[Senate Hearing 111-1170]
[From the U.S. Government Publishing Office]
S. Hrg. 113-236
THE STATE OF SMALL BUSINESS LENDING:
IDENTIFYING OBSTACLES AND EXPLORING SOLUTIONS
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ROUNDTABLE
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2010
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED THIRTEENTH CONGRESS
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MARY L. LANDRIEU, Louisiana, Chair
JAMES E. RISCH, Idaho, Ranking Member
CARL LEVIN, Michigan DAVID VITTER, Louisiana
MARIA CANTWELL, Washington MARCO RUBIO, Florida
MARK L. PRYOR, Arkansas RAND PAUL, Kentucky
BENJAMIN L. CARDIN, Maryland TIM SCOTT, South Caarolina
JEANNE SHAHEEN, New Hampshire DEB FISCHER, Nebraska
KAY R. HAGAN, North Carolina MIKE ENZI, Wyoming
HEIDI HEITKAMP, North Dakota RON JOHNSON, Wisconsin
ED MARKEY, Massachusetts
CORY BOOKER, New Jersey
Donald R. Cravins, Jr., Democratic Staff Director and Chief Counsel
Wallace K. Hsueh, Republican Staff Director
C O N T E N T S
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Opening Statements
Page
Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana. 1
Witnesses
Wills, Mark, Georgia Bank and Trust, Augusta, GA................. 3
Loving, Bill, Pendleton Community Bank, Franklin, WV............. 3
Long, Tim, OCC................................................... 3
Koronides, Christine, senior policy adviser, Small Business
Administration................................................. 3
Greenlee, Jon, associate director, Division of Banking
Supervision, the Federal Reserve Board......................... 3
Fritts, Steve, associate director for risk management policy,
FDIC........................................................... 4
Dammrich, Tom, National Marine Manufacturers Association,
Chicago, IL.................................................... 4
Walker, Carolyn, small business owner and founder, D.C.
Metropolitan Area.............................................. 4
Lucas, Chris, staffer, Senator Olympia Snowe's office............ 4
Walker, Matt, Deputy Staff Director for Republicans, Committee on
Small Business and Entrepreneurship............................ 4
Gillers, David................................................... 4
Alphabetical Listing and Appendix Material Submitted
Dammrich, Tom
Testimony.................................................... 4
Fritts, Steve
Testimony.................................................... 4
Gillers, David
Testimony.................................................... 4
Greenlee, Jon
Testimony.................................................... 3
Koronides, Christine
Testimony.................................................... 3
Landrieu, Hon. Mary L.
Opening statement............................................ 1
Long, Tim
Testimony.................................................... 3
Loving, Bill
Testimony.................................................... 3
Lucas, Chris
Testimony.................................................... 4
Questions for the record......................................... 32
Snowe, Hon. Olympia J.
Prepared statement........................................... 30
Walker, Carolyn
Testimony.................................................... 4
Walker, Matt
Testimony.................................................... 4
Wills, Mark
Testimony.................................................... 3
THE STATE OF SMALL BUSINESS LENDING: IDENTIFYING OBSTACLES AND
EXPLORING SOLUTIONS
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TUESDAY, JUNE 8, 2010
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The committee met, pursuant to notice, at 10:03 a.m., in
Room SR-428A, Russell Senate Office Building, Hon. Mary L.
Landrieu, Chairman of the Committee, presiding.
Present: Senator Landrieu.
Staff Present: David Gillers, Chris Lucas, and Matt Walker.
OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S.
SENATOR FROM LOUISIANA
Chair Landrieu. Good morning, everyone, and thank you so
much for joining us today for this roundtable on a very, very
important and timely subject.
This is probably the sixth one that we have conducted this
year since I assumed chairmanship of this Committee, and we are
pleased to have such a distinguished group gathered today. The
purpose is to assess the current lending environment for small
businesses in America today to try to identify the obstacles
that continue to constrict credit and to explore the proposed
legislative solutions we are considering in a small business
jobs package which will hopefully be enacted by Congress in the
upcoming weeks.
As you may know, since I assumed the Chair of this
Committee in January, lending in the small business sector was
at a historical low. Since then, the numbers have improved
significantly, but not to the satisfactory level of this
Committee, or many others. We passed the American Recovery and
Reinvestment Act, which, in the opinion of many, helped jump-
start hundreds, if not thousands of small businesses on Main
Streets throughout our country and provided increased SBA
lending. This act is widely viewed by economists and policy
professionals as having succeeded to a great extent; however,
we continue to hear that credit in the small business sector is
nowhere near sufficient.
Congress has held countless hearings on this issue,
including six in this Committee alone. The borrowers claim that
they cannot obtain financing despite being creditworthy. The
lenders respond by saying that the borrowers are, in fact, not
as creditworthy as they think they are. Three years ago the
banks would have, without a doubt, extended a loan, but really,
they say, it is the regulators that are being unnecessarily
strict.
The regulators, of course, say the borrowers are not
creditworthy, and the banks are using the regulators as a
convenient excuse. In recent months, some regulators have, in
fact, confirmed that there are likely cases of overregulation,
but they have not been able to definitively confirm such
overregulation. So it is this back-and-forth blame game that
small businesses are tired of hearing and, frankly, many
members of my Committee, from both the Republican and the
Democratic side of the aisle.
I thought that convening this roundtable this morning would
move us past the fingerpointing and would like to walk away
from this conversation this morning knowing that all relevant
parties are participating in a productive dialogue to try to
solve this very important challenge before our Nation today. We
will try to clarify what the current obstacles are so that we
can adequately address them and not to unnecessarily assign
blame.
I am encouraged that the Federal regulatory agencies and
the Conference of State Bank Supervisors issued the interagency
statement on meeting the credit needs of creditworthy small
business borrowers in February. However, it is unfortunately
not seeming to get at the root cause of the problem.
I would like to thank Federal Reserve Chairman Ben Bernanke
for his good work conducting meetings across the country to
determine how best to respond to small business lending needs.
I would also like to thank TARP's Congressional Oversight Panel
who has produced a thorough and thoughtful report on this
subject. And I want to also thank the other regulators who are
sincerely trying to do their best job to maintain stability in
our banking system. I am aware of those painful challenges as
well.
However, some have expressed doubts about the demand for
small business lending. I can assure you from my seat on this
chair there are hundreds and thousands of small businesses,
some of whom have sat right where you all are sitting today,
desperate for money to continue their operations, to weather
the storm, the economic storm, and in some instances, which is
quite exciting, to take advantage of opportunities out there to
grow their businesses. They have sat right where you are, and
they just cannot seem to get their hands on the money to do so.
According to the National Federation of Independent
Businesses, in the last 3 months only 36 percent of small
businesses who applied for financing received the full amount
requested. Compare that to 70 percent as reported in 2008 and
67 percent in 2007. Again, that is 36 percent today compared to
70 and 67 percent, respectively. Clearly, there is a level of
demand that is not being met, and when this demand is not being
met, jobs are not being produced, and this recession is not
coming to an end. You know, the growth is stagnating, will
continue to stagnate. Jobs will continue to go without being
crafted and filled as long as we are restricting the flow of
capital to the small businesses who are indeed the engines of
growth in this country.
In our overall effort in Congress to get this economy
moving in an upward direction, to expand and to grow, to bring
hope and opportunity for Americans, it is imperative that we
drill down on this issue. What is the disconnect here? There
are businesses out there that are creditworthy, that need the
money. There are regulators that have an obligation to make
sure the banking system is stable and is trustworthy and fail-
proof. But there is a disconnect, and the banks are really on
the front line trying to get money out the door. Obviously,
they make money when they make good loans. I would believe it
would be in their interest to do so, yet they are feeling
somewhat restricted.
That is the purpose of this roundtable. This format is much
more informal than our regulation hearings. I am going to open
it up by asking a few questions. I would like to start off by
asking everyone, starting with you, Mark, to introduce
yourself. When you want to be recognized or to respond to a
question, just put your placard up this way with your name
facing towards us so we can call on you--it is going to be very
informal, really a back-and-forth exchange. Do not be
embarrassed about jumping in if you want to take a question or
disagree with something that has been said. We hope that you
all will be very forthright in this conversation because,
again, our purpose is to get to this issue.
Mark, why don't we start off with you? Please introduce
yourself briefly, and we will go around the table.
Mr. Wills. Thank you. My name is Mark Wills----
Chair Landrieu. You have got to press your ``talk'' button.
I am sorry. And perhaps lean into your mic a little bit as
well.
Mr. Wills. Thank you. My name is Mark Wills. I am with
Georgia Bank and Trust in Augusta, Georgia, and I am pleased to
be here, and I hope I can add to it.
Chair Landrieu. Thank you.
