[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





     COMMITTEE ON SMALL BUSINESS FIELD HEARING IN COLORADO: LOCAL 
          PERSPECTIVES ON THE STATE OF SMALL BUSINESS LENDING

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

                                HEARING

                               before the

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                            AUGUST 25, 2011

                               __________





            Small Business Committee Document Number 112-031
              Available via the GPO Website: www.Fdsys.gov

                                _____

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                       ROBERT SCHILLING, Illinois
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director









                            C O N T E N T S

                                                                   Page

                           OPENING STATEMENTS

Coffman, Hon. Mike...............................................     1

                               WITNESSES

Mr. Steven Smits, Associate Administrator, Office of Capital 
  Access, U.S. Small Business Administration, Washington, DC.....     2
Mr. Jay Davidson, Chairman, CEO and Founder, First American State 
  Bank, Greenwood Village, CO....................................     5
Mr. David Brown, President, Southeast Denver Centennialbank, 
  Centennial, CO.................................................    10
Mr. Jeff Wasden, South Metro Chamber of Commerce, Centennial, CO.    16

                                APPENDIX

Prepared Statements:
    Mr. Steven Smits, Associate Administrator, Office of Capital 
      Access, U.S. Small Business Administration, Washington, DC.    27
    Mr. Jay Davidson, Chairman, CEO and Founder, First American 
      State Bank, Greenwood Village, CO..........................    29
    Mr. David Brown, President, Southeast Denver Centennialbank, 
      Centennial, CO.............................................    34
    Mr. Jeff Wasden, South Metro Chamber of Commerce, Centennial, 
      CO.........................................................    00
Questions for the Record:
    None
Answers for the Record:
    None
Additional Materials for the Record:
    None

 
SMALL BUSINESS COMMITTEE FIELD HEARING IN COLORADO: LOCAL PERSPECTIVES 
                 ON THE STATE OF SMALL BUSINESS LENDING

                              ----------                              


                       THURSDAY, AUGUST 25, 2011

                  House of Representatives,
     Subcommittee on Investigations, Oversight and 
                                       Regulations,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:11 a.m., in 
Greenwood Village City Hall, 6060 South Quebec Street, Hon. 
Mike Coffman (chairman of the Subcommittee) presiding.
    Present: Representative Coffman.
    Chairman Coffman. Good morning. Welcome everyone to 
Greenwood Village and to the 6th Congressional District of 
Colorado. I would like to start today's hearing by thanking 
everyone here in Greenwood Village and in the city hall 
building for hosting this hearing. Is Mayor Rakowsky here? 
Thank you so much, Mayor, for making this available. I really 
appreciate it.
    As policymakers in Washington and specifically the 
Committee on Small Business, we seek advice on policies to 
create jobs. And today we have a unique opportunity to hear 
directly from leaders and businesses about what challenges they 
face and how we can get this economy moving again. Small 
businesses create 7 out of every 10 new private sector jobs in 
America. So it is important that any regulation or Government 
oversight fully takes into account how it will impact small 
businesses and their ability to access capital.
    As chairman of the Investigations, Oversight and 
Regulations Subcommittee, I wanted to hold this hearing so the 
people here in Colorado can share their perspective on how 
Government is affecting their businesses and their communities. 
We are 1,661 miles away from Washington, D.C., and with that 
distance, we gain perspective, perspective that allows us to 
stop looking at Government fixes for our struggling economy and 
instead focusing on what the people can do without Government 
interference and regulatory burdens to foster economic growth.
    Up first, we have a representative from the Small Business 
Administration who is here to discuss the SBA loan programs. 
The goal of the SBA loan programs is to help small businesses 
who are unable to secure financing elsewhere, get money to 
start or expand a business. We want to know whether this 
program is actually helping business entrepreneurs.
    Next, we will hear from a few local businesses, including 
First American State Bank, Centennial Bank, and from the 
Chamber of Commerce here in the south Denver region. Their 
testimony will tell us what problems banks and small businesses 
face as they work to start and grow businesses and create the 
jobs that will allow our economy to recover.
    With that, I would like to again thank everyone for being 
here.
    Our first witness this morning is Steve Smits, Associate 
Administrator of the Office of Capital Access at the U.S. Small 
Business Administration. Mr. Smits has 20 years of small 
business banking experience and began at SBA in October 2010. 
Prior to joining SBA, Mr. Smits served as Vice President of 
Operations at Mid-Atlantic Financial Partners. He has also held 
small business banking positions at Quadrant Financial and PNC 
Bank. At SBA, he manages and oversees the agency's programs and 
operations that are designed to expand access to capital for 
America's entrepreneurs and small business owners. Mr. Smits.

STATEMENTS OF STEVEN SMITS, ASSOCIATE ADMINISTRATOR, OFFICE OF 
CAPITAL ACCESS, U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, 
D.C.; JAY DAVIDSON, CHAIRMAN, CEO, AND FOUNDER, FIRST AMERICAN 
     STATE BANK, GREENWOOD VILLAGE, COLORADO; DAVID BROWN, 
   PRESIDENT, SOUTHEAST DENVER CENTENNIAL BANK, CENTENNIAL, 
   COLORADO; AND JEFF WASDEN, MEMBER, SOUTH METRO CHAMBER OF 
                 COMMERCE, CENTENNIAL, COLORADO

