very smart 
idea, and I would argue to my colleagues, both Democrats and 
Republicans, that using the entrepreneurialship model more for 
trying to have Government programs be successful is something 
that I think both parties actually really can support. 
Republicans--and I am not going to speak for them, they speak 
for themselves--but they generally want things to be more 
efficient, more business-oriented, and Democrats like the idea 
of reaching out and getting the job done.
    I would like to really pursue this, and I would love to 
talk with Senator Snowe about it--and also the particular 
business of daycare--because it supports and undergirds small 
business everywhere. Many business owners and their employees 
are parents, whether they are the wife or the husband, and they 
cannot do a real good job at their business if they do not have 
quality daycare.
    I think from that perspective, I would love to hear some 
feedback. The other thing that is coming up to be a big issue 
here in Washington is this whole new focus of social 
entrepreneurship. The President is very focused--and it is 
really very bipartisan as well--on this whole new concept of 
social entrepreneurship. There are business models that are 
being directed to solving major social problems, but in a 
different way than government-run programs--you run them more 
through a business model. It is attracting a lot of broad-based 
support around the country, and in thinking about it, the SBA 
is in a potentially good neutral position because we are not 
the Department of Health or the Department of Agriculture. We 
are a neutral agency in that regard. Matt, has Senator Snowe 
ever made any general recommendations or suggestions to you?
    Mr. Walker. We have not yet. We still want to find out a 
little bit more about the public policy considerations that may 
have been in place at the time it was originally formulated. 
Certainly one can envision concerns of the Federal Government 
getting into the aspects of what happens if there is a default 
on these loans. For instance, if the Federal Government would 
now be in the position of going into churches, to try to take 
over property that secured a loan. Similarly, if the loan was 
for the disabled or the blind or others, the perception behind 
that would certainly be a very serious public policy concern.
    So we just need to delve a little bit further into it to 
find out what those public policy concerns were when they 
initially did not allow nonprofits to participate in the 
program. And, Eric, I would be very interested to hear if you 
could find out a little bit more about that.
    Chair Landrieu. Okay. It would be definitely worth 
pursuing, and I think particularly this idea of nonprofits for 
daycare. But it could potentially be expanded.
    Do any of the lenders want to comment about this, either 
positively or negatively? Or do you have nonprofits coming in 
to see you regularly trying to solicit for loans and they are 
doing good work in the community, I am assuming? Go ahead.
    Mr. Clarkson. Yes. We actually as a full service bank--
thank you for asking. We do look at all types of businesses, 
for-profit, nonprofit, and I think it gets back to an earlier 
point of giving the small businesses choices. And if we have 
limited a small business based on their profit status, then we 
have limited their access to capital. So the more choices that 
we have, the more ability we will have to reach into the 
industry and being able to make specific loans to specific 
borrowing needs.
    Chair Landrieu. Greg, you are absolutely right. From a 
banker's perspective, if you can make money on the loan--that 
is the bottom line. You are going to lend to a creditworthy 
for-profit or not-for-profit. It would be interesting to get--I 
do not know if the staff has the employment numbers for 
nonprofits. It is a huge employer in America. When Americans 
look at jobs, if they can work for a nonprofit as a good job, 
they can for a for-profit company as a good job, and perhaps we 
should be in our reauthorization thinking a little bit more 
broadly about this. The bottom line is about choice, freedom, 
jobs, and that is what we want to stay focused on.
    Anybody else? Any other lenders who have a similar or maybe 
different perspective? This would be a great time to speak up 
or hold your piece.
    [No response.]
    All right.
    Mr. Mills. I think at this time we would like to move on to 
the intermediary lending pilot program. We have Dennis West 
here regarding this issue. This is a proposal that has been put 
forth by Senator Levin for several years now. It has passed the 
Committee at least twice. It is set up to fill the gap between 
the maximum loan amount that a micro loan lender is allowed to 
do, which is right now at $35,000, and below the level that a 
typical 7(a) lender might be able to do. It would provide 
grants to intermediaries and have that paid back at 1 percent 
over a number of years.
    At this time I would like to turn it over to Dennis for a 
little bit better description and some thoughts.
    Mr. West. Okay. Thank you very much. To think about the 
context of how we brought this proposal to Senator Levin, when 
we think about rural places generally, the Global 
Entrepreneurship Monitor suggests that about 11 percent of 
Americans have the attitude and aptitude to run a business. And 
as we are trying to develop our rural economies, it is 
important that we try to get as many of that minority who 
possibly can start a business to be oriented towards starting a 
business, because as you are quite aware, we have a lot of 
challenges in terms of maintaining and growing small businesses 
in many of our rural communities.
    So the way that we try to think about this is that we are 
involved in the character lending process. We are typically 
dealing with people who often have cash deficiencies, 
collateral deficiencies, and we are focusing on--and sometimes 
credit challenges, and the credit challenges come from being in 
rural communities where it is sometimes hard to maintain 
quality jobs.
    So we are working in that space of trying to help build a 
bridge to our community banks. So our portfolio of micro loans 
has a lot of churn in it. We would typically see our loans go 
out maybe 3 to 5 years, at which time it is in our interest to 
work with our borrower to get them into a community bank.
    When we started working with Senator Levin, the problem we 
were trying to solve was that sometimes the start-ups that we 
are trying to build upon are larger in need for equipment or 
value than what would be available in the micro loan program. 
So we propose building this second tier which would solve two 
problems: either the capital requirement or the capital and 
time requirement that would associate with getting someone to 
their community bank.
    So sometimes it is a matter that you have got to introduce 
more capital or have more capital to work patiently with the 
customer to be able to get to a community banking relationship.
    An example that I can tell you about is a small business 
that was purchased in a community in Upper Peninsula. It is a 
chiropractor business, so it was taken from a man who is 
retiring to a new person. The new person who is buying the 
business was not in a position to be able to go to a 
conventional bank because of student loans, and so we are in a 
position to help get that business to stay in this community 
and help this person get started and grow.
    Another example is a gun sight manufacturer, also in the 
Upper Peninsula. In this case, the gentleman was maxed out with 
their community bank, had a chance to get a large contract from 
an OEM, and needed equipment to improve processes so that the 
quality would meet the standards of the OEM. So he needed to 
make an equipment purchase. So it is above the micro loan 
limits. It is in that space that is important because of other 
credit issues. And it helps takes someone who has got 20 jobs 
with benefits and helps them to be able to grow that business 
and to be in a position to work with a substantial OEM.
    So Senator Levin was helping us to think about that space 
of working with start-ups, and the big question is more capital 
and more time that are sometimes required to be able to work 
with intermediaries.
    The idea was modeled after the very successful intermediary 
relending program that has been done through the USDA. That 
program has done about $1 billion and has had no defaults. So 
it is a successful model off of which to build.
    In this case, how would this proposal be different from the 
USDA program? Well, first of all, the USDA program is limited 
to rural places, so this would be a program that would open up 
to more communities throughout America who are involved in the 
micro lending program. The USDA program is highly targeted, so 
you get additional points for limiting the number of counties 
in which you work. So as we are trying to work in 44 rural 
counties through northern rural Michigan, when we go in and we 
get an intermediary relending program through USDA, we have to 
limit the number of counties in which we can work. So that 
makes us unavailable to many of the people that we would be 
trying to work with.
    The third challenge with the IRP program is it is 
dramatically oversubscribed, and it has about 33 million a year 
that is available to help grow the credit and capital needs 
that we are looking at. It was an important piece.
    So what Senator Levin helped us propose is a program that 
solves capital issues, solve capital and time issues, and 
serves as a bridge to be able to work further with community 
banks.
    Mr. Mills. Thanks, and I would like to start with Senator 
Snowe's staff. Any questions?
    Mr. Lucas. Thank you. I had a couple of questions. One of 
the things that Associate Administrator Zarnikow pointed out 
was that the average 7(a) loan is around $200,000, so actually 
we are talking about small loans. When we consider standing up 
a new program, what is the interplay going to be between a 
micro lender program that is a little bit larger that might 
actually stray into the 7(a) space? I wondered if I could get 
your thoughts on this and what the interplay would be with the 
7(a) program.
    Mr. Zarnikow. Well, as you mentioned, our average 7(a) loan 
is a little over $200,000, and I think one of the things we 
would like to understand better or look at is what is that 
interplay with our regular 7(a) loan program. Is this replacing 
that, or is this really a market gap or need that is here?
    Now, I mentioned earlier today that I was really glad to be 
part of this roundtable to do a lot of listening to the new 
ideas and have a chance to go away and evaluate those.
    Mr. Lucas. Excellent. Thank you. And maybe when we are 
finished----
    Mr. Mills. Dennis, did you have a response?
    Mr. Lucas. Oh, I am sorry.