Mr. Loving. Good morning, Senator. I am Bill Loving with
Pendleton Community Bank in Franklin, West Virginia,
representing the Independent Community Bankers of America. As
well, I am happy to be here and help in any way we can.
Chair Landrieu. Thank you very much.
Tim.
Mr. Long. My name is Tim Long. I am with the OCC. I have
been with the agency for 31 years. I have run the large bank
program, I have run the mid-size community bank program, and I
am now running the bank supervision policy for the agency. Glad
to be here.
Chair Landrieu. Thank you, Tim.
Christine.
Ms. Koronides. Christine Koronides from the Small Business
Administration. I am a senior policy adviser. I have done a lot
of work on the Recovery Act measures and the jobs bill efforts
that are currently being discussed to address this lending gap
in the economy.
Chair Landrieu. Jon.
Mr. Greenlee. I am Jon Greenlee. I am an associate director
in the Division of Banking Supervision at the Federal Reserve
Board. I have been spending quite a bit of time on policy-
related matters concerning credit availability.
Chair Landrieu. Thank you.
Mr. Fritts. Yes, good morning, Chairman. I am Steve Fritts
of the FDIC. I am a 33-year veteran of the FDIC, commission
bank examiner. I have worked in seven States throughout the
country in my career, and I am currently associate director for
risk management policy with the FDIC.
Chair Landrieu. Thank you, Steve.
Tom.
Mr. Dammrich. Good morning, Senator. My name is Tom
Dammrich. I am president of the National Marine Manufacturers
Association. We are based in Chicago, Illinois. We have about
1,500 members who manufacture recreational boats, engines, and
accessories. There are actually over 30,000 small businesses in
the recreational boating industry.
Ms. Walker. Good morning, Senator. My name is Carolyn
Walker. I am the proud owner and founder of a small business
located in the D.C. Metropolitan Area. We provide services
primarily to the Federal Government, but also to commercial
industry.
Chair Landrieu. Thank you all very much. So we have our
regulators, we have our banks, and we have representatives of
small business, and I thank you all for making yourselves
available and for sharing your experience today.
What I would like to do is start off with asking just a
couple of questions. I am going to stay with you all as long as
I can. I have got another meeting. I am going to leave you in
the able hands of our senior staff person when I have to slip
out, but I am going to try to stay as long as I can.
Just to get things started, let me get the staff to
introduce themselves. Go ahead, if you would, Chris.
Mr. Lucas. My name is Chris Lucas, and I work for Senator
Snowe on the Committee.
Chair Landrieu. Who is the Ranking Member.
Mr. Walker. I am Matt Walker, and I am the Deputy Staff
Director for the Republicans on the Committee. I work for
Senator Snowe, and I want to thank you for having this
roundtable and for all of your hard work on this issue.
Chair Landrieu. Thank you very much.
David.
Mr. Gillers. I am David Gillers from the Senator's
Committee staff working on banking and finance issues.
Chair Landrieu. Okay. Let us start, if we could, with the
small businesses, representatives of small business. What has
been your experience in the recent 12 months, 24 months,
basically, which has been a tough time? What are you hearing at
the conferences that you are attending or any specific
information or questions that you would like to ask either the
regulators or the banks in terms of the difficulties of either
you getting the credit or lines of credit being constricted,
difficulty--and I know it has been a tough time for everyone,
but I do not know if, Carolyn, you want to start, or Tom?
Ms. Walker. I would be happy to. Thank you. And I would
like to share anecdotally my personal experience over the past
24 months, which I think is a clear indicator of what many of
my colleagues as small business owners have also experienced.
Our company provides services. We do not have our assets in
capital. We are a labor-intensive business. We have been
successfully delivering these services since 2002 and have had,
thankfully, a very steady increase in growth for the first 5
years of our business. We hit a little decline in 2007-08
primarily due to some budget reductions from one of our major
clients, one of the Federal agencies.
However, in 2009, we had an opportunity and won a
competitive bid to provide services for the U.S. Census. So
unlike many of my colleagues, 2009 proved to be a record
revenue-generating year for our company.
Although we were excited and elated, it also provided one
of the most difficult challenges. We had an opportunity to
increase our payroll from our existing six employees to hire an
additional 25 employees over the 18 months, which, of course,
our key issue was financing that payroll.
My first reaction, of course, was to go to my local bank. I
had been banking with them for 7 years. They knew me. I had had
consistent cash flows coming through those accounts there.
There is nothing more assuring to a small business owner or a
banker than to see invoices paid by direct deposits from the
U.S. Treasury. To my surprise, we were declined. The reason
given, not that we were not paying our debts. We were making
our payments on time. But the reason we were given was that we
were overleveraged.
Why? Over the past 6 months, my personal credit lines as
well as the business credit lines had been unilaterally
reduced. So even though we were paying on time, I felt we
should have been creditworthy, we were told that we were not.
Meanwhile, back at the ranch, I am required to deliver on
this contract. I have got a signed contract in hand, a multi-
million-dollar contract, which is a huge accomplishment for a
small business, and I am struggling to hire these people, bring
them on board, and meet my payroll.
For those of you who are not familiar with how the service
industry works, you invoice and get paid once you have
delivered the services. You hire people initially to do the
work. Once it is delivered, your client is happy, then you get
paid. So the end result is I am looking at a payment cycle of
approximately 75 days that I now have to figure out how to
finance a payroll that was running around $25,000 to $30,000 a
month, which was going to peak at $199 a month--$199,000 a
month, excuse me.
So being declined by my small bank, I was advised to try a
larger bank, ``Clients like to see you working with big
national banks. They have got money available to them. Go to a
big bank.'' So I took my application, paid my $1,500, updated
all my financials. This process of applying for loans is pretty
tedious, and you have to dot all your i's and cross all your
t's. But I was refused by the large bank, the reason being,
``Well, we would like to see you operate at this increased
level of revenue through the end of the year to prove that you
can successfully do this.''
Now, mind you, we had been performing on this contract now
for 90 days, and I was fronting this payroll through my
personal assets and resources.
So then I was steered towards a special program that is
funded by the county in which my business resides, a program
designed specifically to provide financing for small
businesses, emerging small businesses like myself. Well, you go
through the same process. They were happy to have me as one of
their clients. I was proving to be one of the largest clients
that they had. Unfortunately, this program was designed for
what they called emerging small businesses, so their assets
were limited, and they were not able to provide the level of
credit that I needed to fund my payroll.
So I took what little they were able to offer, and being an
entrepreneur and very creative, I said, ``Okay, fine. Now what
are you going to do?'' So, fortunately, having the confidence
and respect of colleagues and other small business owners, I
was offered personal financing from one of my colleagues who
had a line of credit as a small business owner but was
concerned that because she had not had to use that line of
credit for the past 24 months, her bank was also threatening to
reduce her credit line. So I was in need of credit; and she was
in need of needing to use the credit. So, fortunately, there
was a synergy there, and I was able to secure private funding
and financing from her, another small business owner, to meet
my payroll needs and perform on this contract.
Meanwhile, we have been doing very well. Twelve months have
gone by. I have closed a year-end book with increased revenues,
performed well; clients are happy. Interestingly enough, my
original local bank has been bought out by a larger national
bank who is now approaching me and asking me if I would please
apply for a line of credit. I figured, ``Aha, problem solved.''
Everything is looking good. I have demonstrated that I can
perform. I have got a large national bank who is actually
wooing me to come and apply for a line of credit, which I did.
They approved the line--however, for such a small amount that
it did not come near to meeting the needs that I had on a
monthly basis. So I now have this small line of credit from a
large traditional bank. I have got another line of credit from
a non-traditional receivables-based program from my county. And
I have got personal financing from a colleague, another
business owner.
Needless to say, the costs of this hybrid solution far
exceeded what was budgeted initially for this program and is
cutting severely into my profit margins on the work that I am
performing.
I am still working with the bank to try to get an increased
line. I recently reapplied to get the small line that my now
large bank offered. I went through the process, applied, paid
for the application. Just last week, I received a nice letter
saying, ``Thank you very much. However, you have not fully
utilized the line that we have given you, so why should we give
you more?''
I say all this to say clearly there is a disconnect between
the availability of capital and really, I believe, an
understanding of the banking industry of what small businesses
really need on a day-to-day basis in order to function.
Chair Landrieu. Well, thank you very much. I am going to
ask anybody that wants to to respond. It is very typical of the
stories and personal testimony that we have heard now in front
of this Committee for over a year and a half. What I heard was
if lines of credit by small businesses are not used, they are
at risk of being withdrawn. But if you do use your line of
credit and you overextend yourself, you cannot then get
additional loans when you need it.