                   STATEMENT OF STEVEN SMITS

    Mr. Smits. Thank you, Chairman. Good morning. I am happy to 
be here in beautiful Colorado. Chairman Coffman, I want to 
first thank you for your service to this State and to our 
country, but specifically your service in the U.S. Army and the 
U.S. Marine Corps. So, again, thank you so much.
    Chairman Coffman. Thank you.
    Mr. Smits. I am pleased to have an opportunity to be on the 
panel with Mr. Davidson, Mr. Brown. As you mentioned, before 
joining the SBA in October, I spent over 20 years as a banker 
and, specifically, as a small business lender. So I value their 
thoughts and their opinions and I am looking forward to having 
a productive meeting and discussion today.
    As the head of the Office of Capital Access, my job is to 
adhere to my mission. I have a ritual every morning when I come 
into the office in Washington. The first thing that I did when 
I joined the agency my very first day is I typed out my 
mission. I taped that mission to the top of my desk. Every 
morning I read that mission. I go through my day and ask myself 
what am I doing that is actually moving that mission forward. 
Every evening I glance down at my desk and I read that mission 
once again to check myself to see what have I done to move that 
mission forward. That mission in the Office of Capital Access 
is to ensure our small businesses have access to capital 
through our lending partners when access to capital is not 
otherwise available on reasonable terms and conditions.
    I want to focus on a little piece of that and that is 
``through our lending partners.'' The Small Business 
Administration and our lending partners, our community banks, 
our lending organizations, our certified development 
corporations all over this country form a partnership, an 
example of an excellent public/private partnership. So what I 
have realized--and my wife reminds me of this all the time. She 
says, Bud, a partnership is a two-way street.
    So when I think of SBA lending, I think of a highway. My 
job really is to identify where there are gaps in financing, to 
work with our lending partners to find ways to fill those gaps. 
So in a highway, I think of them as the potholes. So our job is 
to identify the potholes. As an agency, we develop tools and we 
ask our lending partners to do the heavy lifting, to use those 
tools and to provide the asphalt to fill those potholes.
    Now, what happens after a big storm? More potholes, larger 
potholes, more gaps. A functional, healthy partnership isn't 
simply SBA creating more tools and asking our partners that do 
the heavy lifting to just use those tools and fill those 
potholes. A healthy partnership requires a very clear 
understanding of what challenges, what motivations that your 
partner is facing and dealing with and what tools work and what 
tools don't work. And also, by the way, do they have the 
asphalt necessary to fill the holes?
    So to this end, the first thing that I did when I joined 
the agency is I made a decision that I would travel the 
country, and as I did so, I would take an opportunity to put 
together roundtables of lenders and small business owners. It 
wasn't an opportunity for me to talk about what we are doing as 
much as it was an opportunity for me to listen. Part of a 
partnership is for me to listen and understand what is 
important to my partners.
    I also would always ask my lenders what do you see as the 
challenges facing our small businesses this year and next year 
and going forward that keeps you up at night. I heard working 
capital, for example, which makes perfect sense to me. As we 
pull out of a deep recession, who would have imagined at the 
beginning of the Great Recession, it would have been as long 
and as deep and profound as it was?
    Our small businesses do what they do. They went into 
survival mode to protect their employees, protect the house 
that they have spent their careers building, and they would 
take the resources they needed to keep their lights on. At the 
same time, they were faced with challenges such as 
deteriorating values of real estate. Many of our small business 
owners rely on the equity in their homes, for example. And when 
they see the value of their homes going down, they see fewer 
and fewer resources available just to keep the lights on. They 
are beat up and they are bruised.
    As we pull out and recover, these are our job creators, 
these are our innovators.
    We also need to be aware that many of our lending partners 
are small businesses themselves. Approximately 61 percent of 
the dollars that we lend out through our programs are done 
through community banks. Just like our small businesses, our 
community banks have felt the pressure of the recession, 
challenges with their balance sheets, challenges with their 
portfolios. If they've done the right thing and tried to keep 
their small business owners in good stead, it has resulted in a 
deterioration in their ratios and their balance sheets.
    The good news is our programs are not only designed to help 
our small businesses, but they are designed to provide value to 
our lending partners. Many of our lending partners have found 
that use of SBA loans helps manage balance sheet challenges, 
for example. Since the start of the recession, we have seen 
over 1,200 lenders come back to our program and make an SBA 
loan for the first time in many years.
    So what have we done? With the help of Congress, in order 
to encourage lending and to help fill these gaps that were 
appearing in lending, we increased our guarantee on our 
flagship programs up to 90 percent. We reduced fees that our 
small business owners pay. This is what I call putting our 
loans on sale. By increasing the guarantee, we have created an 
incentive for lenders to take additional risk. By helping to 
reduce fees for our small business owners, it has taken a 
burden off of the small business owners.
    In addition, we opened up our real estate financing program 
to allow for refinancing.
    We permanently increased our loan size from a $2 million 
cap up to $5 million.
    We have opened up our program to floor planning for 
struggling Main Street dealerships, auto and RV dealerships, 
that were having trouble finding financing for their inventory.
    We have also taken steps to open up more points of access. 
We rolled out what we call our Community Advantage Program, and 
what this has done is for the first time allowed nonprofit, 
mission-based lenders--these are community lenders in primarily 
underserved areas around the country who have a mission to 
provide a level of hand-holding or technical assistance on the 
front end for primarily young, startup businesses. For the 
first time, they can apply and become participants in our 
program to offer small loans up to $250,000. This is a strategy 
that opens up--I call it matching. A small business owner's 
success or failure is sometimes determined before the first 
dollar is lent out. Does your business plan make sense? Have 
you thought about things like your competition or your 
challenges or your ``what if'' scenarios? Many times these 
young entrepreneurs, these startup businesses, need a level of 
technical assistance that many of our larger institutions are 
simply not equipped to provide. So for them, this provides 
another avenue where the organization has a mission to provide 
that level of assistance on the front end to lend towards a 
greater degree of success once the business is ready to borrow.
    Now, as I had mentioned, I have gone around the country and 
I have talked to lenders and I have listened to them. That is 
not where the partnership stops. What we also need to do is 
take the partnership all the way through the entire process. So 
when I heard that there are challenges, for example, for our 
small businesses securing sufficient working capital as they 
start to see opportunities for revenue growth or stabilization, 
they need to take a look at their balance sheets. They need 
some restructuring or they need some working capital in order 
to participate and take advantage of these growth 
opportunities. However, I have heard from our lenders that they 
just feel that they continue to have a challenge to find 
conventional means to do that.
    So the other part of our partnership is to engage the 
lending community to help solve the problems together, to come 
up with creative solutions of what can we do with our programs 
that offer working capital solutions to our small businesses to 
make them relevant, to address the concerns that our lenders 
may have. For example, I have spent the last several months, 
myself and my team, and we have conducted well over 150 
conference calls with individual community banks all over the 
country. We spoke to community banks in every single one of our 
50 States. We have had conference calls with every one of our 
68 district offices, and we listened. And what is amazing about 
that is we hear about the challenges, but our lenders are ready 
to provide us with solutions and suggestions, and we have taken 
all of that in. We have taken a look at our policies. Where are 
the barriers to entry for our lenders? What are thoughtful, 
common-sense changes to our policies where we can make these 
programs more effective? And at the end of the day, what that 
means is more access to capital for our small businesses by 
working and focusing on that partnership going forward.
    So again I want to thank you so much for your time today. I 
commend you. This is about our small businesses. This is about 
awareness. Our small businesses are our job creators. Our small 
businesses are our innovators, and this country has been built 
on the successes of our small businesses. And I would encourage 
communities all over this country to offer such hearings 
because this is an opportunity to create an awareness which is 
very, very important. So thank you.
    [The statement of Mr. Smits follows on page 27.]
    Chairman Coffman. Mr. Smits, thank you so much for your 
testimony.
    Our next witness on this panel is Jay Davidson, Chairman 
and CEO and founder of American State Bank. American State Bank 
opened in 1995 and has grown to over $220 million in assets. 
Mr. Davidson has more than 25 years' experience in the banking, 
private business, and corporate sectors and has been recognized 
by numerous industry and public organizations for his 
expertise.
    Mr. Davidson is a graduate of the University of North 
Dakota. He and his wife Christina have two children and reside 
in Greenwood Village. Welcome, Mr. Davidson.