    Mr. West. Well, we would clearly see this as a market gap 
issue, and in some of our rural communities, there are not any 
lenders doing 7(a), is one issue, and we often find ourselves 
working with 7(a) lenders as a complement where they see 
collateral challenges and things of that nature.
    Mr. Walker. Just a quick follow-up on that as well, Eric, I 
would appreciate it, if you could also look at what the 
different requirements are for 7(a) as opposed to these. 
Obviously, different loan levels have different requirements in 
terms of what needs to be produced for paperwork, for oversight 
and for other requirements. We want to ensure that we have the 
information needed to limit potential defaults.
    Mr. Zarnikow. We would be glad to take a look at that.
    Mr. Walker. Thank you.
    Ms. Wheeler. And before I turn to Marianne, I want to ask 
one question of Dennis. Right now, I believe that the 
legislation as it was passed in the last two Congresses, makes 
CDCs, certified development companies, the 504 lenders who are 
here, eligible to apply for the pilot program as envisioned. 
Right?
    Mr. West. That is correct.
    Ms. Wheeler. Okay.
    Marianne.
    Ms. Garvin. So I just wanted to add that in a market like 
Long Island, which is not rural, this program would be very 
valuable to me and other lenders. I have a very recent example. 
I just approved a loan yesterday for $150,000 to a minority-
owned business, an attorney, who got a $1.2 million 7(a) loan 
to acquire and renovate the inside of a building in a low-mod 
census tract. But he also wanted to do a facade improvement, 
and so he came to me from my facade program, which is 
capitalized by a line of credit from one of my lender partners.
    Unfortunately, that lender partner and many of my lender 
partners are eliminating loans to CDC of Long Island, reducing 
our lines of credit, which is also happening in the wider 
environment to for-profit businesses--and I am not-for-profit 
business. And so I just had $150,000 left, and that is it. My 
capital is gone, and I have no other place to get it except I 
am a CDFI so I get some money from Treasury. But I use most of 
that money for my residential lending programs, my second 
mortgages, my downpayment assistance, my rehab lending to home 
buyers or homeowners.
    And so when I look at the range of products that I try to 
offer in my community development lending operation, I need 
more options to kind of mix and match and offer the products 
that are needed for the businesses that are coming to me and 
have that need, and it is primarily targeted to the low-mod 
census tracts.
    So I just want to put in a plug that this would be valuable 
for perhaps more reasons than you might think.
    Mr. Mills. Thank you. And in the interest of trying to get 
back onto schedule, I would like to move the conversation to 
lender oversight. To lead off this conversation, I am going to 
call on the IG's office, Glenn Harris.
    Mr. Harris. Okay. Thank you. Well, I think on the issue of 
lender oversight, you have to sort of put it a little bit in 
perspective, and I think the agency has made a lot of progress 
in developing a lender oversight program. The IG's office had a 
management challenge, which went back to 2002, to the agency to 
establish a lender oversight program.
    Since then, as I said, I think they have made a lot of 
progress. They have established an Office of Lender Oversight, 
now called Office of Credit Risk Management. They have gotten 
issued enforcement regulations which will help their ability to 
undertake enforcement actions. They have established standard 
operating procedures and other procedures to be able to 
implement the lender oversight process. So I do think the 
agency has made a lot of progress.
    Unfortunately, as is often the case at SBA, progress also 
brings its new set of challenges. We still have a management 
challenge on this issue, and we have issued a lot of audit 
reports that have identified problems with the lender oversight 
process.
    One concern for us is, frankly, whether there is a conflict 
of interest between the Office of Credit Risk Management and 
whether that should be properly placed within the Office of 
Capital Access, where OCA has a goal of trying to promote loan 
growth, which is a laudable goal. But does that present a 
conflict in terms of having an effective oversight program?
    You know, I think the issue of oversight also has to be 
looked at in terms of the overall sort of the way the program 
works. I think there are three components that we see in the 
IG's office to this.
    One, is there a clear set of requirements that lenders are 
expected to adhere to?
    Secondly, is there a process at SBA to effectively oversee 
whether lenders are, in fact, adhering to those requirements?
    And, third, is there an accountability program that is fair 
and reasonable but also effective at trying to identify lender 
oversight problems?
    And I think you could look at all three of these areas in 
the lender oversight arena and identify challenges that 
continue to exist. I think SBA could do a better job at 
promoting what the requirements are. You have got SOP 5010. 
Eric has done a considerable amount of work in trying to 
clarify that SOP and improve that SOP. It is still an extremely 
large document, and if that is the set of requirements that 
lenders are expected to adhere to, then do they fully 
understand what all the requirements are? Are they using 
technology, for example, to be able to clarify what is expected 
of the lenders?
    For example, having the SOP, it is online, but is it as--
you know, does it provide as much information to the lenders as 
it could?
    We do think that SBA could be doing more in its lender 
oversight program. This is reflected in our audit reports. Some 
of the problems are, I think, sort of a growing pain as they 
evaluate the progress that they have made. They have sort of 
taken a one-size-fits-all approach. If you are a lender over a 
certain dollar Mauritania, you are going to have on-site 
reviews. There is considerable emphasis on the risk rating 
system in LLMS, and obviously lenders have come up with, 
identified a number of concerns they have with that program.
    I think what we would like to see is the agency to develop 
a more what I consider a holistic approach to lender 
enforcement. For example, look at a wide range of variables, of 
risk factors, and have an engagement program that is targeted 
towards higher-risk lenders. So if you are a lender that is 
performing well against this matrix of risk variables, maybe 
you would have less frequent on-site reviews, for example. 
Maybe you would have some kind of desk review or compliance 
reviews that would not necessarily be as expensive, would not 
necessarily be the same type of review that you might get if 
you were a riskier lender.
    Looking at the legislation, I have only had a little bit of 
time to look at it. I would appreciate the opportunity to be 
able to sit down with the congressional staff at some point to 
maybe go over some sort of more granular concerns we have.
    But just one general point is I think we need to be careful 
about in legislation not tying SBA's hands in a way that 
produces unintended consequences. I think they need to have 
that discretion and flexibility in how they implement the 
program so that they are looking at a variety of risks and have 
a variety of options to be able to address those risks.
    Mr. Mills. Sure. Thank you. Glenn--one thing that comes up 
a lot is the concern about the reversals of repurchases years 
after the fact. There have been some proposals out there on 
whether or not there should be some sort of statute of 
limitations. When this has come up in the past, my 
understanding is that U.S. Code provides a 6-year statute of 
limitations, and it can be extended beyond that for 3 years. It 
is always a question of when does it start, when does it end.
    Could you give me some clarification as to exactly how that 
works?
    Mr. Harris. Sure. First of all, in the IG's office, we do 
understand why lenders would be concerned if SBA has made a 
decision on a guarantee purchase request, and then there is an 
audit, and a length of time--and sometimes a considerable 
length of time--passes, and now all of a sudden they are being 
told that there were problems with the loan.
    Obviously, we understand why lenders would be concerned 
about that. But I think we have to put this a little bit in 
perspective, and that is--and our audits have identified a 
number of concerns with the quality of the guarantee purchase 
review process. This is another management challenge that we 
have, and there are a number of concerns as to whether those 
decisions are being made properly, whether the Herndon center 
is adequately staffed, whether that staff is adequately 
trained.
    And I think that from our mission, you know, it is our job 
to identify when the Government--when SBA has made a payment 
that is improper, and if there is an improper payment that has 
been made, that reflects--that is money that the taxpayers are 
paying in a credit subsidy process, or that is money that is 
going to be reflected in higher fees that are charged in a zero 
subsidy situation.
    So I guess just to be very quick on this, there is a 
statute of limitations in 28 U.S.C. which provides for 6 years 
for the Government to go and recover a claim. We would be very 
concerned about a proposal that somehow gave 7(a) lenders an 
exemption from that statute to say there was some kind of 
shorter period so that if an IG audit discovered that there was 
an improper payment or if there was fraud in a loan, that 
somehow we would be prevented from going forward with an audit 
to identify that improper payment or going forward with a 
criminal investigation to be able to prosecute that fraud.
    Mr. Mills. Thanks, and I know that earlier Tony Wilkinson 
started off some of the conversation on lender oversight, so I 
wanted to turn to him and hear some of his comments.
    Mr. Wilkinson. Okay. I appreciate that. You know, I think 
there are a lot of issues that surround the lender oversight 
program. We clearly have been critics of what is going on. We 
are not convinced that the lender oversight program is 
efficient or cost effective, and we continue to have concerns 
about post-purchase reviews that are happening years, some of 
them 11 to 13 years. And I do not see where it is a lender's 
fault if the SBA was inadequately staffed or trained or that 
the IG decided not to get around to looking at files for----
    Mr. Mills. Can I just interrupt you? Glenn, can you explain 
how, if it is 12, 13 years after, how that actually happens? We 
just discussed that there was a 6-year statute of limitations. 