I also heard that even with a Government contract in hand,
this borrower was still unable to access the credit that she
needed. So from our perspective, as we are pushing the Federal
Government from this committee and other committees to contract
with minority-owned businesses, small businesses, emerging
businesses, the Federal Government has goals that every
department has to meet at about 23 percent. What I am hearing
is even if we are successful pushing those goals out to get
contracts from Federal agencies to small businesses like Ms.
Walker's, even with that contract in hand, she is still having
difficulty getting the financing she needs.
What that tells me is we have got millions of small
businesses out here that do not do business with the Federal
Government, do not have contracts in hand like this. What is
their story? How depressing is their story?
Does anybody want to respond? Maybe start with the banks to
see if this is familiar to you. Could you understand? Maybe
this was a mistake. Mark, you must have customers like this
that come in.
Mr. Wills. Well, I do have a customer that I have had in
the past that does Government contract work through the
military. Please understand that with a community bank, you
know, our bread and butter has been real estate lending, and
community banks--and our community bank has grown through that.
Understanding and having the expertise for lines of credit
are a little more difficult, and the larger the line of credit,
the more difficult it is. Dealing with borrowing-based
certificates and agings and understanding a company's agings
and how they are paid is a little more difficult for us because
we do not have the expertise.
Chair Landrieu. Well, let me ask this question, because
that is a very good point. You said your particular bank makes
its bread and butter, most of its profits off of real estate
lending. That would be raw land or commercial development,
residential?
Mr. Wills. Owner-occupied real estate.
Chair Landrieu. Owner-occupied real estate.
Mr. Wills. Our bank is pretty well diverse with a good
portion of owner-occupied, some non-owner-occupied. We do one
to four residential.
Chair Landrieu. Okay. So you are not used to doing the
small business lending necessarily in your community. You do
mostly real estate lending.
Mr. Wills. No. Small business lending through owner-
occupied real estate, and we do have lines of credit. I would
say our lines of credit are probably going to be below $1
million.
Chair Landrieu. So what you are saying is when you do the
small business lending, you require the collateral or the
equity from a home loan to back it up? That is the way you are
most familiar with lending? I am not----
Mr. Wills. Not necessarily. We may use real estate--we will
use accounts receivable and inventory. We will use a borrowing-
based certificate that will have advance rates based on what
their receivables are. But the risk is going to be less the
smaller the line of credit is. And if you do not have the
expertise to manage and look at borrowing-based certificates
that the borrower is going to provide you on their accounts
receivable and their inventory on a monthly basis and the
ability to monitor the agings of the receivables, you need to
shore that loan up the best you can. Sometimes we shore it up
with equity in their office building or whatever they may have.
We have even, you know, used liquid collateral that they may
have. But, I mean, we do it all different ways.
Now, my understanding is that Government contracts are a
little different. It is much more difficult for a bank to take
a lien against a Government contract. It is much easier to do a
UCC filing on someone's receivables and inventory if it is non-
governmental. If it is governmental, it is a little more
difficult--really a good bit more difficult, and, you know, if
it is not done properly, you have got an unsecured loan. If you
have got a $2 or $3 million line of credit and it is unsecured,
I do not know that that is prudent from the bank's perspective
if you cannot protect that lien.
Chair Landrieu. Right, that is an interesting point, and I
am going to get to the regulators on that in a minute. But,
Bill, can you respond?
Mr. Loving. Yes, I would reiterate what Mark said. You
know, lines of credit are a unique type of financing, and
receivable-based in itself creates its own problems, and as
Mark alluded to, the nature of the contract itself creates
problems.
Now, I have a customer that is doing some Government
financing--or doing financing with Government contracts, and it
has worked well. But based upon their particular cash flow,
they have not drawn against their lines to a significant basis.
Now, I have not used that as a reason to decrease the size of
the line because there could be a time when there would be a
delay from a subcontractor that they receive payment from as
well, that they may need that line. But receivable-based
financing creates its own unique challenges, and like many
community banks, we find that we can shore that up with other
collateral such as real estate or even participating in the
Small Business Administration--they have a cap program for
accounts receivable financing that may be an opportunity as
well.
Chair Landrieu. And how does that program work? Either
Christine or Bill, do you want to talk about the cap program?
Or do you know?
Ms. Koronides. Right now the cap program is a small
fraction of our 7(a) lending program that specializes in
helping small businesses with seasonal needs or receivables
financing needs. It is not fully utilized. I think as Mark and
Bill were describing receivables financing, different banks
specialize in performing those functions, and our program has
not been leveraged that broadly, but we are certainly taking a
look at how to get that more out there.
Chair Landrieu. But just briefly describe the parameters of
the program as it exists today. What is it?
Ms. Koronides. It is a regular 7(a) guaranteed lending
program, so 75, 85 percent guaranteed, depending on the size of
the loan.
Chair Landrieu. It is a 95-percent guarantee.
Ms. Koronides. Right now a 90-percent----
Chair Landrieu. Right now? What is the limit? And what is
the limit you can borrow or access?
Ms. Koronides. I believe the limit is $750,000, but I would
need to get back to you on that.
Chair Landrieu. So with a 90-percent guarantee on----
Ms. Koronides. We do not have a 90-percent guarantee rate,
no. That authority expired.
Chair Landrieu. Okay, it expired, but you had it.
Ms. Koronides. Yes, we did have it.
Chair Landrieu. So you did have a 90-percent guarantee, and
you could lend up to $750,000. It still was not utilized very
much, you say?
Ms. Koronides. No. I think we see from SBA more of the
working capital loans being financed through the SBA Express
program. It is a little bit of a streamlined paperwork process,
a little easier for our lending partners to work with. And as
we have seen the different issues in the current economy, one
of the proposals that the Administration has made is to
increase the available size of an SBA Express loan from its
current limit of $350,000 up to $1 million to meet the needs
that different small businesses have currently for working
capital and to help extend that 50-percent guarantee on those
Express loans to additional lenders.
Chair Landrieu. Well, hopefully that will help.
Mr. Dammrich, let me ask you, what is your experience? Do
you mind sharing it?
Mr. Dammrich. Thank you. I would love to. When you
mentioned that small business is the engine of job growth,
credit is the lubricant of that engine, and it has been sorely
missing, certainly for the marine industry and other industries
that depend on credit to finance inventory. Boat dealers buy
inventory from the manufacturers to have on display, to sell
when consumers come to the showroom. When a consumer is ready
to buy a boat--and in most parts of this country, the boating
season is 3 or 4 months--if you do not have the boat available
and have to order it and wait 6 or 8 weeks for delivery, you
have likely lost that sale.
So the inventory financing is critical to our industry, and
it has dried up almost entirely. At one point there were
probably a half a dozen national lenders that were doing
inventory financing for the marine industry, the RV industry,
the pool and spa industry, and a variety of other industries
that depend on inventory financing. Today in the marine
industry, there is one national lender who at this point
probably serves less than half of the dealers in the industry.
And the rest have a serious problem with their ability to get
credit.
We have stories from many dealers. One dealer who visited
22 banks, was turned down by 22 banks, before he found a bank
that would lend him 85 percent on the inventory that he
purchased.
One of the things to understand, too, about the
recreational boating industry is that 95 percent of all the
boats sold each year are under 26 feet in length. They are
trailerable boats. They are, you know, purchased by middle-
class families. They are manufactured by middle-class workers.
And if the dealer cannot buy the inventory, the manufacturer
cannot produce the inventory, so there are no jobs.
We were very encouraged when the SBA initiated the dealer
floor plan lending program under the 7(a) program, but it has
been extremely disappointing in terms of the number of loans
that have actually been made through that program.
We are now seeing a little bit of an upturn in boat sales.
Certainly things have bottomed for the manufacturers, and
manufacturing is picking up. But the manufacturers have two
problems: one, a problem with credit, there are dealers not
being able to give credit to buy the boats; and, two, as they
begin to ramp--as demand begins to ramp up for their product,
they have needs for working capital to buy the supplies that
they need to manufacture the boats and are finding that
difficult to get on that side of the equation as well.
We have seen credit lines reduced, credit lines withdrawn,
interest rates doubled, which puts additional stress on these
small businesses whose cost of carrying whatever little credit
they have has just skyrocketed, providing further stress on
them.
So I know that there has been some suggestions that there
is a lack of demand for credit by small business. I will tell
you that in the marine industry and the RV industry and other
recreational industries, there is no lack of demand. There is
clearly a lack of lenders.
Chair Landrieu. Thank you. That is my experience as well,
and I am reading as many surveys as I can and listening to as
many different areas of the country, and that is overall--even
though you see some contradictory information coming across
this dais, everywhere I go what I hear is there are small
businesses out there that want to grow, that can grow, but just
cannot get access to the money necessary to allow them to do
so.
