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

      OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION'S FINANCING PROGRAMS

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

                                    HEARING

                                   before the

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD
                                OCTOBER 26, 2011

                                   __________

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                Small Business Committee Document Number 112-041
                  Available via the GPO Website: www.fdsys.gov
                       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
                   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, Staff Director
                         Barry Pineles, General Counsel
                      Michael Day, Minority Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Opening Statements:
        Graves, Hon. Sam.............................................     1
        Velazquez, Hon. Nydia........................................     2

                                   WITNESSES

    The Honorable Karen Mills, Administrator, United States Small
      Business Administration, Washington, DC........................     3
    Sally B. Robertson, President, Business Finance Group, Fairfax,
      VA.............................................................    27
    K. Rodger Davis, Managing Partner, NorthCreek Mezzanine,
      Cincinnati, OH.................................................    29
    Gary Grinnell, President & CEO, Corning Federal Credit Union,
      Corning, NY....................................................    31
    Ms. Lynetta Tipton Steed, Executive Vice President Business &
      Community Banking Division, Regions Financial Corporation,
      Birmingham, AL.................................................    25

                                    APPENDIX

    Prepared Statements:
        The Honorable Karen Mills, Administrator, United States Small
          Business Administration, Washington, DC....................    41
        Sally B. Robertson, President, Business Finance Group,
          Fairfax, VA................................................    45
        K. Rodger Davis, Managing Partner, NorthCreek Mezzanine,
          Cincinnati, OH.............................................    52
        Gary Grinnell, President & CEO, Corning Federal Credit Union,
          Corning, NY................................................    57
        Ms. Lynetta Tipton Steed, Executive Vice President Business &
          Community Banking Division, Regions Financial Corporation,
          Birmingham, AL.............................................    71
    Questions for the Record:
        Chairman Graves Questions for the Record.....................    83
        Rep. Keating Questions for the Record........................    86
    Answers for the Record:
        Administrator Mills Response to Chairman Graves Questions for
          the Record.................................................    88
        Administrator Mills Response to Rep. Keating Questions for
          the Record.................................................    93

      OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION'S FINANCING PROGRAMS

                                  ----------

                          WEDNESDAY, OCTOBER 26, 2011

                              House of Representatives,
                                   Committee on Small Business,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 1:00 p.m., in Room
    2360, Rayburn House Office Building. Hon. Sam Graves [chairman
    of the Committee] presiding.
        Present: Representatives Graves, Chabot, Coffman, Mulvaney,
    Tipton, West, Walsh, Barletta, Velazquez, Schrader, Critz, Chu,
    Cicilline, Richmond, Peters, Owens, and Hahn.
        Chairman Graves. Good afternoon. We will call the hearing
    to order today.
        The most important thing this Committee can do is create an
    environment in which entrepreneurship is fostered, thereby
    producing jobs vital to the economic recovery. There are many
    aspects in creating this environment and in today's hearing we
    are going to focus on one of those, and that is access to
    capital.
        The Committee has heard on multiple occasions from small
    businesses that they cannot get funds needed to operate and
    expand their businesses. At the same time, banks have testified
    before the Committee saying that they have the funds available
    to lend. The Small Business Administration oversees a number of
    programs working in conjunction with the private sector
    partners to bridge this apparent gap between the need and
    availability of capital. SBA statistics show that volume in its
    financing programs has increased. These efforts have been
    supplemented by promises from banks to raise lending to small
    businesses. It remains an open question whether these efforts
    are sufficient to provide the necessary funds for small
    businesses to expand and create jobs. The SBA programs operate
    with loan guaranties issued by the federal government.
        Congress has determined that the risk to the taxpayers are
    outweighed by the benefits providing the needed capital to
    small businesses. Irrespective of that determination, this
    Committee has a responsibility to ensure that the desire to get
    money into the hands of small businesses does not come at the
    expense of exercising due diligence when making a loan,
    especially when taxpayers are on the hook for the government's
    bad decisions. Therefore, the Committee needs to know that the
    SBA and its partners are complying with the requirements of the
    Small Business Act and not issuing loans with document
    deficiencies as the inspector general has recently found.
    Ultimately, the Committee needs to understand whether the
    programs currently constituted are enabling small businesses to
    create jobs; if not, the Committee will need to examine
    legislative changes to promote access to capital without unduly
    placing the taxpayer at risk.
        And with that I yield to Ranking Member Velazquez for her
    opening statement.
        Ms. Velazquez. Thank you, Mr. Chairman.
        In the last year, our nation's economy has experienced
    steady private sector job creation. However, it has not been
    enough to have a sizeable impact on the unemployment rate which
    remains stubbornly high at 9.1 percent. The reality is that we
    will still have a long road ahead of us with millions of
    Americans who are seeking work that cannot find it. Front and
    center to any solution to this dilemma are small businesses. In
    every previous downturn it has been small, innovative firms
    that have created the cutting-edge products and services to
    lead us forward. In fact, more than half of the companies on
    the 2009 Fortune 500 List were launched during a recession or
    bear market, along with nearly 50 percent of the firms on the
    2008 Inc. List of America's Fastest Growing Companies.
        Whether it is a Silicon Valley startup or a Main Street
    mom-and-pop, it is clear that small businesses are our nation's
    job creators. In order for entrepreneurs to continue to play
    this traditional job creating role, it is essential that they
    are able to access capital. Doing so provides the fuel for
    innovation and economic expansion across the spectrum of
    entrepreneurship. It enables unemployed individuals to start
    their own businesses, help domestically-oriented companies to
    sell their goods in foreign markets, and allows high tech firms
    to reinvest in R&D.
        But small businesses face real challenges in the capital
    markets. While lending conditions and credit standards are
    easing, companies have still not recovered from the financial
    crisis and recent recession. This has left many without the
    assets to borrow against and with lower revenues than in years
    past. As a result, business owners now have fewer options to
    secure affordable financing. Lending through the SBA is always
    critical to fill in this void. Several provisions this
    Committee crafted in the Recovery Act temporarily boosted SBA-
    backed lending. Recent guaranties and cutting fees on SBA loans
    spurred demand and was key for the record-setting year the
    agency experienced with record 7(a) loan volume of nearly $20
    billion, an increase of more than 50 percent. It is clear these
    policies work. Impressive growth in the SBA state program, as
    well as more moderate growth in the 504 program, confirmed
    important roles that these initiatives play in the capital
    markets.
        With this growth came other challenges in the portfolio.
    The average 7(a) loan grew by nearly 40 percent, while there
    were percentage declines in smaller loans and those to
    startups. During economic downturns, smaller loans are
    especially important. As an average it costs nearly 75,000 to
    launch a new enterprise. With an average 7(a) loan size of now
    $365,000, five times the cost of a startup, we must make sure
    that the agency is not forsaking its roots solely to set
    records.
        During today's hearing I am hopeful that we will not just
    tout past performances but instead focus on how we can expand
    access to capital for all businesses, especially those at the
    earliest stage of the business cycle. Startups, particularly
    those in the high-growth sectors, remain central to our
    economic recovery, and it is critical that we expand their
    ability to secure financing. Now is not the time to constrain
    free access to capital and problems like those at SBA are
    critical to creating jobs. Getting financing in the hands of
    would-be entrepreneurs has never been so important and doing so
    is not just critical to reducing unemployment but also to
    increasing tax revenue and decreasing our nation's debt. I know
    the next few months are critical in this regard, and I will be
    focusing on making sure small businesses are not dealt a bad
    hand when the Super Committee makes its final recommendation.
        On that note, I would like to thank the witnesses for
    taking their time to be here. I am interested in hearing their
    thoughts on how best to meet the entrepreneurs' capital needs
    so they can create the jobs that we badly need.
        Thank you, Mr. Chairman.
        Chairman Graves. Thank you.
        Our first witness today is The Honorable Karen Mills, who
    is the administrator of the Small Business Administration.
        Ms. Mills has been the SBA administrator since 2009 and is
    obviously no stranger to this Committee. Prior to joining the
    Small Business Administration, Ms. Mills was an investor in
    small businesses, so the struggles that businesses have in
    obtaining capital are obviously very familiar to her. Thank you
    very much for being here. We appreciate you coming in.