How does that happen?
    Mr. Harris. Well, I mean, I think that if SBA tried to 
enforce a claim--in other words, tried to go after a lender to 
recover a guarantee payment 13 years after the fact, I think 
that would be barred by the statute of limitations.
    Now, in terms of--sometimes we do audit, and we have 
recommendations that say try to recover the money. Sometimes 
the recommendations are to improve the process so that these 
mistakes do not occur.
    Mr. Mills. Tony, in your experience, those claims 13 years 
later, have those been paid, or have those--what has been the 
experience?
    Mr. Wilkinson. Well, first of all, those files are 
typically gone, so that the lenders--I am hearing this through 
the lenders' counsel, and I do not know how those have been 
finally resolved. I try my best not to get into individual 
cases and try to stay at the policy level.
    Mr. Mills. That is good.
    Mr. Wilkinson. But when I am hearing from a lender that, 
wow, I am being asked for a file that was paid 11 years ago, 
that is an issue. And I think we need to understand that these 
kinds of things are what is driving lenders away from the 
program. So that we get a guarantee paid, how good was the 
payment? Are we going to have to sit here and wait for years 
and years and years before somebody comes and says, okay, well, 
we are going to look at this again? And that is having a 
significant impact on lender participation.
    Mr. Mills. What type of impact? You say ``significant.'' 
Can you give us some examples?
    Mr. Wilkinson. There have been lenders leave the program 
due to extended post-purchase reviews where they have been 
asked to repay claims that they felt like was unreasonable, not 
timely, and, you know, when they write their check, they close 
their SBA Department.
    Mr. Mills. And to be clear, obviously no one wants a claim 
to be paid if there was fraud involved.
    Mr. Wilkinson. Absolutely.
    Mr. Mills. How do we draw the line to ensure that when 
there is fraud involved, the U.S. Government gets the claim 
paid and the money comes back?
    Mr. Wilkinson. There needs to be a time certain that when 
that passes, it is over. Three years ought to be sufficient for 
everybody to get all the audits done that they want to get 
done.
    Mr. Mills. Why should they have 3 years when the regular 
code is 6 years?
    Mr. Wilkinson. I believe it is 6 years from the last time 
they took an action, so 6 becomes 9. All of a sudden you are 
out there too far. And the OCC, I believe our file retention 
requirements in the banking world is 5 years.
    Mr. Mills. Glenn.
    Mr. Harris. If I could just briefly respond to that, in the 
IG's office--I just want to make it clear--we do not make 
management decisions. We do not make the decision to go after a 
lender to repay a guarantee. We make recommendations. And, 
frankly, it is not unusual, if we make a recommendation to try 
to recover a guarantee on a loan that is 6 or 7 years old, that 
the agency comes back and says we do not think it is 
enforceable and we are not going to proceed. And there have 
been a number of instances where that has occurred. That would 
be point one.
    Point two is I think, again, you have to look at the 
context. I know that a lot of the lender complaints have arisen 
from some of the audits we did recently. Those audits were 
looking at a backlog of thousands and thousands of loan files 
at the Herndon center that the agency was not processing.
    Again, to give credit to Eric and his predecessor, they 
have made a serious attempt to try to reduce that backlog. 
But----
    Mr. Mills. Do we know where the backlog is currently? The 
argument is that there was a spike because they are finally 
working through the backlog.
    Mr. Harris. It is a one-time--I think it is a one-time, 
hopefully a one-time occurrence and that is not likely 
repeated, to have these loans that are 10 or 13 years old. I 
agree with you on that.
    Mr. Wilkinson. That probably is the case. But I think we 
need to make sure--there are two separate discussions here. 
There is the post-purchase reviews. Then there is the oversight 
system that we question----
    Mr. Mills. Does someone want to talk about the oversight 
system?
    Greg.
    Mr. Clarkson. I can. As a lender, I want effective lender 
oversight. I think effective lender oversight is extremely 
important. Then the question comes in: What constitutes an 
effective lender oversight program? And for me, what I would 
like is when I am examined, whether it is off site or on site, 
I have some reasonable feedback that allows me to improve my 
process to the point that I can continue to ensure that my 
guarantee is good, because if I am relying upon my guarantee, 
then I need to make sure that when I talk to my executive 
committee, my board, I can say with certainty, yes, that 
guarantee is good.
    Just back to Mr. Harris' point quickly, I am the one as a 
lender that is now being asked to bear the brunt of those lags 
in purchase times, and if it was a documentation error versus a 
fraud, you know, or I did not provide sufficient documentation, 
then my files are somewhere else. So I am having to recreate 
something that should have been looked at, should have been 
reviewed at the time that that purchase was being taken care 
of.
    But as I go back into effective lender oversight, I think 
that if the SBA can use a system, can develop a system--they 
already have the information on my lending activity, my 
historical performance, plus where I am lending now, they can 
see if there are any anomalies in my process and be able to 
address those with me directly in a timely manner.
    And then, also, one of the things that concerns me as far 
as effective lender oversight is the impact on the thousand new 
lenders that we have coming into the program who need to have 
the ability and the opportunity to have somebody in the SBA 
review their work and have the ability to say that their 
guarantees are good and that it is something that they can rely 
upon and grow their program, sustain their program, and can do 
it in a cost-effective manner. Right now I am not convinced 
that the current structure of the lender oversight program 
accomplishes those objectives.
    Ms. Wheeler. I have a question. In the interest of 
attracting lenders to the program, I spoke to the Department of 
Commerce's Minority Business Development officers, and they 
said they were specifically having a hard time putting their 
clients into loans because when they tried to use the SBA 
products, many lenders told them they would not get into it 
because of the repurchase problems.
    So we are looking for balance here. I do not hear the 
lenders saying they do not want oversight. We all want 
effective oversight, but it has come back to this quality of 
staff. We saw it with the BLX fraud. The audit that came back 
said the reviewers in Herndon were not adequately trained, and 
they were often approving repurchases and honors on guarantees 
that they should not have.
    Is that under control? It seems unfair that a lender has to 
go back and give back money when it was actually a poor 
decision at the SBA staff level. It seems like the easiest way 
to solve this is to have better training. Have we made 
improvements on that?
    Mr. Zarnikow. If I could address--there are sort of three 
sets of issues that I think are going on here. One is what is 
happening at Herndon and guaranteed purchase reviews. You have 
sort of the oversight, both on site and off site, and how was 
that managed. And then you have sort of the structural issue of 
where does oversight reside within SBA. So let me kind of talk 
to those three pieces.
    As the head of Capital Access, you know, my view is have a 
responsibility to run effective programs. Our programs are 
intended to help get access to capital for small businesses, so 
we are interested in getting capital out. But I am also very 
concerned about the integrity of our programs and managing the 
long-term integrity, because if we do not have integrity in our 
programs, we will not have programs. So I am very focused also 
on appropriate oversight and appropriate risk management.
    In fact, as part of the Recovery Act, one of the things we 
implemented for the Recovery Act provisions is we developed 
risk management, risk mitigation plans for each of the sections 
of the Recovery Act. We embedded risk management in the teams 
that implemented the Recovery Act. And we put together plans to 
track how we are doing on risk management. Those were shared 
with the IG and really in a partnership with the IG to get 
their comments on those plans as well.
    So we do in the program office in Capital Access feel a 
very strong ownership to oversight as well as getting access to 
capital.
    The issue with Herndon we have had is there was 
historically significant backlogs in Herndon. It was at a point 
where lenders--we were just taking a long time to pay lenders 
on prepurchase reviews. We were seeing that it was taking close 
to 280 days on average to pay lender claims. And we had a very 
large backlog of postpurchase reviews.
    The agency added significant staffing in Herndon. We did a 
complete reengineering of the process, and we attacked the 
backlogs. And I am glad to say at this point that, to a large 
extent, the postpurchase review backlogs have been dealt with. 
I am not saying they are completely done, but the big surge, if 
you will, or the big bubble has gone through, and the backlog 
we have there is much smaller. In addition, on the front end, 
we have redone our process so that if the lender sends a 
complete package in, we decision that package within 45 days at 
the center.
    We have also added and are staffing up a quality assurance 
function within the center to make sure that the reviews are 
being done properly and that our staff is trained 
appropriately, and we have a feedback process within the center 
to help assure that. I would not tell you that is completely 
done, but that has been a big effort as well to make sure we 
have the quality of the reviews.
    In some cases, in decisioning cases, it comes down to a 
question of judgment. Cases can be very complex, can be very 
unknown what really caused the loan to default, what were the 
factors. So there is clearly a judgmental part of reviewing 
cases where, if you give it to three people, you may get three 
very different judgments. So we have tried to make sure we have 
standards and controls in place to help evaluate that, and we 
have a process where those disagreements get adjudicated, if 
you will.