                   STATEMENT OF JAY DAVIDSON

    Mr. Davidson. Thank you, Congressman Coffman, for the 
opportunity to speak before your Committee today.
    I am a community banker. I serve the small business, the 
independent business market exclusively.
    I am going, I hope, today to show you that something is 
terribly wrong with the recovery which you certainly know and 
everybody here knows. I want to look at possible reasons for 
this poor economy. I want to prove that there is a second 
liquidity crisis in the economy, and I want to provide some 
suggestions for how to solve this problem. And since I am an 
engineer by training, I like slides and graphs. So forgive me 
here.
    Chairman Coffman. That is great.
    Mr. Davidson. I will try to coordinate this whole thing.
    The top chart shows the jobs recovery, the current recovery 
compared to three other recoveries. You notice that the loss of 
jobs went down further and has stayed down longer than 
historical. Gross domestic product, GDP, is the total national 
production. It is an indication of business activity. Again, it 
went down further than any other recession and has still not 
even returned to the 0 line. Actually this is one quarter out 
of date. So we are about 3 years since the beginning of the 
recession and we have not recovered yet.
    I want to talk to you a little bit about why I think that 
is, and I am going to take a couple of seconds here to show you 
another very busy slide. This slide is all recessions since 
World War II. The most important thing to show you that this is 
the job losses. This is the current recession. It went down 
further, stayed down longer, and has not even begun to come 
back really. The reason I think that the job market has stayed 
down so poorly is that we independent banks, community banks, 
and the independent business person, small business person is 
not hiring for a lot of reasons but one of which I am going to 
talk about lending by banks because I think we are the cause of 
the liquidity crisis.
    This is not a normal recovery.
    The next slide gives you some more--just to give you a 
demonstration of the 1982 to 1984 recovery and the current so-
called recovery that we are in, you will note that in 1982-
1984, we hit a high of 9.3 on gross domestic product growth. 
Here we are sitting down at a 1.3 today. We are not recovering. 
In fact, we are going into a double-dip recession, it looks 
like.
    But this is reduction in Government regulation. In my 
opinion, it is putting more money back into the market, letting 
people keep their money to build businesses and supporting 
capitalism. I think this is a perfect example of Keynesian 
economics and the failure of Keynesian economics. The 
Government cannot stimulate the economy. I will go into that a 
little bit more in the next couple of slides here.
    We like to talk about a technical term called the velocity 
of money, and really, it is just the number of times that money 
turns, how often is it moving into the economy.
    You will notice here that when the recession started--the 
gray area is the recession--the velocity of money dropped very 
precipitously down to the point where we felt that GDP had 
grown for two quarters, so by definition we were out of the 
recession. This was back in mid-2009.
    Well, look what has happened with the velocity of money. It 
has continued to trend down rather dramatically, and we are 
seeing that effect in the gross domestic product, consumer 
spending, et cetera. This is the main reason, I think, that we 
are not having the recovery that we should, and I think there 
is a relatively straightforward solution to this.
    The Federal Reserve and the Treasury have liquefied this 
Nation to a point that I have never seen in my life. I mean, we 
are talking trillions of dollars with TARP stimulus, QE II, QE 
I, you name it. There is so much money sitting out there. A lot 
of it is sitting in bank deposits doing nothing, and we are not 
lending that money out.
    The analogy I like to use is that a river can generate 
electricity because the water is moving. When money moves, it 
generates jobs and it generates productivity. A lake can't 
generate electricity. It is static. There is potential there, 
but there is no actual kinetic energy.
    So that is where we are today. The money is sitting in the 
banks, and I want to explore why that might be.
    This is another technical chart. This is what we call the 
money multiplier. Again, it is related to velocity of money. 
This is N2, an indication of money in banks, and divided by the 
monetary base. You notice that normally the turns on the money 
multiplier are 8 to 10 in a normal environment. We are down 
here sitting below 4 right now. Again, money is not moving. 
Frankly, it is banks taking the deposits and not lending it out 
again.
    Just an indication of the manufacturing to tell you that we 
are going into a potential double dip. They dropped 
significantly during the recession, came back substantially, 
and now we are dropping down in both jobs and manufacturing 
production. Not good for our economy.
    This is a survey created by the National Federation of 
Independent Business, NFIB. This is the future lending that 
independent businesses, small businesses are intending to do, 
and from around 2006, it just dropped precipitously and has 
continued to drop. The independent businesses are not borrowing 
money for a lot of reasons. One, we are not lending money in my 
opinion. Two, there is a great deal of uncertainty out there. 
They don't know what to put the money in. They don't know if 
the rules are going to change on them, and the rules have 
changed on them. So the money is being held on the sidelines.
    This is very telling. This is from the FDIC. This is the 
reduction in loans outstanding across the Nation. This is a 
cumulative number. There is almost a trillion dollars in loans 
that are no longer outstanding in our economy, $1 trillion not 
generating new business or generating expansion of business or 
generating jobs. All banks predominantly have stopped lending 
in my opinion. There are some anomalies here, but this is what 
I call the second liquidity crisis the Nation is facing.
    Just as in the Great Depression, there were two liquidity 
crises that occurred. It wasn't just 1929 when the stock market 
crashed. There were two liquidity crises that helped bring this 
Nation to its knees. I believe that the bank lending issue is 
creating a second liquidity crisis that is extremely dangerous 
for our Nation. I am going to ask for your help and your 
esteemed Committee's help on this issue.
    I will give you an example here in Colorado, commercial 
real estate lending, what we call CRE lending. In March of 
2008, we had $10.1 billion in CRE loans outstanding. 3 years 
later, we only have $7.3 billion in CRE loans outstanding. That 
is a decline of $3.4 billion just in the State of Colorado in 
commercial real estate loans, a 27 percent decline. I submit to 
you that there is a contagion effect in this number also. $1.4 
billion of that decline are banks that are not subjected to 
regulatory actions. Their capital is over 13 percent. The CRE 1 
and 2 ratios are within guidelines. So they are not subjected 
to the CRE scrutiny that us community banks are, and they are 
still not making commercial real estate loans. To lose this 
kind of money into the economy has a strangling effect on our 
economy. It is extremely dangerous.
    I would submit to you that those who own and have these 
commercial real estate properties are the small businesses. 
Hence, I believe that the independent banker is the person who 
serves and services the small business people. Since small 
businesses generate over 65 to 70 percent of all new jobs and 
hold 50 percent of the existing jobs, our effect on the small 
businesses as bankers not lending to them has a magnifying 
effect on the overall economy. So you take a $3.4 billion 
reduction in lending and you magnify that, and I don't know 
what the factor is. I couldn't find that number, but there is a 
great magnifying effect there. You can see why the Colorado 
jobs market has gone down. You can see why home foreclosures 
accounted for 36 percent of all home sales in the State of 
Colorado. People don't have money today. We are being squeezed.
    I am going to tell you why now. The capital ratio is what 
we are guided by and what our regulatory agencies guide us by. 
This is probably the most important aspect of what we do as we 
relate to our regulators. It is capital divided by assets.
    There are two ways to increase your capital ratio, which is 
what is being demanded of us community banks today. You can 
increase your capital, which in this market is extremely 
difficult, if not impossible. The stock market for banks went 
away 5 years ago and has not recovered yet. The dilution effect 
of raising capital today is horrendous, and you can't even 
raise capital today no matter what the price.
    The other way--and this is the crux of the problem--is that 
we can reduce our assets, reduce the denominator and increase 
our capital ratio. Well, assets are loans. There is no way I am 
going to make loans and imperil my capital ratio. If I increase 
my loans, I will decrease my capital ratio, and my regulatory 
agencies will just beat me to death. This is their decision. 
This is their right, but I think this is the crux of the 
problem. And I hope that we can find some way to work together 
to meet their need for safety and soundness in the banking 
system but let us banks survive and thrive.
    This is the issue right here. Bank regulators demanded 
immediate increases in capital ratios, far above the Basel 
Accords, to which we all agreed for the past 30-40 years, and 
they forced banks to reduce lending, and thereby caused a 
second liquidity crisis in small businesses.
    For instance, my capital is higher than it has ever been 
before, and I am sure Mr. Brown will say the same thing in his 
bank. And most other bankers will tell you that. We have been 
driving up our capital ratios for a couple of years now, and 
yet I can't lend yet. I can't lend because the regulatory 
agencies have decided that commercial real estate lending is 
dangerous, and I need to increase my capital levels. The only 
way I can do that is by reducing my loans. So I can't increase 
loans.
    I submit to you that commercial real estate lending today 
is much less risky than it was before. In our studies of stress 
testing of commercial real estate, the MIT study indicates that 
nationwide commercial real estate values have dropped 48 
percent in the past 3 years. If I make a loan today, I am 
making it at half the collateral value of that loan 3 years 
ago, and I am making it to an individual who has made it 
through the Great Recession. This is a strong individual with 
net operating income. This loan today on a commercial real 
estate property is much safer than a loan of 3 years ago when I 
am at the top of the market lending at 80-70 percent loan to 
value.
    Solutions. In my opinion--and I will probably get taken to 
task for this--I would ask this Committee to consider forcing 
regulatory agencies to adhere to the Basel rules on capital 
levels. They have served the industry well for the past 30 
years, and the fact that we are having to increase our capital 
ratios at this time means we cannot lend and we are causing the 
second liquidity crisis.
    Allow us to use the excess capital that we have accumulated 
over these 3 years to pay off some of our bad debt, sell it off 
at a loss, and get it off our books, and let us start lending 
that back into the market. This is the crux of what the hammer 
that the regulators have over us today.
    Second, stop regulators from enforcing CRE, commercial real 
estate, guidelines as rules. Mr. Guggenheim asked me to define 
what are the laws that are being broken. Well, no laws are 
being broken. They are being interpreted to a much higher and 
more stringent level than ever before in the history of our 
Nation. For instance, the commercial real estate lending 
guidelines were sent out as guidelines in 2006, and we bankers 
viewed them strictly as guidelines. In Colorado where the ratio 
for CRE 2 was 300 percent of capital, I am at 600 percent of 
capital because I am a commercial real estate lender. This is 
what I do. This is what is available to me in Colorado. I think 
Mr. Brown will agree with that in his banking experience.
    Well, the same level occurs across the Nation. Three 
hundred percent is the number that we have to try and reach. 
That is absurd. Alabama, Detroit--they don't have commercial 
real estate loans. They have P&C loans. They have business 
asset type lending, but they don't have a lot of commercial 
loans. Colorado does. We are kind of a white collar market, a 
lot of office space, a lot of office, commercial, and so forth.
    The last thing is regulators have forced those banks that 
have capital loans at the bank holding company that have 
infused that capital into the bank to make it stronger. They 
are restricting us from paying the dividend on that capital 
loan. They are putting me in a direct default position with my 
lender because in their opinion, well, if I pay that dividend, 
I am reducing capital. Well, yes, I am. And they don't care 
about my shareholders. I understand that. They are here to 
protect the safety and soundness. But this issue is putting 
extreme pain on the banks. I have got several million dollars 
in loans outstanding that are making my bank safer and sounder, 
and I can't pay the dividend on that. So there are some very 
powerful effects that the regulatory agencies are having.
    Granted, my loan portfolio looks pretty ugly right now. I 
will admit that freely. I have never had OREO, other real 
estate owned, or a non-performing asset in my life. We had to 
dust off the books and learn how to handle them because we have 
some now, and a lot of banks are in this situation. But we are 
surviving, as are most community banks that have made it 
through this time.
    So the final thing I would like to say is make the 
regulators live by the rules that they established years ago, 
the rules by which we have been trained to work instead of 
increasing and reinterpreting the rules that are out there and 
having a major impact on the independent business person.
    Thank you, sir.
    [The statement of Mr. Davidson follows on page 29.]
    Chairman Coffman. Well, thank you, Mr. Davidson.
    Our next witness today is Dave Brown, President of 
Southeast Denver Branch of Centennial Bank in Centennial, 
Colorado. His bank is a full-service community bank focused on 
providing a full suite of banking solutions for businesses in 
the Denver metropolitan area. Welcome, Mr. Brown.

