[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


 
            IMPROVING CAPITAL ACCESS PROGRAMS WITHIN 
                            THE SBA

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

                                HEARING

                               BEFORE THE 

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              MAY 19, 2015

                               __________

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            Small Business Committee Document Number 114-011
              Available via the GPO Website: www.fdsys.gov
                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                        TOM RICE, South Carolina
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                          MIKE BOST, Illinois
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
            Stephen Dennis, Deputy Staff Director for Policy
            Jan Oliver, Deputy Staff Director for Operation
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Tom Rice....................................................     1
Hon. Judy Chu....................................................     1

                               WITNESSES

Mr. Rich Bradshaw, President, Specialized Lending, United 
  Community Bank, Greenville, SC, testifying on behalf of the 
  National Association of Government Guaranteed Lenders (NAGGL)..     3
Ms. Barbara Vohryzek, President and CEO, National Association of 
  Development Companies, Washington, DC..........................     5
Mr. Brett Palmer, President, Small Business Investor Alliance, 
  Washington, DC.................................................     7
Mr. Brandon Napoli, Director of Microlending, Valley Economic 
  Development Center, Van Nuys, CA...............................     9

                                APPENDIX

Prepared Statements:
    Mr. Rich Bradshaw, President, Specialized Lending, United 
      Community Bank, Greenville, SC, testifying on behalf of the 
      National Association of Government Guaranteed Lenders 
      (NAGGL)....................................................    25
    Ms. Barbara Vohryzek, President and CEO, National Association 
      of Development Companies, Washington, DC...................    31
    Mr. Brett Palmer, President, Small Business Investor 
      Alliance, Washington, DC...................................    34
    Mr. Brandon Napoli, Director of Microlending, Valley Economic 
      Development Center, Van Nuys, CA...........................    44
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Friends of the SBA Microloan Program.........................    47


            IMPROVING CAPITAL ACCESS PROGRAMS WITHIN THE SBA

                              ----------                              


                         TUESDAY, MAY 19, 2015

                  House of Representatives,
               Committee on Small Business,
                   Subcommittee on Economic Growth,
                                    Tax and Capital Access,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Tom Rice 
[chairman of the subcommittee] presiding.
    Present: Representatives Rice, Chabot, Hanna, Huelskamp, 
Brat, Chu, and Hahn.
    Chairman RICE. Good morning. Call to order this meeting of 
the Subcommittee on Economic Growth, Tax, and Capital Access of 
the Small Business Committee of May 19, 2015. Thank you all for 
being with us today. I call this hearing to order.
    As a result of the Great Recession, lending to small firms 
declined, and only recently have we started to see signs of 
growth. For small businesses, access to capital is often the 
deciding factor if a business will expand or close its doors. 
Since the Small Business Administration's creation over 60 
years ago, the agency has been tasked to administer programs 
that help entrepreneurs receive capital. In doing so, the SBA 
oversees four primary lending programs: The 7(a) Guaranteed 
Loan Program, the Certified Development Company Loan Program, 
the Small Business Investment Company Program, and the 
Microloan Program.
    Each of these programs, as we will hear today, serves a 
unique purpose and aims to fill a gap in the commercial 
marketplace. Although this is a great oversimplification of the 
process, the Small Business Administration does not directly 
provide funds to small businesses through any of these 
programs. Instead, the Administration guarantees the repayment 
of credit and the equity issued by private-sector partners. 
These industry partners are vital to the success of the 
programs and ensuring that small businesses have access to the 
capital they need to grow.
    Today, we are fortunate to have an industry witness here 
from each program to shed light on the assistance they provide, 
and share with us their thoughts on how they can better their 
respective programs. I look forward to hearing your 
recommendations, and thank you all for taking the time to be 
here. I now yield to the Ranking Member for her opening 
remarks.
    Ms. CHU. Thank you so much, Mr. Chair. And I thank all the 
witnesses for being here today. I have been looking forward to 
this hearing, especially since I know how valuable your 
programs are. And today's hearing will provide even greater 
insight into these access-to-capital programs and what 
potential improvements could be made to help these initiatives 
reach their full potential.
    Our small business sector is back at the heart of job 
creation after one of the worst economic downturns in history. 
Small firms with less than 50 employees have averaged 106,000 
new jobs per month for more than a year, and that is a good 
sign. As the economy continues to strengthen, more 
entrepreneurs will be seeking capital to start a new venture or 
expand an existing business. And the Small Business 
Administration's loan programs fill critical gaps in the 
lending market for small businesses that cannot access 
traditional lending sources.
    For more than 50 years, the SBA has been assisting 
America's entrepreneurs and small business owners through a 
myriad of capital programs, including 7(a), 504/CDC, 
microloans, and the SBIC Program. Last year, it channeled more 
than $30 billion in assistance to over 58,000 small firms under 
these programs. And for 2015, SBA is on track to provide over 
$25 billion in capital to small businesses.
    Each program here fills a distinctive, specific need in the 
market. The 7(a) Program, SBA's flagship access-to-capital 
initiative, has made an impressive $19 billion in capital 
available to small businesses in 2014. This number has 
continued to improve over the past few years; however, more 
must be done to encourage lending the small-dollar loans, as 
well as to increase lending in underserved markets--and 
particularly for women, minorities, and veterans. Small-dollar 
loans used to account for 25 percent of all dollars approved, 
but today, that figure is just 10 percent.
    The 504/CDC Program provides long-term, fixed-rate loans to 
help small businesses obtain key fixed assets to expand or 
modernize--such as in real estate, land, or equipment. Since 
1990, the program has provided $64 billion through more than 
120,000 loans. In my home state of California, 504 loans have 
added over 500,000 jobs to the economy, and benefitted over 
20,000 entrepreneurs; however, the program faced challenges 
during the economic downturn to the nature of real-estate-heavy 
programs.
    Despite these setbacks, the program is recovering, and this 
year will mark the first time in seven years that SBA has not 
requested a subsidy. I hope this upward trend continues, and I 
look forward to learning more about what changes we can make to 
ensure the 504 Program preserves the 504/CDC Economic Develop 
mission, and increases its lending volume.
    The Microloan Program is unique in that it is designed to 
provide small-dollar loans, under $50,000, to entrepreneurs 
that cannot access capital through traditional bank loans--and 
it is required to provide education and training to its 
borrowers. And often, these borrowers are women and minority-
owned firms.
    In 2014, SBA Microloan intermediaries provided nearly $56 
million in microloans to small businesses, and created or 
retained 15,000 jobs. That is a big impact.
    Additionally, this year, SBA has requested a 30-percent 
increase in funding for the Microloan Program, which is 
expected to support about $75 million in loans to small 
businesses; however, there are many technical changes that 
could be made to make the program run more efficiently and 
allow intermediaries to provide the kind of assistance that 
borrowers need. And I look forward to hearing more about those 
changes.
    And when small businesses are looking for more than a 
conventional bank loan but are not yet ready for private 
equity, they can turn to the Small Business Investment Company 
Program to fulfill their capital needs. In 1958, Congress 
created the SBIC Program to fill this lending gap. And last 
year alone, the program provided over $5 billion to startups 
and high-growth companies.
    The SBIC Program faces its own unique set of challenges, 
such as limits to the amount of leverages available to them, as 
well as issues with the licensing process for established 
firms.
    Whether it is a working capital loan, a mortgage, a 
microloan, or an equity investment, capital is the lifeblood of 
every small business. Without it, most firms cannot make the 
improvements or hire the people that they need to succeed. SBA 
has been there for thousands of small businesses over the 
years, and it is the responsibility of the Committee to ensure 
that it continues to operate to its maximum potential.
    With this in mind, I am looking forward to hearing from 
today's witnesses on ways to improving the agency's lending 
programs. And I would like to thank all the witnesses for being 
here today.
    Thank you, and I yield back.
    Chairman RICE. Thank you, Mrs. Chu. If additional members 
have an opening statement prepared, I ask they be submitted for 
the record.
    I would also like to take a moment to explain the timing 
lights to you. You each have five minutes to deliver your 
testimony. The light will start out as green. When you have one 
minute remaining, it will turn yellow. Finally, it will turn 
red at the end of your five minutes. I ask that you try to keep 
it to that time limit, but I will be a little lenient if you 
need to close, all right?
    Our first witness is Rich Bradshaw, who serves as the 
President of Specialized Lending at United Carolina Bank in 
Greenville, South Carolina--my home state. Mr. Bradshaw is 
testifying on behalf of the National Association of Government 
Guaranteed Lenders (NAGGL). At NAGGL, Mr. Bradshaw chairs the 
Public Policy Committee, tracking and assessing SBA's current 
lending initiatives. Previously, Mr. Bradshaw served in the 
United States Air Force and Navy, and I want to thank you for 
your service to our country. We look forward to hearing your 
testimony. Please begin.

STATEMENTS OF RICHARD BRADSHAW, PRESIDENT, SPECIALIZED LENDING, 
  UNITED COMMUNITY BANK; BARBARA VOHRYZEK, PRESIDENT AND CEO, 
 NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES; BRETT PALMER, 
 PRESIDENT, SMALL BUSINESS INVESTOR ALLIANCE; BRANDON NAPOLI, 
  DIRECTOR OF MICROLENDING, VALLEY ECONOMIC DEVELOPMENT CENTER

                 STATEMENT OF RICHARD BRADSHAW

    Mr. BRADSHAW. Good morning, Chairman Rice, Ranking Member 
Chu, and distinguished members of this Subcommittee. I am 
grateful to have this opportunity to testify before you and 
discuss the impact of the Small Business Administration's 7(a) 
Program on both lenders and the small business community.
    As Chairman Rice said, my name is Rich Bradshaw; United 
Community Bank. I am the President of Specialized Lending. We 
are headquartered out of Blairsville, Georgia, and I work out 
of the regional headquarters in beautiful Greenville, South 
Carolina--and also representing NAGGL, which is the SBA 7(a) 
trade association. I have had the unique experience of running 
SBA divisions at very large national institutions, as well as 
community banks, and I am also a proud veteran.
    Let me give you an example of why I think the 7(a) Program 
exists. If you were a manufacturer, and you are doing about $3 
million in annual revenue, and you have 25 employees, and you 
are looking to buy a new CNC lathe, it is going to run you 
about $400,000. Conventional financing--we are going to set the 
interest rate at six percent. It is typically going to be five 
years, in terms of the term. Under the SBA, we will have that 
same interest, but it will be 15 years. The cash flow savings 
for that borrower will be in excess of $50,000.
    Now I know in Washington, $50,000 is not a lot of money, 
but to a company doing $3 million in revenue, it is all the 
money in the world. And it allows that owner to focus on 
margins, and market share, and hiring that next employee, and 
not being so concerned about making payroll on Friday. And I 
think that is really the strength of the program.
    To put it simply, think about your main streets back home. 
How difficult is it for your small businesses and your 
constituents to get these loans in a heavily-regulated 
environment, especially given the post-2007 era that we find 
ourselves in. I am sure that you all hear this all the time in 
your districts.
    The 7(a) Program annually supports over 45,000 small 
businesses. These 45,000 small businesses take their loans, and 
are able to hire an additional 500,000 people on an annual 
basis. It is also important to note at this time that the 7(a) 
Program does not cost the taxpayers anything. It is a very 
important point.
    In addition, since 2010, the program has returned over $500 
million to the Treasury. Quite frankly, in the current 
financial climate, the SBA loan programs are the only game in 
town for long-term financing on any kind of interest rate or 
terms that would be accepted to a small business.
    So, what is the one thing that Congress can do to help the 
7(a) Program run more effectively and touch more small 
businesses? It is make sure that we do not shut down. It sounds 
simple, I know, but it is a looming threat we faced last year, 
and we face again this upcoming year and the year after.
    Potential shutdown of the program happens because we 
constantly lend up to the authorized spending cap. This is a 
good problem to have. It means small businesses are obtaining 
capital, and the program is working. But as the bank executive 
who gets to speak to our Board on the updates on the SBA 
division, it is very difficult to discuss the running out of 
funding concept. It is also very difficult to discuss that with 
our borrowers, and we want and need private institutions' 
support to reach more small businesses. And they need to know 
that Washington is behind them; they need to know that you are 
behind them.
    As members of Congress, you are probably all too familiar 
with having to explain to constituents the ups and downs of 
funding in Washington. What I want you to know is that--7(a) 
lender--I am there with you every day, and I am having to do 
that, as well, and I know we have that experience in common.
    For Fiscal Year 2015, the current authorization is $18.75 
billion, but we project finishing Fiscal Year 2015 around $20.5 
billion. If Congress does not act now, we will simply stop SBA 
lending, potentially in the August timeframe.
    If you are asking yourself why this program is going so 
quickly, think back to your constituents back home, and some of 
the challenges they run in obtaining capital and hearing the 
word `no' from the conventional lenders, because it is just too 
risky for them, and because the profiles of the banks have 
changed since the 2007 Recession.
    What this results in is the boxing out the bulk of small 
business, in terms of getting and obtaining long-term 
financing. And if we do not keep running into this problem, it 
is important to make sure that Fiscal Year '16 is also properly 
funded. The President's request for the 7(a) Program for '16 
was $21 billion. NAGGL forecasts the industry will lend up to 
$23 billion in Fiscal Year '16. Our ask is that the House and 
Senate Small Business Committee authorize, with the 
Appropriations Committee, $23 billion.
    I also want to, in closing, make sure that the Committee 
understands that NAGGL is very focused on the underserved 
markets. I cochair the Public Policy Program. And in Fiscal 
Year '12 to '15, African-American lending was up 93 percent. In 
the same periods for veterans, it was up 88 percent. I have 
been the leader in terms of growing the initiatives within 
NAGGL, and have a great committee that we work with really 
focusing on veteran initiatives.
    And with that, I will thank you for letting me speak, and 
open it up for any questions.
    Chairman RICE. Thank you, sir. We will have questions after 
everybody has testified.
    Our next witness is Barbara Vohryzek, who serves as the 
President and CEO of the National Association of Development 
Companies, NADCO. NADCO represents SBA-certified development 
companies and other lenders which deliver SBA loans and 
financing for small businesses.
    Thank you for being here today. You have five minutes, and 
you may begin.