Let us hear from the regulators. I do not know who wants to
start, Tim or Jon or Steve, about the small business lending
activity you are observing in the banks that you supervise,
what the difference is now as opposed to maybe a few years ago.
Any thoughts that you might have on what has been shared? We
will start with you, Mr. Long.
Mr. Long. Sure, let me hit a couple things. What you are
hearing is----
Chair Landrieu. Did you press your button?
Mr. Long. Yes. Can you not hear me?
Chair Landrieu. Could you speak a little bit--just lean a
little bit into it, if you would.
Mr. Long. You know, some of what you are hearing is really
what you see in a normal recessionary cycle. You know, we went
through 15 years of peacetime where, you know, credit was
flowing and credit was pretty easy to get. And, unfortunately,
when you get into an economic downturn, you know, you have a
couple things happen. Demand in many cases does decrease, so,
you know, there is an issue there, and we can come back to
that. But to Ms. Walker's and Mr. Dammrich's issue, what banks
will do, what we see normally in a situation like this, there
is a natural tendency for banks to tighten underwriting
standards. And a good example on the receivable and inventory
financing, you were looking for 85-percent financing on the
inventory. You know, during times where credit is abundant,
that is a number you may see. But as banks tighten up, you will
see them tighten covenants. Maybe they will want to pull that
back to 75, 70 percent on inventory. You know, 85 percent may
be something you would normally see on a receivable. So you
will see banks tighten up underwriting and ask for more equity,
for, you know, different borrowing-based covenants, whatever.
But it is unfortunate at times, but that is what we see during
a recession. You see decreased demand, you see tightened
underwriting, and you have some banks who are in a situation
where they are just simply trying to protect balance sheet,
protect liquidity, protect capital, and survive. So, you know,
you have got a number of factors going on right now.
Chair Landrieu. Jon.
Mr. Greenlee. I agree with a lot of what Tim just said. We
have been following this matter since, you know, early 2008,
late 2007, and trying to understand what is going on with
lending and the economy in general at the Fed.
I would note our senior loan officer opinion survey we do
periodically, we have seen a significant tightening in late
2008 in small business lending. I think 90 percent of the
respondents said they had tightened their underwriting
standards.
Chair Landrieu. But did they say why?
Mr. Greenlee. I think it is a combination of what Tim said.
It is a combination of their view of the economy, their view of
their own financial situation in terms of trying to preserve
capital, maintain earnings, maintain liquidity, and ensure that
they operate a safe and sound bank. And when we have had these
discussions--and we have had a lot of them at the Fed through
our outreach efforts--you know, these are a lot of the dynamics
we hear about, that credit is not as available on the same
terms and in the same quantity as it was in, say, 2006 before
we started to go into the recession. And some of that is what
we would want to see as bank regulators as well, is, you know,
I think part of the problem we had observed, there was too much
leverage in the system in terms of people being overextended,
and when we hit a recession, then there was a lot of negative
fallout from that. And it is a natural tightening that the
banks do.
Now, our most recent survey that we have gotten shows that
there is no more new tightening of small business lending, so
it is not getting tighter, but definitely the banks have
tightened over this period.
Chair Landrieu. Well, Steve, I may want you to comment, but
let us talk for just a minute about the fallout. How many
community banks failed in the country--does anybody know--in
the last 2 years? Or how many have been maybe put on a list
subject to fail? I do not know who keeps that list, but how
many are we talking about?
Mr. Fritts. We keep that list.
Chair Landrieu. Okay. How many do we have on the list?
Mr. Fritts. It is right at 800.
Chair Landrieu. Eight hundred?
Mr. Fritts. Right at 800.
Chair Landrieu. There are 800 out of how many?
Mr. Fritts. About 8,000.
Chair Landrieu. Okay. So it is about 10 percent that are on
a list that are sort of subject to ``if you do not get your
business together, you may fail'' list?
Mr. Fritts. I would say typically they have exhibited some
fairly significant problems. Sometimes it is credit. Most of
the time it is. It would not always be credit problems. And
they are generally on a corrective program with a regulator to
get themselves back to financial health.
Chair Landrieu. And what would you say--how do you judge a
bank's size? By its assets? What is the average size of this 10
percent of the banks that are on this list?
Mr. Fritts. I do not have that stratification, but I think
common parlance is banks that are under $1 billion in asset
size are generally considered----
Chair Landrieu. Considered small banks?
Mr. Fritts. Considered community banks. And we basically--
the FDIC is the supervisor of the great majority of community
banks. We supervise about--both of the banks here today are
community banks that the FDIC----
Chair Landrieu. Because I would be very interested in this
actually, and I am going to ask the staff to get the details of
the banks that are on this list and what their average size is,
because maybe there are some near $1 billion banks that are on
this list, but if this list is comprised of very, very small
banks in certain geographic areas or something like that that
you could identify they are having, you know, problems--maybe
some of them are in Detroit, Michigan, or Ohio and some areas.
My problem is that if regulators regulate for that list as
opposed to regulating for the list of healthy community banks,
we are not going to get out of this situation. This is what I
am starting to think about.
Now, I know that you have to have one set of regulations,
but you also have to apply common sense that if we do not get
lending up through banks to these small businesses, we are not
going to come out of this recession. It is about as simple as
that, unless we can give them some other access to capital. But
go ahead. I am going to be very interested in who is on this
10-percent list.
Mr. Fritts. Well, I think it is a mix. Of course, the
majority of banks are community banks, so they are going to be
a majority on the problem list, too. It is just statistically
probable. And I do not think there is any question, you know,
we have been concerned about credit available at the FDIC for
some time, and, in fact, we and the other agencies started to
track--historically, we just got small business credit semi-
annually, and we have started tracking that quarterly now, and
we just got the March data. And, yes, credit has retrenched.
For the 9-month period from June to March was the first
quarterly report we got small business credit, which we measure
by the size of the loans to business. It retrenched not quite 4
percent. But for community banks, it was essentially static,
and community banks, by and large, have kept up their pace of
lending to small business. And, in fact, they disproportion--of
all bank lending to businesses, even though community banks
make only about 10 percent of the assets of the industry, they
make up almost 40 percent of the lending to small business.
So the community banks are small business lenders. That is
what they do. That is their niche. And, by and large, they have
hung in there. For the banks that have serious problems,
obviously they may be constrained, and you do see some cases
there. But keep in mind 90 percent of banks are still well
rated, are well capitalized, and are healthy, and so----
Chair Landrieu. Steve, how does your testimony gibe with
what Ms. Walker said? She had a 7-year experience with her
community bank. She went in, she had a contract. You say they
hang in there and they continue to lend. They did not seem to
hang in too much with these two businesses.
Mr. Fritts. Well, the statistics, those are the statistics
I quoted you in the aggregate. Obviously, I cannot address
individual--I would say a couple of things.
I would say Ms. Walker's example of having sort of a
variety of financing vehicles that she used--family, personal
credit cards--that is not atypical for small and emerging
businesses.
Chair Landrieu. No. We know that is very typical.
Mr. Fritts. And the other thing to remember is that
commercial banks are secured lenders, like these gentlemen
said, and typically they want hard collateral. That is what
commercial banks do. They are lending on--accounts receivable
factoring is a fairly specialized business that not that many
commercial banks do.
Chair Landrieu. Ms. Walker.
Ms. Walker. Yes, thank you. I just wanted to make a comment
and ask a question. In everything that I have read and what I
see, in this economy business growth and growth of the economy
has moved from traditional manufacturing, where you would have
assets, hard assets, and collateral. And I think moving forward
this country's success is going to be in the space of
technology and service providers. That is where the innovation
is. That is where the growth is. That is where the opportunity
is, not only within the United States but also globally.
My question and my concern is it seems that the banking
industry, the banks and the regulators have not moved to
understand how this service-based business operates and how to
properly assess the viability of a business that is service-
based and does not have traditional assets. As a service
provider, I am not interested in buying brick and mortar to
have as collateral for a loan. My investment is in the
expertise and the technology of the people that I hire and the
service that I deliver.
So how does the industry look at a business that has a
successful track record of providing services and opportunities
for growth and do what needs to be a good financial evaluation
to see how secure is this business and how probable will it be
that the loans are repaid.
Chair Landrieu. That is an excellent question, very well
put. I would love to hear some response to that, either Mark or
Bill. And how about the regulators commenting on that as well?
But, Bill, as the independent banker representative, what do
you think about that? Do you think that is an accurate
assessment or do you think that banks are evolving to make
better--you know, I would not say better or worse. It is not a
matter of good or bad or better or worse. It is just adapting
to new environments, you know, the different kinds of changes
and the types of businesses that are emerging in our country
today. What do you think about that?