    So I think a lot of the problems with Herndon are behind 
us. I would not say it is completely solved, but there has been 
a huge effort by the agency, and we have made substantial 
improvement there.
    I would say, too, when we look at our repair and denial 
rate, it averages about 5 percent. So on a 7(a) guarantee, the 
repairs and denials are typically about 5 percent where there 
has been defects in what the lender did as they have gone 
through the process.
    As far as the oversight, we really have a system that is 
sort of a two-piece or three-piece system. One is we have what 
we call an off-site monitoring tool, which is basically a 
system that allows us to look at all of our lenders. So we have 
close to 5,000 lenders who have an SBA loan on our portfolio, 
and this tool really allows us to take those 5,000 lenders and 
narrow the focus of which are the riskiest lenders we believe 
to SBA to focus our oversight efforts on it, because it is very 
difficult to monitor 5,000 lenders and do on-site reviews and 
do effective monitoring. So the off-site monitoring tool really 
helps us focus our efforts on who do we think are the highest-
risk lenders.
    We also have on-site reviews that we do for our largest-
dollar lenders, and we also have a portfolio monitoring that we 
do that we monitor our overall portfolio metrics. So it is 
really kind of a three-tiered oversight system.
    I would agree with what Glenn said. I think there has been 
substantial improvements made in oversight, but I would also 
agree there is more to do. And we look at it that this is an 
evolutionary process. We have substantially increased resources 
in the oversight area. We wanted with the on-site reviews to 
get sort of a baseline of what we were seeing with our lenders 
and then really look to see how do we evolve that process to be 
even more effective both from an oversight perspective and also 
from a cost perspective, so we continue to do that evolution.
    So it is something that I think is sort of an ongoing work 
in progress, but I think there has been huge improvements that 
have been made.
    Mr. Mills. Thanks. Now I would like to turn to Senator 
Snowe's staff.
    Mr. Lucas. Thank you. I also wanted to point out that there 
is a GAO study in the works, and it was first requested by 
Senator Snowe and then Chairman Kerry and then Chair Landrieu 
was signed on, so that is one of those things where, hopefully 
when that comes out we will have a little bit more information, 
a little more knowledge, and that will help us with our 
decisionmaking process.
    Also, I had a quick question for Mr. Harris on the Recovery 
Act. When the guarantee was increased to 90 percent, one of the 
concerns was are you going to see an increase in fraud with all 
these funds going out. And I just wanted to check in and see. 
Have you seen an increase? If so, what strategies have you 
used? What is the general picture?
    Mr. Harris. It is too early to tell, frankly. You know, 
historically, when the guarantee rate was decreased, not so 
much fraud but we did see better performance in the programs. 
We do in the IG's office have a concern with a lender with a 
10-percent exposure as to whether they are going to exert a 
sufficient amount of due diligence.
    But at this point, in terms of the Recovery Act, it is 
really too early to tell. Fraud is basically a lagging 
indicator. Fraud is usually discovered after the loan defaults 
and the lender gets into it and finds out that the 
representations were inaccurate. So at this point, it is too 
early to tell.
    Mr. Lucas. Thank you.
    Mr. Mills. Great. Tony, did you want to make a final 
comment?
    Mr. Wilkinson. On lender oversight, I do think there have 
been substantial improvements out at Herndon. They really have 
worked hard, and that process is working a lot better.
    I did want to comment on the on-site and the off-site tools 
that SBA uses. It is something that the private sector now pays 
for, and we just do not see the benefit from that payment.
    We have issues with the on-site reviews where any lender 
with a portfolio of $10 million or over gets the exact 
identical same review. It cannot be statistically valid. It 
just cannot be.
    We hear stories from lenders who are in the same town in a 
big metroplex where their reviewers drive in, yet the other 
banks' reviewers fly in because they need one more segment to 
get a lease status on airlines. Those kinds of things are 
totally unacceptable. And I would just like to--you know, 
again, I know the GAO review is out there, and we, too, want to 
see what it has to say. But there are issues like that that are 
just driving lenders from the program.
    I know Eric says that the repair and denial rate is 5 
percent. Well, 5 percent is a big number. The repair and denial 
rate used to be 0.5 percent. So basically what we are telling 
lenders is our guarantee is only 95 percent good today. And a 
lot of lenders find that unacceptable.
    And, yes, we have got a thousand new lenders who made loans 
under stimulus. We lost a lot of lenders who were making a 
hundred loans, and it is going to take a thousand lenders to, 
you know, make that back up.
    So I think we have to have oversight. It has got to be 
effective. It needs to be efficient. It needs to do its job. 
But it also has to realize that there is a public policy 
purpose, and in some instances, we have driven lenders away and 
borrowers have less access to capital today because of it.
    Thank you.
    Mr. Mills. Thank you. I would like to now move on to the 
micro loan program, and I will turn to Marianne Garvin.
    Ms. Garvin. Thank you. I want to start by thanking Senator 
Landrieu and the entire Committee for supporting and increasing 
funding for the micro loan program for 2010, and I hope that 
you are successful in that recommendation.
    Things are very tough out there on Long Island and across 
the country with lenders having to pull back because of their 
capital requirements, and we are finding small businesses 
coming to us that have been in business for a very long period 
of time. The most recent micro loan I just approved was $28,000 
for a piece of equipment from a small manufacturer of magnets. 
He had had a banking relationship. In fact, his lender is who 
referred him to us. A credit score of 772, but was not 
bankable, according to the lender.
    And why was that? Very low collateral coverage and the 
lenders will not do a loan if they do not have collateral 
coverage. This particular business needed this $28,000 loan. 
The piece of equipment was $40,000, and he put a downpayment 
down and came to us for the rest. He did have cash to buy the 
entire piece of equipment outright, but he would have been 
eating into his working capital, and his receivables are coming 
in later than usual because the people who are buying his 
magnets are paying later.
    So it is just one small example of why the micro lending 
program is really critical right now.
    In addition to that, I have to say that our demand for--our 
ability to make loans like this has been challenged because the 
incredible demand that we are seeing for loans from start-up 
businesses. Because unemployment is so high, people are turning 
to the idea and to entrepreneurship to start a business, and 
they are coming to us for a loan, and they are not prepared to 
start that business and get that capital. And so the good thing 
about the micro loan program is that we are able to provide TA, 
technical assistance, to these borrowers and get them prepared.
    Another example. I have a tool-and-die manufacturer, and it 
is a husband and wife team, and they bought the business from 
their father, who retired, went out of business. The father 
gave them the equipment. The equipment is aging. But he also 
turned over to them the customer list, so they are going to be 
a very good prospect for a loan soon. But they just started 
this business themselves in the last couple of months. So I 
cannot do a loan for them right now, but I anticipate that I 
will be able to.
    So what does that really mean in the big picture when you 
look at what is happening on Long Island? We are being 
inundated with requests for technical assistance, and the law 
as it stands now requires that only 25 percent of our effort go 
to businesses that do not ultimately get a loan.
    We cannot tell which ones are going to get a loan and which 
businesses are not going to get a loan. And so it becomes a 
very circulate kind of exercise for us when the business comes 
in and my TA providers/loan officers--because they do both 
functions--want to respond to the businesses that are coming to 
us and have to be concerned about, well, you know, what 
percentage is this now.
    So I think that particular piece of--as you are doing your 
reauthorization, that limit really does not need to be there, 
and I think it will stop us from being able to get the capital 
out, quite honestly.
    Mr. Mills. Thanks. In terms of the overall dollar amount of 
the $35,000, do you have any recommendations for 
reauthorization?
    Ms. Garvin. Absolutely. I think the loan limit needs to be 
increased. I would recommend $60,000. I know on the table is 
$50,000. But the borrowers right now with the need for 
additional working capital, with everyone's receivables--I 
heard this over and over again. Receivables are coming in late. 
It is not that they will not get them. They will get them. But 
they have a larger need for working capital.
    So I think the loan limit needs to be increased to be more 
effective. Again, what happens, we get businesses that come to 
us; they need a $60,000 or a $70,000 loan, and we can only give 
them $35,000.
    Giving them $35,000 when they need $60,000 could ultimately 
hurt them, and so sometimes we have to say no, we cannot give 
you the loan because you really need more to make this work.
    Mr. Mills. I said at the beginning that we might be 
considering a next steps bill. Are there any tweaks or 
technical changes to the Recovery Act--and this is for Marianne 
or Dennis or any of the other micro lenders--that you think 
should be included?
    Mr. West. A few other things. One would be to increase the 
average loan size, the $35,000 in the portfolio.