                 STATEMENT OF BARBARA VOHRYZEK

    Ms. VOHRYZEK. Chairman Rice, Ranking Member Chu, and other 
distinguished members of the Committee, thank you for inviting 
me to testify, and I look forward to an exchange of ideas today 
with you on ways we can work together.
    My name is Barbara Vohryzek, and I serve as President and 
CEO of the National Association of Development Companies, 
a.k.a. NADCO. And we represent more than 90 percent of the 263 
certified development companies, also known as CDCs. These CDCs 
are mostly nonprofit entities that provide small businesses 
with the 504 Loan Program, while often also participating in 
other federal, state, and local economic development programs.
    This is familiar territory for me. I founded and ran 
California Statewide CDC for over 21 years. The 504 Loan 
Program is a financing tool for economic development, and 
provides small businesses, as Ranking Chair said, with long-
term fixed-rate loans to help them acquire equipment. And so I 
do not have to restate, which you also said--and I appreciate 
that--that, last year, we did--since 1990, we have provided 
$64.3 billion in financing over 120,000 loans.
    So, by law--and the reason that we are really here is, we 
are here to create jobs. And we have to create one job per 
$65,000, and we have to meet a public policy goal. And we have 
several.
    Economic development is the watchword, though, for many of 
NADCO's members. While 504 was designed to be the larger SBA 
loan and have a strong community impact, many CDCs also serve 
entrepreneurs who need smaller loans through programs such as 
the SBA's Community Advantage Pilot Program, which provides 
loans under $250,000, and SBA's Microlending Program, which 
provides loans under $50,000. Incubators, CDFIs, and EDA 
revolving-loan funds are all represented by multiple CDCs in 
our community. And these are just a sample of the broader that 
is being done by CDCs nationwide; however, it is the 504 Loan 
Program that unites us all.
    The program has had, as was previously mentioned, 
challenging years, as many others did during the Great 
Recession. But I am pleased to report, as you all know, that we 
will be back to zero subsidies, self-funded with no 
appropriation, October 1st of this year.
    I recommend that during the 114th Congress, the 
Subcommittee focus on several long-term modifications, as well 
as some immediate fixes to a few current challenges that the 
industry and the program face.
    First, the 504 Program lacks definition. It is SBA's 
Economic Development Loan Program, and CDCs are economic 
development entities. However, no definition is currently in 
statute or regulation for the economic development or CDC. I 
recommend that we work together, as we have been doing with 
SBA, to formalize these and other definitions, so that there 
are clear metrics for the program to fulfill its mission.
    Second on the list of long-term program modifications, I 
recommend that the successful debt refinancing with the 504 
Loan Program be restarted permanently. This temporary refinance 
program made available to small businesses precious working 
capital, which otherwise would have been spent on either high 
interest rates or--worse yet--balloon payments. This request is 
quite timely, as well. Over 4,000 small-balance, commercial, 
mortgage-backed security loans will mature in the next three 
years. Borrowers will need to refinance out of what is being 
called the wall of maturities; yet, many banks that handled 
small-balance loans prior to the financial crisis are no longer 
in the market or in business. This is a gap for small 
businesses that could be filled by this debt refinancing 
program.
    Third and finally, the franchise agreements review process 
needs to be addressed. NADCO recommends that SBA adopt 
procedures to streamline the review and approval of franchise 
and license agreements.
    While these long-term challenges will strengthen the 504 
Program for future small-business borrowers, several pressing 
matters are preventing CDCs from best serving their communities 
today.
    The first is that of adequate levels of staffing at SBA. 
Recent retirements and other departures mean that a single SBA 
staff member may be handling the work of two, three, or even 
more personnel. This scarcity slows our ability to support 
small business entrepreneurs seeking 504 loans, and increases 
the concern and lack of confidence within the small business 
and banking community about our ability to deliver loans in a 
timely fashion. We hope this Subcommittee advocates for 
adequate resources for the budget and appropriations process 
for SBA to manage this situation.
    The other challenge which concerns the industry--and is 
taking me over five--is a move by some in Congress to institute 
fair-value accounting. If the small business community is 
consulted on these budgetary changes, I urge you to oppose 
them.
    Thank you again for the opportunity to share NADCO's 
thoughts, and I look forward to your questions and a vibrant 
discussion about America's entrepreneurs.
    Chairman RICE. Thank you. Our next witness is Brett Palmer, 
who serves as the President of the Small Business Investor 
Alliance. The SBIA is a national organization of lower-middle-
market funds and investors, primarily small business investment 
companies whose members provide capital to small businesses.
    Welcome, Mr. Palmer. You may begin.

                   STATEMENT OF BRETT PALMER

    Mr. PALMER. Good morning, Chairman Rice, Ranking Member 
Chu, and members of the House Small Business Subcommittee on 
Economic Growth, Tax, and Capital Access. Thank you for holding 
this hearing today to examine the effectiveness of the capital 
access programs, including the Small Business Investment 
Company Debenture Program. The Small Business Investor Alliance 
represents investors in domestic small business, including 
nearly all of the SBICs.
    I would like to make several points with my testimony. 
First, the SBIC Program is an effective and important program 
for enhancing access to capital for domestic small businesses.
    Second, the SBIC Program works primarily because at its 
core is a market-driven effort that serves the public by 
growing domestic small business and does so while operating a 
zero subsidy. Legislation to increase the family of funds limit 
is the most important issue faces us today, and we encourage 
you to pass it immediately. The cosponsors of the bill, many of 
whom are here today, thank you for supporting HR 10-23. Its 
passage will ensure that the best small business investors will 
continue to invest and grow domestic small businesses.
    Improvements can be made to the SBIC Program, because it is 
operating in a way that is certainly adequate, but there is a 
lot of room for improvement. And more improvement can help us 
serve more small businesses and more people in this country.
    The SBIC Program exists because, structurally, what was 
true in 1958 is still true today. It is much harder for small 
businesses to access capital than it is for their larger 
brethren. That will always be true.
    The SBIC Program helps mitigate this. It will never replace 
that problem and fix that problem entirely, but it helps 
significantly. The importance of SBIC capital was made 
abundantly clear in the financial crisis and the recession that 
followed. While most financial institutions were cutting off 
capital to small business and recalling loans, SBICs were 
throttling up and filling the capital void.
    Demand for capital from SBICs has grown dramatically since 
the financial crisis and continues to grow. From Fiscal Year 
2011 to present, SBICs have made $17 billion in investments in 
about 5,500 small businesses in nearly every state. This 
activity saved businesses and grew jobs.
    In 2004, the SBIC Program had only about $5 billion in 
assets. Today, it has grown to over $21 billion. Not only did 
the Debenture Program not take losses during the time of 
economic turmoil, it ran a small surplus. In the face of 
economic calamity, this program worked both for small 
businesses and the taxpayers. This growth is not driven by 
government directive, but by the market needs of small 
businesses and the opportunities being recognized by private 
investors.
    These investments do create jobs--and lots of them. A 
recent Pepperdine study found that private-equity-backed 
businesses grew jobs at a rate 257 percent faster than the 
economy at large. We need more of that. With the continued 
support of Congress, the administration, and the private 
sector, this program will continue to grow, and serve more 
small businesses, and create more jobs.
    The program works differently than many other programs. To 
become an SBIC, a potential SBIC must pass two important 
filters--and they are both critical. The first one is the 
private market filter. If the private sector will not trust a 
fund manager with their manager, why should the SBA? It should 
not. But if they are able to raise that private capital, then 
they must survive a rigorous licensing process that the SBA 
runs, and many applicants cannot get through this process. Only 
about 25 percent of the funds that first approach the SBA about 
forming an SBIC are able to get through the process.
    Assuming they are able to get through the private sector 
filter and get through the government filter, they are able to 
access an SBA-backed credit facility--able to lever the fund at 
a 2:1 ratio. So, what that does is, it takes $50 million in 
private capital and turns it into $150 million of small 
business capital at no cost to the taxpayer.
    Unlike many other government programs that I know of, there 
is no guarantee on any of the individual investments. In fact, 
the private sector is at first-loss position for all the 
investments. SBA guarantees the investors and the credit 
facility, but not the SBIC or its individual investment. This 
means that there is 100-percent private sector skin in the 
game, and in the interests of the private sector and the 
public, protections are aligned. This is a key reason why the 
Debenture Program has gone so many years, running at a small 
surplus and maintaining a zero subsidy.
    The family of funds limit is important to us in this 
program because the family of funds limit only limits 
successful small business investors. The only funds that can 
hit the limit are funds that have repeatedly come back as SBIC 
funds in raising private capital money and going for the 
licensing process. Underperforming funds cannot hit this limit, 
because they cannot raise another fund. We ask that you pass HR 
10-23 to raise this limit, to make sure that the successful 
small business investors can continue to do so.
    There are a number of improvements that the program needs. 
There are a lot of good things that are happening, but there 
are some improvements, too, that are needed. The licensing 
process is extremely slow and it is expensive. We have 
testified for years, the licensing process blocks qualified 
applicants, and unnecessarily limits diversity in the program--
both geographic and other diversity forms. We ask for your help 
in pushing the SBA to reform its licensing process, and 
speeding it up, and making it less expensive.
    In summary, the SBIC Program is working--and working well. 
Raising the family of funds limit will increase small business 
investing, and help many small businesses grow and access more 
capital. An SBI needs more operational oversight to help make 
data reforms.
    And with that, I turn back the floor and be open to any 
questions you might have.
    Chairman RICE. Thank you, Mr. Palmer.
    I yield to Ranking Member Chu to introduce her witness.
    Ms. CHU. It is my pleasure to introduce Mr. Brandon Napoli, 
who is joining us today all the way from Van Nuys, California--
Southern California--my area. Mr. Napoli serves as the Director 
of Microlending for Valley Economic Development Center--or the 
VEDC--and is here to testify about his experience with the SBA 
Microloan Program. VEDC is an SBA Microloan intermediary, and 
it was named one of the top 10 SBA intermediaries in the 
country, approving over $1 million in microloans for 2014.
    Prior to joining VEDC, Mr. Napoli served as a Community 
Loan Program Officer at the CDC Small Business Finance in San 
Diego, California. He is a graduate of Point Loma Nazarene 
University and San Diego State University.
    Welcome, Mr. Napoli.