     STATEMENT OF THE HONORABLE KAREN MILLS, ADMINISTRATOR, UNITED
                  STATES SMALL BUSINESS ADMINISTRATION

        Ms. Mills. Well, thank you very much, Chairman Graves and
    Ranking Member Velazquez and members of the Committee. Thank
    you for asking me to testify on Access to Capital for Small
    Business.
        For the fiscal year that just closed, the SBA hit an all-
    time record in its 60-year history. We supported over $30
    million in lending to 60,000 small businesses. We brought back
    1,200 lenders, mostly community banks and credit unions who had
    not made an SBA loan since 2007. We also had a record year in
    our Small Business Investment Company program with nearly 2.6
    billion in overall financings. This is a zero subsidy program
    that targets high-growth small businesses, the main driver of
    new jobs.
        Today, SBA's lending volume is back at pre-recession
    levels. However, it is our agency's continued obligation to
    identify and fill gaps where the market is not working. This is
    particularly true for low dollar loans and loans to businesses
    in underserved communities. And as I describe this effort I
    want to be sure that the Committee understands that all of the
    SBA's programs and initiatives have been implemented in
    accordance with our authority as provided by this Congress.
        So first, low dollar loans, under $150,000 have not come
    back. We found three root causes. They have a high cost of
    processing relative to their size so banks often do not want to
    make them. To answer that, we streamlined and simplified
    paperwork on these loans to incentivize lenders to step up.
        Second, we need more points of access to get small loans to
    entrepreneurs in underserved markets. That is why we developed
    Community Advantage to let community-based lenders with proven
    track records and historically low default rates make 7(a)
    loans for the first time.
        Third, when many of the large banks withdrew from lending
    during the recession and the credit crunch in October 2008,
    small businesses were very hard hit. That is why we have
    secured $20 billion in additional commitments over the next
    three years from 13 of our largest banks; many of them will
    focus on underserved markets.
        I also want to be sure the Committee fully understands the
    facts about loan performance and our subsidy costs. Loan
    default rates now have begun to fall; they are not rising. And
    loans made in the past three years are actually performing
    significantly better than in the cohorts of 2005, 2006, and
    2007. As I have testified before, we are also focused on lender
    oversight and the elimination of fraud, waste, and abuse
    through a three-pronged approach. We look at upfront
    eligibility to make sure the loans are flowing to the intended
    recipients. We continue monitoring and oversight of our lending
    partners. And finally, we focus on enforcement efforts to
    pursue fraud and bad actors.
        My commitment is that we will continue to expand access to
    capital while protecting taxpayers' dollars as we embark on
    another critical year in SBA lending.
        Thank you very much.
        [The statement of Ms. Mills follows on page 41.]
        Chairman Graves. Thank you, Administrator Mills.
        We will turn to Mr. Coffman for opening questions.
        Mr. Coffman. Thank you, Mr. Chairman.
        Administrator Mills, since the SBA-backed loans are only a
    small percentage of overall small business lending, what steps
    are you taking to encourage private small business lending?
        Ms. Mills. As you heard me say earlier, we have, as you
    describe, on a good day, a small portion of the market, maybe
    10 percent of the market. So the entire market, the
    conventional market for small business lending needs to also
    come back. We went out to our 13 largest lending partners, all
    the large banks which had not come back in force to SBA lending
    and other lending, and asked for increased commitments and
    promised to work with them to make sure they had access to the
    demand that we see out there. They have committed $20 billion
    of additional capital, incremental to what they have done.
        Mr. Coffman. Who is ``they'' again?
        Ms. Mills. There are 13 banks.
        Mr. Coffman. Thirteen banks.
        Ms. Mills. So we can give you the list. It was public. You
    know, our primary partners, J.P. Morgan Chase, Wells Fargo,
    U.S. Bancorp, PNC, Huntington Bank. And the aggregate amount is
    $20 billion incremental in small business lending over the next
    three years.
        Mr. Coffman. Thank you. Administrator Mills, do you have
    any analysis to determine what SBA-backed lending would be
    without the reduced fees and higher guaranty--75 to 85 percent
    guaranty still provides banks a way to mitigate risk.
        Ms. Mills. Yes, we do have evidence. In a chart which was
    attached to my testimony you can see what happened. The actual
    90 percent guaranties ended on December 31st last year. We had
    a big spike right before that happened so we had a recovery dip
    and then we came back to a level that was significantly above
    2010 as well as 2008 levels. So it seems to be working.
        Mr. Coffman. Thank you. Thank you, Mr. Chairman. I yield
    back.
        Chairman Graves. Ranking Member Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Madam Administrator, since startup rates typically rise
    during economic downturn, you might expect to see a rise in
    lending for such entrepreneurs. However, small dollar loans and
    loans to startups declined as a percentage of SBA lending last
    fiscal year. Does this mean that the agency is shifting away
    from making these type of loans and focusing on larger loans to
    more established, mature companies?
        Ms. Mills. No. The agency believes, as you do, that there
    is a gap in small dollar loans. And in fact, one of the real
    reasons for the high unemployment right now is that we are down
    about 100,000 new business starts. So we have been extremely
    concerned, as I know you have been, about the fact that the
    market did not come back. And that is why we came out with this
    three-pronged approach to promote small loans.
        Ms. Velazquez. Okay. So why is it that last year SBA spent
    nearly $70 million, 84 percent of your 7(a) loan subsidies on
    7(a) loans of $1 million or more? By contrast, subsidy for
    loans of 250,000 or less, for which there is the greater need
    right now, were just 1.9 million? Does it seem fair that so
    much money goes to benefit fewer than 1 in 10 of all borrowers?
        Ms. Mills. As I said, we are in complete agreement with
    your analysis of this problem in that there is a gap in small
    business lending. We have continued to focus on that. But the
    job is not nearly done. We have made slight progress over the
    last year in the smaller loan sizes but there is still a very,
    very large gap. To that end----
        Ms. Velazquez. What do you think it will take so that we
    can see more loans going to smaller or startup businesses?
    Because that is where the need is.
        Ms. Mills. It will take the banks coming back to that area.
    What we have done is try to make it more cost-effective for
    them to use an SBA guarantee for a small loan. We have tried to
    bring together our large lending partners and get them to focus
    on it. We have tried to bring more points of access to all who
    make small loans, like Community Development Financial
    Institutions, and give them access to SBA lending. We will look
    at every possible program within our authority to do that.
        Ms. Velazquez. Okay. Okay. Thank you.
        Last week your agency issued final rules to permit the
    wholesale of refinancing of commercial real estate in the 504
    Loan program. With foreclosures expected to climb this year,
    how much will this new refinancing program contribute to the
    subsidy rate?
        Ms. Mills. Well, this new refinancing program has the
    authority to pay for itself, so it lives separate from the
    subsidy rate.
        Ms. Velazquez. So you do not expect the refinancing
    initiative to contribute to this subsidy rate?
        Ms. Mills. No.
        Ms. Velazquez. No? That is what we heard before regarding
    the regular financing 504 program and you came back and for
    next year you will require nearly $90 million in subsidies. So
    what would you or your agency do if defaults on refinanced 504
    loans begin to exceed the fees charged to cover those losses?
        Ms. Mills. This program is authorized to charge additional
    fees, and we will charge the fees necessary to make a zero
    subsidy.
        Ms. Velazquez. I understand but it is the same situation
    that we have with the 504 regular program. And when you
    continue to charge those fees and increase those fees to cover
    for those losses, you could reach a point where you reach the
    maximum cap allowed by the law. So what will you do then? You
    will have to come back here and ask for subsidies to cover for
    those losses.
        Ms. Mills. The refinancing program ends a year from now.
        Ms. Velazquez. Okay. As you say that a year from now that
    will end, the same situation we find with the stimulus funding
    for the 7(a) and 504. It will expire in December. SBA's loan
    approvals have fallen back to levels not seen since the worst
    of the credit crunch. Why is it that two years after the credit
    crisis began, SBA cannot find a long-term solution to providing
    meaningful levels of credit to small firms?
        Ms. Mills. Well, the facts, as you have just stated them, I
    think, are not correct. If you look at the chart next to my
    testimony you will see that even in the last three quarters we
    have rebounded to levels that are at 2008 levels.
        Ms. Velazquez. Half of all your lending last year occurred
    in the first quarter when the incentives from the stimulus
    package were in place. And that is the only reason lending was
    up as high as it was. So every month since those provisions
    will expire we have seen the lowest number of loans that have
    been issued or backed by the federal government.
        Ms. Mills. With respect, I believe that those facts are not
    correct.
        Ms. Velazquez. It is not the amount. It is not the amount
    of money lent; it is the amount of loans that have been made.
        Ms. Mills. The number of loans that we have right now is
    impacted, as you mentioned before, by the fact that the
    decline--most of the loans are in the small level. In the
    previous years those have not come back.
        Chairman Graves. Mr. Tipton.
        Mr. Tipton. Thank you, Mr. Chairman. Thank you, Ms. Mills,
    for being here. I appreciate your efforts and everything that
    you try and do to help small businesses in the country.
        Just listening to some of your testimony, I would like to
    get a little bit of clarification. You had mentioned that in
    order to be able to get the banks to start making loans again
    you had streamlined some paperwork. Can you describe a little
    bit what were the actual cost savings to the bank as an
    incentive in the streamlining of that paperwork?
        Ms. Mills. I know we have that but I do not have it here.
    So I am happy to get back to you.
        Mr. Tipton. You know, I think we would like to hear that
    because we often hear government is simplifying things and that
    rarely is actually the case. And in terms of trying to be able
    to create some cost savings because that is a real issue. You
    had also mentioned that non-performing loans are dropping.
        Ms. Mills. Correct.
        Mr. Tipton. Right now. Is that the result of an improving
    economy or is that a result that people have simply gone
    bankrupt and they are no longer on the board?
        Ms. Mills. Our loan portfolio is made up of cohorts that
    were made in 2005, 2006, 2007.
        Mr. Tipton. Right.
        Ms. Mills. Many of those, when you look at our delinquency
    rate, failed in the recession and therefore, caused a peak in
    our default rate about 14 months ago, in August 2008. Now it is
    improving slowly as those loans have passed through the
    portfolio.
        Mr. Tipton. So the stabilization is the businesses
    basically went belly up?
        Ms. Mills. Well, actually, the new loans are defaulting.
    They are early. But they are defaulting at a much, much lower
    rate, measured from their month of inception, than the loans
    from those previous cohorts. So we anticipate that this
    improvement will continue. We also know that credit scores on
    our current portfolio of loans made in recent years are much
    stronger.
        Mr. Tipton. Okay. You had mentioned that there is a
    commitment of $20 billion in commitments from the larger banks.
    How much of that has been loaned out?
        Ms. Mills. We made the announcement on this three or four
    weeks ago, so probably not very much yet, but it is coming.
        Mr. Tipton. Okay. Great. You know, looking through your
    written testimony you seem to give a tip of the hat to the
    president in regards to the $467 billion stimulus and indicated
    that it was paid for. My concern and a lot of our constituents'
    concerns that are small businesses is it is being paid for on
    the backs of businesses that are currently struggling in terms
    of increased tax rates. Could you speak to that?
        Ms. Mills. We are talking about the American Jobs Act.
        Mr. Tipton. Right.
        Ms. Mills. The American Jobs Act has received very strong
    support from the small business community because it includes a
    payroll tax cut which they are very eager to get because it
    means cash in their pocket right away. As I understand it, no
    specific pay-for yet has been decided because the bill is still
    in the hands of Congress. But definitely small businesses are
    looking for that cash from the payroll tax cut in their pocket.
        Mr. Tipton. Do you think small businesses are going to be
    concerned about increased tax rates? I have a letter here from
    a gentleman named Jim Bartimus, a small construction company in
    Pueblo, Colorado. Been a successful business, small business,
    and because of a lack of access to capital he paid down his
    line of credit to zero. Went back to the banks trying to get
    that line of credit reupped. He had actually purchased a
    crusher--if you are familiar with construction to be able to
    grind up rocks to put on the roads--trying to grow his business
    and to be able to create jobs. But because of regulatory
    compliance the banks, they wanted to loan the money but could
    not loan the money. He had to line up his equipment, sell it
    off, call in 24 core employees, tell them that they no longer
    had a job.
        But under the president's calculations right now, and there
    is some debate and we both need to probably pass on the message
    that the plan is not paid for, he would have been labeled rich
    a couple of years ago. Do you think it is counterintuitive and,
    in fact, counterproductive to be raising taxes on small
    businesses at this time?
        Ms. Mills. Well, first of all, if you have another small
    business like this or if he is still available, please tell
    your small business owner in that situation to get on SBA.gov
    and come into our district office because that is exactly the
    situation where we can help. And one of the tasks before me is
    to make sure that small businesses are aware that when the bank
    cannot lend because of regulatory issues, our guaranty can
    often, very often, make the difference.
        Mr. Tipton. So that is a lot of clean up that we could do
    in addition to streamlining paperwork, eliminating those
    regulatory requirements on banks so that they can loan. Would
    you not?
        Ms. Mills. We have sat with banks and I sit on a continuous
    basis with the regulators to make sure that the guidance they
    have given on small business lending at the top is making its
    way all the way down to their regional regulators so that we
    have a consistent set of regulations at the banks so that they
    can open their doors to small businesses and get some of this
    money out into their hands.
        Mr. Tipton. Well, I hope that will happen. I see my time is
    expired. Thank you, Mr. Chairman. Thank you.
        Chairman Graves. Mrs. Chu.
        Ms. Chu. Ms. Mills, I am the ranking chair of the
    Contracting Subcommittee and last week Congress Member Mulvaney
    and I were able to have a hearing in Los Angeles, my area, and
    it was about SBA and how it does or does not serve the
    businesses of our area. And at that hearing Jesse Torres, the
    CEO of Pan American Bank, testified about his small business
    lending program. He is doing the job we want. He is providing
    underserved communities with small business lending options. It
    is not easy but they are successful. But they do not operate a
    7(a) loan program and he said that the reason they do not is
    because you need a team of experts to ensure that they meet all
    of the requirements to ensure that they get the SBA guaranty.
    The teams are expensive and not cost-effective for the bank and
    that if SBA finds out that some requirement is not met then
    they will withdraw the guaranty and the bank is liable for the
    entire loan.
        Why would teams of experts be necessary to operate an SBA
    7(a) loan? And what can we do to ease the process for smaller
    banks like Pan American Bank?
        Ms. Mills. Well, first, Mr. Torres and Pan American Bank
    are now on our list to come and do some training and some