    Going along with removing the restrictions on TA, we are 
working in 44 rural counties, so often we want to be able to 
use contractors to go teach people how to use QuickBooks. So 
whereas there is a limitation on being able to use outside 
contractors as well as the limitation on non-borrowers, so just 
removing the restriction would help on both sides.
    The other is to--currently, there is a 15-percent loan loss 
reserve requirement that has to be funded by outside sources. 
You know, that was probably a really great idea when this was a 
pilot 19 years ago, which also we should try to make this 
permanent, but now we have a mature group of lenders. We all 
risk rate. We really do not need to have 15 percent. That is 
just capital that cannot----
    Mr. Mills. Is it you do not need the loan loss reserve or 
you do not want the requirement for kind of having that private 
capital rates that you would be willing to keep the loan loss 
reserve at 15 percent if you removed the requirement for that 
private capital?
    Mr. West. Well, we managed a loan loss reserve, and 15 
percent is an extremely high loan loss reserve.
    Mr. Mills. What level would you suggest?
    Mr. West. It ought to be risk rated.
    Mr. Mills. Okay.
    Mr. West. It ought to be risk rated based on the portfolio, 
and if the risk in the portfolio justifies 6 percent, allow it 
to be 6 percent. It is just now that the program has matured, 
15 percent is excessive.
    Mr. Mills. Kevin, you had a question?
    Ms. Wheeler. I did. As Ed mentioned, the committee is 
working both on reauthorization and the Recovery Act 
provisions, and we really feel an alternative source of 
financing is needed. So, as part of the Recovery Act, extra 
money was put in for the micro loan program. But not that many 
dollars have gone out yet, right, Eric? What is the usage right 
now out of the $50 million that is available?
    Mr. Zarnikow. As part of the Recovery Act, we got $6 
million of appropriations that supports $50 million of lending. 
We also had money from the 2009 budget that was available to 
make loans to the intermediaries as well. So we have utilized 
the 2009 budget money and have turned to Recovery Act money. At 
this point we have committed about $15 million out of the $50 
million of the Recovery Act money for loans to micro loan 
intermediaries.
    Ms. Wheeler. Okay, because we would really like this to be 
treated as urgent. Get the dollars out as fast as possible. We 
were trying to do some tweaks to the micro loan program, and 
one of them was more flexibility in how you could use the TA. 
One of the objections that came up when we tried to do that, 
both on the appropriations bill and more recently on a 
different vehicle, was--that is what the prime program is for. 
PRIME is not tied to loan dollars.
    We know that there are two different missions for those 
programs, but can you state for the record why using prime 
money--assuming you even get it, because it gets so little 
money--would not be adequate, or would not be a replacement for 
the micro loan TA?
    Mr. West. I do not know that there is a prime vehicle in 
the area that we serve, so I do not think that it is 
universally available, which is a limitation that many micro 
lenders would find. So I think that is a key limitation for us.
    Ms. Wheeler. Okay, so it is availability. Thank you.
    Mr. Lucas. Thanks. I think one of the big problems getting 
that money out is the lack of micro lending intermediaries, and 
there has been all this money put into the program, but it does 
not seem like there has been a response among the community 
development entities that would enter the micro lending 
program.
    I just wanted to ask Ms. Garvin what sorts of changes would 
make micro lending attractive to those types of financial 
institutions that we want involved in the program so we can get 
those loans out and grow this program and reach entrepreneurs.
    Ms. Garvin. I think the fixes to the TA grant are really 
critical because micro--you cannot do these micro lending--you 
cannot take the risk with the borrowers that need this capital 
without providing the TA.
    As I testified a few months ago, our portfolio has been 
experiencing a lot of delinquencies, and our not-for-profit is 
on the hook for making the payment back to the SBA. And that is 
a risk that we are willing to take. I mean, this is sort of 
unprecedented times in the economy, and so we will stand behind 
that. But removing the TA grant restrictions I think will 
encourage other intermediaries to step into this.
    Supporting the intermediaries who are doing lending 
already, who are experienced and know how to do this, part of 
the problem is that they have hit up against the $3.5 million 
limit, and so we cannot get the money out if we cannot borrow 
anymore. And so I think removing that restriction as well, 
removing that, increasing the loan size amount, and removing 
the restrictions from the TA grant will move the money faster 
in the communities.
    Mr. Lucas. Great. Thank you very much.
    Mr. Mills. Thank you. And we would like to go to the new 
markets venture capital program and Ray Moncrief.
    Mr. Moncrief. Thank you very much, Ed and Kevin, and to all 
the staff that has put this together.
    I appreciate the opportunity to speak about new markets 
venture capital. By way of introduction, I do run a small 
business investment company, I run a new markets venture 
capital company, and I run a rural business investment company. 
I could probably speak at length about each of the three 
programs, but I will defer to Brett on the SBIC program, and I 
am going to hold my comments on the RBIC program. I think I 
have spoken to Eric sufficiently about the RBIC program.
    As pertains to the new markets venture capital program, it 
was approved in December of 2000 and is a highly targeted, 
narrow investment vehicle that is under the Small Business 
Administration. Its purpose was ultimately to invest 
traditional types of investing in nontraditional areas, more 
specifically low-income census tracts.
    There were six programs authorized. There were six programs 
approved and licensed in 2003 to 2004. And those six companies 
have done quite well.
    Just some of the measurements, there were six that have 
invested more than $48 million in 75 companies in low-income 
census tracts. They have leveraged an additional $136 million 
to low-income census tracts. There are areas that are not 
available for investing. For example, there is indeed a venture 
capital food chain. Years ago, I heard a speech by a guy named 
Ray Smilor at the Kauffman Foundation about the food chain of 
venture investing. I did not quite understand it then because I 
was somewhat of a novice in the venture industry, and there 
most definitely is a food chain, of which the new markets 
venture capital is at the very end of the food chain, with 
large private equity funds being at the top.
    I would tell you that as a practitioner of new markets 
venture capital, new markets venture capital needs to be moved 
into the mainstream of the SBIC industry. It needs to be 
treated not as sort of a bump over here on the side that is 
some nuance that we are dealing with, but it needs to be dealt 
with as something that is real, that serves a purpose, that has 
an effective use.
    For example, where I practice in eastern Kentucky and 
eastern Tennessee, the Appalachian counties more specifically, 
traditional SBICs do not do much work there. It is profoundly 
rural. It is profoundly poor, and one would think that there 
are not any investment opportunities in those areas.
    As a matter of fact, most of the new markets venture 
capital firms that have been licensed act indeed as segues or 
conduits for traditional venture capital into these underserved 
markets. So I would like to point out that there are several 
things that we should do.
    First of all, it should be reauthorized, most definitely.
    Second of all, I would like to see something that gave it 
some substance, like an Office of New Markets Venture Capital 
to be established. The traditional SBIC program has three tiers 
of leverage, although roughly only two are used. The new 
markets venture capital program is relegated to one and a half 
tiers of leverage. They ought to be treated as they have the 
competence to effectively invest more than that.
    The third point that I would point out is that the over-
line limit should be congruent to that of the SBIC industry. 
Interestingly, I sat in a room similar to this 2 years ago 
talking about the very subject of over-line limits for the SBIC 
industry, which was inclusive of new markets venture capital, 
rural business investment companies, et cetera. Interestingly, 
the SBIC industry has enjoyed an over-line limit increase from 
20 percent of private capital to 10 percent of combined 
capital. I would like that same consideration for the new 
markets venture capital.
    There was interesting conversation recently that we were 
going to do this in the extension bill, but for many reasons, 
that was pushed to perhaps a technical change that would happen 
in later months. So I would certainly encourage a look at the 
over-line limit for new markets venture capital funds.
    Fourthly, back when this program was going together, there 
was a very specific timeline to raise the money. Statutorily, 
it was 2 years. I shall recall that I was authorized in July of 
2001, and I was given until September 30th of 2001 to raise my 
private equity. An undoable task, in the events, as you might 
recall, around 2001. We were successful in getting that 
iterationally pushed out over time. So we should enjoy the 2-
year regulatory statutory cap that we have to raise the money.
    The other thing that I would say is that this new markets 
venture capital is highly targeted in areas of low income. The 
problem is that there is a different definition of low income. 
For example, I invested in a company in northern Kentucky, 
Covington, Kentucky, and, incidentally, I used the new markets 
tax credit program in part to capitalize the new markets 
venture capital program. I am the only one that used that 
particular program.
    I found that the new markets tax credit definition of low 
income was different from the new markets venture capital, so 
that needs to be looked at, and it needs to be harmonized 
together.
    And, lastly, I would point out that one of the key 
components of the new markets venture capital program is the 
fact that there is an operational assistance grant that comes 
from SBA. Heretofore, there has been the requirement that there 
be a match, that you go out and raise part of or at least 50 
percent of that amount to leverage the operational assistance. 