                  STATEMENT OF BRANDON NAPOLI

    Mr. NAPOLI. Chairman Rice, and Ranking Member Chu, and 
members of the Subcommittee, thank you for the opportunity to 
submit testimony about a crucial component of a vital American 
business community.
    My name is Brandon Napoli. I am the Director of 
Microlending at VEDC, located in Los Angeles. We are one of the 
nation's largest SBA microlenders. We provide real money to 
real people, creating real jobs.
    Microlending is foundational to the economy, and VEDC is 
committed to helping entrepreneurs like Maria Martir secure 
microloans to foster healthy, sustainable community. Ms. Martir 
had saved $40,000 to launch a business, but her request for a 
$10,000 loan was declined by local, traditional lenders, 
because there was no outside collateral or existing cash flow. 
Ms. Martir turned to VEDC, who offers access to capital, as 
well as free technical assistance, for entrepreneurs unable to 
secure traditional bank financing.
    Three years after receiving a $10,000 loan and help with 
writing her business plan, Ms. Martir's De Todo Un Poquito 
Cafe--A Little Everything--has expanded next door, hired on her 
four children, and is now looking to expand elsewhere.
    Her experience illustrates what we in the industry have 
known from years of experience: Hands-on technical assistance, 
coupled with need-based financing, greatly increases a small 
business's chance of success.
    Microlending reaches entrepreneurs who are outside the 
economic mainstream, who are very much a part of the economic 
fabric of this country. Ms. Martir's cafe is one of 25 million 
businesses--or 88 percent of all business--in the United States 
considered a micro-business--a business with five or fewer 
employees and less than $50,000 in startup capital. These 
businesses generate $2.4 trillion in receipts, account for 17 
percent of U.S. GDP, and employ more than 31 million Americans.
    Micro-businesses are everywhere--the farmer at the Saturday 
Market, the trucker who works those long hours on the road, the 
contractor who built your home, the beauty salon or barber 
shop, your favorite neighborhood restaurant that you always 
want them to commercialize the barbecue sauce, and the 
miniature golf course you worked at as a kid. Think of the 
business you frequent, and I am sure that you encounter many 
micro-businesses you call your own.
    Ms. Martir's De Todo Un Poquito Cafe and other microloan 
businesses could not do what they do without the support they 
get from SBA Microloan intermediaries, such as VEDC. Since 
1998, VEDC has lent over $11 million and 1,000 SBA microloans. 
Thankfully, there are many others like VEDC around the country. 
For example, the Economic and Community Development Institute 
in Ohio that provide a one-stop shop where a business owner can 
secure flexible financing, as well as individual business 
assistance throughout the life of a loan.
    The proposed Fiscal Year 2016 budget provides continued 
opportunities for American entrepreneurs to start their own 
business and become successful, independent, and self-reliant. 
To keep the American dream a reality for millions of micro-
businesses, Congress needs to increase the effective investment 
it has made in SBA Microloan from $24.8 million to $28.3 
million, and make the programmatic changes suggested by the 
current intermediary micro-lenders.
    Increasing lending and easing some of the SBA Microloan 
Program restrictions will help to further the American dream, 
one microloan business at a time. Since the Microloan Program 
was authorized in 1991, intermediary lenders have borrowed over 
$414 million, of which they have been able to lend $629 million 
to small businesses that help create or retain 185,000 jobs at 
the cost to the federal government of around $2,000 per job.
    During this time--and since launch of the SBA Microloan 
Program--intermediaries have realized that several well-
intentioned policies now serve as barriers to gains and 
efficiencies. The most restrictive barrier is the statutory 
restraint of utilizing 75 percent of the technical assistance 
post-funding and only 25 percent prefunding.
    As Ms. Martir and the majority of micro-enterprises, the 
need for intense technical assistance before receiving 
financing ensures that the small business is loan-ready.
    In closing, every day, VEDC and microloan lenders across 
America seed hardworking people like Ms. Martir who want to and 
can build businesses, create jobs, and strengthen communities. 
The greatest investment we can make is in people who create 
jobs. The returns go far beyond dollars paid back.
    Thank you for this opportunity to share Ms. Martir's and 
the industry's story, and I look forward to your continuing 
support of the programs designed to promote job creation, 
especially those with proven track records, such as the 
Microloan Program at SBA.
    Chairman RICE. Thank you, Mr. Napoli. I have a lot of 
questions for you, but I want to start out by saying that, in 
my opinion, there is nothing more important than American 
competitiveness and jobs. We cannot have a strong country 
without a strong economy, and I think you guys are on the 
frontline, and I cannot thank you enough for what you do--
providing access to capital. I think that is one of the 
foundations, one of the bricks in the foundation of the 
prosperity of this country. And I am so impressed listening to 
how you perform your duties and how you grow jobs in this 
country.
    I have so many questions with respect to what areas--where 
are the gaps here that are not being filled? You know, you have 
microloans. You have the 7(a) loans. You have the CDC/SBIC. Who 
is falling through the cracks here? It sounds like you have got 
the small business area pretty well-covered. Are there broad 
classes that are not being covered? Mr. Palmer, I will start 
with you.
    Mr. PALMER. Sure. I think that one of the classes that has 
not been covered and not really discovered is the early-stage 
equity side--and a lot of businesses to start up that are 
smaller businesses, that are not necessarily tech and biotech 
in Silicon Valley, really do have a real challenge in figuring 
out how to get, you know, early-stage equity investing when you 
are not cash flowing, and you are not going to be cash flowing 
in the very near-term, to, you know, pay an interest payment on 
a debt structure. So, I think that is an area that really is 
lacking in the economy right now.
    Chairman RICE. Mrs. Vohryzek, you said something that 
intrigued me earlier. You said we need to restart the refinance 
program--and why did you say that?
    Ms. VOHRYZEK. There are a couple of reasons, but the large 
reason coming is what is known as the wall of maturities. So, 
these small-balance loans that were done prior to the 
recession--a lot of small businesses are in these pools and 
these mortgage-backed securities. And so as they mature and 
they come out of the pool, then the houses--the larger 
investment houses--do not do loans under $2.5 million. And so 
there is all of these owner/user small business types coming 
out of that, having to come up with other financial 
instruments.
    Chairman RICE. So, there were commercial lenders that made 
these loans before the financial crisis.
    Ms. VOHRYZEK. They were actually pooled loans. So, Wall 
Street firms would typically be involved. Some of them--I mean, 
you know, Chase is in the room, and they act on both sides. So, 
you have a lot of banks that also have investment houses, as 
well.
    Chairman RICE. Here is my question: You know, certainly 
things were out of hand before the financial crisis, and 
certainly there needed to be some additional safeguards. But 
have we snapped back so far that we have taken lenders out of 
the market that were previously providing this financing? And 
can the SBA ever--because I do not think they can--can they 
ever respond to that demand?
    Ms. VOHRYZEK. Oh, boy. I am not sure--I am trying to 
understand the question. For some reason, I was kind of caught 
with the walls of maturity, thinking of these coming out. The 
comment we made--and I made--about ``as these loans come to 
market''--as you know, the shrinkage in the number of community 
banks that are now alive and well, versus who they were back in 
'07, '08--we have had a shrinkage in numbers of community 
banks. And very often, the borrowers would look to their 
community bank to refinance. Those would be where they would 
typically go.
    Chairman RICE. I agree that we have had a huge shrinkage. 
Mr. Bradshaw, I am going to turn to you. I agree we have had a 
large shrinkage in community banks, and I think a lot of that 
is because we have snapped back too far with regulation. And 
what I am concerned with--Mr. Bradshaw, do you think the SBA 
can ever fill that niche completely, or do you think we need to 
expand, do what we can to ease the regulation on community 
banks and get them back in the market?
    Mr. BRADSHAW. I think the answer is probably yes on both 
sides--meaning, can SBA fill the gap? Yes. Can it fill it all 
the way? No, but the combination of SBA and a combination of 
less regulation can get us a long way there.
    Chairman RICE. Mr. Palmer?
    Mr. PALMER. The private sector can fill a lot of gaps that 
we cannot. And the SBA is really meant to fill areas where the 
private sector cannot fill the gap, but where there is a public 
policy need. The banks, particularly the smaller banks, are 
feeling all sorts of pressure that really is hindering their 
lending. They are not something that we compete with. We 
actually augment a lot of the banks. But I think that is an 
area--certainly, there is need for regulation; do not get me 
wrong. But I do think that the banks that I talk to--and I hear 
from anecdotally--feel there is a lot of pressure that is 
hindering them from doing small business lending that they 
otherwise would do.
    Chairman RICE. Mr. Napoli, I do not know that this is 
really in your area of expertise, but I want to ask you the 
same question.
    Mr. NAPOLI. Can you repeat the question?
    Chairman RICE. My time is expired. Thank you very much. I 
will yield to Mrs. Chu for her question.
    Ms. CHU. Well, thank you. And I feel the same as Chairman 
Rice, in terms of all that you are doing for the small business 
community, in providing them the access to capital. And I am 
intrigued by your recommendations for improvement.
    And I will start with you, Ms. Vohryzek. Last week, I 
introduced the CREED Act, which would reinstate SBA's 504 
Refinancing Program. The President has supported this 
initiative in his budget. The SBA Administrator has spoken 
favorably of the program, and the Senate has marked up their 
version of the CREED Act with bipartisan support from the 
Chairman and Ranking Member. Do you believe the reauthorization 
of the 504 Refinancing Program would be beneficial for the 
small business economy? And simply that while we were already 
in the recovery period--but can you tell us why right now 
actually is an optimal time to restart the Debt Refinancing 
Program?
    Ms. VOHRYZEK. Well, first of all, let me thank you for 
introducing the CREED Act. The industry is very thankful for 
that. I think it is a good time. I mentioned the walls of 
maturities that is coming up, and that would be an opportunity 
to help small businesses that are coming out of that, looking 
for alternative financing by providing them with refinancing 
under the 504 Program.
    I also believe that the 504 Program is a very efficient way 
to refinance, and I think it is good for the banks. And I will 
tell you why. When you refinance a 504--a situation where it is 
a 504 refi--the bank may be involved, and they continue to be 
involved. So, they are not taken out by another bank. So, it is 
an opportunity for many banks--and, often, community banks--to 
keep their customer, and then we do the second mortgage, 
because our loan is always in companion with the first mortgage 
lender. This is a relationship that the lender has, and we are 
coming in to accommodate them up to a 90-percent loan-to-value, 
which--Chairman Rice, I apologize. I think I now understand 
your question, and I guess what I would echo in here--but also 
state that I think that I am a Director of community bank, and 
I would say that the guarantee, whether it is a 504 second 
mortgage or a 7(a), allows us to do loans that we otherwise 
would not be able to do. So, it is absolutely a critical 
product--particularly now, with all of the regulation that has 
fallen on the smaller banks, we are looking for opportunities.
    I am sorry, Ranking Member; I wanted to get back to your 
question. But there is a great need out there for the ability 
to take advantage of the low rates. We see it across the board 
in housing right now so homeowners can lower their rate. And in 
many different cases, it is allowing them to get the working 
capital, when we speak about small businesses, for growth. And 
that was alluded to. Mr. Bradshaw alluded to the need for 
working capital, and how businesses--that $50,000 that was 
saved on that $400,000 equipment loan.
    When we refi, and you look at the cost savings, and you 
bring them into a low-cost interest--the first mortgage will be 
lower. Our second mortgage will be a lower interest rate. The 
savings over time provides that business the opportunity to 
invest in jobs, inventory, and growth.
    Ms. CHU. Okay. Well, thank you. Mr. Napoli, I was impressed 
by the success of the Microloan Program. And you emphasized 
this issue regarding technical assistance, this requirement 
that only 25 percent can be used prior to the loan. Why do you 
believe that this should be changed?
    Mr. NAPOLI. Thank you for the question. Since the creation 
of the program back in '91, a lot has changed. Micro-lenders 
are now not just micro-lenders; they also offer other types of 
technical assistance, or an SBA 7(a) loan, a 504 loan. A lot of 
times, a client comes in, and through that SBA technical 
assistance, we find that there might be a better fit for 
another product. And so we only give them the pre-loan 
technical assistance.
    Another thing is, a lot of times when a client comes to us, 
they do not have a money problem at first; they have an idea 
problem. And so to be able to frontload a lot more technical 
assistance in the frontend, and deal with that idea problem--
like creating a business plan, or helping them with lease 
negotiation, or working with marketing--instead of trying to 
get them through the process quickly, and get them a loan, so 
then we can give them more technical assistance--will allow us 
to be able to really foster that time with the client before 
they just get the loan and go forward.
    Overall, just more flexibility and technical assistance 
would allow the intermediary--which was proven over the last 20 
years--that they are able to serve the clients with customized 
technical assistance in their local communities.
    Ms. CHU. And also, intermediaries are limited to no more 
than 25-percent contracting out, and you think that this should 
be changed. Why is that?
    Mr. NAPOLI. That is correct. Right now, the SBA says that 
we can only use 25 percent of our TA dollars for contractors, 
and that poses two limitations. The first is, it is hard to 
recruit talent outside of my staff. So, if I need to get a CPA, 
or a lawyer, or someone that has specific technical experience, 
overall, I am limited to 25 percent of my money being used for 
those contractors.
    Additionally, if I want to expand in the local markets, and 
I want to have somewhat of a local presence there, again, I am 
limited by the fact that I can only do that with 25 percent of 
my dollars.
    Ms. CHU. Thank you. I yield back.
