[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
SBA MANAGEMENT REVIEW: OVERSIGHT OF SBA'S ACCESS TO CAPITAL OFFICES
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JANUARY 12, 2016
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-037
Available via the GPO Website: www.fdsys.gov
_________
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98-248 PDF WASHINGTON : 2016
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
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
Emily Murphy, 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. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Ms. Ann Marie Mehlum, Associate Administrator of Capital Access,
United States Small Business Administration, Washington, DC.... 3
Ms. Linda Rusche, Director of Office of Credit Risk Management,
United States Small Business Administration, Washington, DC.... 5
APPENDIX
Prepared Statements:
Ms. Ann Marie Mehlum, Associate Administrator of Capital
Access, United States Small Business Administration,
Washington, DC............................................. 16
Ms. Linda Rusche, Director of Office of Credit Risk
Management, United States Small Business Administration,
Washington, DC............................................. 19
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
SBA MANAGEMENT REVIEW: OVERSIGHT OF SBA'S ACCESS TO CAPITAL OFFICES
----------
TUESDAY, JANUARY 12, 2016
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:02 a.m., in Room
2360, Rayburn House Office Building, Hon. Steve Chabot
[Chairman of the Committee] presiding.
Present: Representatives Chabot, Velazquez, Chu, Hahn,
Payne, and Meng.
Chairman CHABOT. Good morning. The committee will come to
order. Last week we heard from both the Government
Accountability Office, the GAO, and the Administrator of the
Small Business Administration, the SBA, on troubling management
challenges within the agency. What I heard led me to believe
that this committee needs to fully review offices within the
SBA to ensure that each one is meeting its mission.
We started a series of hearings just yesterday in both full
committee and subcommittees to examine various SBA offices and
find ways to overcome significant deficiencies. As the
President's budget is due to be released next month, it is
imperative that these hearings are held to ensure our decisions
about funding various programs, and offices are well-informed.
Today's hearing will focus on the Office of Capital Access
and the Office of Credit Risk Management. Access to capital
continues to be challenging for small businesses. And these two
offices have the competing tasks of both promoting the SBA's
access to capital programs and ensuring those programs are free
of waste, fraud and abuse.
In fiscal year 2015, SBA lending programs had a record
year. Lending roughly $23.5 billion in the 7(a) program and
nearly $4.3 billion in the CDC program, also known as the
certified development companies, or the 504 loan program.
As the SBA's lending portfolio continues to grow, it will
become even more vital that these two offices work together to
establish clear guidance and ensure the integrity of the
lending programs. As the committee of jurisdiction, we must
ensure that we are conducting aggressive oversight and doing
everything within our power to assist small businesses all
across the Nation.
I want to thank our witnesses for being here today and we
will be introducing you here shortly. At this time, I would
like to yield to the ranking member, Ms. Velazquez, for her
opening remarks.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. Our small business
sector has made great strides since the financial crisis.
According to ADP, small firms with less than 15 employees
created over 1.2 million jobs in the past year alone. However,
traditional bank loans have only recovered to 85 percent of
their pre-recession level, making the SBA's loan programs a
critical component of the market.
To help fill the gap, the SBA assists American
entrepreneurs and small business owners through a range of
capital access programs. Today, we will be examining SBA's
management of this initiative.
The 7(a) program is, by far, the largest and most active of
all SBA programs. It guarantees general business loans that can
be used for everything, from payroll to inventory. Last year,
SBA made 63,000 7(a) loans totaling $23.5 billion, a record for
the agency. As SBA's portfolios grow, it is imperative the
agency has people and systems in place to conduct necessary
lender oversight and protect taxpayers' interests.
I will also note that lending volume on loans $150,000 or
less has shrunk to one-third of pre-recession levels.
Similarly, small dollar loans used to account for 25 percent of
all dollars approved. Today, that figure is just 10 percent. It
is not just about setting loan volume records, it is about
ensuring the type of businesses that cannot get credit
elsewhere are gaining access to SBA's program. I look forward
to hearing from Administrator Mehlum on this subject.
While providing more capital is laudable, it did not come
without congressional intervention. Two years in a row, we were
called upon, at the last minute, to increase SBA's 7(a)
guaranty authority because it underestimated loan activity by
30 and 55 percent, respectively. In response, Congress included
report language in the omnibus to ensure we are kept informed
of loan activity going forward to prevent the need for
emergency intervention in the future. How the agency adheres to
this requirement is a top priority, and one I will be watching
closely.
Unfortunately, while the 7(a) program is setting records,
the 504 program is struggling, and has been on the decline for
the past several years. In an effort to spur growth, the 504
refinancing program was recently reauthorized in the 2016
omnibus. These bipartisan accomplishments will help many
businesses improve cash flow, expand operations and hire more
workers, thereby improving the communities around them.
This is not to say that the 504 CDC program does not have
outstanding issues. In fact, six GAO recommendations on program
oversight remain open nearly 2 years after the report was
issued. I would like to hear how they are being addressed.
It is the responsibility of this committee and one we take
very seriously to examine SBA's management practices and ensure
that adequate internal controls are in place to administer the
capital access programs. While more work remains to be done, I
look forward to hearing from today's witnesses on their plans
to address these outstanding issues.