It is very difficult to raise soft money like operational 
assistance in today's market in order to leverage that 
operational assistance from the SBA.
    I think about entrepreneurs like Mr. Heath who would love 
to have some operational assistance to do a marketing study, to 
learn how to put in an effective accounting program in his 
business. In the areas that I invest, in the low-income areas 
that I invest, the operational assistance is absolutely an 
incredible tool that we are using to get businesses off the 
ground, having them work, having them get across the finish 
line in a good fashion.
    I will tell you that I have invested in eight portfolio 
companies. We have had three exits. We still have five that are 
performing and expect those five to exit successfully as well.
    I think the new markets venture capital program is a worthy 
program, one that should be given strong consideration, and 
should be reauthorized.
    Mr. Mills. Thanks, Ray. I think you have really covered the 
waterfront there in terms of the questions I have, but I do 
have two quick ones. Just the number of companies you believe 
that should be in a reauthorization. Originally, there were 
supposed to be 15 NMVCs. Right now we have six. Do you see any 
number of what the program should be expanded to?
    Mr. Moncrief. I do not know what that number is, but I 
would think that in the industry that I work, there is a pent-
up demand for a dozen to 15 more of these companies nationwide.
    I know that the person who introduced the legislation was a 
Congresswoman from Milwaukee, Wisconsin. She would like to see 
some diversification. She would like to see there to be a more 
geographic dispersion in the United States for these new 
markets funds. They are highly concentrated to the East.
    Mr. Mills. You mentioned the match on operational 
assistance grants. Is there a dollar amount you believe should 
go to these grants?
    Mr. Moncrief. I do. The RBIC program, which is a rural 
program that came from the USDA, is run by the SBA. There is a 
$1 million grant that goes with each program. And it is much 
simpler to effectively use the operational assistance as a 
designated grant than having to raise the match that goes with 
it.
    Mr. Mills. Thanks.
    Kevin, do you have any questions?
    Ms. Wheeler. Is there matching for the RBIC?
    Mr. Moncrief. There is not.
    Mr. Mills. So there is no matching for the RBIC.
    Senator Snowe's staff?
    Mr. Berger. I do have one quick question.
    Mr. Mills. Can you use your microphone?
    Mr. Berger. On the new markets program, all the provisions 
that you listed were in last Congress' SBA reauthorization 
bill, so if the Committee were to essentially pass that bill 
again, would that meet your needs? Or is there something else 
that you would like to see.
    Mr. Moncrief. No. That would very much meet my needs, and I 
would like to see that happen.
    Ms. Wheeler. May I just clarify for the record? The one 
thing that was not in there that you would like to see is a 
difference in the tier matching, right, the 1.5? Julia Sass 
Rubin had testified from Rutgers that she was seeing evidence 
that the match needed to be a little larger because the size of 
the funds should probably be a little bit larger to attract 
what you need to do your investments. Is that right?
    Mr. Moncrief. That is correct. There should be more than a 
one-and-half-tier leverage. You are absolutely correct. That 
should be in there, Kevin. Thank you for that.
    Ms. Wheeler. Okay.
    Mr. Moncrief. Most definitely.
    Ms. Wheeler. And just for the record, Ray, it was from you 
that we got the idea to change the over-line limit for MBCs, 
the same as SBICs. We fully intended that it was in the 
Recovery Act, and it was a drafting error, so we are working to 
correct that.
    Mr. Moncrief. Thank you, Kevin.
    Mr. Mills. Thank you. And the last issue of discussion is 
the SBIC program. I will turn to Brett Palmer, please.
    Mr. Palmer. Thank you very much. I will make it quick so I 
do not stand any longer between you and lunch than I have to.
    The SBIC program is one of the oldest programs at the SBA. 
It has been around for 51 years. It has had some extraordinary 
successes providing growth capital to small businesses that 
have grown into American icons. It is not insignificant. It is 
quite meaningful. The past number of years, the SBIC program 
has focused on some challenges of its mismanagement, and it has 
shrunken pretty significantly.
    You all were very helpful last year in helping to create 
some incentive for staying in the program with higher leverage 
limits and family of funds limits, which we appreciate, and we 
particularly appreciate the flexibility that this Committee 
gave to the SBA to allow for greater investments in companies 
that were experiencing economic shock from the financial 
collapse last year.
    And I also want to thank the Chair and the Ranking Member 
for the letter that they wrote to the SBA to ensure that the 
regulations were put in place. Frankly, I do not think the 
stimulus provisions would have been enacted had it not been for 
that letter, because it really just is not a priority. I know 
that there are other, bigger programs that are out there. But 
it really was helpful, and it really is an important thing.
    The SBIC program really can be an important part of growth 
capital available. When I was hearing Mr. Fruge--correct me if 
I am mispronouncing your name--talk about how, you know, 
capital is unavailable for some of the investments he has in 
Louisiana, there are two SBICs in Louisiana, and they are not 
prohibited from investing in ship purchases and other asset 
purchases and financing with it. Many folks do not know about 
that. But there are way too few SBICs, and so we really do 
think there is a significant need for reform for the SBIC 
program.
    The biggest problem with the SBIC program right now is the 
licensing. This has been a longstanding problem, and it is a 
problem you will not hear from individual SBICs because they 
are afraid of retaliation from the people that are reviewing 
them, particularly ones that are currently in the process. It 
is not unreasonable--whether those fears are rational or not--
or, you know, are justified or not, I do not know. But there 
are dramatic problems with it. We have repeat licenses that are 
taking 14 and 15 months to go through. For people that are on 
their fourth license, exceptionally qualified funds that are 
just being hung up, that is nuts. I mean, there is a nicer way 
to put it, but really it should not be. That is just bad public 
policy. They are driving out good funds and repeat funds from 
being in this space.
    And to that end, we are really proposing a number of 
reforms which I submitted for the record to keep funds in the 
program that are established funds and good funds. We want an 
expedited relicensing process for funds that are in good 
standing. If you are a fund and you have proven yourself, you 
have been through the FBI background check, you have a history 
of success, you really had all the audits and exams and you are 
doing fine, after a couple of years, if you want to start a new 
fund and get a new SBIC license, it should not take you 14 or 
15 months. It should take you a couple months. You should get a 
new FBI background check, because that situation could have 
changed. I hope it does not, but it sure could have. And you 
should have to document your private capital that you have 
raised and a couple of other criteria which I can lay out for 
you. But if the basics are in place, it really should be fairly 
automatic and consistent as long as you are investing in the 
same space.
    To that end, if we are able to get an expedited relicensing 
process and keep more funds in the SBIC space, you really need 
to increase the family of funds limit again because the family 
of funds limit increase which you put in the stimulus was very 
helpful for keeping a number of funds from butting up against 
that ceiling limit. But if you are going to be able to have 
serial funds to keep these funds that are really specialized in 
small business in the space, you need to be able to have one at 
peak, one at start-up, and probably one in their last wind-down 
phase, which means bumping it up a little bit. Nothing dramatic 
and not raise an individual fund rate. Just the family of funds 
rate, again, to keep the serial funds in the process.
    Mr. Mills. It is at 225 now?
    Mr. Palmer. It is at 225 now. It is 250 if you have more 
than half your funds in an LMI area, a low- and moderate-income 
area, like Ray talks about.
    Mr. Mills. Do you have a dollar amount you would----
    Mr. Palmer. I think, you know, somewhere in the 300 to 350 
range would be more than reasonable. I do not think you would 
want to go into the 450. I do not think you want three funds at 
peak at a time. I think you need to manage your risk profile, 
but I think you could certainly set a number that with the next 
relicensing--that would be every 3 to 4 years, I would think, 
that you would qualify that you could work out that number and 
do something manageable. And we could work with SBA on that.
    We would also like to get more funds in the program. There 
is a real licensing--the licensing process is such an opaque, 
bizarre, and slow process that it steers people away and there 
are very few minority SBICs. There are very few women-run 
SBICs. The chair of our board is a woman, but she is rare, and 
we would like to get more of them in that space.
    We would like to bring in more people from the Western 
United States. There are exceptionally few SBICs in California 
and the Mountain West, and that is really an underserved area, 
and we can provide capital in a market-driven fashion that 
works in quantities greater than some of the other programs 
allow.
    We would like to make sure that there are incentives for 
coming into the program and not disincentives. There are a 
number of regulatory compliance issues that can put a fund at a 
disadvantage as far as enforcements of warrants and as far as 
your co-investors, what places you are in. There are issues 
dealing with GAAP accounting versus SBIC accounting, as far as 
the costs associated with that. And there are a number of 
technical things that I think we can use to streamline the 
program to, again, attract people in that do not reduce any 
taxpayer protections. We want a stable, functioning program. 