    Chairman RICE. Now I yield to the Chairman of the full 
Committee, Mr. Chabot.
    Mr. CHABOT. Thank you, Mr. Chairman, and let me begin by 
thanking you, Mr. Chairman, and the Ranking Member, Ms. Chu, 
and the other members for attending this hearing--and 
especially the witnesses for being here today.
    I think we all know that access to capital is one of the 
most critical challenges that is faced by small businesses in 
today's environment. It has been the case in the past; probably 
will be in the future. But it is really important, and so 
addressing this in this hearing, I think, is quite important. 
So, thank you.
    I just have two questions. And, first of all, Mr. Palmer, I 
will begin with you, if I can. I recently introduced HR 10-23, 
the Small Business Investment Company Capital Act of 2015, 
which would increase the amount of capital available to small 
businesses by raising the family of funds cap from $225 million 
to $350 million. Do you have any data on the effect that this 
would have on small business lending--and just anything you 
would like to say about that legislation, we would be happy to 
hear.
    Mr. PALMER. Well, Chairman Chabot, thank you first and 
foremost for your support of that legislation and your 
leadership in this Committee. I would also like to thank 
Congressman Hanna and Congresswoman Chu, who are cosponsors of 
that bill.
    We have a number of funds that are slamming into that 
ceiling, and there are a number of funds that are going to hit 
the ceiling that may not apparent that they are going to hit it 
yet. They know it, but it is not necessarily showing them the 
data, because they are long-term investors. So, their current 
fund--they may not be at the limit, but as they are planning 
their next fund, they know they are going to slam into it, and 
they are considering whether or not they are going to do a 
small business fund.
    So, I think that once this gets up and running, I think it 
will be an increase of between $500 and $750 million a year in 
small business investing. Marketing conditions will dictate 
that, but that is a significant increase in small business 
capital that is out there at zero cost to the taxpayer.
    Mr. CHABOT. Okay, thank you very much. And my second 
question, Mr. Bradshaw, I would like to go to you, if I can. 
Thank you, first of all, for your service to our country. I 
greatly appreciate that.
    I am planning to introduce a bill shortly that would 
statutorily eliminate the origination fees on 7(a) loans, the 
express loans to veterans. As you know, SBA is already doing 
this through the Administrator's discretion, at no cost to 
taxpayers. Can you discuss the 7(a) Expense Loan Program, and 
how this fee waiver benefits veteran entrepreneurs?
    Mr. BRADSHAW. Sure, and thank you for the support of this, 
Chairman Chabot. Veterans are my passion. And just for the 
Committee, I brought our brochure that we do. I know it is a 
long way to see, but we do this, and we work together as a 
committee with NAGGL. We compete with each other every day, and 
so we are always trying to, you know, take deals away from each 
other. In terms of veterans, we actually share our marketing 
ideas, and we work together. We electronically send things like 
this around. Speaking with some of you before--last time I sent 
this around, I had a person call me and said, ``I really, 
really like this. Is it all right if I copy it?'' I said, 
``Absolutely, but you may want to change the phone number.''
    So, thank you for the support of the veterans. I have been 
representing NAGGL--very vocal on that from day one, because 
several years ago, one of the biggest initiatives of SBA was 
the veteran push. And I was always, ``Well, if we have a 
veteran push, should not we reduce the fees?'' And we take this 
very seriously in NAGGL and in the institution I run. The fees 
have really made a difference. Sometimes, it is momentum. It 
has been very recent. This year has been the biggest year in my 
institution.
    Mr. CHABOT. Thank you very much, and I yield back the 
balance of my time.
    Chairman RICE. I recognize the gentlelady from California, 
Ms. Hahn.
    Ms. HAHN. Thank you for all of your testimony.
    You are supporting our small businesses, helping our 
economy, getting people hired. It really is so critical. And I 
appreciated all your testimony this morning.
    Last August, I held a roundtable with a lot of local women 
business owners in a waffle shop in San Pedro. It was a great 
morning, and while I am always impressed to hear, like, the 
7(a) Program were up in lending, I think, for loans under 
$150,000 up by 23 percent. I mean, we are hearing all these 
great stories about how more capital is getting to our small 
businesses. But I got to tell you, almost every one of those 
women owners that came that morning, you know, continued to 
complain a little bit about always being denied by banks for 
some of these 7(a) loans.
    And still, probably one of the biggest complaints I get 
from my small businesses in my district is still difficulty--
there is a disconnect on getting some of this capital to our 
small businesses.
    So, I was going to ask Mr. Bradshaw, do you have a sense of 
what are some of the reasons that lenders decide that a small 
business is not worth the risk? What would those be, and how 
can we maybe fix that?
    Mr. BRADSHAW. I think the challenge when people look at a 
small business conventionally--probably the biggest challenge 
is collateral. So, that is probably number one.
    And then number two is, traditional, conventional lending 
has shorter terms. And those shorter terms do not allow the 
loan to meet bank debt service requirements, because it is just 
a shorter term. You are thinking about buying a car in five 
years versus ten years; the financials do not work for the 
company to do it on five years, where they would on ten years.
    And I think those are the biggest impediments.
    Ms. HAHN. Do any of the other witnesses have any comment on 
why you think some of our small business--particularly our 
women-owned--many women-owned businesses sometimes fall through 
that crack that we were talking about, of being, you know, not 
a good risk?
    Ms. VOHRYZEK. Well, I would say it is a bit out of my 
wheelhouse as representing the 504 industry, although a number 
of our members do a great deal of technical assistance.
    I think that the reality of banking these days is that they 
simply do not have the time to invest in what needs to happen 
with a small business in order to make them capital-ready. Mr. 
Napoli actually brought up a very good point I was applauding 
over on my side that much of the work needs to happen before 
the loan.
    And so there are networks, like the SBDC network SCORE, 
that can help borrowers--and including the micro-lending 
network and community advantage network that actually work more 
intensively, I would say. I do not know the women you met with, 
but I would probably, you know, speak with them about, you 
know, where they are on the capital readiness. And you are 
really looking at the continuum of capital readiness sitting at 
the table. But I think a lot of it is how they are queuing it 
up--you know, meaning how they put together their request for 
funding, and whether they qualify for conventional. And then as 
you go to SBA, there is obviously a greater tolerance for no 
collateral or high loan-to-value situations. But a lot of small 
entrepreneurs and businesses, they simply need hands-on in 
order for them to be able to get to the capital point.
    Ms. HAHN. Right. Thank you. And, Mr. Napoli, I would follow 
up with what you were talking about--how you offer this kind of 
assistance helping writing business plans, finding ways to 
finance businesses that have been considered unbankable. Do you 
believe that model could also be expanded to assist small 
businesses that are being denied these 7(a) loans, so that they 
could also get this kind of financing?
    Mr. NAPOLI. Absolutely. And to go back to your original 
question, I know over 60 percent of my portfolio is made up by 
women and minority. So, I think what microloans do very well is 
actually reach out to those communities, and allow them to feel 
welcomed into the process.
    And one of the things is the technical assistance that we 
do provide, from a gamut of different services that could 
completely be relevant to more upstream 7(a) lending, as well.
    What I find is, borrowers are very competent at making 
widgets or doing exactly what they do to know. But they do have 
blind spots. I even have my own MBA, and as I was discussing 
yesterday, I would be frightened to start my own business 
because I did not do so well in my accounting class. And so I 
think, you know, when we are talking to business owners at any 
level, technical assistance is something that is absolutely 
necessary for them to become more successful.
    Ms. HAHN. Thank you. Mr. Chairman, I yield back.
    Chairman RICE. I now yield to the very learned Chairman of 
the Contracting and Workforce Subcommittee, Mr. Hanna.
    Mr. HANNA. Hey, thanks. Mr. Napoli, changing the 75/25 
rule, I want to ask Mr. Bradshaw about Dodd-Frank, and 
commercial banking, and how that has changed the nature of--and 
you mentioned mortgage-backed securities, the wall of loans. I 
mean, if you never pay anybody back, basically you never 
default--which is--I am concerned about the wall of loans.
    But, Mr. Napoli, how would you recapture that money if you 
were to change this or eliminate it all together? Because what 
you say makes perfect sense--that people need a lot of 
technical assistance. They have a great idea, but no basic 
skill set to do this. What would that look like, though, and 
what would it cost? Because, basically, you are upfronting 
money before you make a loan, and you may decide otherwise. So, 
how do you navigate that?
    Mr. NAPOLI. That is a great question. I think one way you 
honestly navigate it is through looking at, obviously, the 
portfolio's performance of what we have already done, and 
trusting in these microloan intermediaries that they are going 
to make the right decisions from the years of experience. And, 
also, you incentivize them to continue to stay loan-centric in 
their lending, so they are not just offering technical 
assistance.
    Mr. HANNA. So, what you are saying is that we should allow 
the subjective nature of the process and the people in the know 
to take advantage of their knowledge, their interaction with 
people, and give them more latitude in that ratio of 25/75 and 
TA assistance.
    Mr. NAPOLI. That is correct.
    Mr. HANNA. Thank you. That is helpful, because I believe 
that makes sense to me. I just do not know what it would cost. 
Mr. Bradshaw, talk to me, if you can, because you have 
mentioned a couple times about commercial banks, and how they 
have changed, and how they have walked away a little bit--that 
is my words. How did that play out, and why did it make what 
you are doing more important?
    Mr. BRADSHAW. I think, as we are all aware, with the 
recession--and part of the recession that came was, banks 
became more conservative; credit became tighter to get. In 
addition, we became a little more heavily regulated. And you 
mentioned Dodd-Frank; that has been part of it. And it has not 
just been--in addition to someone looking over our shoulders, 
there has been a real cost associated with that, too--meaning 
you have to hire more compliance officers, you have to have 
more bank security officers. There has been a real cost 
associated with that. And I think that has just continued to 
add to tightening the credit market. And one aspect that does 
help from this, from the SBA standpoint, is, the SBA loans take 
less capital. And so by applying SBA loans, banks can take 
advantage of that attribute--that they are not using as much 
capital, and they are not running into the capital requirements 
under Dodd-Frank and other regulatory requirements.
    Mr. HANNA. Everybody here has referenced the fact uniformly 
that the default rate is really, really low, which makes you 
feel good about the process, and it makes people want to raise 
the limit, because--what the hell--there is no associated risk, 
right? We know that is not true, because there has to be. And I 
could answer the question, why have a limit at all? But could 
you talk to me about this mortgage wall or this lending wall, 
Ms. Vohryzek? Because it is interesting to me, because implicit 
in that is that there are people who will default if they are 
pushed up against that wall without the extension. Is that 
fair?
    Ms. VOHRYZEK. What would happen, just for the sake of this 
discussion--let us say you have an owner/user small business 
borrower in there that was financed through one of these 
security pools, and they are coming out with a $2 million 
balloon. And it is very tough to finance a $2 million balloon 
payment. Basically, you are looking to refi, so you are coming 
into the commercial market or the SBA market, saying, ``I need 
to refinance this $2 million balloon.''
    Mr. HANNA. And how long have they been in business, do you 
think?
    Ms. VOHRYZEK. You know, that would require that I would 
know what was sitting in those mortgage-backed pools back in 
'05, '04. You know, I would imagine that if they got into the 
pool in the first place, my guess would be that they were a 
relatively seasoned business, because in the pooling process, 
they would be vetting if it were a known user----
    Mr. HANNA. Thank you. That is helpful. So, if they are a 
relatively seasoned business, they took out a balloon mortgage, 
which can be foolish on its face, right? They knew that. They 
are facing that. They are a relatively mature business. What do 
they need with us?
    Ms. VOHRYZEK. What was available to them in '05--let us 
say, for instance, they were financed in '05. They are upside-
down on that commercial building in Brooklyn. Well, maybe not 
Brooklyn. Maybe they are upside-down in that commercial 
building in Oklahoma City or, you know, wherever things 
flipped. And California was one of them, but we are recovering. 
So, their loan-to-value is compromised--or they are at 90 
percent if they try to get $2 million, whereas under a normal 
amortization, they may have been at 70, which would be 
financeable pretty easily through the banking markets. But 90 
is absolutely an SBA product.
    And so I want to differentiate. In SBA lending, under our 
program, the 504, we are looking to provide working capital--
free up working capital for these businesses to grow. And in 
the case of refinance, this is so that they have the funds in 
order to expand their business and not be taken down by the 
inability to get a 90-percent loan-to-value. We are not looking 
at businesses that if they had the financing available would 
default. We are looking at a market gap. And so these could be 
healthy businesses coming out, but they are still at a high 
loan-to-value.
    Mr. HANNA. Thank you. That clarifies everything for me--
because, really, you are not trying to push out the inevitable; 
what you are trying to do is help people who inevitably will 
succeed, in your view.
    Ms. VOHRYZEK. And to remember that there have been many 
times in our history in lending where balloon payments were 
absolutely the market. When I first started in the '80s, five-
year mini-perms was kind of a standard on commercial product, 
and it then stretched to ten. Even to get banks to go to 10 
years, given capital requirements and liquidity issues--10 
years can be tough. So, it just depends where we are in the 
market in lending.
    Mr. HANNA. My time is way over. I thank the Chairman for 
indulgence. Thank you.