Mr. Loving. Well, again, small business lending is the
bread and butter of the community bank model, and so I would
say that while community banks historically have been secured
lenders and we are the first secured lending arrangements, we
always look at new opportunities and ways to approach a
customer or a client in their line of business. Different lines
carry different risk factors, and, yes, we have to evaluate all
those risk factors in the equation because, in fact, what we
are doing, we are extending credit of funds that are our
depositors' and which we have to protect those funds. And so we
have a fine line that we have to walk to try to satisfy the
credit needs of the community as well as satisfying the needs
for safety and soundness issues as well.
So in answer to your question, our banks are changing. I
think we are, I think we are looking at new ways to approach
this new industry that is coming about, because I agree, you
know, we are seeing more service-based industries. But, you
know, back to the model of the community bank, we historically
have been secured lenders and need to look for ways to maintain
that balance going forward.
Chair Landrieu. Tom.
Mr. Dammrich. Just a couple of comments that have been
made. The normal advance rates on wholesale boat purchases by
dealers historically has been 100 percent. And banks like hard
collateral, and new boats are hard collateral.
Our issue has been the exiting of this inventory lending by
larger national banks, not by community banks, which, frankly,
I think probably most community banks do not have a great deal
of experience with this type of inventory financing, which is
why we thought that the SBA program might be a good way to
encourage more community banks to take a look at this type of
lending.
But there are several issues with the SBA dealer floor plan
financing program that we think need to be addressed. One is
that the program was announced as a 1-year pilot, and it is
very difficult, I think, to entice a bank or a lender into a
business for a 1-year program.
Chair Landrieu. It has to be longer.
Mr. Dammrich. You know, we really think that we need a 5-
year program at a minimum. We think the loan limits need to be
increased. They are currently capped at $2 million. We would
like to see that increased to at least $5 million, which I
believe your Committee has recommended.
There is a restriction on less experienced floor plan
lenders in the program, so that if a lender has less than $15
million in floor plan lines or less than 5 years of experience
in floor plan lending, they can only lend to current customers,
which to us seems completely contrary to the goal of attracting
new lenders to this floor plan space.
We would like to see increases in the size standards for
the businesses, increased and made permanent so that, you know,
boat dealers up to $14 million in sales could qualify for the
program. And we would like to see the process streamlined
significantly. We have had a few boat dealers that have been
successful in getting loans through the SBA dealer floor plan
program, but the amount of time and paperwork it has taken is
an impediment, I think, to banks' participation in the program.
But those who have been successful, few as they are, the
program has been a godsend, and we think with some of these
changes the program would provide more credit to more dealers.
Chair Landrieu. Well, thank you, Tom. It is very timely
because we are going to be--hopefully on this third jobs bill,
some of these ideas that you have just presented will be
strongly considered by me.
Christine, I do not know if you want to comment, and then I
will get back to you, Steve.
Ms. Koronides. Sure. We have definitely heard these
concerns before around the dealer floor plan program, and the
pre's as well, where this is a pilot program that we were able
to flexibly put together very quickly in response to a number
of lenders exiting that type of financing market. And it is a
brand-new program. We stood it up less than a year ago. We have
been working very hard to get the different lenders, our
lending partners engaged. As, you know, a start-up pilot
program, we had to control the risks around the program by
concentrating on bringing in some more experienced lenders
first. As we look to evaluate the success of the program and
make a decision about its extension, we are definitely taking
these factors into consideration and seeing what types of
changes might be helpful to make it more broadly available.
Chair Landrieu. Okay. Mr. Fritts, you had something?
Mr. Fritts. Yes. I think Ms. Walker's point is a good one,
and I think the banking industry and financing, there is
probably some evolution that is probably appropriate there
where businesses--their primary assets are human capital and
intellectual property as opposed to hard assets. And there are
some things going on there relative to credit scoring for small
businesses that are sort of evolving us toward that, because
community banks are very comfortable making loans to their
local doctors and lawyers and vets, taking their office
building and all of their assets and tracking their predictable
cash flows, whereas businesses like Ms. Walker's where it is
not that traditional set of circumstances.
I would say this, though, a little note of caution as we
evolve towards that. I use the example of the residential
mortgage arena where some would say that the lending evolved
very heavily towards credit scoring, discounting traditional
underwriting and documentation, and I think some would observe
that maybe there is always that balancing of making sure you
have sufficient documentation and underwriting, and credit
scoring has some limitations.
Chair Landrieu. Thank you very much. I am going to have to
slip out. I am going to leave you in the able hands of David
and the staff here to continue this line of questioning, and I
really appreciate it. This has been very, very helpful. It is
very, very timely. And this Committee is just staying focused
like a laser on this issue until we can break through, you
know, strengthen our programs, build strong partnerships with
the community banks, which this Committee is very, very proud
of the community banks in our country that have been trying to
do good work in difficult times. But, you know, we continue to
hear from small business owners everywhere, and unless we get,
you know, Ms. Walker and Mr. Dammrich the money they need, this
recession is not going to end. I mean, it is about as simple as
that. There is no magic here. There is really no magic. You
know, you do not wave a magic wand and jobs are created. You
get money, capital, in the hands of small business in America.
They create the jobs. The numbers go up. Everybody goes back to
work. It is just as simple as that. Big business is not going
to lead us out of this recession. It is not going to be GE, it
is not going to be IBM, it is not going to be Microsoft, it is
not good morning be McDonald's. It is going to be the small
businesses, the boat manufacturers, the marine operators, the
technical companies out there. And this country, I will just
say, has invested a huge amount of money in brain power, and if
America cannot figure out a way to lend on brain power, which
the taxpayers of this country--I am going to add up what this
number is. Just over the last 20 years, if you add up what we
invest from Pell grants to State taxes to local taxes educating
our population, if we cannot figure out how to lend on that
intellect and move this country to another place, we are never
going to get out of the box we are in.
So this is sort of a paradigm shift that I see and many of
my colleagues see as well. So we will keep plugging along.
I am going to turn it over to David. Thank you all very
much.
Mr. Gillers [presiding]. We will now turn it over to Chris
and Matt for questions.
Mr. Lucas. Thank you. I want to open this up to the
regulators. Chair Landrieu talked about what may happen in the
future, and I know that it is tough to look ahead 6 months let
alone 6 years. But a few years down the line, if there is a
slow economic recovery, what activity levels will you see in
access to capital? Do you think that it will be back to where
we were at pre-recession? Is it going to be a different
environment? We talked about new business models and banks
learning to adapt to lend to them. What sort of growth and
change do you see in the community banking industry? How are
they going to become more responsive--or are they going to
become more responsive to small businesses?
Ms. Koronides. I am not exactly a regulator, but I can
start us off. We have seen at SBA that--we have had a long
history of great partnerships with community banks, but we have
also seen community banks increasing as a share of our active
lenders in the past year or year and a half, and we believe the
tools that the Committee has equipped us with--through the
Recovery Act and through a number of additional measures being
discussed for the jobs bill, we will be able to work even more
closely with community banks to help them continue to meet the
needs and the growing and changing needs of small businesses.
Mr. Long. I will add a couple things, I guess. You have got
a couple things going on here. From one aspect, I think with
one of the small businesses here, you have got the issue of
underwriting got pretty loose. There is a natural tendency to
pull it back. It needs to be pulled back. It should have been
pulled back earlier. And, you know, clearly in terms of how
they evaluate credit, I mean, every bank is different, and, you
know, they do their thing.
You have got another situation where the business model,
you know, there are banks exiting. You are right, Mr. Dammrich.
On the marine industry, there is not a lot of lenders doing
this right now. And in an effort to meet credit demands, some
of our--a lot of our banks, particularly the large and mid-size
banks, have moved that into a true asset-based lending unit to
where they can meet those credit demands, and there are greater
controls over that type of lending, receivable and inventory,
because it is a high-touch, high-cost, high-overhead type of
business. So that is an issue of where is that credit supply
going, and clearly I think there is a space there, I think,
that I would agree the SBA could significantly help with.
More to your question, maybe long term, look, there are a
lot of things going on right now that the industry is facing,
both community banks and large banks, with legislation, with
FASB, trying to go to mark to market, with the accounting
pronouncements, with 6667, everything coming back on balance
sheet. Ms. Walker talked about one of the problems that she had
accessing her loan was her credit lines. I mean, small
business, when you look at small business lending, eight out of
ten small business loans as defined on the Call Report, loans
under $1 million, are funded by large banks. But that is not
really where the small business lending activity is. It is in
credit card lines, and it is in home equity lines.
And, you know, part of the problem with the credit card
lines is the recent legislation that was passed a year ago.
There has been $1.5 trillion cut in credit lines, in credit
cards in the last probably 18 months, 24 months, and it is a
direct result that the business model does not work as well
under this new legislation. And these banks are going to have
to find out how do they make the business model work, can they,
and, you know, what do they have to do.