    outreach so that we can get him into the program.
        The problem that you describe, we have put forward what we
    call a 10-tab program. When a bank makes a loan we have a 10-
    tab system so that if they put the right paperwork in every
    single tab, when they come forward at some point to have us
    honor the guaranty if there is an issue, we will know that
    every piece of that paperwork is in place. So when we come out
    and we speak to Mr. Torres, we are going to teach him the 10-
    tab business and hopefully alleviate the need for the extra
    cost that he is concerned about and assure him that we will be
    able to make a proper payment on that guaranty because all of
    his paperwork will be in place. We do have paperwork. We do
    have rules. We cannot make payments on guaranties if those
    things are not in place.
        Ms. Chu. So is this a program that you have in place, a
    technical assistance for the smaller banks that need this kind
    of training?
        Ms. Mills. Yes, it is. It is run through our district
    offices. That is one of their primary focuses.
        Ms. Chu. How often do you withdraw the guaranty so that a
    bank might be held liable?
        Ms. Mills. We honor the guaranty in 95 percent of cases.
        Ms. Chu. Hmm. Okay. On another topic, something else that
    we learned from our field hearing in Los Angeles is that
    microloans are incredibly important. In particular, the PRIME
    Program seems to really work, especially now that big banks are
    now likely to deal in millions of dollars. These micro
    entrepreneurs create jobs for themselves and contribute to our
    economy and they might start with one or two persons but before
    you know it they could be a major company. Many of these
    entrepreneurs only need 50,000 or a couple of hundred thousand
    to get started but I understand in SBA's 2012 budget you say
    that the PRIME Program is duplicative of the Small Business
    Microloan Program. But I believe the PRIME Program is different
    in that the PRIME Program gets entrepreneurs ready for a loan,
    whereas the Microloan Technical Assistance Program trains
    already existing programs for growth.
        And just to give an example of a PRIME Program success
    story, two sisters, one a recent college graduate, invested in
    a business with fashion design and manufacturing. They had
    135,000 but they needed to borrow 35,000 to help cover their
    working capital. But they came to PRIME because the regular
    banks would not help them. And where would businesses like this
    turn to if PRIME is eliminated?
        Ms. Mills. Well, first, you are correct. There are
    thousands of stories out there where PRIME has helped many,
    many small businesses with technical assistance. The issue we
    face is that everybody has to tighten their belt in these
    difficult budget times. So we looked for programs where we
    could execute those activities through other programs we had or
    through partners. And it turns out that our microloan
    intermediaries and our Community Development Financial
    Institutions provide terrific technical assistance. We felt
    that our value-added was to provide them with the ability to
    use our 7(a) program, get access to capital, and that we would
    use public-private partnerships to work together with them to
    make sure that the technical assistance through our entire
    network of Small Business Development Centers, microlenders,
    Women's Business Centers, was still robust and growing.
        Ms. Chu. Well, thank you. I would like to get that list of
    these partners that you think would help get these micro
    entrepreneurs ready.
        Ms. Mills. Yes, we can do that.
        Ms. Chu. And I yield back.
        Chairman Graves. Mr. Barletta.
        Mr. Barletta. Thank you, Mr. Chairman.
        Ms. Mills, I represent Pennsylvania's 11th Congressional
    District and Northeastern Pennsylvania. My district has one of
    the highest unemployment rates in the state of Pennsylvania.
        On September 8th, after Hurricane Irene and Tropical Storm
    Lee, we have experienced the worst flooding in the history of
    our area. Many people, many businesses, as you can see, have
    lost everything. Many people did not have flood insurance as
    they were told they were not in a flood plain. As I traveled
    around talking to the residents there, many businesses were
    saying they are not going to open again. They just do not know
    what they are going to do. Many of the folks there, a lot of
    them senior citizens, again, asking what will the federal
    government do to help us? And what I had to tell them was that
    they could qualify for a SBA loan. If you are an individual we
    will give a loan at 2.7 percent interest. If you are a business
    and you cannot get credit anywhere else, we will give you a
    loan at 4 percent. But if you could get credit somewhere else
    we will give you a loan at 6 percent interest.
        I have got to tell you I was almost embarrassed to tell the
    people back home that, especially after, you know, whenever a
    disaster strikes somewhere else in the world, America, being
    the most generous country that we are, are always the first to
    help people. In fact, in the last two years we gave Pakistan
    $215 million for flood disaster relief. No interest. No
    payback. I do not know about you, but I think we should help
    America and Americans first. What do you say that I tell the
    people back home in Northeastern Pennsylvania why the interest
    rate would be 6 percent?
        Ms. Mills. Well, I am familiar with your district, and it
    was extraordinarily hard hit by both Irene and Tropical Storm
    Lee. For the benefit of those who are new on the Committee, we
    run a ready reserve of 2,000 disaster operators who actually
    within 24-36 hours are on the ground in these areas, assessing
    damage, speaking with people, co-locating with FEMA. We have a
    two-page application. We do homeowners. We do businesses that
    are damaged. And we do economic injury. So make sure that they
    know even if they did not have physical damage but because the
    area was cut off, businesses suffered some damage or because it
    is still distressed, they can get 30-year long, 4 percent
    economic injury loans.
        Mr. Barletta. But----
        Ms. Mills. The issue about credit elsewhere----
        Mr. Barletta [continuing]. But they could get credit
    elsewhere.
        Ms. Mills. The reason for the credit elsewhere test is that
    we are responsible for the good use of taxpayer money, and the
    reason for an uptick is that if there is a private sector
    mechanism, a bank, where they can get credit elsewhere, then
    the market should provide it. If they cannot, then that is our
    job. And that is where we step in and try to give the most
    benefit----
        Mr. Barletta. Well, I guess the problem I am having is we
    gave Pakistan $215 million for flood disaster relief. So should
    I tell the people in Northeastern Pennsylvania they would have
    been better off if they were in Pakistan than if they were
    right here at home? I do not know. I think at some point we
    should take care of America and Americans first and American
    businesses. We cannot afford to lose any more jobs.
        I introduced a bill. This has changed my life, this flood.
    I mean, I walked with these people. I cried with them and
    watched them as they put their life's possessions out on a curb
    to be taken away. I introduced a bill that would change the way
    America handles disasters by introducing a bill that would give
    a 1 percent loan for 30 years, enough to cover our
    administrative costs. If we could help other people I think we
    could help Americans at a time of disaster first.
        Thank you. I yield back.
        Ms. Velazquez. Mr. Barletta, will you yield?
        Mr. Barletta. Sure. I will.
        Ms. Velazquez. I really welcome your position. In fact,
    after Katrina I tried to reduce the interest rate and even
    provide a bridge loan, zero interest rate. And it did not
    happen. I did not have the support from your side so maybe this
    time around we could work together.
        Mr. Barletta. Do you want to get on the bill with me?
        Ms. Velazquez. Okay.
        Mr. Barletta. I think we could change the way we handle
    disasters. Thank you.
        Chairman Graves. Mr. Schrader.
        Mr. Schrader. Thank you, Mr. Chairman.
        I am pleased to hear that some people in the majority party
    are beginning to rethink having to require to pay for our FEMA
    reimbursements upfront when there is a disaster and real people
    are hurting. And I assume Mr. Barletta was obviously one of
    those that was not willing to hold up the FEMA bill and have it
    paid for at the time. So I appreciate his help there.
        Mr. Barletta. Will you yield just for a moment?
        Mr. Schrader. No. I have got a limited amount of time.
        I want to talk about I think the successes that this small
    business administrator has had over the last few years. I mean,
    I have--when I came here actually Administrator Mills came in
    at the same time and I was a little bit aghast at the status of
    the Small Business Administration. It had been hacked at and
    cut back dramatically by the previous administrations, not just
    the one before but over the years and it was in total disarray.
    We had a lot of testimony about waste, fraud, and abuse that we
    have had several subsequent sessions with the administrator and
    it looks like things have gotten, frankly, a lot better. I
    mean, there is a new sheriff in town, and I appreciate that,
    Madam Administrator.
        And I think there is some misinformation here. I mean,
    people are talking about going, you know, they have not been
    here, I guess, but there is talk about what the role of the SBA
    is. And I assume that you are not trying to supplant private
    enterprise; you are trying to work with private enterprise. If
    for some reasons banks, credit unions, mortgage lenders cannot
    step in, that is where you step in. And so there is going to be
    some defaults. There are going to be some defaults.
        But I think I need to hear clarity. You mentioned it but it
    seems to me that a lot of the subsidy rates that we have
    endured, you know, where we are paying back the Treasury for
    ``bad loans,'' where under the previous administration's watch,
    and actually our rate of default since you have taken over, is
    down. Am I incorrect there?
        Ms. Mills. Well, thank you.
        On your point about the current rates, have turned the
    corner on our default rates. They peaked in August 2010 and now
    have been reducing each month. Our current default rates
    overall are actually quite low. Our default rates tend to be
    under 5 percent. Our loss rates actually tend to be much lower.
    They are about two points higher than the normal Federal
    Reserve credit because we are giving credit where you cannot
    get credit elsewhere.
        Mr. Schrader. I appreciate that, too. I mean, that is
    really the bottom line. You hit the nail on the head. We have
    got to get small businesses back in the business of hiring and
    growing the economy and growing America. And so you take a
    teeny bit of a risk and I am amazed that the default rates are
    where they are.
        I also remember, and some members on the Committee are new,
    that one of our big angst when you took over was, well, the
    process is too bureaucratic. Trying to get a loan is
    impossible. The applications--we asked again and again and
    again, can you not streamline this application process? Can you
    make it simpler so that people can actually get in there and
    get the loans they need? We also were worried about the valley
    of death, you know, where a lot of small businesses, you get a
    little start up and then you try and get to the next level and
    all of a sudden you cannot get that credit. And you have
    developed some pilot programs. There is some controversy about
    that. I appreciate that. But I assume they are in response to
    our direct requests. Am I not correct on that?
        Ms. Mills. That is correct. So if we look at the Small
    Business Investment Company Program, I do want to thank our
    team and note that not only did they have a record year, they
    took the processing turnaround time for licensing new funds
    down from over 15 months to 5\1/2\ months.
        Mr. Schrader. That was a big deal.
        Ms. Mills. And they are bringing in new funds. They are
    bringing some of the best funds, and they are putting more
    money into those funds and those funds are putting more money
    into small businesses. We do have some gaps, so we have
    orchestrated two other sets of funds under the SBIC authority.
    SBIC authority was not being fully utilized. It is a zero
    subsidy program. It pays for itself and therefore, we want to
    make sure we put as much money through it as the authorization
    has. So we have a new Impact Fund, which is designated to go to
    areas hard hit. The first one was in Michigan. Then we have a
    new Early Stage Equity Fund, which will be launched this year.
        Mr. Schrader. Well, I appreciate your efforts there.
        Just a last comment in the remaining seconds. It does not
    have a lot to do with you but I cannot tell everyone out there
    how disappointed I am in the Treasury Department and the way
    they are not run as efficiently as you and that Small Business
    Lending Fund having cratered horribly. When small businesses
    needed access to capital at the critical time and the
    regulators were beating up on the banks for, you know, having
    too much of this type of loan, this was a great opportunity to
    free up capital. In my state, you know, not a single bank got a
    loan. And a ton of them applied. And while I am sure some were
    probably in tougher shape than they let on, not all of them. So
    I am very, very disappointed in the Treasury. I would like to
    have a hearing with a Treasury official sitting right where
    Administrator Mills is, Mr. Chairman, at some point in time if
    that is not out of order.
        And I yield back.
        Chairman Graves. Mr. Walsh.
        Mr. Walsh. Thank you, Mr. Chairman. Welcome. And Ms. Mills,
    thanks for coming in today.
        My colleague, Mr. Schrader, mentioned that it is the
    purpose of SBA to help small businesses access capital when
    they cannot do that in the private marketplace. What is SBA's
    mission, in 20 seconds? Twenty-four seconds?
        Ms. Mills. There's the access to capital area. We also have
    disaster operations. We help small businesses--win $100 billion
    in federal contracts. That is a win-win situation. And we have
    a network of counselors, mentors, advisors, that are as equally
    as important as the capital.
        Under access to capital, where the market is functioning,
    where a small business can get a loan from the market, why
    should taxpayers subsidize that activity because the market is
    handling it? But there are many, many small businesses out
    there that do not have access and opportunity. That is where we
    have been able to step into the market as you just saw in this
    credit crisis and provide that access and opportunity.
        Mr. Walsh. I actually chair the Access to Capital
    Subcommittee, and we held a hearing a couple months ago and
    brought in heads of community and small banks and asked them
    pretty directly why they were not lending to small businesses,
    knowing full well this is where the bulk of small business gets
    their capital. And their answer was fairly clear and equally
    direct--our hands are tied. Government regulations have made it
    darn near impossible for us to lend to small business. I am
    curious, have you heard the same sort of thing?
        Ms. Mills. Well, as I said earlier, we work very closely
    with the regulators on guidance to small business. Out in the
    field we hear the same thing you have, which is that the
    guidance that has come down from Washington has been
    interpreted more tightly at the regional levels. When we have
    had these conversations we have gotten very strong assurance
    that the regulators will work with us to make sure that the
    guidance that they think is proper is the guidance that is
    being affected at the community bank level and in the regional
    level. We want to make sure the pendulum is in the right place
    and it has not swung back.
        Mr. Walsh. And take that pendulum, do you feel that it has
    swung too far? I can tell you that I have probably spoken to
    the heads of 20 or 30 community banks in my district in the
    last six months and to a man and a woman they all say it has
    the last couple of years. They have seen a noticeable uptick.
    Are you sensing any of that?
        Ms. Mills. Well, that is a matter for the regulators, but
    our role was to bring to their attention that we were hearing
    concerns, and to make sure that they took their guidance all
    the way down. Our job is actually to make sure that we provide
    the product that can take some of that risk out of the system
    and allow banks the opportunity to make some loans they want to
    make but for various reasons cannot fulfill the total risk
    profile on their books right now.
        Mr. Walsh. But you have heard that concern at that level?
        Ms. Mills. We have communicated. Every week I am somewhere
    different in this country and every week I have a roundtable
    with bankers and small businesses owners. So I have a pretty
    good sense that in the middle of the summer everybody--small