    Ms. VOHRYZEK. Oh, I apologize.
    Mr. HANNA. Oh, no, it is my fault. Thanks.
    Chairman RICE. I want to just ask a couple more questions. 
Mrs. Vohryzek, this wall of refis is just a curious thing. Is a 
part of that because the capacity of lending has declined? You 
know, we are hearing there are fewer community banks today than 
there were eight years ago. And there is also, for the first 
time in seven years, there has been less business startups than 
there have been businesses going out of business. And I am not 
sure that those things are not very closely related, because 
access to capital is one of the keys to our competitiveness.
    So, what I am asking you--because I am concerned that the 
SBA, although you are doing great work, can never fill the 
void--that commercial lending is going to have to be where this 
solution is found--do you think it is because of lack of 
capacity? Has the pendulum swung too far, and are we regulating 
these community banks out of business, and, therefore, we have 
this wall of refis coming that presents this big problem?
    Ms. VOHRYZEK. I think that things have swung quite to the 
opposite direction, as has been mentioned several times. It is 
costly to run a bank now--I do not care if you are large or 
small--with all the regulations. And, really, you know, things 
that are in place that they want to avoid another disaster--I 
understand why they are there. But, as you said, the swing is 
quite strong. Can SBA fill the gap?
    When you are looking at programs--at least three of the 
four here--that are paying for themselves through zero 
appropriation, it is a heck of a deal for the taxpayer and for 
our communities, as we are at zero subsidy.
    And so, yes, we are filling a really important gap. And as 
you have seen in the 7(a) program, the growth is there. And in 
504, you know, we have been a little challenged, and we will 
come back roaring. But, you know, we have had times right now 
that our volume is not as high as it could be. But we still are 
zero subsidy. And so we fill a gap, and we fill a gap at no 
cost to the taxpayer. And so for that reason, I would say that 
we can grow, and we can be important to fill what you are 
speaking about.
    Chairman RICE. Mr. Palmer?
    Mr. PALMER. I guess what I would add to that is, you know, 
Dodd-Frank existed because we clearly had gotten, you know, 
overboard, and there were real problems that had to be 
addressed. But one of the challenges of a Dodd-Frank is that it 
does not scale. You know, if the big banks are screaming about 
the costs and the regulatory compliance problems, the little 
guys--it is 10 times worse. We are seeing that in the private 
equity space, as well, where the big private equity funds can 
deal with all this SEC compliance, and the little one are 
getting creamed.
    I mean, you know, with all good legislation, you have to go 
back and review it. I think if that ever does get reviewed, I 
think it is worthwhile to look at the scaling challenges of the 
smaller lenders and the smaller investors, versus the largest, 
as far as how they can handle the compliance costs on the 
backend.
    Chairman RICE. I think community banks should be exempted, 
but that is just my opinion. Mr. Bradshaw?
    Mr. BRADSHAW. I like that, sir. And to your point, Chairman 
Rice, I mean, my institution is a large community bank, and we 
are just under $10 billion. And in Dodd-Frank, going over $10 
billion, there becomes essentially a regulatory tax. And so you 
do not go to $11 billion; you go from just under $10 to $14 or 
$15, because you have to pay for that additional cost. You just 
do not go right over it. And so, you know, it is a very real 
thing in our world.
    Chairman RICE. Yeah, I have spoken to community banker 
after community banker. Community bankers have come in here. 
The owner of the only minority-owned bank in Washington, D.C. 
was in here last year, saying that if we cannot find some 
relief for him, that Dodd-Frank will put him out of business. 
And I hear that over and over again, and access to capital is 
just so incredibly important. I worry that we really need to go 
back and review some of that. I yield to Mrs. Chu, if you have 
any additional questions.
    Ms. CHU. I do. Thank you, Mr. Chair. Mr. Bradshaw, last 
year, the 7(a) Program faced a funding shortfall, and Congress 
had to include a billion-dollar allocation for the program in 
the continue resolution to prevent the program from shutting 
down.
    For 2015, the 7(a) Lending Program is potentially facing 
another shutdown in a few months if loans continue to follow 
these projections. How critical is it for Congress to 
appropriate and authorize adequate funding for the program? And 
what would be a real-life example of what consequences would be 
if there is a potential shutdown of the program?
    Mr. BRADSHAW. Thank you, Congresswoman Chu. Yes, we feel 
that the program will run out of money this year. We talked 
about in my testimony that within--probably in August. And what 
that would mean in terms of real life is, you could have a 
customer that you are working with. They are acquiring a 
business, or a piece of real estate, or both. They have a 
purchase-to-sale agreement, so they have committed hard money 
to this purchase-to-sale agreement, and we cannot process their 
loan, because we have run out of money with the SBA.
    Ms. CHU. Thank you. Mr. Palmer, I certainly heartily 
support the idea of lifting the cap from $225 million to $350 
million. And I understand there is also another issue, which 
has to do with the licensing of the family of funds, and that 
it is taking longer and longer. Could you talk about that issue 
and what needs to be done?
    Mr. PALMER. Sure. Thank you very much. The licensing 
process for the SBIC Program is for the frontline of taxpayer 
protection, in that they are making sure that only qualified 
people are getting through, and those standards need to be 
high.
    However, the licensing process is really long, and this 
administration actually did a very good job for several years 
getting that licensing process down to about five months. The 
official numbers are around nine or ten months. That does not 
include a month of the magic mailroom, where the documents do 
not get processed and some other stuff. So, it really is 
running over a year for repeat licensees.
    And for a repeat licensee, you are talking about someone 
who has raised the private capital, gotten licensed with the 
SBA, invested successfully, gone out to the market again 
several years later, raised private capital, has been 
compliant, and then it is taking them another year--potentially 
even longer than it did the first time. That does not make any 
sense.
    And so they have got a process that the standards need to 
be high, but it has got this multitiered process that really 
can be consolidated, and sped up, and maintaining taxpayer 
protections that, really, right now is causing people's, you 
know, vein in their forehead to pop out, out of frustration, 
but it is also slowing things down, adding costs, and there 
really is not any benefit to it. We would really like to get 
that reformed, and I think probably the SBA would, too. They 
just kind of need a little push to make it happen.
    Ms. CHU. And it makes total sense to differentiate the 
repeat licensee versus the new one.
    Mr. PALMER. And I think there is an added benefit to that, 
too--because if you put your resources to the first-time funds 
that are really more unknown, it gives you more opportunity to 
reach out to geographies that you have not touched before or 
that you have not done the outreach for. It also lets you do a 
deeper dive on the backgrounds of the people that are coming 
in, so you can get more diversity of fund managers that are 
coming in--because, right now, you know, they are treating 
everyone exactly the same, even if you have been on your fourth 
or fifth license. And dedicating those resources there, where 
you really have a whole new generation of, you know, investment 
managers, and women, and minorities, and doing different 
strategies. They cannot get the time of day, because they are 
not in such a tight band. And I do not think that helps the 
program or the country at large.
    Ms. CHU. Mm-hmm. Mr. Napoli, you had a third reform that 
you were discussing, which is this 1/55th rule. And the SBA has 
requested to adjust this cap for the 1/55th rule in the 2016 
budget request. Can you tell us what this is, and what you 
think the adjustment should be on this?
    Mr. NAPOLI. Yeah. So, currently, there is a rule called the 
1/55th rule. And what it means is that the amount of funding 
for lending for SBA micro intermediaries is divided equally 
between 55 states and territories. That is the case, even when 
several of those territories or states do not even have an 
intermediary actually located there--or, a lot of times, they 
do not even need that much actual lending capital, but other 
intermediaries do.
    And so what happens for the first two quarters or six 
months of the federal year, funds are just sitting at the SBA 
until they are able to open up to these other intermediaries in 
other states that actually have a demand that has been waiting 
for the last six months.
    What it can look like is just actually look at eliminating 
that all together, and allow for those intermediaries that 
actually have demand to show that, and for the SBA to make 
loans that are targeted to those intermediaries that make sense 
for the demand that they have.
    Ms. CHU. Thank you. And if I could ask another question--it 
is about the SBA requesting a 30-percent increase in funding 
for the microloan intermediary lending authority, which would 
be expected to support about $75 million in loans to small 
business. Do you think this increase is enough for the level of 
demand that you encounter?
    Mr. NAPOLI. Well, as I stated, you know, 88 percent of 
small businesses fall under micro. It is a huge amount of 
businesses. But I also know that that is a completely 
digestible demand that we can meet this next year. So, yes, 
absolutely, that is something I think that we can--I can come 
back in a year from now, and show the amount of jobs created, 
the fact that we have gotten the money out, made quality loans, 
and then the next year, pose the exact same good problem to 
have.
    Ms. CHU. Thank you. I yield back.
    Chairman RICE. Mr. Hanna?
    Mr. HANNA. Does anybody--Mr. Bradshaw, Mr. Palmer--we have 
a situation which I think Chairman Rice rightly identified, and 
that is, this kind of dragnet thing that Dodd-Frank did caught 
up a lot of commercial banks that were doing just fine, added 
millions to their cost of doing overhead in small communities, 
limited their--increased their overhead, limited their ability 
to make local loans, and do the things that you four do so 
well.
    And I saw you nod your head, Mr. Bradshaw. You would 
eliminate, at some point--maybe on a sliding scale--the 
requirement for commercial banks to fall under some of those 
rules or those--how would you change that? What would you do 
differently?
    Mr. BRADSHAW. Well, I am going to respectfully agree with 
Chairman Rice. I like the thought process of looking at the 
community banks first. And if you look at--we announced an 
acquisition about 30 days ago of a $1.3-billion bank, and in 
the press release, the CEO of that bank said one of the reasons 
he was selling was because the regulatory pressures were just 
too hard on it.
    Mr. HANNA. Yeah. Well, I guess what I am suggesting 
implicitly--and Mr. Palmer or anybody--is that in doing that, 
we actually made it more necessary for the SBA to do all those 
things, because we interrupted the marketplace in a place that 
arguably maybe we did not need to or did not need to do as much 
as we did.
    So, the whole nature of loans from commercial banks has 
become more strict, more difficult, more onerous for people to 
go to. So, therefore, you have more need for what you all do, 
which it is good that you are filling the need, but maybe we 
can work up the food chain and down the food chain.
    Mr. BRADSHAW. I would like to comment that, you know, in a 
commercial loan environment, you do have a credit approval 
process. And I can tell you that the credit officers have not 
forgotten about 2007 and 2008. So, I do not know that all the 
additional regulation is necessary in that regard.
    Mr. HANNA. Mr. Palmer?
    Mr. PALMER. Well, the growth in the SBICs has been driven 
by a couple things, but one of which is just the awareness of 
the SBIC Pogram. And, frankly, it has been run well. It really 
had some struggles before the financial crisis, just from 
management issues and very few licenses were getting out there.
    So, as the SBIC product has become normalized, they have 
partnered with a lot of banks, which they had done before to a 
certain degree, but not to the extent they do. So, they are 
backfilling and allowing banks to do lending that they 
otherwise could not do, because they are often coming in with 
subordinated debt where the bank comes in with the senior, but 
the condition of the business itself would not otherwise be 
eligible for a loan. So, you know, they go hand-in-glove.
    But to your point, I do think we need a healthy banking 
structure generally, and let the banks, you know, operate in an 
appropriate and prudent way to fill the market needs. And then 
where the gaps are, where public policy should be applied, let 
it be applied.
    Mr. HANNA. Sure. And if they are not allowed to assume any 
risk, then there is more and more demand on what you all do.
    Mr. PALMER. Well, the challenge--there is a real 
perception, whether fair or unfair, in the market that risk is 
trying to be, you know, really stripped of every investment and 
every loan in the universe. And without a downside risk, there 
can be no upside risk. And I think at some point, we need to, 
you know, establish, what is the appropriate level of risk we 
are willing to live with as a society?
    Mr. HANNA. Mr. Napoli, you could probably speak to that 
better than anybody here, since you do microloans. Do you think 
a lot of people could be successful that just do not fill the 
bill for you? Do you think, like, there are opportunities out 
there that take greater associated risk for microloans, and 
ultimately grow what it is you are out there growing as 
businesses, and create jobs, and all of that?
    Mr. NAPOLI. Absolutely. As I said before, one thing micro-
lending does is definitely address the minority and women-owned 
markets better than any other lending tool. But one of the 
trends I see right now is the increase of younger entrepreneurs 
that is not being addressed by the market--talking about, you 
know, people coming out of college, even young 30s. And a lot 
of times, these are held down by the amount of student loans 
they have. It is a huge factor. But I think that is one thing 
that we could definitely target and do a much better job.
    Mr. HANNA. Thank you. My time has expired again. Thank you, 
Chairman.
    Chairman RICE. That was a great hearing. Thank you all for 
participating today. I truly appreciate you taking time out of 
your hectic schedules to provide the Committee with suggestions 
for improving SBA's lending programs. These ideas will be 
instructive as the Committee works to ensure small firms have 
access to capital which is vital to their success, and 
necessary for the United States's continued economic growth.
    I ask unanimous consent that members have five legislative 
days to submit statements and supporting materials for the 
record.
    Without objection, so ordered. The hearing is now 
adjourned.
    [Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