So I would tell you there are a lot of things facing the
banking industry right now. In some cases, the old models are
not going to work, and in many cases, you may have, you may
very well have a very restricted access to credit going
forward.
Mr. Lucas. So you are saying that this is sort of the new
normal, that it is a very real concern.
Mr. Long. I actually said a lot of things.
Mr. Lucas. I know you did.
[Laughter.]
Mr. Long. I do not know what the new normal is. I do not
think anybody does. I think we are in a very tenuous time right
now. I think there is a lot of uncertainty out there. I think
there is a lot of nervousness. You have got to get the
securitization market opened back up. You have got to get
credit flowing again. And, you know, there are just a lot of
balls in the air right now that have to land.
Mr. Lucas. Mr. Fritts.
Mr. Fritts. Thank you. I would echo--there are a lot of
things going on in the credit arena and financial services,
obviously, as you are aware. And I do not predict the future. I
would say, though, history has shown that the credit cycle
almost invariably mirrors and trails the economic cycle. It
really does not drive the economic cycle. It is a reflection of
it. So history has shown that the credit cycle mirrors the
economic cycle and trails it by generally about a year. So if
that proves to be the case, as the economy picks up, the credit
cycle will pick up.
And I just want to say a few things about the FDIC, what we
have tried to do. We have tried to recognize this issue because
I lived through the 1980s when it was, quote-unquote, the
regulator-induced credit crunch, which we were very attuned to
that, we and the other regulators, as we saw the credit cycle
turning. And we have tried to get the message out there about
fair and really a balanced approach to our supervision and
understanding of what banks have to do. And we have done some
very specific things relative to policy guidance to the
industry about that balanced supervision and understanding what
banks and customers are going throughout their as to
credibility. And a couple other things that we specifically at
FDIC have done, when we have had failed banks, whereas in the
past you have had a lot of disruption to the community and the
customers, we very heavily use loss share programs which are
the least disruptive option to those communities and the
customers at those failed banks. And the other things that we
have done is we have engaged in and sponsored a lot of small
business roundtables around the country. We have done in the
last year and a half I think four or five in Louisiana and a
lot of other States. So we are out there in the marketplace, in
the communities, talking about this issue. We bring community
groups and lenders together to discuss these issues. We saw
this coming. We cannot change the economic cycle. We cannot
necessarily change the credit cycle, but we are attuned to the
issues here.
Mr. Greenlee. Just to follow up a little bit, I think, from
the Fed's perspective, as I mentioned earlier, we started
getting concerned about what was happening with lending, you
know, late 2007, early 2008, primarily to recognize the exact
question you have raised about the economy, job growth, the
concerns there.
We have done a number of things on the supervision side, as
Steve had mentioned interagency, to, you know, reinforce the
message to our examiners as well as industry, take a balanced
approach, look at a borrower's ability to repay, do not treat
everybody the same, you know, look at the facts and
circumstances.
In addition to that, you know, we have set up the TALF
program that provided a lot of financing to a lot of
individuals as well as small businesses. And I think the most
important thing, as our Chairman and our other Governors have
mentioned, is, you know, the accommodative monetary policy we
have in place, improving the economy, trying to get, you know,
the economic growth to come back is going to be a key to this
whole thing.
Mr. Gillers. Thank you. I would like to turn now, if I
could, to trying to get a sense of the bigger picture. Mr.
Long, you mentioned that there really is a question of demand
and there is a decrease in demand out there. We are obviously
hearing from the small businesses that, despite whatever
decrease in demand there is in general terms, in very specific
case, obviously, there is still a real need. And the Senator
mentioned in her opening statement that, independent of
whatever general drop in demand there was, 36 percent of those
who have actually applied for credit have gotten what they have
applied for. So there is, in fact, a real need that is not
being met.
What I would like to do and to take advantage of everyone
we have in this room--and, Christine, I would actually like to
start with you to get a sense of this big picture--but to go
around and to give your own--or the institutions your
represent--your perspective on this question of drop in demand,
because this ultimately is, we think, one of the more important
issues to really clarify.
Ms. Koronides. Sure, thanks. I think what we have seen as
we look and talk to all of our small business and our lending
partners and our Federal partners is that there really is not
just one problem going on. I think that is consistent with what
we have heard today. There is a documented decline in demand,
according to the senior loan officer survey, and I think that
part of that comes from businesses that are sitting on the
sidelines that could be--you know, they are doing fine, they
are paying back their loans, they are not growing and expanding
at a rate that they could be right now in order to add jobs to
the economy, and they are uncertain of the economy and
uncertain of the outlook. So there is, on the one hand, a part
of the market that has a lower demand than previously seen.
At the same time, there is a huge issue of risk aversion on
the part of the banks, and those are things that the SBA
guarantees can definitely help with. There are credit
qualification issues as people see their assets declining in
value and their collateral declining in value, and at the same
time a pressure to shore up collateral on lending.
At the same time, there is another issue we heard about
today with capital availability in community banks and issues
about making sure that they are prepared to expand and grow and
ready to lend more to small businesses.
So those are the three problems we have seen, and I think
that kind of sets the framework for looking at--there is not
going to be one solution to the availability of credit at this
point. There are a number of different problems out there.
There are a number of different proposals that have been made
to address these different market issues.
Mr. Gillers. And I would also be interested in what the
banks are experiencing just on the ground. Are you seeing, in
fact, as the senior loan officer survey suggests, a real drop
in demand?
Mr. Wills. I would say demand is very weak. At our bank in
Augusta, Georgia, the demand is very weak. We do see our
pipeline is growing a little bit. You know, I want you to
understand. We are a bank that is very pro-small business. It
is the backbone of our bank. We work very closely with the SBA,
with SBA 504 loans, and we are seeing some of it come back.
But just to give you some of my experience with the clients
that I deal with, I try to build a good relationship with my
clients, and I try to understand their business. And I work
with them, I work with their accountants. You know, a lot of
these business owners have kind of gone over to the sideline.
They are fairly debt averse. They are not ready to bring on
additional debt at this point. They are waiting on making
equipment purchases. They are waiting on expanding their
buildings.
At the same time, you know, as their revenues are going
down a little bit, they are looking at what expenses they can
cut. They are learning that they are working with less and
doing just as well.
So I think there is going to be some--we are going to get
the equipment purchases. We are going to get expansions in
buildings. I think you are also going to see, with the way that
property values have gone, you may see them moving into other
buildings. There are a lot of vacant buildings out there in our
market that are great opportunities for businesses. And I think
you are starting to see some recognize it, because I am
starting to get those questions.
But they are learning to work with less and doing it well,
and that is going to be a challenge going forward. But we are
seeing demand going up a little bit, but it is way down.
Mr. Gillers. And so this leads then to the solution
section, that the Treasury Department and the administration
have obviously proposed a $30 billion small business lending
fund. But it is premised on the idea that capital purchases or
capital infusion for the banks will, in fact, help small
businesses. And I guess the question, in light of what we are
now saying, that there really is a drop in demand by small
businesses, the question that I would be curious to know
responses, both from the banks and from the regulators, if, in
fact, there is a drop in demand, will a--and we do not have to
discuss the real specifics of the proposal. But, you know, in
its essence, will a capital purchase program, will a capital
infusion for small banks really help bring demand back to the
small business sector? Christine, go ahead.
Ms. Koronides. Sure. As I mentioned before, I think there
are a number of different problems. There is demand, there is
capital availability, and there is risk aversion, and there are
different solutions that address those problems.
Now, the Treasury proposal really does focus on infusing
community banks with capital that gives them an incentive to
make more small business loans. That program works on the
general premise of providing low-cost capital based on the
increase in small business lending that community banks do.
Now, that interest savings for the community banks can be
passed on to borrowers, and that is where we really see an
increase in demand, almost a sale on loans. The interest rates
can come down, but the capital is available at a lower cost. We
have seen that be very successful in the Recovery Act SBA
programs. The fee relief that given to borrowers kind of puts
the SBA loan on sale, and that helped. As you know, our
Recovery Act lending has increased from the weeks before the
Recovery Act was passed, has increased by over 90 percent. So
it is a combination of addressing the different factors. There
is an issue with capital availability that the Treasury
proposal addresses. It can be translated into increased demand
from businesses. The other measures that your Committee has
discussed, that the President has discussed, like extending the
90-percent guarantee on 7(a) loans, extending the fee relief,
go to address demand; they go to address risk aversion.
Increasing the loan sizes, which the Committee has taken a
great leadership role in, will help address risk aversion for
part of the market that currently SBA cannot serve, so
borrowers that might have qualified for conventional non-SBA
credit previously might be good candidates for guaranteed loans
now that they are sized out of the market.