                    STATEMENT OF DAVID BROWN

    Mr. Brown. Thank you, sir.
    I would like to reiterate everything that Mr. Davidson 
said, and he is actually the first person I have ran into 
recently who has a negative look on the current recession as 
deeply as I do. So it is refreshing to see that. [Laughter.]
    We probably shouldn't hang out together too much, though. 
[Laughter.]
    The neat thing about this was when Mr. Guggenheim gave me a 
call, he asked for five direct things that regulations were 
doing that are stifling businesses. And honestly, I couldn't 
come up with five. It is a neat and tidy little package. It 
doesn't always work in the real world. And part of it is what 
Mr. Davidson just alluded to is so much of what we are dealing 
with isn't necessarily the regulation. It is regulatory 
guidance, but that regulatory guidance in today's world has 
taken on every bit as much of a focus and it is dangerous to us 
as regulation is without the enactment of Congress. And to me, 
I find that to be very disturbing, which is why I have to agree 
with him on his Basel comments and the capital levels.
    But when I do get into it, the first thing that I saw was 
the FIRREA, the appraisal standard that we have, Financial 
Institutions Reform and Recovery Act which was actually enacted 
during the last real estate crisis with the savings and loans 
way back in the 1980s.
    With that, it dictates when you have to do an appraisal on 
a property, and as Mr. Davidson pointed out, the length, depth, 
and slow recovery of this recession has been so long--we are 4 
years into it already--that there are so many companies, 
businesses that do have a physical plant that they are using to 
run their business out of. They have come up with a renewal on 
a loan and they have to do something to refinance that with the 
existing lender or move it to another one. Well, the appraisals 
have gone down, in many instances 48 percent, and so what this 
has done is a business that has done everything that it could 
since 2007 to make it through the recession all of a sudden has 
to come up with a capital call, in some instances as much as 20 
percent of the loan, just in order to get it refinanced. In 
many instances, this is being done where the business has never 
actually had a payment default, but I would come to them and I 
would say, for instance, on a $1.1 million loan, I need 
$200,000 in additional capital from you in order to pay this 
loan down to an appropriate level. They simply don't have that, 
Mr. Coffman, and that is creating a massive problem for them.
    So I talked to one of my appraisers in preparation for 
this, and he told me at this point in time that is happening as 
many as three times a month at his company. And that is only 
one of the commercial valuation companies here in Denver that 
do this sort of work. So it is a very prevalent problem 
throughout our market, and taking that capital away from small 
businesses right now at the worst possible time and putting it 
into the banks is a very bad thing to do. And it is also 
preventing us from lending.
    Now, one of the great things that you hear the talking 
heads in the media spout on about is that what this is doing is 
it is deleveraging the community. The businesses are 
deleveraging. The consumer is deleveraging. And I would say I 
completely disagree with that fact. If we have a building or a 
house that was worth $1 million--it is now worth $750,000--the 
loan is still 75 percent. Even though it is much less than it 
was before, the deleveraging hasn't actually occurred. It is 
just that the economy as a whole and the asset base of the 
economy as a whole has shrunk. The leverage ratio is still 
exactly the same.
    So, for instance, if we look at a company that would get 
into a position where they would have to refinance a loan with 
me, I go out, I get an appraisal on that house or that 
commercial building. It has fallen in value. I have to ask for 
the $200,000. The after-effect of that for the company is that 
their building, where it used to be worth--I have got a 
specific example here. The building at one point in time was 
worth, say, $1.1 million. I apologize. $1.475 million. Today it 
is worth $1,192,000. The original loan was $1 million. Now I 
can loan them $894,000. In that instance, it goes down $145,000 
that they have to come up with, $145,000 that they don't have.
    Unfortunately, the loan-to-value is exactly the same at 75 
percent. The asset has dropped. The company is $148,000 short 
in capital, and they still have payroll to make and I just took 
their payroll money. So the 65 percent of the new jobs that are 
being created, the 50 percent of the existing jobs in the 
market right now--I have just materially damaged that in my 
local market by that rule--oh, guidance, not regulation. I 
apologize for that. [Laughter.]
    What happens, for instance, if the loan can't be 
remargined, if that $148,000 isn't available in that company's 
business? I am now looking at a foreclosure. I'm looking at--
I'm whole if he can come up with $148,000, and my primary 
regulator, the Federal Reserve, is very happy with me. That is 
good. The business has taken a hit.
    But if the business doesn't have that money, I have two 
choices. I can go into a thing called the troubled debt 
restructure with that company or I can enter into a 
foreclosure. Foreclosure is very bad and that could lead 
immediately to a personal and corporate bankruptcy personally 
because most small businesses have to guarantee personally all 
of the debt that they have. So we have got two bankruptcies 
that I have created. And the business could quite easily--that 
could shutter the business if I do that. Or I enter into a 
troubled debt restructure.
    If I go into the troubled debt restructure, at that point 
in time I now have to reserve more money for that loan because 
I have demonstrated an obvious weakness in it. And therefore, 
more money from my current net income is going to be taken out 
of that, which is going to reduce my net income, taken over to 
my provision for loan loss reserve, which also takes it out of 
my tier 1 capital, moves it into tier 2, and then the Basel 
ratios that Mr. Davidson was talking about--I've just 
materially hurt those ratios at my bank, and it makes it more 
difficult for me to lend going forward. That is one thing.
    The second thing that the stress testing and all of that 
led to was--the current guidance right now on just regular C&I, 
commercial and industrial, lending is to institute stress 
testing on that. And part of that is with global cash flow, as 
well as uniform credit analysis cash flow. I have got a lot of 
problems with both of those, and while each of them have a very 
strong point--they were instituted to reduce and identify 
risk--there is good and bad that go along with both of that.
    The global--what that does is it takes in everything that a 
business owner does, money that he has to generate from the 
business in order to pay his own personal mortgage, as well as 
take care of the liabilities of the company. And so it blends 
that all that together and gives you a ratio of, hopefully, 
over 1 to something, sometimes negative.
    The problem with this is that the regulators are pushing 
this so hard, and again, this is guidance. It is not 
necessarily a regulation. But it is being pushed so hard right 
now and there is no actual standard for this. RMA hasn't come 
out with it. None of the community banking organizations have 
come out with a standard for it. FASB has done nothing with it. 
So everybody is just kind of set doing their own thing. I am 
sure it is done differently at your organization as it would be 
at mine, as it would be at every other bank. In fact, the 
differences in this are so universal that at our last FRB exam, 
Federal Reserve examination, two examiners on the same team 
were using different formulas in order to come up with global 
cash flow. This doesn't do very much to help us or the business 
owners.
    Finally on the UCA, UCA is actually an industry standard. 
It works well, but the way that it is being enforced----
    Chairman Coffman. UCA stands for?
    Mr. Brown. Uniform Credit.
    Chairman Coffman. Okay.
    Mr. Brown. Basically it came out of the Risk Management 
Association many years ago, and it determines how much free 
cash flow a company has in order to take care of its 
responsibilities. An excellent standard.
    The problem with it is that from the guidance that we are 
getting right now, the regulators would like us to come up with 
a specific number that we are going to lend into. So if I am 
going to leverage that at 1.5 times, it is going to be across 
the board. That doesn't work.
    There are pretty amazing differences. If you look at the 
same product line, for instance, manufactured windows, the 
manufacturer of that window, the middleman that is going to 
take it and do the distribution, and the retail vendor are all 
going to have remarkably different balance sheet to income 
statements, and I can't leverage each of them under the same 
guidelines. So what it really comes down to is we are being 
asked to do something as a standard which really is an art. 
Lending is part art, part science. You can only do so much 