[GRAPHIC] [TIFF OMITTED] T4650.001

    Chairman Rice, Ranking Member Chu, and distinguished 
Members of this Subcommittee, I am grateful to have this 
opportunity to testify before you to discuss the impact of the 
Small Business Administration's 7(a) loan program for both the 
lending and small business communities.

    I wear many hats as I testify this morning--the lender who 
has worked at both a large, national bank and in my current 
position at a community bank; the member from NAGGL, the 
national trade association for 7(a) lenders; and a proud 
veteran. I hope that all of these perspectives that I bring to 
the table will help create a productive conversation with this 
Subcommittee about the strengths, the challenges, and some of 
the possible misperceptions about the 7(a) loan program.

    The 7(a) program annually supports over 45,000 small 
businesses and over 500,000 jobs with partnership from more 
than 2,600 participating private-sector lenders. And we do all 
of this at no cost to the taxpayer. In fact, in many years, the 
program's subsidy rate has been reestimated down the road to be 
far less than originally estimated, resulting in over $530 
million returned to the Treasury since FY 2010.

    The 7(a) borrower is a small business that cannot find the 
same terms in the conventional market because the banking 
industry, continues to remain cautious with its capital and 
heavily regulated in this post-Recession, post-Dodd-Frank 
environment. The bulk of conventional loans are made for 3-year 
terms of less. This means that the majority of small businesses 
who typically need long-term, competitively priced loans can 
only find these terms through the SBA loan programs, which 
offer loans up to a term of 25 years, with average terms for 
the 7(a) program of 16 years.

    In a Basel III world, banks avoid tying up their deposit 
base in long-term loans. A larger, short-term deposit base is 
meant to keep the bank afloat in the event of a recession, 
allowing the institutions to stay nimble enough to shrink their 
loan portfolio when necessary. For any bank to tie up a 
significant portion of their deposits in long-term loans would 
be a funding mismatch and regulators would raise red flags. The 
7(a) loan program provides a way for banks to make these long-
term loans that, in today's financial climate, are virtually 
impossible to obtain by small businesses conventionally. 
Simultaneously, borrowers are just coming out of the shadow's 
of the Recession, dramatically increasing the pool of 7(a) 
applicants. It is no wonder that annual new loan originations 
have grown from $16 billion in FY13 to what industry 
anticipates will be $23 billion in new loan originations in 
FY16.

    Therefore, the single-most pressing issue that threatens 
the 7(a) program year in and year out is constantly hitting the 
lending cap set by Congress. On the one hand, this is a good 
problem to have--it means that the program is growing beyond 
what Congress expected and that the program's private sector 
lenders are pumping more and more loans out into the small 
business economy than ever before. In fact, the program volume 
in dollars increased on average 22% ahead of last fiscal year 
as of the first week of May. On the other hand, it means that 
like last year, the program is once again facing a potential 
eleventh hour threat of shutting down in this fiscal year and 
potentially not receiving enough room to grow in FY 2016.

    If there is one thing that Congress can do to help the 7(a) 
program run more effectively and serve more small businesses, 
it is to make sure that the authorizing committees and the 
appropriations committees in both the House and Senate work 
together every fiscal year to set a cap for the program that 
gives the portfolio enough room to grow without the looming 
fear of shutting down. The consequences of not setting an 
appropriate cap are dire for the program.

    Washington stop-and-go funding patterns are a complete 
mismatch for how the rest of the world operates outside the 
beltway. Small business owners and lenders alike need assurance 
that the 7(a) program will be a reliable resource. The 7(a) 
loan goes to small businesses that incorporate this capital 
into their business models months in advance for new hires or 
long-term expansion plans. Quite simply, the small business and 
lending communities will stop turning to the 7(a) program as an 
answer to capital access if they feel its existence is 
uncertain. Believe me--this issue is difficult to explain to 
the board of directors of a community bank. In addition, 
participating lenders diligently watch the volume of the 
program and their anticipated pipelines, and if it seems the 
program will come close to the authorized cap at the end of the 
fiscal year, lenders will start to change lending behavior as 
early as June. If the most important thing in finance is market 
fears and perceptions, the always precarious nature of the 7(a) 
authorization is undoubtedly the weakest part of the program.

    For Fiscal Year 2016, the President's budget request for 
the 7(a) program was $21 billion. NAGGL is anticipating that 
the 7(a) program will actually lend about $23 billion in FY16. 
We are asking that the House and Senate Small Business 
Committees work together with their respective Appropriations 
Committees to give the program what it needs to simply allow 
for the natural increase in small business lending, a trend I 
know this committee would strongly applaud. I understand and 
respect Congress' need to justify every dollar spent. But 
Congress cannot encourage small business lending on the one 
hand, and yet on the other hand, keep the lenders and borrowers 
in constant fear of shutdown for simply robustly participating.

    Even more pressing is the potential authorization 
shortfalls this fiscal year. For the past three fiscal years, 
loan volume in dollars has on average increased by 27% in the 
second half of the fiscal year from the first half of the 
fiscal year. And I am confident that trend will remain true for 
FY 2015, putting us easily at around $23 billion gross and 
$20.5 billion net, if not more. While that level of lending is 
encouraging, it is also disastrous since the industry only has 
$18.75 billion in authorization from Congress. That is akin to 
giving a car with no brakes a full tank of gas but only giving 
it a little bit of road. What is the car supposed to do when it 
runs out of road?

    Last year, in FY14, we had this same funding shortfall and 
Congress included a $1 billion anomaly in the Continuing 
Resolution in September 2014 to save the program from shutting 
down. And we certainly would have shut down without that 
additional authorization--the 7(a) program made loans totaling 
$19.2 billion gross and $17.7 billion net, given an original 
$17.5 billion in authorization. That net figure would have been 
even greater had the additional funding come earlier than the 
last week of the fiscal year since lenders begin to change 
their lending behavior at least four months in advance of the 
end of the fiscal year. I know personally that many lenders 
slowed down their own lending early last fiscal year in 
anticipation of a shutdown. No lender wants to tell a small 
business borrower that its loan was delayed. In real world 
terms, that means the small business can't make those 
additional hires or has to find a way to stall construction on 
a new expansion. That is the opposite direction we want the 
small business economy to be moving toward.

    We hope that either Congress or the SBA can work with us to 
address this looming issue for FY15. Otherwise, the program 
could shut down and the 7(a) program's reputation as a reliable 
resource for small businesses will be damaged. And more 
importantly, small businesses will not receive the access to 
capital they so badly need in this economic climate.

    As a lender, I can tell you that most people do not 
understand the 7(a) loan program. This program is not a subsidy 
for small businesses--it's a loan made with a private financial 
institution to small businesses that are paid back in full and 
treated as any other conventional market loan. The program is 
the very essence of a public-private partnership, allowing 
government to stand out of the way of what banks know how to do 
best.

    Perhaps the most critical part of the program to highlight 
is that I know for a fact that without the 7(a) program, the 
loans I make would never be made. That does not mean the small 
businesses receiving a 7(a) loan are failing or unable to repay 
their loans. Many believe that a mission statement of helping 
small businesses find capital that they could not find 
elsewhere means that these small businesses are somehow 
subprime--that is false. These small businesses are not 
subprime; rather, the current conventional market is 
unavailable to satisfy the majority of small business needs. As 
lenders participating in the SBA programs, we have to abide by 
many parameters, including making sure the borrower is in sound 
financial health and credit worthy. As bankers, we never want 
to see a risky loan on our books to open us up to potential 
losses or criticism from our regulators. The 7(a) program 
ensures we have skin in the game with the lender standing to 
lose 25%-50% of the loan in the event of default, as well as 
heavy oversight measures that would affect our reputation as 
financial institutions.

    As an active part of NAGGL, I co-chair the association's 
Public Policy Committee, which focuses solely on the public 
policy goals of the 7(a) program. The 7(a) program is 
inherently connected to a larger mission--to lend to small 
businesses that cannot find credit elsewhere. Over the years, 
this has come to mean not only small businesses that cannot 
find a conventional loan, but also underserved markets and 
minority populations. This public policy portion of the program 
is a critical mission for NAGGL and the 7(a) industry, and we 
have already begun the task of creatively addressing the gap in 
lending to certain demographics. Veterans and African-Americans 
are two of the most underserved populations within the SBA 
lending programs. It is important to note, according to SBA's 
weekly lending statistics as of the first week in May, when 
comparing May 2015 to May 2012 year to date, 7(a) lending to 
African-Americans has increased by 93%. Similarly, when 
comparing May 2015 to May 2012 year to date, lending to 
veterans has increased by 88%. Let me caveat this good news 
with some sobering reality--these increases are augmented by 
the fact that the pool for each of these underserved 
demographics is so small in the first place. These are steps in 
the right direction, but we have much more we can do as 
lenders.

    In response to this, the 7(a) lending industry is reaching 
out into the communities to attack this challenge in a 
personal, hands-on way. For example, the SBA and the industry 
have learned over the years that it is not a matter of lenders 
not choosing minority borrowers. Rather, it is a matter of 
minority borrowers not being credit ready and aware of SBA 
opportunities. In response to this educational need, NAGGL 
recently partnered with the SBA to create an entrepreneurial 
education toolkit for minority communities that will be 
translated into Spanish and taught through faith-based and 
local community organizations. This educational initiative, 
called the ``Business Smart Toolkit,'' is being rolled out this 
year. I'm looking forward to seeing the results of this 
terrific partnership.

    Additionally, NAGGL has been crisscrossing the country to 
honor minority small business borrowers who have received a 
7(a) loan and subsequently revitalized their neighborhoods. 
During Black History Month of this year, NAGGL hosted an event 
to honor James Hamlin, an African-American entrepreneur in 
Baltimore on Pennsylvania Avenue, the epicenter of the most 
recent protests have been centered. With the help of a 7(a) 
loan, Mr. Hamlin opened The Avenue Bakery and turned around a 
small corner of his community that is currently under the 
microscope of the world when it comes to underserved segments 
of the population that have been left behind. Mr. Hamlin's 
bakery was spared from any recent violence that occurred in the 
city and he is a beacon of hope when it comes to how we 
communicate with younger generations about how to make a better 
life. Mr. Hamlin will also tell you that at the end of the day, 
struggles in minority communities are all about economics. We 
hope that the 7(a) loan is a way to inject these underserved 
markets with the power of economic sustainability and success.