Thanks.
Mr. Gillers. Bill.
Mr. Loving. As we said earlier, credit usually follows the
increase in an economic cycle, and while credit demand may be
down at the present time, the availability of this capital for
many community banks will be a stimulus to increase small
business lending. And as we noted, you know, there are
incentives to use a fund with a reduced cost. If you
participate and you do not increase your small business
lending, then there is a disincentive to do so.
So as it is structured, and not getting into specifics, but
as it is structured, I think it would be a great opportunity to
provide capital to community banks who many of them need it
today with the challenges they have been facing, with the GSE
issues on the stock, and other issues that have decreased the
capital that is available to them.
So I think it would be a good program. Once demand does
increase, there is going to be a need for additional capital.
Mr. Gillers. And I am curious to get the regulator input
here, knowing, of course, that you are not going to make an
official statement on the proposal, but in general terms, you
know, again, in its essence, is a capital infusion program what
is needed at this point? Is that going to address one of the
three issues that Christine has pointed out?
Mr. Greenlee. I think from our perspective, to the extent
that capital constraints are, you know, causing banks not to
lend, this was a possible option that could be considered to
alleviate that. Does it spur demand? I think improving the
economy is what really is going to be the key to improving
demand for credit.
Mr. Long. Our position is we are fine with the program. We
have testified to that, but I agree it is not going to--you are
talking about $30 billion. If you look at the five banks that
we had in the TARP program in the fourth quarter of 2009,
during that quarter they put out $420 billion in loans. That is
$32 billion a week, those five banks alone. And we had $4
trillion in unused commitments on our national banks' balance
sheets.
So, you know, it is an issue of there is increased demand.
There is no question about that, and that is what happens
during a recession. The spot that businesses need help are the
businesses that were probably on the margin during good times,
and we clearly--we were up testifying on this, and I think all
of us have spent time on the Hill of you have got constituents
who have been with the bank for 5 or 6 years, and then they go
into the recession and they do not get their loan renewed.
Well, maybe that loan was on the margin during good times, and
that banker looked at that loan and said, ``You know, we are
going into a recession. I do not know if this borrower is going
to do very well inside this recession, and I do not want to
bank them.'' That is the piece that appears very unfair to the
borrowers. They have been borrowing there. They have been
paying. But, you know, if their balance sheet is not strong
enough to survive a recession, they are not going to get a loan
in a recession.
So, you know, if this will maybe help with that, I mean, we
are on record as fine with the program, we support it. But as
Jon said, you know, demand and the economy have got to turn
around before this gets fixed.
Mr. Gillers. If I could just do a quick follow-up to that,
the issue that Jon also spoke about is that the Fed has tried
other measures to actually deal specifically with the economy,
monetary policy, and I guess it is another question. If we are
skeptical or if one is skeptical that this $30 billion fund is
not going to be a cure-all, then from a regulator's
perspective, looking at this issue of demand, what else should
we be looking at? Setting aside, of course, your understanding
that the Fed has already mentioned some suggestions.
Mr. Long. Well, I will just say this--because I talk to
hundreds of bankers, and I have asked them, specifically groups
of bankers I talk to, Are you willing--are you open for
business? Are you willing to make loans to creditworthy
borrowers? And the answer is resoundingly yes. But the issue is
the creditworthy borrower, you know, on the risk scale, you
know, where do they want to be.
There are two ways to juice loan demand. One is to reduce
rates, and, you know, you are obviously not really able to do
that in this environment. And the other is to relax your
underwriting standards, and that is really the last thing that
needs to be. That is why we are where we are at, is because
underwriting standards got too loose.
So those are the only two ways to juice loan demand
artificially, so I would say again that I agree with my
colleague from the Federal Reserve, you have got to get the
economy to turn around, and you have got to get things working.
Mr. Greenlee. I would again just come back to I think the
main thing is the economy. We are trying to understand this in
more depth all the time. We are doing these outreach--public
and private outreach efforts to try to understand what are the
issues here and thinking are there other tools. But I think it
is a balance here between preserving the safety and soundness
of the banking system and individual institutions and promoting
the economic growth. And I think Tim is absolutely right. I
think you could reduce underwriting standards, you could do
things to make a lot more loans, but in the long run, that may
not be the best thing for the economy more broadly, because I
think we came out of the--we are coming out of a situation
where we had very liberal lending standards in certain aspects
of the economy that we are now working our way through. And so
this is very painful at this point, and we do not want to go
back, you know, and have to go through that again in a few
years.
Mr. Dammrich. Thank you. Everybody talks about the demand
for credit is documented to be down, and I would say even in
the marine industry, probably the demand for credit is down.
But there is still a significant unmet demand. And no one has
said it but I seems to be implied in some of the comments that
there is plenty of supply, there just is not enough demand. And
knowing that there is a significant unmet demand, at least in
recreational boating, the RV industry, and some other
industries that require inventory financing, how do we get this
excess availability to where the unmet demand is?
Mr. Lucas. That is a good question. I want to refocus a
little bit back to the small business lending fund. I think
that one of the big questions that has been raised about it is
whether banks actually use it, and that is the main question,
because if banks do not use it, as well intentioned as it might
be, it is going to be perceived as a failure. And since we have
a couple community bankers here, one of the concerns with this
program has been that although it is not being taken from TARP
funds, it is TARP-like, and banks may suffer reputational
damage if they take this in the future.
What are your perspectives on--I am not going to ask you
whether your bank would take these funds, but what type of
program would meet your needs?
Mr. Loving. Well, as you stated, it is not TARP, and I
think it needs to be clear that it is not TARP, because there
are reputational issues surrounding the possibility of
accepting it.
I think the guidelines have to be clear, concise, and
permanent. The one thing that we all as consumers, and when we
enter into a contract, we like to know what the rules of the
game are going to be from the beginning to the end, and that
was not the case with TARP, and so I think it has to be clear,
concise, and a known set of rules for the banks to participate.
And, yes, it has to be completely separate and apart from any
semblance of a relationship to TARP because of the possibility
of reputation.
Mr. Lucas. Thank you.
Mr. Wills. I think it is going to also be important what
the requirements are going to be as far as the lending side. If
we put benchmarks out there that banks have to meet, we are
going to have another challenge with the type of loans you get.
So we have got to be careful that it is done right and that
there is the proper incentive for the banks to go out. I
definitely think it is a good program.
It is going to be for the banks that do not have the
liquidity or do not have the--or their capital has been
stretched to a point that they are challenged right now in
making loans. So it will depend on, you know, will it just be a
funding isuse, or will it be Tier 1 capital to allow them to
leverage that out for loans? You know, if you have got
stretched capital already, you know, just having a funding
source is not going to help you any. So it depends on how it
comes.
Mr. Walker. It is interesting you mention that. One of the
criticisms that we have heard is that the benchmark being used
is the amount of lending that took place in 2009 for the banks
and that they would use that as a benchmark to determine the
increase, the percentage increase. That begged the question,
What if the banks would have increased lending anyway, not as a
result of this program, but as the economy gets better and more
lending takes place? Would it be somewhat of a windfall for
banks? I am not taking that argument. I am not saying that
argument is correct, but that is an argument that has been
made.
So I guess my question to you is: What are your thoughts on
that, number one? And, number two, do you have another idea for
another benchmark or some type of benchmark that might be more
relevant?
Mr. Loving. Well, in response to your question, I think the
banks that would participate in the program need the capital to
increase their lending anyway, so if they did not participate
in the program, they may not have the necessary capital to
increase their lending beyond the base that was set for the
2009 cycle.
You know, I think, again, as a bank needs the capital for
growth, as you said, included in Tier 1 so that it can be
leveraged to expand the borrowing base, the banks that
participate will need that capital. You know, the supply-demand
side would not dictate taking the capital if you could not put
it to use because there is a financial cost for doing so.
Mr. Gillers. I just wanted to briefly share with the
regulators and the banks--oh, excuse me. Christine, did you
want to--sorry.
Ms. Koronides. I think that as these gentlemen covered it,
it is a very important program, and there are a number of
community banks that have stuck up to say that they would be
willing and would need to take advantage of it. I believe the
baseline that has been set out--one of the important things
that I believe Mark just mentioned is making sure that it is
data that everyone has already collected. So in order to
establish a common baseline, we went to Call Report data on
this. I know Treasury worked very hard to look through what
does everyone already have, how can we measure from a common
place. And the Call Report data on small business lending is
the only common baseline that was out there that everyone could
quickly and easily leverage.