    business owners, bankers, everybody--had a moment of pause and
    we did go to the regulators and have conversations to make sure
    that everybody stays on the same page, and that access to
    capital is, within the proper constraints, available to small
    businesses as much as possible.
        Mr. Walsh. Well, if you are out there as you say, and I
    believe that you are, I am convinced then that you have heard
    the same thing most of us have heard when you speak to small
    and community banks, that they are suffocating right now. Their
    hands are tied.
        Ms. Velazquez. Will the gentleman yield?
        Mr. Walsh. Yes. Many of them allude specifically to Dodd-
    Frank.
        Yes, I would be happy to yield.
        Ms. Velazquez. Dodd-Frank will not apply to those community
    banks whose holdings, whose assets are less than $10 billion.
    And those are the community banks that are in our districts. I
    am a member of Financial Services and I work on Dodd-Frank.
        Mr. Walsh. And I will close with this, and thank you, I
    guess they are not convinced of that. Thank you. Thank you, Mr.
    Chairman.
        Chairman Graves. Mr. Critz.
        Mr. Critz. Thank you, Mr. Chairman. Thank you,
    Administrator Mills for being here.
        Going back to what Ranking Member Velazquez was talking
    about, the spike in lending that you had at the end of the
    first quarter of FY11 and then as December 31, 2010 hit, the
    precipitous drop in lending--I think the figure she used was
    half of your lending took place in that first three months for
    the entire fiscal year and some of the information I have been
    given is that SBA used to come to the Congress so that you get
    an appropriation to cover--to waive the upfront borrower fees
    on the 7(a) program. But you did not do it this time. And I
    have been told that you had $500 million of Jobs Act money that
    you might have been able to use to alleviate some of that. And
    I am just curious, as our economy was going the way it was, why
    you chose not to ask for that appropriation at that point or
    why you did not use the $500 million in Jobs Act money.
        Ms. Mills. I assure you we have used every penny of Jobs
    Act money for fee reduction that we possibly had.
        Mr. Critz. Okay. Is there a reason you did not ask for a
    waiver or did not ask us for an appropriation to waive so you
    could waive the upfront borrower fee?
        Ms. Mills. We did waive all the upfront borrowing fees
    through the end of the Jobs Act period. We used every single
    penny and we are very grateful for it. Thank you.
        Mr. Critz. Okay. One quick thing, and this builds on what
    Mr. Walsh was just saying, is I noticed in your statement that
    you say that you brought 1,200 lenders back to SBA lending. And
    obviously some of my community banks must be over that 10
    billion in assets because they are asking and talking about how
    some of the regulations that they are having to meet are
    hindering them lending money, or some of the capital
    requirements that they have to keep are hurting in the way they
    lend money.
        I was listening to you as you were saying you convene
    roundtables and you talk to banks all the time. I would be
    curious to hear what your suggestions are on the way we can be
    more effective or help you be more effective in getting money
    out and getting these small businesses energized.
        Ms. Mills. Well, thank you. I want to make sure that you
    are properly connected to all of our resources on the ground.
    So we have district offices, we have Small Business Development
    Centers, and we have a flow of small businesses that we match
    with banks. To the extent that you come in contact with banks
    and with small business owners who have concerns, who are
    struggling, who want to make more small business loans, we can
    help them with our programs. We are in high outreach mode and
    the best thing to do would be to send them to us.
        Mr. Critz. I know your administrator in Pittsburgh is Carl
    Knoblock. He is a friend of mine and I can tell you where all
    the SBDCs are in my district as well. So we are pretty well
    plugged in. I was just, you know, my banks are talking about
    having troubles with lending money. And it is not just SBA
    money. Actually, I have a letter in front of me from one of my
    banks but it is the Treasury Program that Mr. Schrader was
    mentioning that one of the rules to get a Treasury loan is that
    the company has to certify that they are not child sex
    offenders. And there was a parliamentary trick played last year
    to defeat this bill and it actually got included, so now they
    are having trouble lending the money because of this provision
    because the small business owners are a little bit insulted
    that they have to certify--not that they are not rapists, not
    that they are not murders, but that they are not child sex
    offenders.
        So, I appreciate your efforts. I am not going to belabor
    the point. My office is always available if we can be of any
    help, and I appreciate the work you are doing.
        Chairman Graves. Mr. Mulvaney.
        Mr. Mulvaney. Thank you, Mr. Chairman. Administrator Mills,
    thank you very much for doing this.
        At the risk of repeating what may have been said, I
    apologize for being a few minutes late. But I want to thank the
    chairman and the ranking member for giving me and Mrs.--
    Congresswoman Chu the opportunity to have a field hearing last
    week in the San Gabriel Valley where Mrs. Chu is the
    representative.
        And instead of asking questions I would like to report back
    briefly to you on what we heard because it was very educational
    for me. This was an area that is literally driven by small
    business. It takes up an inordinate size of the economy in that
    part of Southern California. There are very few large, national
    Fortune 500 companies, but a very, very active small business
    community, entrepreneurs, in large part from the immigrant
    community.
        And here is what we heard. We had small business lenders
    there, small banks, and one of the things they told us was that
    they were doing lots of lending to small business but no small
    business lending. They were not using any of the programs that
    were available to them. And when we asked them why they said it
    was too hard. And they said that the large banks were doing it.
    And really what the large banks had done is put together teams
    of professionals who did nothing but small business lending. So
    the Wells Fargo, the Bank of Americas of the world, they would
    have small business units because it was a specialty, and it
    had to be a specialty because it was so complex. And they did
    not have the human capital or the money available to develop
    that area of expertise. So they asked us to please do whatever
    we could to simplify the process.
        We also heard that one of the things they focus on is micro
    lending. They do a lot of micro lending. We heard some great
    stories about loans under $100,000, how successfully they had
    been used. And when I asked them if they knew about the small
    business micro lending program, one of the things they said is
    they had looked at it but that the paperwork for a $50,000 loan
    was almost the same as the paperwork for a million dollar loan.
    And in terms of a return on the time and the investment that
    they had to make into setting up that loan it simply was not
    worthwhile. So they asked us to please take a look at anything,
    if anything, looking at making micro lending somehow
    streamlined so that they could do more of these things. And
    again, this was--a large majority of the loans they were
    issuing to the businesses in that area were under $100 to
    $150,000.
        We also learned about the difficulties of opening a small
    business development center. That area had lost its SBDC in the
    recent past and there were a couple of organizations that were
    interested in reopening it only to find it was going to take at
    least three years to go through the paperwork necessary to open
    a new SBDC. And one of the things that we suggested or that
    Mrs. Chu and I talked about is maybe suggesting to you a
    grandfather process. So if there was an organization that was
    an SBDC that closed, that maybe they could be put on a fast
    track to reopen since they have already gone through the
    process at one point in the past.
        I guess the last thing that we heard was that many of them
    had not heard of many of the programs that you offer. They were
    not aware of the Mentor Protege Program. Only one of them even
    had ever been to the SBA website. So I do not know what you all
    are doing in terms of outreach to these small community banks.
    And maybe they dismiss it because of their impression that it
    is too difficult to work with the SBA because of past history.
    Again, I am not laying any blame here; that is not the point of
    the presentation. But that if the opportunity exists to reach
    out to educate these lenders, because again, the basic message
    I took away was that they are lending to small business and
    they want to do more but they are not using any of the tools
    that are made available to them through the Small Business
    Administration.
        So again, not a question. A comment back from the field,
    and I appreciate your attention.
        Thank you, Mr. Chairman. I yield back.
        Chairman Graves. Absolutely. Mr. Peters.
        Mr. Peters. Thank you, Mr. Chairman. And Administrator
    Mills, it is great to have you here with us today, and I
    appreciate all the SBA has been doing, particularly in the
    state of Michigan. You mentioned some innovative programs that
    you have engaged in the state, and I thank you. We have been
    particularly hard hit as a result of what has been happening in
    the economy, and thankfully the auto industry is responding,
    been adding jobs in our area, but we all know that it is not
    just the auto industry or large industry in any particular
    region that is important, but the small businesses that are in
    the region that need to grow and prosper. And you have been a
    key player in helping us do that in Michigan. So I wanted to
    thank you for that first off.
        And before asking some, a couple specific questions, I also
    just kind of want to get your sense on a statistic that you
    mentioned in your opening comments that ``job creation is down
    starts by over 100,000,'' I believe was the quote that you had.
    And we, obviously on this Committee, are all big believers in
    small business and understand that small business is the engine
    of growth for an economy. But we also know that job creation is
    heavily skewed towards startups in order to get that kind of
    job creation.
        And I just want to kind of get your assessment. You have
    been a very successful businessperson prior to your current
    position. As to what do you think accounts for that? Is it just
    as a result of lack of demand in the economy, a very weak
    economy we are in? Or are there some structural impediments,
    like financing that we are discussing here today? I mean, how
    would you weigh those and what sort of things should we be
    thinking of as members of the Small Business Committee to
    address the startup issue in particular?
        Ms. Mills. Thank you. I have enjoyed working in Michigan
    with all the great small businesses there. We focus on both
    Main Street small business and the kind of high-growth small
    businesses that could be part of the next large public company
    and employer. We are down 100,000 starts, and that is
    contributing to part of the employment problem. We do know that
    access to capital for startup businesses and for small growth
    amounts for those businesses is constrained. That, as they say,
    the valley of death has widened. We do have some programs,
    particularly the new one we are going to launch, but there is
    still a need for continued focus on getting more access to
    capital, particularly in underserved communities, particularly
    in distressed areas, particularly in places which have not
    traditionally had venture capital, because we know there are
    small, innovative businesses and entrepreneurs waiting to start
    up in all of those areas.
        Mr. Peters. Now, along those lines, and you mentioned the
    success that you had in the Recovery Act and as a result of
    that you were able to increase lending considerably which had
    higher guaranty rates as well as the waiver of fees. And I know
    your activity was up dramatically. Have you done any analysis
    as to what is more important--waiver of fees or the guaranties?
    And if given a choice as we go forward, how should we weigh
    that as perhaps a program going forward? Because we know the
    track record of success?
        Ms. Mills. Well, that is a very good question. We have done
    some analysis. I asked at every focus group for a long period
    of time and usually I would get half of them saying it is the
    fees and the other half saying it was the guaranty. So I think
    the jury is out.
        Mr. Peters. So we still have to find that out. But
    certainly, the----
        Ms. Mills. We think the combination clearly worked.
        Mr. Peters. Certainly, the combination worked. And I guess
    in thinking of how the jury is out, I do not know who were your
    focus groups. Probably smaller companies in particular get
    impacted by fees perhaps more than anything else. And I am very
    concerned about access for underserved communities. I represent
    a community that has an unemployment rate well in excess of 20
    percent and we have a large urban area in the Detroit area, as
    you know, which also suffers. You talked about the program we
    are bringing large banks, and I believe it says it is going to
    target underserved markets in particular. And I would like you
    just to tell us more what does it mean by ``in particular'' and
    how do you define ``underserved''? And how are we going to
    really monitor what is going on with these banks and have some
    sort of report as to the success they are having and hopefully
    focusing completely in underserved areas. But I want to know
    what it means by ``in particular.'' What is your hope for that
    program and how will you assess it?
        Ms. Mills. Well, once again, this is a voluntary program
    that private sector banks came in because we asked them to step
    up. Each bank has a different set of activities and commitments
    that they are interested in pursuing. Many of those banks
    demonstrated that part of that commitment will be around
    underserved markets. We are going to partner with them,
    connecting them to Community Development Financial
    Institutions, and making sure their CRA contributions go as
    much as possible to help proven programs that will get money in
    the hands of small business. So it will be a wide array of
    programs.
        Mr. Peters. Great. Well, thank you very much. Thank you for
    your time. I think my time is up.
        Mr. Coffman. Mr. Chabot from Ohio.
        Mr. Chabot. I am going to pass, Mr. Chairman.
        Mr. Coffman. Mr. West. Mr. Cicilline, Rhode Island.
        Mr. Cicilline. Thank you, Mr. Chairman and Ranking Member
    Velazquez. Welcome, Administrator Mills. It is good to have you
    here.
        I always want to begin my comments about the SBA with
    recognizing the great director in Rhode Island, Mark Hayward
    and his staff who are doing really excellent work and I want
    you to be aware of that.
        As you know, the SBA has $3 billion in authorized leverage
    annually through the SBIC program. And each year anywhere
    between $1 and $2 billion in leverage authority remains
    untapped. And I understand that the Early Stage Innovation Fund
    and the Impact Investment Fund are intended to leverage a
    portion of that existing and yet untapped authority with the
    hope of really propelling into the hands of startups and
    entrepreneurs the capital that they need to be successful. And
    I know there are some studies that indicate that the unmet need
    for early stage capital equity financing for small businesses
    is somewhere in the neighborhood of $60 billion annually. This
    is a really important issue in my state, and I think all of us
    are trying to encourage new startups. And those typically are
    small businesses.
        And so there is a particular, you know, just to use as an
    example, a constituent of mine, along with his partners, is
    forming a company called Axena Technologies, which has
    developed an antimicrobial material that can be used on medical
    devices to combat healthcare associated infections with huge
    potential for savings in healthcare and improved outcomes in
    health. And they have been working with SBA programs, including
    SBIC. And I am just wondering if you could explain how the
    Early Stage Innovation Fund and the Impact Investment Fund
    would help a company like that access startups to really get
    through, as was just described, this valley of death, which is
    really the most challenging time and get to that place where
    they can actually create jobs and grow our economy.
        Ms. Mills. Well, thank you. As you know, I am a person who
    spends quite a bit of time in Rhode Island. My husband's family
    is all there, so I know that you have fabulous entrepreneurs.
        The SBIC fund had a record year, and it had a record year
    in a number of ways. Number one, it had a record year in the
    financings that went out the door to small businesses. Number