    As a veteran, I acutely see the challenges we're facing in 
the portfolio to lend to veterans, as well as other underserved 
markets, in a very personal way. I feel compelled to be a part 
of the answer to help the SBA loan programs become more 
accessible to minorities. As a young man, I attended the Air 
Force Academy and subsequently served five years active duty in 
the Air Force. Following my service, I entered the Naval 
Reserve and for sixteen years working in Naval Intelligence, 
until finally retiring in 2005. Now, in a new chapter of life, 
for the last two years I have served on Senator Lindsey 
Graham's Academy selection boards, interviewing prospective 
applicants.

    One of the most rewarding parts about my alternate life as 
a banker is that in the SBA 7(a) program, I actually have the 
rare ability to merge my two worlds and help veterans achieve 
economic empowerment when they return from the battlefield. I 
helped create and chair NAGGL's Operations Veterans Access 
Subcommittee focused on bringing veterans into the 7(a) 
program. I was encouraged by so many of my peers committing to 
NAGGL that they would increase lending to veterans by 5% over 
the course of the coming year, but we need to do more. Some of 
my favorite moments of my job is seeing that a loan on my desk 
is going to a veteran and calling them up personally to thank 
them for their service. Now, as the industry continues to hone 
in on underserved markets like veterans, I hope that those 
calls become more and more frequent.

    Once again, thank you for this opportunity to testify. I'm 
encouraged by being here today that Congress and industry can 
work closely together to address some of the program's 
challenges and encourage our strengths. I look forward to 
discussing the 7(a) program more with you and happy to take 
your questions.
    Representative Rice, Representative Chu, and other 
distinguished members of the committee: Thank you for inviting 
me to testify before the subcommittee. I know you all share the 
goal that I do, which is to ensure American small businesses 
have the access to capital necessary to grow and, in doing so, 
help their local communities flourish. I look forward to the 
exchange of ideas today on ways we can work together towards 
that vision.

    My name is Barbara A. Vohryzek and I serve as President and 
CEO of the National Association of Development Companies, or as 
we're commonly known, NADCO. In that role, I represent more 
than 90% of the Certified Development Companies in the country. 
These Certified Development Companies, or CDCs, are mostly non-
profit entities that execute the financing for SBA's 504 loan 
program, while often also participating in other federal, 
state, and local economic development programs, including the 
SBA Microloan program and the SBA Community Advantage Loans 
program. This is familiar territory to me--I founded and ran 
California Statewide CDC for over 21 years.

    The 504 loan program is a financing tool for economic 
development that provides small businesses with long-term, 
fixed-rate loans to help them acquire major fixed assets for 
expansion or modernization of their businesses. These loans are 
most frequently used to acquire land, buildings, machinery, or 
equipment. Eligibility for 504 loans is linked to job creation. 
By law, each $65,000 in financing must create or sustain one 
job, or meet one of several public policy goals. Our loans are 
closely linked with our local government and local communities 
so we can help them grow. A loan which includes a 504 guarantee 
portion can be over $13 million, which allows the CDC community 
to contribute to impactful economic development work.

    The 504 loan program had challenging years during the 
economic downturn. As a real estate-heavy program, it 
experienced losses and, in directly tracking with the real 
estate market, took a while to recover. I am pleased to report 
though that this October, it is back to being self-funded with 
no appropriation, as it had been since the program went to 
self-funding in FY1996. Now that we are on firm footing, we 
must turn to where the 504 program and the CDC industry must go 
next.

    I recommend that during the 114th Congress, the 
subcommittee focus on several long term modifications as well 
as make some immediate fixes to a few current challenges that 
the CDC industry and the 504 loan program face.

    First, the 504 loan program lacks definition. It is SBA's 
economic development loan program and CDCs are economic 
development entities. However, no definition exists in statute 
or regulation for ``economic development'' or for ``CDC.'' I 
recommend that we work together, as we have already started to 
with SBA, to formalize these definitions so that there are 
clear metrics for this program to fulfill its mission and be 
respectful stewards of the taxpayer's guarantee. This will be 
an opportunity for us to delve into many important topics, such 
as making the Community Advantage loan program permanent and 
increasing outreach to minority borrowers.

    Second, I recommend that the successful debt refinancing 
with a 504 loan program, a program that was in place several 
years ago, be restarted permanently. When this program was 
active from mid-2011 through September 2012, the peak of the 
economic downturn, more than 2,300 small businesses refinanced 
over $5 billion in capital. This returned to their business the 
many tens of thousands of dollars a year previously spent on 
high interest rates or saved them from balloon loans. Small 
businesses who participated in the refi program were required 
to reinvest the savings in their businesses, creating jobs and 
opportunity for them and into the wider community. SBA 
estimates that this program would operate at a zero subsidy 
cost, so no appropriation, if restarted. In fact, this year's 
subsidy reestimates for the programs show that existing refis 
have operated at a negative subsidy rate, meaning that they 
have actually made money for the government. A program with 
such a strong track record should be available again to our 
small businesses.

    This request is timely as well over 4,000 small balance 
commercial mortgage-backed security loans will mature in the 
next 3 years. Most of these borrowers will need to refinance 
yet many banks that handled small balance loans prior to the 
financial crisis are no longer in the market or no longer in 
business. This will be a gap for small business owners which 
must be filled. Refinancing these conventional loans with the 
504 loan program can do that.

    Third, last year the committee introduced H.R. 5600, which 
clarified SBA franchise and affiliation rules. NADCO would 
welcome passage of a similar bill to address this confusing 
issue.

    While these long term changes will strengthen the 504 
program for future small business borrowers, several pressing 
matters are preventing CDCs from best serving their communities 
today. Most timely is a recent SBA procedural notice which 
states, for the first time in the program's history, that the 
Anti-Deficiency Act prevents 504 loans with open-ended 
indemnities from closing without onerous waivers, costly 
attorney fees, and many hours of red tape for small business 
owners and CDCs. When this unprecedented policy was first 
issued, NADCO surveyed our members and discovered that a 
billion dollars in financing had been delayed or canceled from 
this change. And that was only as of October 31, 2014. More 
perplexing yet, this policy was issued despite the fact that, 
according to the SBA, not one single loan has caused any loss 
of taxpayer dollars due to this issue. While fixing this 
problem is within SBA's regulatory authority, the Agency has 
not, as of yet, found a solution that is workable for small 
businesses. I hope we have the opportunity to discuss this 
complex issue during your questions. There is no issue more 
critical in the 504 program and, in my opinion, in the 
government lending arena, since it seems that this policy 
logically extends to the many other SBA and federal government 
loan and guarantee programs that have real estate as 
collateral.

    A final challenge that the CDC industry faces is a 
challenge that I know is shared by many of the other SBA 
partners--that of adequate levels of SBA staffing. Recent 
retirements and other departures mean that a single SBA staff 
member may now cover portfolios previously managed by 2, 3, or 
even more staff members. This result of this change is both a 
slowing of our ability to support small business entrepreneurs 
seeking SBA 504 loans, and an increasing concern and lack of 
confidence within the business community about our ability to 
deliver 504 loans in a timely fashion. Our small business 
borrowers deserve to have access to capital that is 
unconstrained by the vacancy of these SBA positions that are so 
critical to our ability to deliver this high value loan 
program. We hope this subcommittee provides adequate resources 
through the budget and appropriations process to hire and train 
strong SBA employees.

    Thank you again for the opportunity to share NADCO's 
thoughts. I look forward to your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 

       Brandon Napoli, Director of Micro lending at VEDC

 Statement for Record for the Subcommittee on Economic Growth, 
                        Tax and Capital

          Access of the House Small Business Committee

                 U.S. House of Representatives

                          May 19, 2015

    Chairman Steve Chabot and members of the sub-committee, 
thank you for the opportunity to submit testimony about a 
crucial component of a vital American business community. My 
name is Brandon Napoli and I am the Director of Micro Lending 
at VEDC, located in Los Angeles. VEDC is one of the largest SBA 
micro lenders in the nation. We provide real money to real 
people who are creating real jobs.

    Micro lending is foundational to our economy, and VEDC is 
committed to helping entrepreneurs like Maria Martir secure 
microloans that foster healthy, sustainable communities. Maria, 
who started her own business at age 12 in Mexico, is the proud 
owner of De Todo Un Poquito Cafe (A Little of Everything) in 
Los Angeles. Raising the funds to start her own business was 
not easy; Maria saved what she could out of every paycheck she 
received. Three years later and with $40,000 in savings, she 
approached several banks for the last $10,000 to provide a 
working capital cushion for the first several months of 
operation. Maria was turned down several times for traditional 
financing. She had no existing cash flow and no outside 
collateral. Maria turned to VEDC, which offers access to 
capital for entrepreneurs unable to secure traditional bank 
financing as well as free technical assistance.

    Three years after receiving a $10,000 loan along with help 
writing her business plan, Maria's original cafe has grown to 
occupy the vacant space next to her and has created jobs for 
her four children. She is now looking to expand elsewhere. 
Maria's experience illustrates what we at VEDC know from years 
of experience--hands on technical assistance, coupled with 
need-based financing, greatly increases a small business's 
chances of success.

    Micro lending is not just about making small loans, though. 
It is about reaching entrepreneurs who are outside of the 
economic mainstream and helping them start and sustain a 
business that eventually creates jobs, adds to the tax base, 
and after a few years, becomes bankable.

    All those micro-businesses add up to big numbers. These 
businesses generate $2.4 trillion in receipts, account for 17% 
of U.S. GDP, and employ more than 31 million Americans.\1\ 
Maria Martir owns one of the 25 million businesses, or 88% of 
all businesses, in the United States considered a micro-
business--a business with five or fewer employees and start-up 
capital of under $50,000. Microbusinesses are everywhere--the 
farmer at the Saturday market, your neighbor who runs the local 
childcare center, the trucker who works long hours on the road, 
the contractor who built your home, the beauty salon or barber 
shop, your favorite neighborhood restaurant that you always 
suggest needs to commercialize their barbecue sauce, or the 
miniature golf course you worked at as a kid--think of the 
businesses you frequent and I am sure that you encounter many 
microbusinesses you call your own.
---------------------------------------------------------------------------
    \1\ Survey of Business Owners and Self-Employed Persons, conducted 
by the U.S. Census Bureau in 2007 and 2008.

    The proposed FY2016 SBA Budget provides continued 
opportunities for American's entrepreneurs to start their own 
businesses and become successful, independent, and self-reliant 
like Maria. To keep the American Dream a reality for the 
millions of micro-business owners, Congress needs to increase 
the effective investment it has made in SBA Micro Loan Program 
from $24.8 million to $28.3 million and make the programmatic 
---------------------------------------------------------------------------
changes suggested by current intermediary micro lenders.

    Increasing this funding would have a positive impact on a 
current market trend that is siphoning the cash flow out of 
small businesses today. Today, we hear about online lenders and 
how they are addressing the financial needs of small 
businesses. But a lender that provides short term, high-
interest rate products without transparency in their pricing is 
not what small businesses need. The good news is that there are 
initiatives like microloan.org and SBA LINC, both new gateway 
referral programs for small business owners. These efficiencies 
are being built, through automation, yet staying committed to 
the long-term, relationship-based lending that has been the 
driver behind high performing portfolios and the successful 
borrowers who have benefited from them.

    Maria's De Todo Un Poquito Cafe and other microbusiness 
could not do what they do without the support they get from SBA 
micro loan intermediaries like VEDC. Since 1998, VEDC has lent 
over $11 million by providing over 1,000 SBA micro loans, as 
well as pairing business technical assistance with the loans. 
Thankfully, there are many others like VEDC around the country. 
These participating intermediary lenders, like CDC Small 
Business Finance in California, Lift Fund which lends in over 
five Southern States, Common Capital in Massachusetts, 
Community Investment Corporation in Connecticut, Entrepreneur 
Fund in Minnesota, Wisconsin Women's Business Initiative 
Corporation, and the Economic and Community Development 
Institute in Ohio provide a ``one-stop-shop'' where a business 
owner can secure flexible financing as well as the 
individualized business assistance as needed throughout the 
life of their loan. This model forges a unique dynamic between 
the lender and the business owner that has enabled intermediary 
lenders to maintain healthy and growing loan portfolios while 
financing businesses deemed ``un-bankable'' by conventional 
lenders. And unlike the growing trend of the online lenders, 
these community based lenders offer affordable capital with 
longer terms, and lower interest rates.