mathematically. The other piece of it has to be what the 
business is, the strength of management, the character of the 
people, and that art part is being moved out of this equation 
and put someplace else. We desperately need that in order to 
properly service the communities that we are taking deposits 
from.
    The next thing is I am going to get into the capital levels 
as well. I completely concur with Mr. Davidson on this. Where 
these capital levels came from was guidance again back in 2005-
2006 where they asked us only to do 100 percent of our capital. 
So if I have $100 million in capital, I can lend $100 million 
in construction and land development. I think that is probably 
not necessarily a bad thing because if you look at all of the 
banks that have been closed over the last several years, they 
were predominantly in construction and land development 
lending. So that has helped out with that.
    The 300 percent would be inclusive of that 100 percent, and 
then you would be able to lend 200 percent to the rest of the 
commercial real estate, people who have apartment buildings, 
office buildings, retail centers, plant and equipment for 
plants for their businesses.
    The problem with this is that we are combining two areas 
that don't need to be combined. If you are looking at a plant 
and equipment for an owner-occupied business and that becomes 
part of your 300 percent ratio, you could quickly exhaust that 
ratio and no longer be in a position where you can lend money 
to people who are trying to do something.
    A case in point with this is we just completed a loan. 
Actually Myron Spanyer in your office gave me a great deal of 
help through the SBA. It is a Golden Corral that is under 
construction right now at the intersection of Parker and 
Arapaho. This business, when open, is going to employ 180 
people in the 6th Congressional District in the City of 
Centennial. I am looking very forward to that. And at the end 
of the day for a banker, when I go home and I know that what we 
did at my bank had a small piece, minuscule, in employing 180 
people, not to mention all the construction people that are 
over there, that is why we do what we do. You don't get paid 
for that, but there is a lot more of that that hits you, and it 
is worth more than the money that you get at the end of the 
day. It is what keeps you coming in day after day.
    Unfortunately, that now, when it is finished, is going to 
become part of my 300 percent CRE. That real estate has 
absolutely no bearing on--as an income-generating piece, it has 
no bearing on what is going to happen with that. Golden Corral 
sells food. I am going to be repaid from the sale of food, not 
from rental income that is coming off of the real estate.
    So at the end of the day, if there is one thing that I 
could ask for, it would be to remove owner-occupied from those 
guidance levels if we do nothing else with them because that is 
really restrictive to the business that we have here.
    The last thing that I want to get into on that is that 
right now in Colorado, you have effectively got a number of 
banks. I don't know how many it is, but several that are 
actively looking to sell commercial real estate loans out of 
their portfolio. And I have personally looked at a number of 
these from several banks. I have purchased a lot of them, and I 
know that these things are getting sent out to investors, hedge 
funds, et cetera. And so what this is doing is helping to take 
care of that capital-to-asset ratio, that 300 percent, that 
these companies have.
    The problem with that is that the banks that are doing that 
right now, if you are selling loans, you certainly aren't 
making any. They no longer have the ability to service the 
community that they are in because of these capital restraints. 
And on top of that, the loans that they are selling are 
absolutely the best loans in their portfolio, otherwise 
investors won't buy them, and it further weakens the bank going 
forward. So it is highly negative on every front that I look at 
for that.
    In fact, this is so pervasive that Community Banks of 
Colorado last week just sold 16 branches to the NBH Group out 
of Boston, Massachusetts. Again, it had a lot to do with the 
fact that they needed to raise capital and they couldn't do it 
in the market, and selling half of their franchise was the only 
way that they could do this.
    So the last thing that I want to say is that the regulatory 
change that we have is going at warp speed. Dodd-Frank is not 
entirely written. The regulators don't understand what is going 
to happen with it. The Consumer Financial Protection Bureau was 
underway. Have no idea how that is going to affect it. And 
while most of the banks in Colorado are too small for it, the 
rules that they are going to enforce through the CFPB are going 
to drill down to us through our primary regulators. That is 
also included in the law.
    The effect of this is primarily what really frightens me 
individually as a banker right now is that this pace of 
regulation, the fact that we don't understand what is going on 
with it. A lot of what we have already enacted hasn't worked 
out very well. I will give you a case in point.
    Several years ago, they redid the good faith estimate for 
home mortgages, as well as the HUD-1, to help to prevent people 
from becoming victims of predatory lenders. And the stated goal 
for this was to provide more simplicity, clarity, transparency, 
and certainty of mortgage costs for consumers. What this 
effectively did, however, was it took a good faith estimate 
that was one page, increased it to three, and when it was one 
page, the average consumer could look at it, understand it, and 
figure it out. The three-page one, a CPA really has to be 
brought in so that you can understand what that is. That is not 
simplicity. It certainly isn't clarity. Most people aren't 
going to go to their CPA to take a look at it.
    The same thing with the good faith estimate, from three 
pages to four--or the HUD-1. The HUD-1 as a three-page document 
was completely unintelligible. As a four-page document, it has 
been further muddied. And again, people don't take these to 
their CPA's to look at them beforehand. So who is actually 
giving them guidance on these very complex, non-simplistic 
things that the Government has asked us to do? It is that same 
predatory lender that this was designed to get it out of the 
hands of.
    So that is what scares, again, just me personally. That is 
what scares me the most about this upcoming regulation.
    Jamie Diamond several weeks ago asked Ben Bernanke in an 
open hearing, have you given any thought to how all of this 
regulation is going because you are writing so much of it? Ben 
Bernanke gave a very flippant, off-the-cuff remark that I think 
he would probably regret at this point in time.
    But when I look at the HUD and the good faith estimate, I 
am very frightened for the stuff that is coming out. In the 
last couple of weeks, four banks have trimmed 9,500 people from 
their payroll because, stated fact, the regulation was too 
great--regulatory burden was too great and they couldn't afford 
it. So they have to cut costs someplace else. So they get rid 
of the people that have to check into this regulation. 
Regulatory staff, on the other hand, has increased at the 
United States Government and it is the fastest growing part of 
the United States Government right now. And that was given to 
me by Mr. Spanyer. I have it on page 4 of my testimony. I 
should have done a PowerPoint on that. But that is actually 
coming out of the Office of Personnel Management and the Bureau 
of Labor Statistics.
    So at the end of the day, regulators are growing in 
numbers. Bankers are decreasing in numbers, and we have to take 
care of the same amount of regulatory burden or an increased 
amount of regulatory burden with fewer people. And the 
Government is sending more people to make sure that we are 
doing it. It is not a recipe for success in my estimation.
    In fact, this regulation--and I will end right here--is so 
prevalent that the number of emails that I personally get right 
now from the Colorado Bankers Association, the American Bankers 
Association, the ICBA, the RMA, the ABA, on and on and on, if I 
read and tried to understand every bit of it on a daily basis, 
it would take over 2 hours of my time. I and the rest of the 
community bankers in this country cannot afford to spend a 
quarter of our time looking at proposed regulation trying to 
understand it, but if we don't, we are in even more trouble.
    Chairman Coffman. Mr. Brown, thank you so much for your 
testimony.
    Our next witness is Jeff Wasden and he is the owner of 
PROformance, a small business here in Colorado. Jeff is a 
member of the South Metro Chamber of Commerce, and I believe 
you are the chairman--am I correct--of the South --
    Mr. Wasden. Public Policy.
    Chairman Coffman. Of the Public Policy Committee in the 
South Metro Chamber of Commerce, and he is filling in for 
Chamber President John Brackney who could not be here today due 
to a family illness.
    Jeff, I know that you don't have an opening statement, but 
I would like to give you the opportunity to give opening 
remarks if you would like.