    two, it had a record year, as you see in the charts in the back
    of my testimony, in SBA commitments to the funds. We would like
    to fully utilize that authorization because, as I said earlier,
    this is a zero subsidy program and it directly impacts jobs.
        We have built a great pipeline of credible funds who are
    applying, and they can come into the regular program or they
    can apply to an Impact Fund, which is really very much similar
    to the regular program but it is our way of directing potential
    investors to areas that are distressed and are trying to turn
    around and have had a difficult time in this recession. The
    Early Stage Fund will be run slightly differently. It will be a
    one deadline fiscal 2012 activity. For each of those two
    programs we have committed a billion dollars, $200 million per
    program, per year, for five years.
        So those will ramp up. We are doing it as expeditiously as
    possible. Our licensing time has gone down from 15 months to
    5\1/2\ months, so we are taking our pipeline through faster.
    But that said, we need to get capital into the hands of these
    terrific private partners. They need to then deploy it out to
    their small companies. They have been doing it remarkably
    quickly. I think you are going to hear that in the next
    testimony, but we are also doing it thoughtfully because we
    want to maintain this program at its positive levels.
        Mr. Cicilline. Will that be acting as early stage equity
    funding for those two funds?
        Ms. Mills. Correct. Our current funds are actually
    mezzanine funds. But within the early stage there will be a
    deferral mechanism where they can essentially be an earlier
    stage equity contribution.
        Mr. Cicilline. Well, I thank you. And I hope that the SBA
    will really focus on both innovative and creative ways to do
    this kind of financing because I think we have a lot of
    financing tools that were designed during a different age of
    industrial and manufacturing, and we really need to have this
    nimbleness in government to be able to respond to this new
    economy and have financing mechanisms that provide the kind of
    support that our small businesses, our entrepreneurs. And our
    early stage capital is one of those examples. So I applaud you
    for that and look forward to its results.
        Thank you. I yield back the second that I had.
        Chairman Graves. Ms. Hahn.
        Ms. Hahn. Thank you, Mr. Chairman, Ranking Member
    Velazquez.
        Ms. Mills, it is wonderful to listen to you today and I
    know while we are bringing forward problems and issues that we
    have heard in our districts, it is clear that you and the
    entire Small Business Administration is working, I think, you
    know, daily to try to do what you are intended to do, which is
    really to support our small businesses and try to get the
    capital into the hands of startups, current businesses, and I
    think you are doing a great job.
        Since I have been on the Small Business Committee, I have
    done what many of the members have been doing longer than me,
    and that is actually going and meeting with small businesses in
    my district. I think I am up to 80 just in the last month that
    I have met with personally. And I have held roundtables, I have
    walked into their businesses unannounced, and I am beginning to
    hear sort of a common theme, which I think you have heard
    today, which is the paperwork that is needed to apply for these
    small business loans is many times daunting, and as we have
    heard some of them feel like it is not really even worth their
    time.
        You know, as of February of this year, the SBA preferred
    lenders can approve loans using the new Small Loan Advantage
    Process. And the goal of this program is to expand the
    availability of small dollar loans by allowing existing SBA
    lenders to make loans under 250,000 using a two-page
    application. SBA has shortened the approval time to minutes if
    the application is submitted online, and from 5 to 10 days for
    non-delegated lenders. It seems to me that this Small Loan
    Advantage Program is exactly the type of solution that I think
    small businesses are looking for.
        What do you think we could do to expand this program and
    make it accessible to everyone? How can we ensure that
    preferred lenders are using the small loan advantage process
    for all of their small loans?
        Ms. Mills. Well, thank you, Congresswoman, and thank you
    for your letter. I know that you have met with over 50 small
    businesses.
        Ms. Hahn. It is up to 80 now.
        Ms. Mills. And clearly you just said it better than I
    could. We have a product that we have designed. We are reducing
    our paperwork, increasing our turnaround times, keeping a level
    of underwriting to make sure we have risk oversight. We are
    taking those principles of that product and now broadening them
    exactly as you had asked.
        Ms. Hahn. You know, one of the other things I heard from my
    small businesses was under the Loan Guaranty Program. The
    criteria that SBA has to qualify for the loans is sometimes
    broadened when they actually go to the banks to, you know,
    access the loan. The banks put on more criteria than SBA
    requires. One of the issues they brought forward to me was
    while SBA, the Loan Guaranty Program does not require
    collateral--real estate as collateral. When they go to the
    bank, the banks say, by the way, we are going to require that
    you put up real estate as collateral. What can we do in working
    with the banks that are lenders, you know, to not add criteria
    or add restrictions to these loans when SBA is clearly not
    setting these criteria forward to small businesses as a means
    to qualify?
        Ms. Mills. We work with about 5,000 of the 8,000 banks.
    They are our partners. The first line in the credit process is
    generally the bank. The bank will make a credit decision
    because they are on the hook for somewhere between 50 and 25
    percent of the loan as well. They have to have an independent
    credit decision. We have tried to coordinate, to work on
    paperwork reduction, but we have to make sure that both of us
    are satisfied in risk oversight.
        Ms. Hahn. Well, again, I would urge you to maybe work with
    some of our partners out there because, again, that clearly
    stops many of these small businesses, these startup companies
    from accessing this capital. So if you could work with them on
    maybe trying to keep their criteria at least the same as yours.
        And the last thing I will just say, and I wrote you in my
    letter, I would love to invite you to sunny Southern California
    and come to my district. I know that would be a great honor to
    have you there and I think there would be a lot of folks out
    there that would really enjoy listening to you and really
    hearing more about the programs that are available to small
    businesses. Come during the winter.
        Chairman Graves. Mr. Richmond.
        Mr. Richmond. Thank you, Mr. Chairman. Thank you,
    Administrator Mills.
        One thing, and I will ask out of order, but we are talking
    about making sure that small businesses have the capital and
    access to capital so that they can flourish and they can
    fulfill their mission and they can continue to employ people,
    which is an important aspect of it, but the other aspect of it
    which drives all business is demand. How do we increase demand
    so that those businesses can continue to sell their products or
    widgets or gadgets or whatever it is that they are doing?
        Ms. Mills. With the American Jobs Act, we want to put more
    cash in the hands of small business right now because we have
    seen that when they have more cash available, such as in the
    payroll tax cut, they can take that money and they can put it
    into advertising. They can put it into inventory. That creates
    more demand for their products. That creates more jobs. Then
    they can come for financing expansion.
        That is one of the first things, to prime the pump.
        Mr. Richmond. Also, let me thank you for your
    administration coming down and participating in my small
    business fair that we had. We had over 347 small businesses
    sign up. I had a chance to talk to almost 120 of them on the
    opening night. And many of them sang the praises of our local
    SBA office in terms of the outreach and assistance that it
    gives. And now the new push, which I think is very important,
    is helping them understand that 95 percent of the consumers in
    the world are outside the United States and China, we must help
    them get to a point where we can sell our goods over there. And
    a few of them are taking us up on the offer of attempting to do
    that. And many of them left the small business fair with
    contracts with new vendors. So that was a very good thing.
        There are two issues and two suggestions they gave to me,
    and I think we submitted them to you. And I will give them to
    you.
        When the president announced expedited pay for contractors
    working with the government, they wanted to make sure that that
    trickled down to the subcontractors, to make sure that when the
    PRIME contractor was paid, that they do not unnecessarily hold
    up the subcontractors' money. And I think there was a program,
    maybe 10 years ago, where the PRIME contractor had to indicate
    that the subs were paid or would be paid in a short period of
    time. So they expressed that that would help. Because if they
    do not have access to capital, they do not have the time. Well,
    they do not have the resources to float payroll and all of
    those things, waiting on that payment.
        The other suggestion that was made was--and I am sure it
    would ease a lot of members of Congress' workload--was if we
    could put the status of 8-A and other programs, the application
    process, on line, almost like colleges can do now where they
    can log into a secure account and see if all of their documents
    are turned in. See if they need anything else. See if they are
    on a background check phase or whatever, because a lot of times
    if they know, then they can make better decisions. And I think
    that now with technology we can offer that so that they can
    keep up with that.
        Other than that, I do not have much else to offer. I would
    just again thank you for what you are doing and give you an
    opportunity to offer anything that you think you can need or
    what we need to do to help.
        And I will say that we are looking forward, at least in
    Louisiana, to working more and maybe another round of teaming
    grant opportunities which we were not successful in the first
    round, so maybe we can look at second and additional rounds to
    see if we cannot participate.
        Thank you, Mr. Chairman.
        Chairman Graves. Mr. Coffman has one more.
        Mr. Coffman. Thank you, Mr. Chairman.
        Ms. Mills, I think you had mentioned the issue about
    banking regulations and its impact on small business and your
    view was, as it filters down, that at the top that there is
    certainly clarity and there is balance but that as it filters
    down perhaps there is not balance. And I just want to say that
    there is not balance, and I think it has hurt small business
    lending, particularly the community bank level, where you do
    have a wide latitude for which the regulators can go, but yet
    they obviously take the most conservative approach just in case
    anything ever happens, that their fingerprints are not on it.
    And you have performing loans out there that are being
    downgraded, causing these institutions to increase their
    capital requirement and pull in their ability to lend. And I
    just think that is a huge issue impacting small business at the
    community bank level.
        One thing, I was visiting businesses last week in the
    district and, you know, you always wonder did you get the right
    cross section. But it seems like there were some signs of life.
    It seemed like although we felt like we were still skipping
    along the bottom, that the firms that survived this seem to
    have adapted. And, you know, they adjusted their business
    model, they made changes, and adding some employees.
        I visited a manufacturer and probably three services
    companies last week. Very different picture from 2009 when the
    economy was in freefall and these poor--these small businesses
    were getting their credit lines just cut off. I mean, and
    everybody was just going down. And so that was tough.
        I will get the other--get to probably a better picture next
    week when I am doing a job fair back in the district because I
    know there are a lot of unemployed folks that have been out of
    work for a very long time. And just last point, and if you
    could just respond to these, and that is I have had small
    businesses that are service-related companies come to me and
    they are very concerned about the impact--and these are kind of
    relatively low wage employees, one was a dry-cleaners who had a
    chain of dry cleaning stores but incorporated under the same
    entity had about--you know, had well over 50 employees. The
    other new as a janitorial firm with well over 50 employees.
    What is the impact on the health care bill going to be on their
    firm and their ability to keep these employees. And I will turn
    it over to you then.
        Ms. Mills. Well, number one, I think you characterized it
    exactly right. We are seeing some signs of life among small
    business. We have some demand now and we have to make sure that
    they get access and opportunity.
        In October 2008, I was hearing ``I need a loan to save my
    business.'' Now I hear ``I need a loan to buy that next piece
    of equipment, hire that next worker, make that next
    expansion.'' That is good news, but that also means we have to
    be there with access and opportunity.
        Mr. Coffman. And let me just say real quick, I was able to
    visit--one of them, in fact, that I did mention was a
    restaurant that is being built and, in fact, that is with an
    SBA loan. So, thank your department for that.
        Go ahead, please.
        Ms. Mills. Thank you.
        I would also ask small businesses to come to our website,
    where we can walk them through everything. With the Affordable
    Care Act, we know that small businesses now pay 18 percent more
    than large businesses, and when the exchange is open that
    premium will go down or disappear. So there are many good
    prospects. There is also the health care tax credit. We have a
    tool on the website to see if they qualify. Those would be
    opportunities I would suggest.
        Mr. Coffman. Thank you, Mr. Chairman. I yield back.
        Ms. Velazquez. Ms. Mills, you recognized the need to
    increase lenders in your loan programs. Last year you had 2,727
    total lenders; 1,349 made three loans of less. And my guess is
    that some of the lenders who came into the program were
    attracted by the provisions of the Recovery Act. So once those
    provisions expire I just wondered how many of those lenders are
    still active and making those loans. In the second panel we are
    going to have a credit union testifying.
        And my question to you is what will you do to retain the
    lenders that are participating as SBA's loan programs, but
    also, what are you doing to increase direct union participation
    in your loan programs.
        Ms. Mills. Thank you. Credit unions are about 10 percent of
    the current activity. We love credit unions and we think they
    can do a very good job with SBA. We are bringing them in
    through training, through education, through participation.
    Active participation with their association. On the ground, you
    are exactly right. We have to work very, very hard now to make
    sure that we continue to meet one of our base goals, which is
    active lenders. About 5,000 of the 8,000 banks actually hold an
    SBA loan. But we track how many have made a loan within that
    year, and that number is around 3,000, in the high 2,000.
        So we need to keep that number up. And we are going to be
    working. We hold lender roundtables. We simplify our program.
    We walk them through applying. We do everything we can. So if
    you have lenders in your communities, particularly those who
    are on the ground and know these good small businesses, we will
    bring them in. That is why we are opening our doors to
    community development financial institution, who have good
    lending track records and we want to be there with as many
    doors, points of access, as possible.
        Ms. Velazquez. The challenge that I see when it comes to
    either community banks or credit unions is that you need the
    personnel. And they do not have that type of capital and
    expertise. So what will you do to help them? It is just not
    walking through. Just because of the pressure coming from
    regulators to make sure that they are complying with credit
    standards. How do you balance that?
        Ms. Mills. Well, as you know we have a product for a lender
    that is only going to make one or two or three or four loans
    that allows them to use much more of their own documentation.
    We continue to streamline that so they are able to come into
    our program without undue burden.
        Ms. Velazquez. Okay. Thank you, Mr. Chair.
        Chairman Graves. Thank you, Administrator Mills for being
    here today. We appreciate it. I think that is the end of the
    questions. We will go ahead and seat the second panel, if we
    could.