And I think that would be very helpful and something we can do.
    Regarding the equity side of the equation, there was an 
equity program that the SBA had a couple years ago, and, 
frankly, it was structured in a way that did not work. It cost 
the taxpayer money. It did have some significant public policy 
benefits, but it did cost money, and that is a problem.
    There really is a dearth of growth capital for early stage 
businesses now. It is painful what is going on. And in the 
pipeline, in the continuum of the small businesses, you really 
have to have everything from the early stage to the buyout be 
healthy. And a couple of those areas really are unhealthy right 
now, so I think it is worthy of this Committee and the 
Administration to take a look at how they can, in a market-
driven fashion, have a reasonable and taxpayer-protected equity 
program, and I think that is something that we can help you 
with and provide some guidance on if you are willing to engage 
on that.
    We also want to take a look at some of the areas that are 
in the energy and green space. There is an energy saving 
debenture and a renewable energy debenture--they were created 
in 2007--that still have not been implemented. That is a 
problem. There is also a technical problem with them that the 
only funds that are able to engage in those debentures, when 
the regulations eventually come out, are ones that were 
licensed since last year. That I think is a technical drafting 
error that we can probably work around.
    I think that there may be some new and creative ideas, and 
I have been approached by some of the funds that want to get 
into that new space, that we can apply new debentures to meet 
those needs. We want to make sure that small businesses are 
able to engage in that green space as well as the big 
multinationals, and I think that is fairly easily done, again, 
without taxpayer cost.
    The other thing we may need your help with--and this may be 
appropriate for this reauthorization or maybe, frankly, some 
help with some other committees, but SBICs do get regulated by 
the SBA, very intensely regulated by the SBA, and as regulatory 
reform is being looked at more broadly in the financial 
services sector, the proposals that are out there right now 
would create duplicative regulation on top of SBICs. A lot of 
SBICs are just, you know, four-, five-, six-man operations, and 
to have that double regulatory burden on them would require 
them to hire another person. That is pretty significant, in 
which case the cost/benefit analysis might be that you just do 
not become an SBIC. We want to attract more people in the SBIC 
program.
    We also want to, frankly, take a look at some of the bank 
issues dealing with SBICs. Banks get credit for investing in 
SBICs. They are not required to capital charge when they invest 
in SBICs. And some of the regulatory reform proposals would 
actually accidentally wipe those away. We would like to take a 
look at how we can maintain those because, again, we want to 
make sure that there are incentives to invest in small 
businesses and use the money multiplier of the SBIC program.
    That being said, I am very pleased that the SBA has a new 
head of the Investment Division, who seems to be very competent 
and very promising, so we are looking forward to working with 
him. And we also look forward to working with you on the 
legislative fixes that are needed.
    I know I am the last one, and you guys are trying to get to 
lunch, but I would welcome any questions that you may have.
    Mr. Mills. Thanks.
    Kevin, do you want to start?
    Ms. Wheeler. No. Go ahead.
    Mr. Mills. Okay. Could you explain a little bit more about 
the regulatory reforms and how the capital charge could be 
potentially taken away?
    Mr. Palmer. The SBICs are, throughout Federal code and 
throughout regulation, well beyond the SBA because of the 
public policy benefit they provide, and so as the proposals 
exist right now--and it is very much in flux, and this may take 
some time to do--it would require a full holding of a capital 
charge for all alternative investments, including SBICs. And 
that is a concern for us.
    There are also issues dealing with clarifying of the 
Community Reinvestment Act. SBICs are deemed to meet the 
investment criteria there, and, frankly, just getting that 
clarified that that is a full dollar for dollar credit would be 
very helpful.
    Mr. Mills. Can you explain a little bit more about the 
impact of the Recovery Act provisions now that there are 
requirements for investments in low-income areas?
    Mr. Palmer. Well, I think there are a couple of things in 
the Investment Act that were exceptionally--the Recovery Act 
that were helpful. The flexibility for raising the over-line 
limit was exceptionally helpful and very good. There is a lot 
of interest in the LMI area piece and the higher leverage 
limits associated with that. There are some folks who are 
trying to figure out how to rig their system in their investing 
structure to make that work.
    Part of the problem there is the LMI formula is 
complicated, and making sure that you match it is not the 
easiest thing. But there is some interest in doing it. Ray is a 
classic example of one of our funds who is a very strong 
believer in investing in underinvested areas.
    The other standard that was in there was the increased 
requirement for smaller enterprises, and that is being 
implemented. I think there are some--in the regs that were 
proposed, there were some complications for certain funds that 
could actually kick up to 36 percent, but that will pass 
through with time. And so I think that is a helpful 
requirement, and it works, and that needs to get fleshed out 
more. But I think that has yet to be fully seen, the benefits 
of it. But, again, part of that is the number of SBICs has 
shrunken pretty dramatically, which limits our ability to 
provide the up-side risk to the public.
    Last year, in 2008, there were six funds licensed. Last 
year--I guess it is last fiscal year, 2009, there were 11 funds 
licensed. Of those 11 funds, I think 7 or 8 of them were done 
by last winter.
    And the pipeline--I need to mention this--is really 
increasing. The number of funds that are looking at becoming 
SBICs has exploded. I have gone to meetings in Chicago, in New 
York, where there are sold-out shows. They are just basically 
explaining the SBIC program. The people in the space that help 
these applicants go through the licensing process say that they 
have got pipelines of, you know, between 30 and 45 companies 
that are doing it. That is very promising. That is very good. 
The problem with is, again, is still the licensing process is 
opaque. It is very subjective. And, frankly, there have been 
some recent developments regarding the access to leverage that 
you are going to be able to get that has sort of--the licensing 
process is being used to limit that. And I am concerned that it 
seems to be--I keep seeing these little data points that would 
indicate that SBA is actually trying to cut off leverage and 
limit leverage access, not increase it, per what the stimulus 
did. The stimulus put a cap on leverage, a dollar-figure cap 
and a tier cap, so you are not taking out 10 times as much 
leverage as you have private capital. It is a three-times 
limit.
    Basically, the regulations that were put forth cap it at 2 
percent, and the analysts are giving guidance--the SBA analysts 
are giving guidance to the funds: Do not bother trying to ask 
for more. Yes, there are criteria by which you can get more. 
You are not going to get. And that is not particularly helpful. 
If you cannot get it, just say you cannot get it. But do not 
set that up, and that is a cause for concern.
    Again, it is not appropriate for every fund to get three 
tiers of leverage. There has to be a relevant-to-risk profile 
associated with it. But it is not helpful, and as the licensing 
process goes through, if they are limiting who can get it, I am 
curious if there is some guidance from senior--either OMB or 
wherever, with what is going on with the leverage access. Is 
there a direct intent to limit the exposure to leverage going 
forward for the SBIC program? Is there anything happening 
there, Eric? I keep hearing these stories from these SBICs, and 
I am getting quite concerned.
    Mr. Zarnikow. Yes, I think obviously in the program the 
thing you balance is getting access to capital for small 
businesses versus managing risk. So I think it is really being 
looked at on a case-by-case basis, depending on the performance 
of the individual fund managers. So there is no blanket 
direction that has been given. It is really being looked at on 
a case-by-case basis.
    My understanding is there has been very few funds who have 
come in and actually asked to get into that higher tier of 
leverage at this point.
    Mr. Palmer. I will tell you what they will not tell you 
individually, which is they are being told, ``Don't.'' You 
know, don't try it. And it is that unofficial pushback, it has 
a chilling effect, and, again, you do not bite the hand that 
feeds. And so they do not like to complain about it.
    I am being much more open about it because I can be. I am 
not an actual fund. But it is something that does cause some 
concern that we want to make sure is taken care of.
    Mr. Mills. Senator Snowe's staff?
    Mr. Berger. We had a number of questions----
    Mr. Mills. If you could use your microphone.
    Mr. Berger [continuing]. We have a number of questions with 
respect to the licensing and relicensing issue. Eric, as you 
know, Senator Snowe spearheaded a letter with Senator Landrieu 
on the issue, and we got a response back that says that, ``SBA 
is taking steps to accelerate the process, and we have set 
goals for processing new applications which should 
substantially reduce the time frames for processing. Although 
it is too soon to tell, our initial information indicates that 
we are making substantial progress in meeting these goals. 
Additionally, I have instructed the program managers to devise 
measures where we can accelerate the process even more for 
applications from existing licenses. I am hopeful that these 
new guidelines will be available by the end of the month.''
    Could you comment here for the record as to what 
specifically is being done with respect to the licensing and 
relicensing issue and whether or not you feel we need a 
legislative solution? Because the concern that we have is that 
only $650 million of the available $3 billion in leverage is 
being used to help start up small businesses. Given that $3 
billion is the current authorization level, we feel that amount 
of leverage could be used safely. Why not take advantage of 
that, particularly because it does not cost the Federal 
Government a penny because it is a zero subsidy program.