    The SBA Microloan Program reclaims the American Dream, one 
micro-business at a time. Intermediaries work with every day 
entrepreneurs to harness their innovative ideas and creativity 
and empower them to become their own bosses. Our micro 
entrepreneurs work hard to become self-sufficient. They hire 
locally, pay taxes, and, in other ways, give back to their 
communities. It is our responsibility to make sure they have 
the access to capital they need.

    Since the Microloan Program was authorized in 1991, 
intermediary lenders have borrowed $414 million from the SBA 
and have used those funds to originate more than $629 million 
in loans to small businesses that have created or retained 
185,800 jobs at a cost to the federal government of less than 
$2,228 per job. After 24 years, the cumulative default rate on 
SBA loans made to intermediary lenders is 1.8%. This is due 
largely to intermediary lenders having ``skin in the game'' in 
terms of having to pay back the SBA, and therefore a vital 
interest in their borrower's success. There are currently 137 
active intermediary lenders participating in the program, and, 
in 2014 alone, these lenders made 3,917 loans totaling $55.5 
million to small businesses supporting 15,880 jobs. Overall, 
intermediary lenders have proven that this is an efficient 
model to make smart investments in our local communities.

    After 24 years, these intermediaries have also realized 
that several of the, well-intentioned policies, originally 
placed by cautious policy makers, now serve as barriers to 
gains in efficiencies. The most restricting barrier is the 
statutory restraint of utilizing 75% of the technical 
assistance post funding and only 25% pre funding. As with 
Maria, and the majority of micro entrepreneurs, the need for 
intense technical assistance before receiving financing ensures 
the small business owner is loan ready. Additionally, micro 
lenders now offer a continuum of services; including, technical 
assistance, microloan, the SBA 7(a), small business loan, or a 
504 loan, that support a business until they are bankable. When 
they speak to one of the hundreds or even thousands of pre-loan 
clients, the need identified through the pre-loan technical 
assistance provided, may result in the client being better 
suited with one of these other products. In other words, 
technical assistance is provided to all clients, regardless of 
the loan they end up, but that is not known at the start of the 
process.

    We are all cognizant of the current budget situation. 
However, programs designed to promote job creation--especially 
those with proven track records such as the Microloan programs 
at SBA--require continued support.

    In closing, every day, VEDC and micro lenders across 
America see good, hardworking people like Maria who want and 
can build a better country, contribute to society, and create 
jobs. The greatest investment we can make is in these people, 
in your people who create jobs. The returns go far beyond the 
dollars paid back. Thank you for the opportunity to share 
Maria's story and for your continuing support of microloans.
                  Friends of the SBA Microloan Program

    ------------------------------------------------------------------------


              Friends of the SBA Microloan Program

   Statement for the Record for the Subcommittee on Economic 
                    Growth, Tax and Capital

          Access of the House Small Business Committee

                 U.S. House of Representatives

                          May 19, 2015

    Mr. Chairman and Members of the Subcommittee, thank you for 
the opportunity to submit testimony to the Small Business 
Committee of the U.S. House of Representatives on the Small 
Business Administration (SBA) Microloan Program on behalf of 
the Friends of the SBA Microloan Program.\1\
---------------------------------------------------------------------------
    \1\ This testimony is submitting on behalf of the Friends of the 
SBA Microloan Program, including: Roberto Barragan (VEDC), Wendy K. 
Baumann (Wisconsin Women's Business Initiative Corporation), Robert 
Boyle (Justine Petersen Housing & Reinvestment Corporation), Mark 
Cousineau (Connecticut Community Investment Corporation), Grace Fricks 
(Access to Capital for Entrepreneurs), Brett Gerber (Impact Seven), 
Dave Glaser (Montana Community Development Corporation), Luz Gutierrez 
(Rural Community Development Resources), Clint Gwin (Pathway Lending), 
Gina Harman (ACCION The US Network, Inc.), Edmundo Hidalgo (Chicanos 
Por La Causa), Peter Hille (MACED), Inna Kinney (Economic and Community 
Development), David Kircher (Wisconsin Business Development), Sandy 
Lowell (Northern Community Investment Corporation), Lisa Macioce 
(Bridgeway Capital), Ceyl Prinster (Colorado Enterprise Fund), Jeff 
Reynolds (Center for Rural Affairs), Nelly Rojas-Moreno (LiftFund), 
Chris Sikes (Common Capital), Kevin Smith (Community Ventures 
Corporation), Namoch Sokhom (Pacific Asian Consortium in Employment 
Business Development Center), Jennifer Sporzynski (CEI), Robert 
Villarreal (CDC Small Business Finance), Birdie Watkins and Jerry 
Rickett (Kentucky Highlands Real Estate Corporation), Shawn Wellnitz 
(Entrepreneur Fund), Dennis West (Northern Initiatives), and Karl 
Zalazowski (California Coastal Rural Development Corporation).

    The Friends of the SBA Microloan Program is an informal 
working group of nonprofit SBA Microloan Intermediaries. Its 
members provide small-dollar loans up to $50,000 and business 
development resources to help women, low-income, veteran, and 
minority entrepreneurs successfully create and grow sustainable 
businesses. In doing so, its members support economic 
opportunity for underserved entrepreneurs in rural, suburban, 
and urban communities across the nation by increasing access to 
the resources and services necessary to create wealth and build 
---------------------------------------------------------------------------
assets through business ownership.

    The Impact of the SBA Microloan Program

    The Friends of the SBA Microloan Program strongly supports 
the SBA Microloan program as a critical tool for our nation's 
small businesses. Under the Microloan program, the SBA provides 
loans to nonprofit intermediary lenders who, in turn, lend the 
funds--in addition to state and local resources--in amounts of 
$50,000 or less to the smallest of small businesses. Microloan 
program intermediary lenders also receive grants to help fund 
the cost of providing business-based training and technical 
assistance to small business borrowers and potential borrowers. 
The fusion of capital and training helps shore up the capacity 
of these small businesses to help them turn a profit, improve 
operations, grow the business, and create jobs.

    Since the program was launched in 1991, SBA Microloan 
Intermediaries have borrowed $414 million from the SBA and have 
made over $629 million in loans to small businesses that have 
created or retained 185,800 jobs at a cost to the federal 
government of less than $2,228 per job. According to SBA's 
Fiscal Year 2014 (FY14) Financial Report, the cumulative loss 
rate to the SBA on the Microloan Program is exceptionally low 
at just 1.88 percent.

    In FY14, the SBA approved 36 loans--amounting to $26.5 
million--to Microloan Intermediaries. By the end of the fiscal 
year, these Intermediaries leveraged an additional $29 million 
to provide $55.5 million in microloans to 3,917 small 
businesses. These businesses created or retained 15,668 jobs in 
local economies.


                                              SBA Microloan Program
                                            FY14 Performance Metrics
----------------------------------------------------------------------------------------------------------------
                                                                               Loan Amount
   Small Businesses Assisted With     Jobs Supported by     Loan Amount        Approved by      Small Businesses
             Microloans                   Microloans      Approved by SBA       Lenders to         Counseled
                                                          to Microlenders     Microborrowers
----------------------------------------------------------------------------------------------------------------
3,917                                            15,880      $26.5 million      $55.5 million             15,668
----------------------------------------------------------------------------------------------------------------


    Support for Increased FY16 Appropriations

    The Friends of the SBA Microloan Program strongly supports 
the funding recommendations included in the House Small 
Business Committee's FY16 Views and Estimates of the SBA 
Microloan Program. Specifically, we support the Committee's 
call for a modest increase in funding for Microloan Budget 
Authority and Technical Assistance grants.

    In its assessment, the House Small Business Committee 
voiced its support for an additional $800,000 in Budget 
Authority for the SBA Microloan program which would allow for 
an additional $10 million in microlending authority. If 
enacted, this would increase the program's Budget Authority to 
$3.3 million and its program levels to $35 million. The 
Committee noted that its support for increased funding--also 
proposed by the Administration in the President's FY16 Budget 
Request--was due to ``the effectiveness of the Microloan 
Program in job creation.''

    Likewise, the Committee supports the Administration's 
request of $25 million in FY16 for SBA Microloan Technical 
Assistance grants, which represents an increase of $2.7 
million. Calling the program the ``keystone of the Microloan 
program,'' the Committee agreed that Technical Assistance 
grants are both ``valuable and irreplaceable.''

    Recommended Legislative Proposals

    The SBA Microloan Program was established in 1991 as a 
pilot program. Since that time, the program has grown to 137 
active intermediary lenders who made more than $55 million in 
loans to almost 4,000 small businesses across America in 2014.

    While the program has grown in size, scope, and success, 
many of the original provisions of the pilot program remain in 
effect. These provisions create a paperwork burden for 
Microloan Intermediaries and the SBA. Moreover, these 
provisions have been in statute since the inception of the 
microloan program and are no longer appropriate.

    Proposal 1: Limitations on Prospective Borrowers

    Section 7(m)(4) of the Small Business Act (15 U.S.C. 636) 
establishes a grant program to help SBA Intermediaries provide 
marketing, management, and technical assistance to address the 
small business concerns of prospective and current borrowers. 
Under current law, up to 25 percent of the total grant funds 
may be used to provide highly targeted technical assistance and 
business counseling to prospective borrowers. This provision is 
known as the ``75/25 Rule.'' By providing these services, SBA 
Intermediaries can help prospective borrowers prepare to become 
microloan borrowers in the future.

    Moreover, implementation of this rule has limited the 
ability of intermediaries to counsel and underwrite prospective 
borrowers and has created a high administrative burden, as 
grants must meet the 25 percent limitation on a quarterly 
basis. Rural organizations indicate that given that time to 
travel to meet with business, this limitation has made their 
efforts especially difficult. With a loan loss rate of less 
than 2 percent, intermediaries have proven their ability to 
service their loan portfolios. Limiting their ability to work 
with new or prospective borrowers is no longer necessary.

    The Friends of the SBA Microloan Program recommends that 
Congress eliminate Section 7(m)(4)(E). Specifically, it 
proposes the following language:

          Section 7(m)(4) of the Small Business Act (15 U.S.C. 
        636(m)(4)) is amended--
                  (a) by striking subparagraph (E)(i); and
                  (b) by redesignating subparagraph (E)(ii) as 
                subparagraph (E)(i).

    This language is similar to a provision of the Women's 
Small Business Ownership Act of 2014, as introduced by Senator 
Cantwell in July 2014.

    Proposal 2: Minimum State Allocations

    Section 7(m)(7)(B) of the Small Business Act (15 U.S.C. 
636) establishes the minimum state allocation of microloans to 
SBA Intermediaries. It states that ``the Administration shall 
make available to each state an amount equal to the sum of (I) 
the lesser of (aa) $800,000; or (bb) 1/55 of the total amount 
of new loan funds made available for award under this 
subsection for that fiscal year.'' The statue goes on to 
provide that in the 3rd quarter of the year, the Administration 
may collect and redistribute any funds that are unlikely to be 
made available.

    With 137 borrowers across the country, this provision--
which was designed to promote geographic diversity--is no 
longer necessary.

    The Friends of the SBA Microloan Program recommends that 
Congress eliminate the ``1/55th Rule.'' Specifically, it 
proposed the following language:

          Section 7(m)(7) of the Small Business Act (15 U.S.C. 
        636(m)) is amended--
                  (a) by striking subparagraph (B).

    Proposal 3: Third-Party Contracts

    Under current law, no more than 25 percent of technical 
assistance grants may be used for contracts with third parties. 
This provision makes it difficult for organizations with small 
grants that do not have enough money to hire full-time staff 
and may be better able to fulfill grants obligations with 
consultants.

    The Friends of the SBA Microloan Program recommends that 
Congress eliminate the limitation on third-party contracts. 
Specifically, the Friends Network proposes the following 
language:

          Section 7(m)(4) of the Small Business Act (15 U.S.C. 
        636(m)(4)) is amended--
                  (a) by striking subparagraph (E)(ii).

    Conclusion

    Over nearly 25 years, the SBA Microloan program has proven 
to be a successful tool for assisting small businesses in 
rural, urban, and suburban communities across the nation. 
Despite its success, there are a number of provisions that were 
included in the original authorizing legislation that are no 
longer appropriate and which limit the ability of 
Intermediaries to serve small businesses. In light of the 
program's proven track record, the Friends of the SBA Microloan 
Program recommends that Congress eliminate these burdensome and 
unnecessary provisions.

                                 [all]