Mr. Gillers. I was about to share a glimmer of good news
for the regulators. As you are probably aware better than we
are, we have been in touch with a good number of banks recently
in some conferences, and there have been some workout groups
that bankers are getting together talking about issues of
regulation. And the glimmer of hope or of good news is some
bankers have come back and have just finished examinations, and
they have said it is as if the regulators have been told to
kind of calm down a little bit.
That said, we are still hearing reports from a good number
of banks. The vast majority are still having a tough time with
the examinations. And, again, as I am sure you all know better
than we do, it breaks down into about three different
categories of complaints.
Number one is the explicit message from the examiner to the
bank that, despite whatever regulatory requirement of risk-
weighted capital, say it is 10 percent, even though
regulatorily that is what is required, I am telling you I am
not going to accept anything less than 12 percent. So there is
the explicit spoken message.
There is an implicit message that is often suggested to the
banks--and, again, this is the reports that we are hearing. It
is an implicit message that, you know, really you should shore
up your capital.
And then the third issue that we are hearing from banks is
even if there is no explicit or implicit message, there is a
great fear. There is a great fear among the banks that at some
point capital requirements will shift and the regulators will
change their requirements. And the Senator mentioned the
interagency statement on meeting the credit needs of
creditworthy small business borrowers, which was a very strong
step in the right direction. This, of course, is in addition to
in the fall of 2009 the policy statement on prudent commercial
real estate loan workouts, which we also appreciate. It seems,
however, that these interagency statements are not necessarily
having the intended effect.
And so the question is just assuming--we do not have to
kind of get into the--but assuming that these three reports
that we are hearing are still true, how do we as the
Government, how do we as regulators deal with those complaints?
And I think I am most interested in how do you deal with the
real fear that bankers have that capital requirements will
change.
Mr. Long. I will start. You know, we have had this
conversation a lot up here, and in the case of--you know, none
of the regulators--I will speak for the OCC, but I think I can
probably speak for my colleagues at the FDIC and the Fed, too.
You know, we do not have a secret number that the old 10 is now
12. We go into every bank, and we look at it individually. We
look at that loan portfolio. And in some cases, you know, if
you have got a banker that has put 500 or 600 percent of their
capital in commercial real estate, they have bet the farm. And
in some cases, they may need that capital just to survive.
So this idea that the regulators are arbitrarily coming in
and raising PCA minimums--and those are minimums. Those are for
well-run, clean, well-managed banks. So, obviously, if it is
not a well-run bank or they have taken on too much risk or they
do not have good risk management practices, we are going to
raise those minimums. And it is completely within our rights to
do it, and that is what we do. But we do not have a standard
across-the-board 6 is now 8, 8 is 10, and 10 is 12. We look at
each bank individually. In some cases, they need the capital to
survive. In other cases, we think what is coming at them--you
know, maybe they have not realistically assessed the situation,
and we want them to shore it up in a space where they can
before it is too late. So, you know, it varies, but every bank
is different. And we do not have examiners just out there
arbitrarily raising capital on banks. It goes through layers of
review, and it is signed off on at the highest levels of the
organization.
So I am a little surprised at the comments we get, and when
you have a conversation with the bankers, you know, for the
most part they understand it. I will tell you, though, you
know, in terms of an exam team going into a bank and that
banker is in denial and they are not recognizing what is going
on around them and they do not realize that the real estate
values have fallen and that the loans are not paying and they
are not funding their reserve and classifying their loans, that
exam can be an unpleasant experience for them. There is no
question about that.
Mr. Greenlee. I will just echo what Tim said. We have not
changed our minimum expectations for capital requirements. We
expect banks to hold capital for the risks and the quality of
their management. And as Tim alluded to, a number of smaller
banks in particular have large commercial real estate
concentrations that have proven to be problematic. We expect
them to hold capital and manage those risks appropriately.
So we have not changed any of our standard requirements in
this area, and similar to what they do at the OCC, we have a
thorough review process, a vetting process. If we are here in
Washington and we meet with bankers or others that have
concerns about this, we do follow up and look into the
situation as much as we can. And usually my experience is
similar to Tim's. When we get down and then really talk about
it, people understand the analysis we have done and why we have
the expectations we do.
Mr. Gillers. And I am not necessarily asking whether, in
fact, you have changed your capital requirements. What I am
curious about--and the message that we can bring back to
bankers who have a very real concern that there will be a
regulatory shift, I guess my question is: How do regulators
address these fears that banks have? Again, I am staying away
from whether or not you have technically made the decision.
Obviously, you have not. But how do you address their fears
aside from saying, ``Well, we do not do it''?
Mr. Greenlee. I think one of the key ways we do it, I mean,
obviously we go through the examination process and explain
ourselves and give them a chance to ask questions and iterate
with us on these things.
The other thing we have done a lot of is outreach to the
industry to explain the expectations. Part of that commercial
real estate workout guidance is about, yes, working with
borrowers, but the other key message in there is recognize your
problems and deal with them in a timely manner. We have tried
to get that message out to people that, you know, you need to
be realistic about the quality of your assets so that your
business, your environment you are operating in, make the
appropriate plans and management actions to preserve the safety
and soundness of the organization. So that is one of the key
things we do.
Mr. Fritts. On the capital issue, I think it is important,
just as these business people understand, first and foremost
capital is a business necessity. It is not a regulatory
construct, you know, that we make up, except in those few cases
where bankers are in denial, and I think most are not, the
great majority are not. In fact, the great majority of banks
are reasonably healthy and have weathered some hard economic
times reasonably well. For those that are in most severe need
of capital, those are the ones that are finding it the hardest
to get.
I guess there are some positive signs that capital is
starting to flow into banking, particularly the community
banking sector. It is becoming a little bit more available, as
I think the general investor community has started to think
that maybe the economic and credit cycle have bottomed out. So
we are seeing and hearing a little bit of good news, and the
growth in problem loans and that sort of thing has sort of
stalled out. Having lived through the 1980s in Texas, the late
1980s in Texas, I would say this: that, you know, we saw a lot
of bankers in denial then. They were not recognizing their
losses. They were not dealing with their problems. We are not
seeing that nearly as much. I will give you a good example of
the State of Georgia. The bankers there have had a very rough
time. They are fighting through it, and I would say at least
some there tend to be a little bit more optimistic at this
point. That is not to say that we are out of the woods. We are
not. But I think you are hearing more of optimistic.
But the reality is our exams do not create the economic
reality. In most cases, we are validating the bankers' own
credit ratings, their own financial statements. If they have
had bad losses for 2 years and they need capital, that did not
have anything to do with the regulators. That had to do with
the economic circumstances.
Ms. Koronides. One of the things we have heard from our
lending partners is during this time as they are looking at
their capital reserves, the 90-percent guarantee and actually
any guarantee on an SBA loan, the lenders do not need to
reserve capital against. So one way that we have really helped
the banks weather this uncertainty is by raising the SBA
guarantee and allowing them to more comfortably use the capital
that they have.
A proposal that addresses the coming risk, as Tim and John
mentioned, the banks' exposure on commercial real estate,
particularly owner-occupied small business commercial real
estate, is a growing concern. One of the proposals your
Committee has put forward and the President has put forward is
to open up certain SBA lending products to allow banks to use a
partial guarantee on those loans and in that market to help
address some of their capital concerns.
Mr. Gillers. And before you go ahead, if you do have
comments on the 504 commercial real estate refinancing piece
that Christine was referring to, we would love to hear them.
Mr. Loving. I do not, but I have used the 504 program in
the past, and it is a great program. But in answer to your
question and comment, you know, how do you eliminate the fears
of the bankers, capital is, as you said, a necessity in our
business, and I and our institution have had an outstanding
relationship with our regulator, with the FDIC, and we
appreciate the job they do. And I think the way to eliminate
the fear across the country--because there are parts of our
country that are experiencing more problems than others. You
mentioned the Georgia area. You have got Michigan, Illinois,
California. There are various pockets of our country that are
experiencing significant problems, and I would say a continued
balanced approach from the regulatory environment, you know,
the guidance that has come out, a continued balance of that
approach of looking at the credits, you know, looking at
credits that go beyond just the surface and look at the
guarantors and, you know, what the supporting factors behind
that are.
When we see that that is really taking place, then I think
the capital fears will be eliminated to some degree.
Mr. Dammrich. I would just make a quick comment on the 504
program. A number of our members have suggested that if that
program could be modified to allow refinancings under the 504
program, that would be very beneficial both for dealers and
manufacturers.
Mr. Gillers. Well, thank you very much, all of you, for
your participation. As the Senator mentioned, the record will
be help open for a week, so if any of the participants have
suggestions on how to help get small businesses out of the
crisis they are in, we would love to hear them. Thank you all.
Mr. Lucas. Thank you very much.
Mr. Walker. Thank you.
[Whereupon, at 11:40 a.m., the Committee was adjourned.]
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