     STATEMENTS OF LYNETTA TIPTON STEED, EXECUTIVE VICE PRESIDENT,
      REGIONS FINANCIAL CORPORATION, TESTIFYING ON BEHALF OF THE
       CONSUMER BANKERS ASSOCIATION; SALLY ROBERTSON, PRESIDENT,
     BUSINESS FINANCE GROUP, TESTIFYING ON BEHALF OF THE NATIONAL
    ASSOCIATION OF DEVELOPMENT COMPANIES; K. RODGER DAVIS, MANAGING
      PARTNER, NORTH CREEK MEZZANINE, TESTIFYING ON BEHALF OF THE
    SMALL BUSINESS INVESTOR ALLIANCE; GARY GRINNELL, PRESIDENT AND
    CEO, CORNING FEDERAL CREDIT UNION, TESTIFYING ON BEHALF OF THE
             NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

        Chairman Graves. Let me take a moment to explain the lights
    to you. Each of you have five minutes to testify and the lights
    will be green during that time. When you get down to one minute
    they will change to yellow and then when your five minutes is
    up it will go to red.
        And with that I will introduce our first witness today,
    which is Lynetta Tipton Steed, the executive vice president of
    Business and Community Banking at Regions Bank. Regions Bank is
    headquartered in Birmingham, Alabama. It is one of the largest
    full-service providers of financial services with 1,800 bank
    offices in 16 states across the Midwest and the South. Ms.
    Steed joined Regions in 1992 and is now responsible for
    managing Regions' Credit Underwriting, Documentation, and
    Administration for Small Businesses. She is testifying today on
    behalf of the Community Bankers Association. Thank you for
    coming all this way. I look forward to hearing your testimony.
    You might turn on your mike, too. There we go.
        Ms. Steed. Thank you.
        Chairman Graves. Go ahead and give your testimony, and then
    we will go through each one and then open it up for questions.