    Could you just let us know specifically what the SBA is 
doing with respect to the licensing and relicensing?
    Mr. Zarnikow. Sure. We have taken steps to look at the 
licensing process to try and speed that process. It is, 
obviously, critical to make sure you manage the integrity of 
the program and you have an appropriate vetting of the 
licensees or the potential licensees who are coming in.
    I would say, too, some of the timeline on how long it takes 
depends on how responsive the fund is in getting back with 
additional information requests. So it can be misleading to say 
the average time is X if it takes months for the fund to 
respond. But having said that, we recognize that there is a 
growing pipeline of people we think are going to be applying 
for licenses. We want to make sure we have an appropriate 
process that appropriately vets people in a timely manner.
    We are specifically looking at a fast-track process for 
second or third or fourth funds where the fund managers had 
good performance, have been in compliance with the 
requirements. And as Brett mentioned, we have recently had come 
on board a new Associate Administrator for the Investment 
Division who brings both a private sector background as an 
investor as well as a business owner and start-up business 
owner, who is really going to be focused on the program, 
focused on innovation, and had really been tasked with looking 
at that licensing process and making sure that it is 
appropriate but speeding the process and providing more clarity 
to the process.
    Mr. Berger. I absolutely agree.
    Mr. Palmer. May I add one thing? The SBIC community 
strongly agrees that they do not want bad actors in and that 
the risk must be maintained. I mean, they want a stable, 
workable program, and so we agree with that. And it is 
certainly fair that some of the delay can be because the SBIC 
is in that process. But in many cases, it has lost fingerprints 
five times or three times, you know, not getting the FBI 
background check for months and months. Granted, it is getting 
better, and now that there is a person in place--and, frankly, 
the crisis, the rest of the broader crisis that is facing SBA 
is getting better. So we are very hopeful.
    So I am not trying to beat up on anybody, but there really 
is a concern here.
    Mr. Berger. I do not think that anybody is looking to 
legislate unnecessarily in this area, but this is something 
that we all recognize needs to be addressed. So is there a time 
frame that you could commit to us where you might be able to 
roll out one of these programs or give us a status update as to 
how this is going?
    Mr. Zarnikow. What I would like to do is maybe come back to 
you with a timeline and when a status update would be 
appropriate. As I said, the new Associate Administrator 
recently came on board. This is one of his very top priorities 
to look at quickly. I just want to make sure it is a thoughtful 
process that we can come back with a timeline.
    Mr. Berger. Okay. Can you commit to coming back with a 
timeline by sometime in November?
    Mr. Zarnikow. Sure.
    Mr. Berger. Okay. That would be fantastic.
    Next, I wanted to turn to this energy debentures issue 
because that is a big sector of the economy. I think we could 
do a lot more if we could roll that program out.
    Do you know what the hang-up is on getting the regulations 
to roll that out?
    Mr. Zarnikow. You know, we have been working on drafting 
regs on that and actually had drafted regs prior to the 
economic crisis and the Recovery Act. We have really been 
working with the Department of Energy on some of the 
definitions that go into that, and we are following up with 
them to try and get clarification and, you know, finish the 
regs. So it has been something we got sidetracked a bit with 
implementing the Recovery Act, but are turning back to get that 
program or those regulations implemented.
    Mr. Berger. Absolutely understood. It has been, I think, 
close to 18 months now since the energy bill was enacted. Is 
there a time frame that you could give us where the regs are 
going to be rolled out?
    Mr. Zarnikow. What I would like to do is come back to you 
with a time frame on that as well.
    Mr. Berger. Okay. And then last but not least--and I 
promise not to stand between too many people and lunch. This 
question is for Brett. One of the issues as we tried to 
reauthorize this program during the last Congress is we run up 
against the argument that you do not need SBICs; there is 
plenty of private capital out there in the marketplace; so, why 
are you asking the Government to get involved here?
    Could you, for the record, explain why you feel like your 
program----
    Mr. Palmer. Sure. Absolutely. I think it is--I mean, this 
program was created, you know, over 50 years ago because banks 
tended to want to invest in larger companies because they were 
lower risk and higher rate of return for the amount of work 
they needed to do. That was true then. It is true now.
    This program tends to be countercyclical. I mean, right now 
there is no question a credit crunch, and this is a form of 
credit that is available to businesses for growth capital that 
normally in many cases cannot get it from banks. But yet it is 
required by statute and by regulation to manage their risk to 
ensure it is zero subsidy.
    So it is filling a gap in the marketplace that is real, 
that is there. That gap is actually growing, not shrinking. We 
now have a number of funds that are actually, you know, larger 
funds moving into the space because they see this need that 
they cannot fill, and so they are willing to take on the burden 
of the regulatory oversight, which is required and appropriate, 
and the costs associated with it and the limits on their 
investments because, otherwise, if they were in the free 
market, they could do whatever they want. And this one you have 
to really be honed down because they think that there is a need 
there that is not being met that they can help me and capital 
that is not showing up from the private market.
    So, again, part of this program, I think it is critical to 
the market function of it, is it maintaining itself as a 
market-driven program. It is not a handout. It is not a 
bailout. When money is lost in the debenture program, it is the 
private capital that is lost first, and then taxpayer money is 
at risk second. That keeps funds from gambling with other 
people's money and keeps it, you know, a functional, 
sustainable system. And I think that is a key element that 
should be consistent with anything in the SBIC program where 
the private capital is at risk first, to make sure that prudent 
investment decisions are made and that this is not just some 
subsidy to prop up one industry or another.
    Mr. Mills. Thank you very much. I think Kevin has one last 
question, and I have one question for Michael, and then we will 
end the roundtable.
    Ms. Wheeler. To Fred, we really are trying to be helpful on 
this Community Express program. So on this idea, and to the 
SBA, of a 1-year extension--if 1 year is not unacceptable, 
would something like a higher pilot limit per lender work? 
Would that satisfy the SBA need for protecting the portfolio 
until they can figure out how it is performing and then address 
the industry's issues of meeting their borrowers' demand and 
not hitting your caps?
    Mr. Crispen. Yes. I mean, if what you are asking is if we 
cannot make it a permanent program today, extend it for a year, 
but at the same time increase the base that allows everyone to 
have access to the program up to $50,000, $60,000, whatever the 
figure would be, would that be helpful? Absolutely. The biggest 
problem I have right now--and we have streamlined our program, 
not just Community Express anymore. We call it Borrego Express 
Capital. But we incorporated the Patriot Express program into 
it as well. So if you have got a guy that qualifies for 
Patriot, he can get a $50,000 loan even if he is not in a low- 
to moderate-income area. But if you have got a business that is 
not in a low- to moderate-income area or a HUBZone and they 
apply for a $50,000 loan, I am sorry, I cannot make you that 
loan unless I do it as a 7(a), which I tried to do. But when 
you start getting into regular 7(a) underwriting, it is a whole 
different ballgame. You cannot credit score anymore. You have 
to look at collateral, and we do these unsecured up to 50.
    So it is a myriad of problems trying to do small loans, and 
it would be most helpful to raise the limit and extent it for 
at least a year until we can make it permanent. But it needs to 
become a permanent program. Even in good economic times, small 
businesses are forced in a lot of cases to use credit cards for 
working capital at a much higher and more expensive cost of 
funds than a SBA loan like we make.
    Ms. Wheeler. Okay. Thank you.
    Eric, did you want to add to that?
    Mr. Zarnikow. I think that is something we would want to 
look at as far as a change to the pilot limit.,
    Ms. Wheeler. All right. Well, we will keep working on this. 
We want to be helpful on it, but making it permanent is really 
problematic for us. We are trying to find a happy medium here.
    Mr. Mills. Thank you. And for Michael, I just wanted to 
document for the record, who is the lender on the loan for your 
7(a) loan? Do you remember?
    Mr. Heath. It would have been Passumpsic Savings Bank.
    Mr. Mills. The what?
    Mr. Heath. The Passumpsic Savings Bank.
    Mr. Mills. Okay. And from your loan, how many jobs do you 
believe you either retained or created?
    Mr. Heath. We had about 15 on the payroll when we started. 
We have about 21 now.
    Mr. Mills. Great. Thank you. I believe this concludes the 
roundtable unless there are any final comments?
    [No response.]
    Okay. Thank you very much for everyone's participation. I 
believe it has been helpful, and we look forward to getting a 
reintroduction of some reauthorization bill in soon.
    Ms. Wheeler. Congratulations to Michael who gets married 
next week.
    [Applause.]
    [Whereupon, at 12:44 p.m., the roundtable was concluded.]
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