[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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