                    STATEMENT OF JEFF WASDEN

    Mr. Wasden. Thank you, Mr. Coffman. I appreciate the 
opportunity to be here and I do send out regards and regrets 
from John Brackney. His father is having some health issues.
    I would also like to take a second to thank Mr. Smits, Mr. 
Davidson, Mr. Brown for their candor and their insight and your 
expertise in these issues.
    I come with a little bit of unique perspective today as 
probably one of the most recent recipients to capital in the 
State, having just closed on a loan last week, and then 
certainly as a board member for the South Metro Denver Chamber 
of Commerce and also dealing with the public policy arm of that 
particular chamber.
    Talking a little bit on behalf of the Chamber and the 
Chamber investors are things that you repeatedly hear over and 
over from fellow investors of that Chamber, not just the access 
to working capital to stay afloat to keep the businesses to 
meet their weekly commitments. But there are opportunities out 
there and there are people that understand the new technologies 
and the new opportunities that they can do to reconfigure their 
business, to realign their business in new trends and what is 
out there is equally as important, and having that access to 
that I think Mr. Smits alluded to earlier is equally as 
important certainly on certainty of the regulatory environment.
    The Chamber numbers continue to maintain strong. You lose 
some investors due to various factors with their marketing 
dollars, with businesses closing. But there are people that 
understand the impact and importance of maintaining those 
relationships, cultivating new relationships, being in an 
environment and marketing their businesses are important to 
them.
    Unscientifically I think from our business side and who 
work with and then from the Chamber side, I think you are 
seeing about 10 percent of the businesses that are thriving in 
this economy and this environment. There is about 20 percent, 
in my understanding, that are slightly up. About 30 percent are 
basically flat, which leaves over 40 percent of the businesses 
that are basically down or struggling on some various level. 
And I think that is concerning to all of us as you sit down and 
know not only as a Chamber person but the people that we work 
with on a day-to-day basis.
    From our business perspective and how we look at things and 
what we were doing, we had moved into a new location. We 
expanded to about 2,500 square feet and hired some new 
employees and needed some additional equipment that we now had 
room to place and put there because of those new opportunities, 
some new contracts we have received, some new schools, some 
different bids that we were awarded. It puts you in a difficult 
position when you have the opportunity to grow your business 
and have that work to be able to try and chase the equipment, 
things to be able to do to produce what you ultimately received 
and were awarded. And I think that is where some of that 
opportunities that people are struggling with. There are some 
carrots out there and people's access and ability to get that 
and maintain those have been severely limited.
    The term ``uncertainty''--I think I could say with 
certainty that that phrase is tossed about all too frequently. 
I think business people put blinders on. They are focused on 
the day-to-day. Yes, they are aware that there are these 
regulatory issues. They are aware of the Government and the 
impacts on these things that are out there. They are trying to 
produce goods. They are trying to produce product. They are 
trying to make sure that they meet the demands and timelines of 
the businesses. They are trying to make sure that their 
employees are paid, that their lights on, their bills are paid. 
And I think that is what they are focused on. I think they hear 
these things about the Government and the regulations and the 
environments that are out there, but deep down, I think most of 
those are too busy and struggling too much in some ways to pay 
attention to those.
    You mentioned spending hours a day trying to stay up with 
those things. I think most of these businesses, because of 
their trade associations who they are involved with, get those 
same things but don't have the time or ability to research and 
to study them, to pay attention to how those things are 
impacting their businesses.
    There was a business in our complex where our business 
resides that was doing, on a day-to-day basis, quite well. The 
problem was there were some tax issues and things that were 
behind and they couldn't catch back up and went to try and get 
some loans and access to capital to try and take care of some 
of those past debts because they knew they were poised to 
continue to be successful. Unfortunately, their doors were 
shuttered and it is another one of those casualties of our 
State right now.
    So I appreciate the dialogue, appreciate you being here and 
an opportunity to be here to address that. Thank you, 
Congressman.
    Chairman Coffman. Thank you so much, Mr. Wasden.
    Let me just start out with a question for Mr. Smits from 
the SBA. Many banks claim the SBA's procedures are cumbersome. 
What steps are being taken to further reduce the complexity 
associated with making an SBA loan?
    Mr. Smits. It starts with engaging our lending partners. So 
I had mentioned that as we take a look at our policy and 
procedures, what is real barriers to entry and what is 
perceived barriers of entry, by engaging our lenders to 
communicate to us a possible solution, it adds a level of real-
world application and it helps us direct towards what really 
makes a difference.
    It is interesting. When I was managing a lending department 
division, my day-to-day involved dealing with real small 
business challenges. You know, the local mechanic on the corner 
has this challenge. How can we make this work? How can we 
restructure this? You felt very engaged to what was happening 
outside.
    What I have discovered, as I came to work for the 
Government just 10 months ago, is we run the risk of becoming 
isolated--I call it the ``Washington bubble,'' which you 
probably are well aware of--from real-world application of our 
programs. It is very easy to identify risks, and it is very 
easy to create policies and procedures to protect against that 
risk. It is really challenging to take the next level and step 
back and say what risks have I created by creating this policy 
to protect against this risk. Have I quantified? How does that 
play out in the real world?
    And so what I have challenged the team to do is to take 
that extra step, and that extra step often involves having an 
understanding of how this really plays out. And the best thing 
that we can do as an agency is to be very engaged with the 
banks and the small businesses out in the communities to hear 
the real-world challenges that this policy could possibly 
create.
    So, again, we are looking at all of our programs. We are 
taking a look at what are policies, why do we have these 
policies, what are we protecting against, is there another way 
to do that. Too often in the past, we have said it is simply a 
matter of making our applications or our forms shorter. Well, 
see, I know that most lenders--you know, TurboTax. So forms 
aren't as important as they were when I was a young underwriter 
20 years ago where I had to fill out just hours and hours and 
hours. There is software now that populates a lot of these 
forms. So making a change to a form doesn't have the impact as 
maybe taking a look at the process.
    So we have to remind ourselves that when a lender is taking 
advantage of an SBA loan, for example, the process isn't just 
we see the loan and we see the application and we work through 
our guarantee and we issue the guarantee. It starts when the 
small business owner approaches his or her banker, and it 
doesn't end until the dollars are funded through a loan 
closing. So there's a great deal of process that is outside of 
our scope of vision. The best thing that we can do is to be 
proactive to gain an understanding of the entire process and 
map out to say, Mr. Banker, what do you do when you originate a 
conventional loan, what do you have to do to originate an SBA 
loan, and map out where the differences are. There is a reason 
for some of the differences. There are other things we can 
improve upon.
    And I always say this. When a banker looks and a lending 
partner makes a decision to participate in our programs, if 
they are going to originate a $100,000 loan, they know they 
have this much resources to put towards the origination and the 
closing in order for that to be a profitable transaction and 
everybody wins. When out of this much resources, this much is 
for us to--you know, the burden from the Government to obtain 
the guarantee--they are left with this much, which is sometimes 
the most important part of the origination, which is the 
underwriting. Is this small business owner positioned for 
success? Have we looked at the business plan and does it make 
sense? Have we forced our lenders to underwrite towards the 
Government guarantee as opposed to the success of the business?
    So my argument is this is our responsibility as an agency 
to continue to look for ways and process improvements and 
efficiencies that we can pass on to our lenders so that the 
small business owner has a chance of success, a greater chance 
of success, because we have allowed our bankers and our lending 
partners to do what they do best, which is assess the risk and 
still be able to make economic sense to originate that.
    Chairman Coffman. Thank you.
    SBA's 2012 budget request that was released in March claims 
to increase the number of participating lenders to 3,000 
projected. What steps are you taking to meet that goal?
    Mr. Smits. I will make this comment. My experience with the 
Small Business Administration stretches across 20 years, and I 
will say that I have never seen a time period in my 20-year 
experience where the agency has been more engaged with their 
lending partners. As I had mentioned, we saw 1,200 new lenders 
use our program for the first time in many, many years. A lot 
of those lenders have found it for what we have talked about, 
managing their capital ratios, the advantages of having a 
guarantee in order to manage their balance sheets.
    We need to keep those new lending partners in the fold. And 
that is good, old-fashioned customer service. That is providing 
support at the local level. It is providing streamlined and 
efficiencies as we move forward with our programs. It is to 
make the program accessible and easy for them. And it is good, 
old-fashioned contact with them. It is about making them part 
of the solution as we look for working capital solutions to 
benefit our small businesses, make them part of the process to 
make thoughtful changes to our programs because then, first of 
all, there is validation from them. They are part of the 
solution so that they feel some ownership. All of that leads 
towards building a stronger and stable base of our lending 
partners.
    Chairman Coffman. You know, we have had a lot of 
consolidation in the banking industry, and how has that 