                   STATEMENT OF LYNETTA TIPTON STEED

        Ms. Steed. Yes, sir. Chairman Graves, Ranking Member
    Velazquez, and members of the Committee. My name is Lynetta
    Tipton Steed and I am an executive vice president and division
    head for Business and Community Banking for Regions Financial.
        Regions is a full service financial company headquartered
    in Birmingham, Alabama, with over 1,800 branches and 2,200 ATMs
    in our 16 state footprint. I am also a member of the Consumer
    Banking Association Small Business Committee, which includes
    top small business bankers who share the goal of improving the
    state of small business banking, including SBA programs.
        Small businesses are facing a number of challenges--weak
    economic conditions, high levels of unemployment, and low
    consumer confidence have led to low sales volumes, which have
    resulted in a lack of demand for small business loans. Despite
    the decline in overall loan demand, we continue to see healthy
    SBA lending. The SBA 7(a) and 504 programs have been effective
    during these economic times. Earlier this month, the SBA
    announced it supported $30 billion in fiscal year 2011,
    bringing the three-year total to over $70 billion in support of
    small businesses lending.
        Regions recognizes the value of SBA partnership and has a
    proven track record with its programs, having been a preferred
    lender since 1996. In 2010, Regions identified increased SBA
    lending as a strategic initiative. Significant resources have
    been devoted to this initiative to improve the delivery and our
    special lending efforts. As a result, we have more than doubled
    our SBA lending staff.
        Regions has ranked in the nation's top five for overall 504
    loan approvals for the past two years. We have also
    dramatically increased our 7(a) lending over the past year by
    82 percent. In addition to the SBA 504 and 7(a) programs,
    Regions participated in the Americas Recovery Capital Loan
    Program when it was in place, and recently added the export
    working capital and export programs as well.
        We intend to implement the newly named working capital
    CAPline program in the first quarter of 2012, and we were
    strongly considering the contract CAPline program as well.
        So what can be done to make things better? The loan
    enhancements provided under last year's Small Business Jobs
    Act, allowed the SBA to raise the guarantee on its 7(a) and
    waive certain fees on both (7a) and 504 loans. While in effect,
    these provisions had a tremendous effect on the ability of
    banks and small businesses to utilize these important programs.
        As an example of this effectiveness, in the fourth quarter
    of 2010, Regions' application trends and approval trends
    increased by more than 25 percent over the prior quarter. Also,
    the Small Business Jobs Act's permanent increase in 7(a) and
    504 limits from $2 million to $5 million and its permanent
    increase in microloan limits from $35 to $50,000 have been
    helpful. However, the act only temporarily increased the cap on
    SBA express loans, a subprogram of 7(a) from $350,000 to $1
    million. In order to expand access to much needed working
    capital.
        A further streamline 7(a) loan process would help borrowers
    attain loans more easily. The SBA has done a good job at
    enhancing but there are relatively easy to implement
    adjustments that could be made to the 7(a) loan process that
    would expedite originations of small business loans.
        For example, allowing financial institutions to use their
    own application and notes for all SBA loans would be helpful.
        The SBA currently allows lenders and credit policies on
    express loans, which has greatly improved that process.
    Effective aside from the SBA Lender Oversight is another
    crucial area of concern. While there needs to be strong and
    consistent lender scrutiny, fluctuating economic conditions
    often call for flexibility. Overall, CBA's members have all
    reported increased efforts to help small business access
    capital. Many CBA members have hired new small business
    bankers, initiated second look programs to ensure that every
    possible loan is being made, and incorporated other initiatives
    to improve delivery of SBA programs.
        I could cite many good outcomes for SBA programs, but as we
    look forward, CBA encourages Congress to monitor the SBA
    guaranty levels. It is also important that they have the
    funding and authorization necessary to continue to work with
    the private sector in financing American small businesses.
        In conclusion, we support improvements in the SBA loan
    structure, but there is also a need for greater certainty in
    SBA programs, especially during these difficult economic times.
        CBA looks forward to working with this committee and the
    SBA to improve lending disputes and the SBA to improve lending
    to small businesses. Thank you for the opportunity to appear
    before the Committee to discuss the SBA and the current status
    of small business loans lending. I would be happy to address
    any questions you may have.
        [The statement of Ms. Steed follows on page 71.]
        Chairman Graves. Thank you, Ms. Steed.
        Our next witness here today is Sally Robertson, president
    and chief executive officer of Business Finance Group, a
    community development company located in Fairfax, Virginia. Ms.
    Robertson is testifying today on behalf of the National
    Association of Development Companies. She has served Business
    Finance Group as president and CEO for 15 years and she has
    also been involved in several CDC industry organizations.
    Serves as vice chair of the board of directors of the National
    Association of Development Companies. Thank you for being here.

                      STATEMENT OF SALLY ROBERTSON

        Ms. Robertson. Thank you very much. Again, my name is Sally
    Robertson, president of Business Finance Group in Fairfax,
    Virginia. We are a non-profit certified development company and
    I also serve as vice chair of the National Association of
    Development Companies. I am very pleased to provide comments
    regarding the niche filled by the 504 Program for small
    businesses seeking long-term capital to grow and create jobs.
        Successful small businesses are innovators who often buck
    the trend in order to realize a market advantage. Many small
    businesses are now ready to take that next growth step, but
    banks are constrained by the impact of losses on their capital
    and they face regulatory criticism for their real estate and
    small business lending. As the need for new long-term capital
    increases, conventional sources and financing are less
    available. What is the real impact? Without capital even
    successful businesses cannot grow. Capital is the grease that
    enables businesses to grow and add new jobs. Without new jobs,
    America cannot pull itself out of this jobless recovery.
        As you all know, 504 is a leverage program that
    incentivizes banks to lend to small businesses by sharing the
    risk of a long-term loan. Small business owners benefit from a
    20-year loan, and an attractive 20-year fixed rate, along with
    terms that allow them to preserve cash flow for growth. With
    short-term deposits as their source of funds, banks cannot
    offer the same terms to small businesses, but as a participant
    in the 504 project, banks are able to offer a low-risk,
    conventional loan that provides a return to their stockholders.
    The 504 program is an excellent match of the private sector and
    public sector working together to provide capital for growing
    small businesses.
        Best of all, 504 projects create new jobs and save jobs in
    communities across the country. The 504 program is the most
    successful economic development financing program provided by
    the federal government. A study completed by California State
    University three years ago demonstrated that in just a two-year
    period, 504 loans directly created 54,000 new jobs and
    indirectly led to another 66,000 jobs. Further, for every
    dollar SBA spent to operate the 504 program, federal, state,
    and local governments realize $94 in new tax revenues.
        We would like to note that NADCO supports effective SBA
    oversight and we applaud SBA's steps to improve those
    functions. SBA is currently staffing senior managers for the
    Office of Credit Risk Management, and we encourage SBA to
    rethink its oversight systems. Today, SBA has two different 504
    portfolio oversight systems operated by two different
    departments. Not surprisingly, they sometimes come up with
    different reviews of CDC loan performance. We encourage SBA to
    move towards a single portfolio monitoring system, establishing
    firm boundaries, making the rules clear, and providing
    consistent oversight will lead to a stronger lending process
    that reaches program needs yet curbs abuses.
        During the recent recession, the 504 program saw dramatic
    increases in defaults over historical levels. What the
    statistics, however, do not show are the small businesses that
    were saved. With troubled debt restructuring rules, banks are
    very inflexible in workout situations. However, the CDCs and
    SBA have some flexibility with the second trust. These
    successful workout situations have resulted in a business
    surviving that might otherwise have failed, resulting in more
    lost jobs in a fragile economy.
        The 504 program has become one of the most successful and
    largest economic development programs in the federal
    government. By leveraging its guaranty authority and private
    sector capital, SBA has directly assisted in the creation of
    millions of jobs through more than 150 billion in 504 first
    mortgages by banks and 504 second mortgages by CDCs.
        The public-private partnership is a unique program feature
    that encourages the investment of private capital in growing
    small businesses. The value of the 504 program can also be seen
    in successful small businesses who have used the 504 program to
    finance their next level of growth. Every CDC in every state
    can provide stories of small businesses who would not have
    achieved their current success without the ability to use the
    504 program. And as we begin to climb out of this terrible
    recession, there are many small businesses whose continued
    existence is a result of successful workouts hammered out by
    CDCs and SBA on their behalf.
        We are excited to be working closely with the skilled and
    innovative SBA management team to look carefully at how the 504
    program can continue to be relevant and beneficial to future
    small businesses. We hope that this effort will lead to
    improved oversight, improved processing, and more flexibility
    to encourage more banks and borrowers to participate in the 504
    loan program. Small businesses that are nimble and forward
    thinking will lead us out of this recession by creating the new
    jobs we need. Let us help them do it sooner. Working together
    we can get America working.
        Our thanks to Chairman Graves, Ranking Member Nydia
    Velazquez, and the Committee for your leadership and support
    for America's Small Businesses. Thank you.
        [The statement of Ms. Robertson follows on page 45.]
        Chairman Graves. Mr. Chabot.
        Mr. Chabot. Thank you very much, Mr. Chairman.
        I am pleased to welcome to the Committee this afternoon a
    constituent of mine from Cincinnati, Ohio, Rodger Davis. Mr.
    Davis is co-founder and managing director of North Creek
    Mezzanine, a small business investment company located in our
    community. Mr. Davis is testifying on behalf of the Small
    Business Investor Alliance, the industry association for small
    business investment companies. Mr. Davis has 25 years of
    experience in the banking sector, including commercial banking,
    real estate, leveraged finance, direct equity, and fund
    investing to name but a few areas of his expertise. We welcome
    you here this afternoon, Mr. Davis, and look forward to your
    testimony.

                      STATEMENT OF K. RODGER DAVIS

        Mr. Davis. Thank you, Congressman Chabot, and thank you to
    the rest of you for giving me the chance to talk today.
        I am proud to represent the Small Business Investor
    Alliance. As Congressman Chabot pointed out, that is the old
    NASBC for those of you who do not recognize the name.
        My name is Rodger Davis, and I am co-founder and managing
    partner of North Creek. We are a $70 million SBIC fund located
    in Cincinnati. And to put that in perspective, that puts us at
    the smaller end of the range for SBIC funds. And frankly, we
    think that is a good thing. We can focus on smaller companies.
        My partner, Barry Peterson, and I are lifelong bankers to
    small businesses. And when Provident was sold in 2004, we set
    off to create a fund dedicated to lending and investing in
    small businesses, really continuing what we love to do at the
    bank.
        The credit crunch in '08 and '09 really served as the
    catalyst for the creation of our fund. Our research quickly led
    us to the SBIC program for several reasons. We were comfortable
    with the regulatory oversight and licensing process, the
    program is targeted exclusively towards small business where we
    felt there was really the greatest need, and it could amplify
    our private capital through the use of low cost leverage from
    the SBA debenture program.
        To me, the SBIC program is a perfect example of a public-
    private partnership that works. So in the spring of 2010, we
    opened our doors for business. The biggest surprise I think
    that Barry and I have experienced so far has been the
    overwhelming response to the nation's small business need for
    capital. We reviewed over 350 business plans from company
    owners nationwide seeking capital. We originally thought that
    we would see a lot of companies losing money that frankly did
    not deserve the capital, but it has been quite the opposite.
    There are many companies that we have been unable to help that
    we would have liked to.
        Unfortunately, for most small businesses the traditional
    markets remain constrained or closed altogether. I have a few
    thoughts on why that is still the case. Many companies reside
    in the workout area of the banks because their revenues and
    profits declined in the recession. And until that backlog
    clears these companies will have a very difficult time growing
    as all cash flow will be dedicated to paying down the bank
    debt. I kind of call this the hangover from the credit crunch.
        Bank consolidation, although there has not been as much in
    recent years, continues to have a negative impact on lending to
    small business. As a former banker, I understand the need for
    process ratios, systems, credit scoring, but for us it is about
    meeting management teams, listening to the story, and
    determining if they deserve the capital. Regional and small
    community banks are helping but it is not enough.
        So herein lies the value of the SBIC program in a firm like
    North Creek. In a year and a half we made seven loans to five
    companies. These companies are located in Cincinnati, Ohio;
    Austin, Texas; Elkhart, Indiana; Boulder, Colorado; and
    Sanford, Florida. I find this statistic remarkable myself when
    we put this data together, but these five companies have added
    over 200 new jobs in really less than a year. That is a 20
    percent increase over their base employment.
        You can see the impact on a management team that now has
    the capital to grow. If Todd Cleveland and Any Nemeth of
    Patrick Industries and Elkhart were here they would tell you
    that bank lending is still very tight. But they would thank you
    for the SBIC program because of the capital they received from
    us they are now in position to grow and prosper.
        Randy and Rick Girard of Girard Environmental Services in
    Florida will tell you that the capital that they received from
    North Creek now puts them back on offense and they can now take
    advantage of growth opportunities in the market.
        Troy Augustine of iNET Interactive and Cincinnati would
    tell you that the acquisitions he has made to more than double
    the size of his company would not have been possible without
    the SBIC program and North Creek.
        Just a few thoughts on the future of the program. We need
    to make sure we keep successful fund managers in the program
    and Congressman Chabot's bill 3219 will help by raising single
    and family fund limits. What happens is as funds grow they bump
    up against single and fund limits and those need to be kept
    modernized to keep up with funds as they grow so we keep them
    in the program.
        Secondly, we need to make sure banks continue to be active
    investors in the program. Banks have been long-term supporters
    of SBICs. It is a great partnership where we can work with
    their lending staff and they can work with us. Let us make sure
    they stay in the program in a big way.
        And lastly, I just want to make sure you understand that by
    raising taxes on carried interest, for small fund managers like
    me, the only impact will be that I have less capital to put
    into small businesses. The management fee that we earn pays for
    the overhead of the business and we only make money on the
    carried interest if our companies prosper and grow. So thank
    you.
        [The statement of Mr. Davis follows on page 52.]
        Ms. Velazquez. Mr. Chairman, it is my pleasure to introduce
    to the Committee Mr. Gary Grinnell. He is the president and CEO
    of Corning Federal Credit Union located in Corning, New York.
    He is testifying today on behalf of the National Association of
    Federal Credit Unions, a leading advocate for America's Credit
    Unions and all of their members. Welcome.

                       STATEMENT OF GARY GRINNELL

        Mr. Grinnell. Good afternoon, Chairman Graves, Ranking
    Member Velazquez, and members of the Committee. My name is Gary
    Grinnell and I am testifying today on behalf of NAFCU. We
    appreciate the opportunity to participate in this discussion
    regarding financing programs under the Small Business
    Administration.
        At Corning Credit Union we have a well diversified business
    lending portfolio with minimal delinquencies. For the last two
    years we have been recognized as the top small community lender
    by the Small Business Administration in the 34 countries that
    make up the SBA district in which we are located. We started
    our business services program in 2006 and have been an
    important source of funding for small businesses in our areas
    ever since.
        During the recent economic downturn, many banks in our
    market stopped lending to their clients. Corning Credit Union
    has been able to fill the void and provide these businesses
    with the funding they need to continue to grow and create jobs.
        Since our SBA programs' inception, we have made several SBA
    loans totaling over $8.2 million. Our average SBA loan is about
    $116,000. We participate in the SBA 7(a), SBA Express, and
    Patriot express loan programs.
        Many of our SBA loans are for entrepreneurs wanting to
    start a new business and create new jobs. A 2011 study
    commissioned by the SBA indicated that credit union small
    business lending has increased in terms of the percentage, both
    before and during the recent financial crisis. Well, bank small
    business lending has decreased. This demonstrates that credit
    unions continue to meet our capital needs of our business
    members, even during the most difficult times.
        Unfortunately, when Congress passed the Credit Union Member
    Access Act in 1998, it put in place an artificial cap on the
    ability of credit unions to offer member business loans. It
    should be noted that the non-guaranteed portions of SBA loans
    count toward this arbitrary cap. At Corning Credit Union we are
    approaching the cap and expect to reach it next year. This
    would ultimately impact our ability to make member-business
    loans, including SBA loans to the small businesses we serve.
    Fortunately, there is bipartisan legislation in the form of
    H.R. 1418, the Small Business Lending Enhancement Act pending
    before the Financial Services Committee that would address this
    issue. We urge the Committee members to support this important
    bill.
        Some NAFCU members tell us that they have scaled back on
    the number of small SBA loans, as a response to comments
    arising from SBA examinations. These credit unions feel that
    the SBA's lender evaluation and scoring process disadvantages
    those that make a number of small, lesser collateralized loans
    as it compares them with those institutions making large, fully
    collateralized loans in their evaluations and scoring. If this
    evaluation process is not changed, it may eventually drive a
    number of small loans from lenders' portfolios. NAFCU members
    have requested that the SBA address this deficiency, and we
    hope that the small businesses committee will be able to help
    as well.
        At Corning Credit we are an approved SBA lender. We are
    fortunate that we have hired an experienced SBA lending officer
    with knowledge of the system to help run our program. Still one
    of the hurdles that we see is that our local SBA 7(a)
    applications are sent off to national offices for review by
    underwriters who do not understand our local economy. This
    impersonal step adds time to the approval process for the small
    business owner.
        Furthermore, the lack of having local SBA underwriters to
    interact with, they discouraged those lenders who do not have
    the expertise that we do on their staff. This makes it harder
    for those institutions that may want to do SBA loans but would
    only have limited volume that does not justify hiring an in-
    house SBA expert. As a result, some credit unions in this
    situation may opt not to get involved in SBA lending at all.
        There is a way that this concern can be addressed. NAFCU
    supports the reintroduction of the Credit Union's Small
    Business Lending Act. This bill would make it easier for credit
    unions to become more involved in SBA lending and open the door
    to more access to credit for those small businesses and
    communities served by credit unions.
        In conclusion, small businesses are the driving force of
    our economy and the key to its success. The ability for them to
    borrow and have improved access to capital is vital for job
    creation. While the SBA's financing programs are providing much
    needed opportunities to businesses, there are still obstacles
    withholding the programs from their full potential. We are
    confident this committee will do what is necessary to ensure
    that these programs are successful.
        Thank you for the opportunity to testify before you here
    today. I would welcome any questions that you may have.
        [The statement of Mr. Grinnell follows on page 57.]
        Chairman Graves. Thank you to all our witnesses. And I have
    one question for each of you actually. Out of curiosity, how
    responsive is the SBA when--you come to them with problems
    within the programs. How responsible are they to trying to
    rectify those? And are they very open for, for suggestion, for
    criticism?
        Ms. Steed.
        Ms. Steed. Yeah, I will start.
        I would say that the SBA is more receptive today more than
    ever. And undressing issues the community faces for lending. An
    example would be the rewriting of the 504 refinance provision
    we talked about earlier. That will have a dramatic effect on a
    lot of these small businesses who have conventional loans that
    are ballooning and it allows them to access their capital--
    access their equity to use for capital. So anytime we have
    given feedback to them they have been very responsive and very
    helpful.
        Chairman Graves. Ms. Robertson.
        Ms. Robertson. I would certainly have to concur. The SBA
    has been extraordinarily responsive anytime we have gone to
    them with issues and concerns. It is a large agency. It may not
    happen as quickly as we would like but I think they have tried
    their best to listen and to actually come up with workable
    solutions.
        Mr. Davis. I found them to be very responsive. I think if
    you talk to some people in our industry that find them to not
    be responsive it is because of probably something on their end.
        Mr. Grinnell. We have found them to be responsive, as well.
    The main change that we have seen from a negative perspective
    is the consolidation to the national offices, as I mentioned in
    my report, as opposed to the local focus of where it used to
    be.
        Chairman Graves. How about when it comes to loans getting
    approved. I have had people come to me and talk to me about the
    fact that particularly if it is a new startup and they have got
    construction issues in there and it is delayed in getting that
    loan approved. As that delay spreads out then their costs go
    up, contractor costs go up. Where is that breakdown? Is it SBA
    approval? Is it just requirements that you have in the process?
    In some cases it seems to just drag on and drag on and drag on
    and then you have to, apply for more money on that loan, which
    creates more problems because the costs are going up?
        Mr. Grinnell. I can speak to that. We would certainly like
    to see the process quicker. Again, I think it goes back to
    trying to work with somebody out of one of the national offices
    who does not understand the local economy. We've seen them be
    less experienced people over the last couple of years and we
    think that slows down the process. Sometimes it can take up to
    three to four weeks to get a loan approved, and if we were
    doing that loan in-house it would take a couple of days. So we
    definitely see that as an area for improvement.
        Chairman Graves. Ms. Robertson.
        Ms. Robertson. From a 504 standpoint, we are now required
    to provide construction bids at the time a 504 application is
    submitted on a construction project for approval. A commercial
    reasonable standard would be that construction documents are
    provided at the time of a construction loan closing with the
    bank rather than at the time of SBA approval. So that is
    certainly delaying the approval process and likely causing
    borrowers funds not only delaying their settlement on a
    property but also if contractors are charging them fees for
    those kinds of things they are having to pay those in advance
    of having a loan approval.
        Chairman Graves. Ms. Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Ms. Steed, you heard a lot of the members here asking
    questions to the administrator regarding the need to have more
    smaller loans, those defined at $150,000 or less. And since the
    Jobs Act increased the maximum SBA loan size to 5 million, the
    percentage of smaller loans has declined from 17 percent of
    total lending dollars in 2009 to just 8 percent in 2011. And
    the administrator, when I asked why this is happening, she said
    that banks are not making those smaller loans. My question to
    you is why.
        Ms. Steed. Well, I cannot speak for all banks. I can only
    speak for my bank and the members that I sit on with the Small
    Business Committee with the CBA. And we are not finding it
    difficult to fund those customers. It is an opportunity that we
    have through our 7(a) and our express programs. It is a core
    program we already have in play today. We also have a small
    loan advantage. We do not participate in that one separately at
    Regions because we have the core programs that accomplish the
    same thing. And so we are not finding that to be a challenge.
    It is just a matter of incenting them to kind of get in the
    game, make sure they have the business plan to support the
    credit.
        Ms. Velazquez. The SBA loans that your bank makes, what is
    the percentage of smaller loans, under 50,000 or less?
        Ms. Steed. I do not have it off the top of my head.
        Ms. Velazquez. Would you be able to find it?
        Ms. Steed. I could. I absolutely could do that for you.
    Yes, ma'am.
        Ms. Velazquez. Thank you.
        Ms. Robertson, last week the SBA released final rules for
    the 504 Refinancing program. We do not allow CDC lenders to
    make loans in excess of $12.5 million with no requirement that
    they create a single job. And as we all know, with this job
    loss economy, the challenge that we have is job creation. So
    given that fact, was it a good idea for the agency to abandon
    this critical element of the 504 program?
        Ms. Robertson. I think the intention here is to save
    businesses that might not be able to find financing or
    alternatively provide a financing structure that is more
    appropriate to the business, improving their cash flow so that
    hopefully they can then add jobs.
        Ms. Velazquez. The intent of the program, 504, has always
    been economic development and job creation. And to me this
    flies in the face of the original purpose of 504. The fact that
    it requires to create jobs does not take away the debt
    refinancing, even if you tell me, well, it did not create new
    jobs but at least we are preserving.
        Mr. Davis, the SBIC program has had proven success at
    helping later stage businesses but has struggled to raise early
    stage and startup firms since the participating securities
    program was eliminated. Are there ways that the debenture
    program could be adapted to help meet the needs of earlier
    stage businesses?
        Mr. Davis. Well, I think the first comment, the debenture
    program, because it has a current pay interest feature we need
    to be sure that we have portfolio companies that are paying our
    investments current.
        Now, some SBIC firms could take lower leverage and so they
    could sprinkle in some additional equity investments that could
    go towards more early stage. But the classic 2:1 leverage,
    which we are, it is really incumbent upon us to stay away from
    those. We need to be financing companies that are just going to
    the next level. So I think lower leverage could be an avenue.
    And maybe, you know, just relook at what was wrong with the
    participating securities program and, you know, look at it
    retrospectively and say what could we have done differently?
    So.
        Ms. Velazquez. Mr. Grinnell, in your testimony you
    emphasized the continued need for credit, especially among
    businesses who are seeking smaller loans. Do you believe that
    the SBA large bank lenders overemphasize more profitable loans,
    like loans to established businesses with larger credit--
    greater credit needs to the detriment of smaller firms?
        Mr. Grinnell. Well, in terms of our credit union, we like
    to make small loans to help your members. And I think credit
    unions in general like to make small loans. We have seen very
    strong demand throughout the entire financial crisis. As I
    mentioned before, we are almost at our member business loan cap
    and we are going to have to stop lending. From what we heard
    from our members the banks have turned them away. We have
    helped entrepreneurs star started with very small loans that
    the banks were not interested in. And those members are now
    hiring additional individuals, additional employees in our
    communities and making a real positive impact in our
    communities.
        Ms. Velazquez. Ms. Steed, I do have some numbers here about
    how your bank increased by 58 percent in terms of the average
    of your loan by 146. It seems to me that you are making much
    larger loans at the expense of smaller loans. And I will
    encourage the bank at least when you are doing 7(a) loans that
    you tackle the gap that exists because you have a
    responsibility. You are participating in a program that is a
    guaranty by the federal government. And the same is true with a
    lot of the other banks.
        Ms. Robertson, beginning this year, taxpayers will be
    paying $90 million to subsidize 504 loans. In the past, some
    CDCs have provided their executive staff with salaries and
    benefits that defy their supposed status as a non-profit
    company. And I just would like to hear--we know that IG did an
    investigation. What is it that your members are doing--your
    company is doing to ensure that this type of practice does not
    take place any more. You have executives making or at least
    they were making $800,000 in salaries.
        So I would like to hear what you are saying because we have
    to protect the taxpayers' dollars.
        Ms. Steed. Absolutely. I think our trade association is
    extraordinarily concerned about those practices. We have
    provided guidance to our members on IRS requirements for non-
    profits, on board governance. We have talked to SBA about
    oversight and enforcement. Unfortunately, the trade association
    is not really an enforcement or police vehicle but is doing its
    best to provide training to members on those topics.
        Ms. Velazquez. Well, training them to have the discussion
    because I know that you cannot enforce how much salary you are
    going to provide any of the executives but it is a good PR that
    it might benefit the entire association.
        Ms. Steed. Absolutely.
        Chairman Graves. Mr. Mulvaney.
        Mr. Mulvaney. Thank you, Mr. Chairman.
        A few quick questions just to clarify and make sure I heard
    correctly the first time through. Ms. Steed, did you say that
    your organization had doubled SBA lending staff over the course
    of the last period of time?
        Ms. Steed. Yes, sir.
        Mr. Mulvaney. Are they--do they specialize in SBA lending
    or are they doing SBA lending part of the time and then regular
    commercial lending the rest of the time?
        Ms. Steed. No, they specialize in SBA lending. It is a
    build out for underwriting, paralending, packaging, everything,
    so that the process is streamlined. We are reeducating our
    relationship managers out in the field with this new--we have
    this streamline process because that is a negative connotation.
    We heard it earlier today when Administrator Mills was
    speaking. It is cumbersome. So what we are trying to do as an
    industry and as a bank is streamline it so when you have
    opportunities you do not have to reinvent the wheel every time.
    So that is dedicated SBA.
        Mr. Mulvaney. And I guess one of the things, Regions is a
    large bank. They have a presence in my district.
        Ms. Steed. They are a regional bank.
        Mr. Mulvaney. They are good folks, right? I mean, I am from
    South Carolina. You all have a presence there.
        Ms. Steed. Yes.
        Mr. Mulvaney. And I guess what I am struggling with is--
    here is my question. In your opinion, has SBA lending gotten to
    the point where it is so complex that you have to do that in
    order to do it in a cost-effective manner?
        Ms. Steed. I think the impression is that is the impression
    for your borrowers out there and the bankers. So reeducating
    them is important. You can streamline it. You just have to get
    back out and reeducate because that perception is out there.
        Mr. Mulvaney. Gotcha. Thank you very much.
        You also mentioned I think that the SBA now allows you to
    use your own notes. Is that right?
        Ms. Steed. For the 7(a) express program. We are suggesting
    that could be something we could look at for all of the core
    programs, to streamline it.
        Mr. Mulvaney. And I used to do some corporate work. Tell
    folks why that is important.
        Ms. Steed. You do not have to duplicate your efforts. It is
    one application one time. It goes through the process easier.
    When you have extra documentation from the SBA side you seem to
    be duplicating your efforts. And this just makes it very, very
    convenient, very fast, and you will get onto getting that loan
    funded.
        Mr. Mulvaney. And the standardization, them allowing you to
    use your own documentation, which is absolutely critical, is it
    just in 7(a) or are you seeing it in other programs as well?
        Ms. Steed. Right now I believe it is just 7(a) Express and
    we are trying to get that broadened. We are making that
    suggestion.
        Mr. Mulvaney. Gotcha. Thank you very much.
        Mr. Grinnell, you said some of your members, and again, I
    come from an area, textile communities, very strong credit
    union presence where I am from. And you said that some of your
    members have scaled back on some of their smaller loans. Is
    that correct? Did I hear that right? The number of loans and so
    forth?
        Mr. Grinnell. I said that--well, we have very strong
    demand. We are continuing to make a very large number of small
    loans as a credit union. What I have heard from other credit
    unions is based on the way that the SBA does their risk ratings
    and it does not really compare apples to apples; it compares
    institutions that do a lot of small loans with institutions
    that do a very few large loans. And based on that, so if you
    have a lot--if you have more small loans that go past due, that
    can basically hurt your rating. So it could potentially
    discourage institutions from making the smaller loans.
        Mr. Mulvaney. Is there a fix to that?
        Mr. Grinnell. I believe they should change the risk rating
    system.
        Mr. Mulvaney. Give me an example. I am not familiar with
    the risk rating system that they use.
        Mr. Grinnell. Well, first of all, I should say that that is
    also what we have heard in talking with other credit unions,
    other NAFCU members, as a credit union, Corning Credit Union,
    we have not had a particular challenge with this issue, so I am
    not an expert on exactly, you know, what needs to change but,
    you know, we have definitely heard that--and it just does not
    make--I mean, just common sense approach. You know, you are
    comparing apples--you are not comparing apples to apples.
        Mr. Mulvaney. I gotcha. Mr. Davis, I think I heard you say
    that there was some level of consolidation going on within your
    industry and that I think you said that that led to less small
    business lending. Is that accurate?
        Mr. Davis. You know, the statistics probably may or may not
    support that. What it does though is it significantly changes
    it.
        Mr. Mulvaney. In what fashion?
        Mr. Davis. Well, for example, if you have fewer assets, a
    service company, for example, a lot of the larger banks now,
    they will be happy to give you an asset-based loan. Very
    simple, very easy to standardize. So it is different. I am sure
    the large bank would say we are making small business loans,
    but they are not making small business loans to companies that
    have a wrinkle in their past and, boy, a lot did. I call Asset
    Light companies service companies. Specialty manufacturing
    companies. Those are very difficult for the large banks to
    make.
        So, you know, again, we are in the market day in and day
    out. We are finding--I will give you an example. We had a
    portfolio company of ours that went out to the market. Great
    company. Very light in terms of assets. They went out to 10
    banks, got 1 proposal. Great company but it just did not have--
    it did not fit the box. So if you do not fix the box, you are
    in trouble. And so you are going to need a firm like us to step
    in and work with a bank that can do a small piece that is
    simple straightforward and does not have a wrinkle to it.
        Mr. Mulvaney. Thanks very much. Thank you, Mr. Chairman.
        Mr. Chabot. Thank you very much, Mr. Chairman.
        Mr. Davis, I just have a couple questions. First, how will
    an increase in the SBA leverage limits for SBICs as proposed in
    the legislation that we have introduced, the H.R. 3219 as you
    had mentioned, how will that affect the ability to provide
    capital to more small businesses?
        Mr. Davis. Well, what happens, so you get fund managers
    like ourselves. This is our first fund. It is a $70 million
    fund. If we are successful, and I hope we are and I am
    confident we will be, we will go out for a second fund. We will
    probably be able to raise more capital in the second fund. So
    our family of funds can start bumping up into an aggregate
    limit that the SBIC program currently has. In addition, there
    are single aggregate limits and so there are a lot of
    successful fund managers that start in the SBIC program and
    then they graduate out of it and move on to a non-SBIC program.
    And as they move out they may or may not stick with small
    business. They may move on. So by expanding that family of
    funds' limit you will keep more managers dedicated to small
    business.
        Mr. Chabot. Thank you. And you had mentioned, I think you
    have 70 million available funds and I think you had seven loans
    out to five companies. How much of the 70, for example, would
    you have used up in those loans, approximately?
        Mr. Davis. 12.3 million. So we are making--again, we are on
    the small end of the range for SBICs, and I think that is a
    really good thing, especially for our market. There is a lot of
    small business owners that do not need $10 million or $20
    million. We are making--our average loan size is about $1.8
    million. And we have got a half million dollar loan. It was our
    first loan. It turned out to be a great loan. The company now
    has made two subsequent acquisitions and they have doubled the
    number of employees they have.
        Mr. Chabot. That is great. Now, as far as the--I think you
    said you had about 350 companies that you had looked at.
        Mr. Davis. Correct.
        Mr. Chabot. Those are actually applications that they had
    gone through the process or is that what it was basically?
        Mr. Davis. Yeah. We manage a pipeline database so every
    transaction that we evaluate is logged and entered. So we will
    have received information on the company. If we just get a
    phone call and it is not a fit, we do not enter it into the
    pipeline. So I think we put in our business plan to the SBA
    that we would review 200-250 business plans in a year and it is
    almost doubled that.
        Mr. Chabot. Okay.
        Mr. Davis. And the other interesting part is we thought we
    would get a lot of just no right out of the gate but we are not
    seeing that. We are seeing a lot of companies that are making
    money, that have a business, that deserve capital. Now, you
    know, we pick and choose the ones we think are best for our
    fund but we are seeing a high percentage of very viable
    candidates.
        Mr. Chabot. What were the other ones missing or wanting?
    You know, if there were only seven loans and you had, you know,
    350 applications and they were good, you know, what----
        Mr. Davis. It just may be the structure. It may be the
    business. Again, you know, we have got private investors so our
    job is to take the best of what we see and we do that. It could
    be we lost it to a competitor. Somebody else saw it differently
    than we did and were willing to price it differently. There is
    a whole host of--we have some bias. You know, we have been in
    this industry a long time so I have seen certain industries be
    good candidates for loans and some be not quite so good
    candidates for loans. And so we make that distinction as well.
        Mr. Chabot. Okay. Thank you.
        This is a little broader question and I would be happy--
    anybody who might want to take this one on. You know, there has
    been a lot of talk lately, whether it is the president's Jobs
    Bill or talk that was related to the debt ceiling debate that
    occurred last summer and various things about increasing taxes
    in one capacity or another on investors. Or, you know, the top
    1 percent are not paying their fair share but I do not think it
    is really the top 1 percent they are talking about. They are
    talking about a lot bigger percent of the people than that that
    allegedly is not paying their fair share. What affect would
    actually increasing taxes, especially in these economic times?
    What sort of affect would that do you believe have on the
    economy overall and small business investing in particular?
        Ms. Steed. That is actually a topic that, you know, we
    watch in the banking industry quite closely. You know, we were
    starting to see an increase in our application volume this
    summer and then when the media started paying a lot of
    attention to the debt ceiling discussions that were happening
    you could literally just watch the application volume just
    drop. And so what is happening is small business owners are
    tuning in to anything that creates a level of uncertainty and
    they are responding to it by holding back, maybe sitting on the
    sidelines, not expanding, not hiring new people. They have
    learned to do, you know, more with less because they are just
    not sure what is happening. So anything we could do to keep
    certainty around it. That is taxes, that is any regulation.
    That is anything that is coming out that creates a level of
    unknown, they are doing a wait and see and that is not helping
    us to get them motivated to get back in the game.
        Mr. Chabot. Okay. Thank you. Anybody else, Mr. Chairman, if
    they have time to answer it if anyone wants to or are we----
        Mr. Davis. I would just chime in we heard the same thing
    from our business members. It is just the uncertainty, whether
    it is taxation or regulation, and it just, you know, it puts
    them more on the sidelines from a borrowing expanding
    perspective. So, you know, we definitely hear evidence of that.
        Mr. Chabot. Thank you very much. I yield back, Mr.
    Chairman.
        Ms. Velazquez. Yes. I have a question for Mr. Grinnell.
        You told us that your credit union hired an expert, right,
    on 7(a)?
        Mr. Grinnell. Correct.
        Ms. Velazquez. So how could we encourage other credit
    unions who might not have maybe the resources to hire someone
    to be able to participate in the SBA loan programs?
        Mr. Grinnell. Well, I think there are a couple different
    ways. One of them I mentioned is the increasing of the MBL cap
    because credit unions can only lend up to 12.25 percent of
    their assets in business loans. So that in itself does not
    incent credit unions to get into the business lending game.
    Only about 2,200 credit unions out of 7,300 offer business
    loans. So that in itself would help credit unions do more SBA
    lending. The other would be the reintroduction and passage of
    the Credit Union Small Business Lending Act. There are
    provisions in there that are designed to encourage more SBA
    lending.
        Back to your comment about our expertise. If we did not
    have the expertise on staff we would not be doing the number of
    SBA loans that we are doing today. We would not be willing SBA
    awards if we did not have that expertise on staff. It is
    critical because of the paperwork-intensive process.
        Ms. Velazquez. Let me ask you a question or for you to
    clarify to me. The guaranty portion of SBA loans do not count
    against the membership cap, right?
        Mr. Grinnell. That is correct.
        Ms. Velazquez. Okay. Thank you.
        Chairman Graves. With that I want to thank all of you for
    participating today. This has obviously been a very
    enlightening and timely hearing as a matter of fact.
        But with that I would ask unanimous consent that all
    members have five legislative days to submit statements and
    supporting materials for the record. And without any objection
    it is so ordered. And with that the hearing is adjourned. Thank
    you.
        [Whereupon, at 2:26 p.m., the Committee hearing was
    adjourned.]

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