affected your SBA loan programs?
    Mr. Smits. One of the things I also look at is I look at 
the concentration, you know, good, old-fashioned concentration 
analysis of who is using our programs. And we have seen more 
community-based organizations that have gravitated or used our 
programs. So we have seen a shift in community banks using our 
program. We have seen a rise in credit unions to take advantage 
of our programs. We have seen a decline in some of the finance 
companies, the national finance companies, that focus on the 
SBA product sets as being the primary drivers that use our 
programs. So we have definitely seen a shift in concentration 
of the makeup, which isn't necessarily a bad thing.
    Chairman Coffman. How are SBA loans performing right now, 
and how would you compare that to the private sector?
    Mr. Smits. I pulled the numbers before I came out here, and 
surprisingly--the good news is--what I watch closely is 
delinquency because that gives me a real close indication of 
what is happening today. So our 7(a) program, for example, as 
of June 30th, the current month, the delinquency was about 1.75 
percent compared to a year ago. It was 3.24. So that is the 
good news. Our portfolio appears to have turned the corner. It 
looks like we really turned the corner in January of 2010. It 
has seen a steady improvement in the portfolio performance.
    Chairman Coffman. Does the SBA communicate with your 
counterparts in the Fed, in the FDIC, with the Comptroller of 
the Currency? Could you----
    Mr. Smits. So one of the real values to our proactive 
approach to being engaged with our lenders has been that when 
you start to hear the same--you know, when you hear the same 
concern from a banker in Seattle as you do from a banker in 
Denver, you say, okay, there is something here. We need to look 
at this. And it has really helped us. And what we have done is 
reached out and been proactive. We said, well, gosh, we need to 
be very engaged with the FDIC, the OCC for a number of reasons. 
One, it is an opportunity for us to continue to educate. The 
more touch we have, the more opportunity we have to talk to 
them about business lending and some of the things that we are 
seeing from our lending partners and the nuances and the value 
of our Government guarantee and our enhancements, it is also an 
opportunity for them to share with us from their perspective. 
So there is real value to having an ongoing dialogue.
    So the FDIC, for example, we have made some great progress 
where I have been putting the credit groups together with a 
focus on having monthly productive meetings to just discuss 
what we are seeing and what they are seeing. And it all goes 
back to what I was saying, that you need to--you can't simply 
look at these regulations as an academic exercise. You have to 
actually take it further and look at it as a real-world. So I 
feel we as an agency--we have a real value where we can 
communicate out to them, and we have a very large network of 
lending partners. And it is an opportunity for us to continue 
to disseminate what we are hearing, and they seem very open and 
perceptive to that. So I am encouraged by that progress.
    Chairman Coffman. Thank you.
    Well, let me ask some questions of our bankers, Mr. 
Davidson and Mr. Brown.
    The Wall Street Journal recently reported that a banker in 
Texas decided to give up his charter because of the regulatory 
environment, and I remember reading that story. Is this an 
isolated story or a common concern among bankers? Mr. Davidson.
    Mr. Davidson. It is an isolated story. It is unheard of, 
Congressman Coffman. However, it tells you how onerous the 
burden is on this bank that he would consider doing it. We can 
work on some pretty nice margins in banking because our cost of 
funds are relatively low. It is deposit cost basically. He has 
got to borrow money to lend money, and so his margin is going 
to get squeezed. But he has decided that the regulatory burden 
is too great and it overshadows that margin squeeze. So I think 
it is indicative at a very extreme end of excessive regulation.
    Chairman Coffman. Mr. Brown.
    Mr. Brown. I would absolutely concur with that, Congressman 
Coffman. It didn't seem to me like the most intelligent choice 
that he could have made on that. I will leave it there.
    Chairman Coffman. If you were going to give me your top 
priority to lower the regulatory burden on banks to allow more 
small business lending, what would that be? What would the top 
priority be?
    Mr. Davidson. If I could, Congressman Coffman, the number 
one request would be that the regulators live according to the 
rules that have been set in the past, the Basel Accord rules, 
for capital. Let me use the excess capital I have generated 
over these past 3 years to lend money out to the small business 
market. Capital is the key issue. Capital ratios is the key 
issue.
    Mr. Brown. I would concur with that.
    And then in addition to that, the difference between actual 
regulation and guidance needs to be--you guys need to really 
take a strong look at that because if an examiner happens to be 
in the bank and they make a statement that we would like you to 
do this, that becomes as strong as regulation. And if you don't 
comply with what their requests are, it is going to end up 
causing you a myriad of problems in the very near future. And I 
don't think that it needs to carry as much weight as the actual 
regulation.
    Chairman Coffman. I think you kind of went over this, but 
if you would just--you know, in a very brief statement, how 
would you really bring it down to summarize how the regulatory 
burden has constricted your ability to do small business 
lending. Would it just go back to not complying with the Basel 
rule? And was that the 20 percent, the 10-12 percent issue in 
terms of----
    Mr. Davidson. The Basel rules in this case for our bank 
controls risk-based capital. The rule for a well-capitalized 
bank on total risk-based is 10 percent or greater.
    Chairman Coffman. Right.
    Mr. Davidson. We have managed our bank to that level, as 
have a lot of community bankers, to maximize the return on 
equity for our shareholders. That rule has changed, and we 
don't know what the new target is but it is much higher than 
that. My current total capital is over 12.5 percent over the 
past 3 years in the worst recession that I have ever 
experienced. I am not getting any credit from the regulators. I 
am getting beat to death because I am not up higher. So, yes, I 
would say capital.
    Ask the regulators to adhere to the rules that were 
established. They are concerned about safety and soundness, and 
I respect their jobs. It is a very difficult job. They do not 
look at the unintended consequences of their actions, and I 
submit to you the second liquidity crisis that we are in today 
is the unintended consequence of regulators trying to protect 
the safety and soundness of the banking system while at the 
same time, in my opinion, destroying the national economy.
    Chairman Coffman. Let me ask you both. Do you think that 
regulators in a way overreact simply because of the fact--
obviously, in the free market system, there is always going to 
be an element of risk. There is certainly no incentive for them 
to keep an institution open, but there is every incentive to 
close an institution in the event that down the road something 
happens to that institution and their fingerprints are on a 
particular audit. Is there any----
    Mr. Brown. Oh, yes. I would absolutely agree with that. I 
think that is human nature. If you came in as an examiner to a 
bank you took a look at and something had you feeling just a 
bit squeamish about it and you didn't bring it up and then 6, 
8, 12 months down the road something happened with that 
institution, that is the first thing that you are going to go 
back to is whatever made you feel squeamish. So from a fear 
instinct, they aren't looking at that anymore. If there is 
something that is even giving them the slightest tinge, they 
are going to go into it at great depth and it is going to cost 
a lot of money for the bank to comply with all of those things. 
And while a couple of those may actually be relevant, there are 
so many more that simply aren't.
    Chairman Coffman. So your position is, for both of you, 
that it is not simply the troubled institutions that the 
regulators are coming down on. It is well capitalized 
institutions.
    Mr. Davidson. It is everyone, absolutely. We are 
excessively well capitalized, and they are coming down on us.
    Chairman Coffman. How would you both in a way quantify, I 
mean, just anecdotally to talk about the increase or decrease 
in loan demand--or I suppose it is a decrease--over the last 2 
years?
    Mr. Davidson. The loan demand has decreased over the last 
couple of years.
    Chairman Coffman. Okay.
    Mr. Davidson. There is a triumvirate here. We stopped 
lending because of the regulatory environment. They stopped 
asking for money because we stopped lending I think. Mr. Brown 
may disagree with that.
    But there is certainly a lower demand but there are still 
loans out there. I am making loans right now, much to the 
chagrin of my regulators, because I have to maintain my net 
interest margin. So we are trying to work around a regulatory 
environment that shouldn't be there today.
    One other point, if I could make, Congressman Coffman. 
Right now, the requirement of the banking regulators is to 
promote the safety and soundness of the banking system. It is a 
respectable goal. But if you were able to include to promote 
credit availability under the guidelines of safety and 
soundness, then they might be modified. They might modify their 
actions and understand there is another element here. They are 
shutting down lending. They don't care about lending. They 
don't care about--and that is not their job. I understand that. 
They should and I think it has come to the point where the 
legislators, the gentlemen in Congress and the Senate, have to 
step up to protect the banking system from this egregious 
overreaction by the regulatory agencies. So I would like to 
say--and I will give the credit to Don Childers with the CBA. I 
would like to have you say their job is to promote credit 
availability within the safety and soundness guidelines.
    Chairman Coffman. Okay.
    Mr. Brown.
    Mr. Brown. I agree that the regulatory burden has a measure 
of an effect on what is happening in lending right now. The 
bank that I am at--we bought it in--the group that I am with 
bought it May of 2010. And at the outset, we had such a small 
loan-to-deposit ratio that the only thing we can do is lend. So 
we have been very active. And there's really not as much loan 
activity that is out there that the general public would expect 
that you would see.
    In my estimation, regulation certainly has an effect on the 
limitation of availability of credit, but the economic 
environment has a very strong role to play in that right now. 
Again, we are coming out of a recession as slowly as I have 
ever seen a recession crawled out of. And the companies that 
have survived it--their balance sheets are weaker than they 
were. Their profitability is weaker than it was, and many of 
them simply aren't good candidates to receive credit. As much 
as I hate to say that, it happens to be true.
    And then on top of that, the third layer that I look at is 
the fear perception. The stock market moves on perception. It 
isn't moving on reality. The entire world right now, I believe, 
is moving on perception. And with all of the negative forces 
that we have going economically right now, the companies that 
have weathered it that do have a good balance sheet and could 
look at it, I don't know that they are necessarily looking to 
borrow a lot of money. I have asked the same question a hundred 
times to a lot of different people. If I gave you $1 million 
right this minute and asked you to return 8.5 percent to me 
within a year, what would you do with the $1 million? In the 
last 4 years, I haven't had a good answer.
    Chairman Coffman. So, Mr. Davidson, let me, if I can sum--
because I believe, Mr. Brown, you agree with. The regulatory 
framework today does not take into account anything about 
preserving lending. It is all about reducing risk. And the 
optimistic goal, the idealistic goal would be no risk.
    So how did you frame that then again? So what you are doing 
is you are going in and changing in a way that the mission 
statement of the regulators to add a dimension to it. How would 
you define that dimension again?
    Mr. Davidson. Yes, sir. The dimension I would add is that 
they need to promote credit availability within the guidance of 
safety and soundness. Life does not exist without risk. I know 
that certain individuals have a higher tolerance for risk than 
others. Those individuals that are perceived to have a higher 
tolerance are probably the people that start the businesses. I 
think we could conclude that. Bankers don't like risk. We don't 
have a big enough margin for it. But we do take some risks. 
Regulators in my opinion have no tolerance for risk and don't 
understand the risk that we feel that we understand. And I 
think we have done a pretty good job managing that risk.
    You can't make a system totally without risk. Life is risk. 
Business is risk. It is managing that risk that makes the 
difference. But the regulators have now taken away our ability 
to manage our bank to a business standard for the benefit of 
our shareholders and our borrowers, and now we run our bank to 
a regulatory standard. It is extremely difficult. And that 
regulatory standard changes with every examination. There is no 
hard and fast rules. The rules that we used to live by are 
gone. I have never seen that in 30 years.
    My chief financial officer, John Phillips, and Nick 
Lepetsos, my president, who helped me put together this 
presentation--in their combined 50 years' experience in 
banking--and I can say John was in Texas in the 1980s during 
the oil crisis and, in fact, helped Continental Illinois try to 
work out of their issues that caused the whole issue. That is 
what he saw at ground zero. And he says this is nothing like 
what it was back then. It was bad back then. This is beyond the 
pale. It is indescribable.
    Chairman Coffman. The final question, and that is, so if we 
were going to go back--so you believe that the risk-based 
capital standards prior to 2009 were adequate.
    Mr. Davidson. Yes. The Basel rules are certainly adequate. 
Absolutely.
    Chairman Coffman. Mr. Wasden, in your view being a small 
business owner and a Chamber member, how high is access to 
capital on the list of things your membership is struggling 
with?
    Mr. Wasden. I want to address that after I let Mr. Brown 
know I want to be the recipient of that $1 million challenge 
you are throwing out there. I would like to take a shot at 
that. [Laughter.]
    You know, you brought up the question about loan demand, 
and I think using the analogy of running into the wall, running 
into the wall, at some point you stop running into the wall. 
And so there are certainly going to be some businesses out 
there that have asked, that have gone to the banks that have 
opened the doors to try and have those conversations that have 
been turned down on that and then stopped doing that.
    I think what is happening, Congressman, is we are being 
forced to evaluate your aspects of your business, how to run 
more efficiently, how to trim fat, how to shed waste, to re-
function where your business is, what your core strengths are, 
what your market will tolerate, where your business plan is 
heading. And I agree with Mr. Brown there. There are certain 
people--and it is hard from, I think, a business perspective 
from a Chamber that they have someone that comes in that wants 
to be a business coach, a life coach. You have someone that 
wants to come in and open a martial arts studio, and that is 
all they know about and that is what they are good at and they 
are passionate about it and they know how to run that. It does 
not make them necessarily a great risk in saying that this is 
somebody that we want to lend money to. And so I think part of 
the challenge from the Chamber's standpoint and some of these 
organizations is to try and help them through that and look at 
those challenges and those opportunities that are out there so 
they can see that so we can better prepare them to go and open 
that door to try and make them a better recipient of those cash 
and funds that are available that banks clearly are wanting to 
lend.
    Chairman Coffman. So what do you think is the biggest 
factor for small businesses in this area when deciding to hire 
an additional employee?
    Mr. Wasden. I appreciate that question. Actually our 
president and CEO did make it back in here. So if he has any 
insight and there is time for that, I would certainly like to 
recognize John Brackney who is here and who might be more 
suited to answer some of those questions.
    But I think as you are sitting there and you are talking 
about hiring or expanding or purchasing new equipment, you are 
looking, Congressman, at a couple of factors. You are looking 
at your bottom line. You are looking at what is out there as 
far as your markets or past history. We came into a very unique 
situation in our business, but believe it or not, we have had 
six straight record years of sales in our company. I know that 
is kind of an unheard of thing, but we have reevaluated. We 
have opened up a fire and safety division that didn't exist 
previously. And you find niches. You find roles. You look for 
opportunities that are there.
    When we look at that impression of hiring and it comes down 
to very simple--I spent till 1:30 on Thursday night, until 3:30 
on Friday night not with my wife, not on a great date night, 
but doing football jerseys in preparation for. Could we hire 
more staff to do those? Certainly but then it comes out of your 
bottom line. Then you are worrying about being able to make 
payroll. And so you are constantly chasing that tail of going 
back and doing those things yourself as owners and spending 
that time versus what are the costs of hiring additional staff 
to take on those burdens and those times to do those.
    Chairman Coffman. For you and your fellow members of the 
South Metro Chamber, what do you think is the outlook in terms 
of hiring over the next 6 months?
    Mr. Wasden. I don't see a lot of businesses within the 
Chamber--and John, certainly you can correct this statement--
that are looking at hiring and expanding as a great percentage. 
And I mentioned that before. I think you have got 10-15 percent 
that are thriving, that are doing well in this economy, that 
are growing and hiring today. I think the rest are sitting on 
their hands and being very cautious and very concerned about 
the uncertainty that exists out there and are probably not 
going to leap at that opportunity.
    Chairman Coffman. So for businesses that are looking for 
additional capital, what do you think their biggest impediment 
is to getting a loan?
    Mr. Wasden. I think it is creating that business plan, that 
opportunity that comes to let them know that you have thought 
about this, that you are a safe risk, that you have the ability 
to make good those loans. And I think that is certainly 
something that they have to understand going forward. And I 
think certainly Chambers--and we have within our South Metro 
Denver Chamber the small business center that is there. I think 
it is understanding how to proceed with those business plans 
and how to go to a bank. I think a lot come in there and say, 
look, I need money, I need money, but don't necessarily take 
the steps and the plans and the thought process to generate 
that plan to make them a safe investment.
    Chairman Coffman. Well, I just want to thank you all so 
much for your testimony, for coming today. I think it was very 
insightful for me as a subcommittee chairman in the Small 
Business Committee to certainly take your comments back and 
make some changes I think that need to be made and I will 
certainly work with my colleagues on other committees of 
reference in the Congress such as the Financial Services 
Committee to make some of these changes a reality I think that 
we talked about today that are hurting, I think, access to 
credit in the United States for small businesses.
    Now that the questions are completed, I would like to again 
thank the folks here at Greenwood Village. Thank you, Mayor 
Rakowsky, and your staff for hosting us and for all of our 
witnesses that were here today testifying. I know you are busy. 
So I appreciate your taking the time out of your schedules to 
share your views with us.
    Small businesses will lead our economic recovery. So we 
need to do everything we can to make sure that they have the 
capital necessary to grow and create jobs. It is not every day 
that we can hold hearings outside of Washington. So I am 
pleased that we were able to have local witnesses testify about 
what is going on in this area in the 6th Congressional 
District. We heard today about some of the problems that bank 
regulators are causing, as we work to get money into the hands 
of our Nation's job creators. We will make sure that the 
Committee of Small Because follows up with banking regulators 
so they know what is going on outside of Washington.
    Mr. Smits, I want to thank you so much for your testimony 
today. I really appreciate all that you do to help small 
businesses in this country.
    Mr. Davidson, God bless you for all you do. And I know 
these are tough times, and I really appreciate what you do.
    Mr. Brown, a great job again. And I just want to thank you 
for all you do. Stick with it. I know it is tough. And thank 
you.
    Mr. Wasden, as a former small business owner myself, I know 
how tough it is. It is a matter of surviving these tough 
economic times and holding on to the employees you got. But if 
you can create some more, I would certainly appreciate that.
    And I thank everybody else for coming today. This has been 
extremely helpful and very insightful in terms of, I think, 
making a difference to get this economy moving again. Thank 
you.
    The Committee is adjourned. The hearing is adjourned.
    [Whereupon, at 11:38 a.m., the subcommittee was adjourned.]






                                  
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