With that, Mr. Chairman, I yield back.
Chairman CHABOT. Thank you very much. The gentlelady yields
back. I would ask that any committee members who may have
opening statements submit them for the record. I will take just
a moment to explain the rules here and the lighting system. You
are probably both familiar with it, but we operate under the 5
minute rule. You will each have 5 minutes to testify, and we
will ask questions for 5 minutes. And there is a lighting
system, the green light will let you know, it will be on for 4
minutes, the yellow light will come on when you have got a
minute to wrap up, and the red light will come on and we ask
you to complete by the time the red light come on, if at all
possible. I may give you a little leeway, but not a whole lot
so try to stay within those parameters, if you wouldn't mind.
I will now introduce brief introductions for two witnesses
here this morning. Our first witness is Ann Marie Mehlum, who
is the Associate Administrator of Capital Access within the
Office of Capital Access at the SBA, the Small Business
Administration. We appreciate you being with us today.
Our second witness will be Linda Rusche, who is the
Director of the Office of Credit Management, also at the Small
Business Administration. We welcome you both here and look
forward to your testimony.
And Ms. Mehlum, you are recognized for 5 minutes.
STATEMENTS OF ANN MARIE MEHLUM, ASSOCIATE ADMINISTRATOR OF
CAPITAL ACCESS, UNITED STATES SMALL BUSINESS ADMINISTRATION;
AND LINDA RUSCHE, DIRECTOR OF OFFICE OF CREDIT RISK MANAGEMENT,
UNITED STATES SMALL BUSINESS ADMINISTRATION.
STATEMENT OF ANN MARIE MEHLUM
Ms. MEHLUM. Thank you, Chairman Chabot and Ranking Member
Velazquez. Thank you so much for giving me the opportunity to
testify today before this committee.
As the associate administrator for capital access, I am
responsible for the SBA's loan and surety bonds guaranty
program, which consists of the 7(a), the 504, the Microloan and
Surety Bond Programs. As a former community banker who relied
on these tools for many years, I have seen firsthand how they
programs help support small businesses and working families
across America. My time at SBA has only deepened my respect for
the programs and their direct impact.
At SBA, we view our role as one of filling an unmet need in
the lending marketplace. The goal is to help small businesses
access credit when a conventional loan is otherwise
unavailable, due to insufficient collateral or equity, startup
status, or a host of other credit challenges.
Administrator Contreras-Sweet has asked my office to focus
on ways to streamline and modernize our programs, recruit new
lending partners, increase our service to minorities and
underserved markets, and develop policies that are in line with
the experience of small businesses in today's economy.
Last year, as both the chairman and the ranking member have
noted, our flagship 7(a) program approved over $23.5 billion in
gross loans, a record loan volume in SBA's history. However,
there is still much work that needs to be done.
I want to extend my gratitude to this committee for leading
Congress in providing additional authorization to meet this
marketplace need in 2015. SBA's growth in small dollars, or
loans of $150,000 or less is also worth highlighting. Studies
show that nearly 90 percent of business loan applications are
for these small loans. And with gaps in the lending
marketplace, many of the Nation's underserved small businesses
often rely upon higher cost alternatives. Under the
Administrator's leadership, SBA has actively encouraged lenders
to expand access to these loans. And I am pleased to report
that since last year, small dollar loans have increased by 22
percent.
SBA's commitment to underserved lending is also evident in
our recent extension of the Community Advantage Pilot Program.
Created in 2012, lenders participating in community advantage
are required to make at least 60 percent of these loans in
underserved markets. SBA's Microloan Program completed a rule
change effective July 2015 that, for the first time, allows
microloans to be made to individuals on parole and probation.
This new rule aligns with White House and interagency
initiatives to make capital available to credit-ready
individuals in some of our hardest-to-reach communities.
Last year, we launched SBA One, and end-to-end
modernization of 7(a) loan programs accounting platform. Its
goal was to make doing business with the government easier by
reducing the cost, time and uncertainty in submitting a loan
guarantee application. SBA One incorporates electronic
signatures to complete documentation, interactive online
decisioning logic to determine a small business's eligibility
for a loan guarantee, as well as autopopulated forums to reduce
redundant processing.
We have consulted our lending partners in developing and
refining SBA One; we have enrolled hundreds of lenders to use
the systems; and we reviewed over 1,000 loans via SBA One since
its launch. We continue to encourage small business growth by
encouraging new lenders join our program. Currently, a little
more than one-third of the Nation's banks are active
participants in SBA's lending programs. Despite recruiting many
lenders since 2014, there is opportunity for better coverage by
increasing this participation level.
We continue to clarify and simplify our rules in standard
operating procedures for our lending programs without adding
additional financial risk.
For the 504 development company loan program, we are
working hard since the passage of the 2016 omnibus to implement
504-Refi. And finally, we continue to improve the oversight
function for SBA's loan programs, which will be addressed in
more detail by my colleague, Linda Rusche, the Director of the
Office of Credit Risk Management.
We must keep these programs relevant and cost effective for
lenders. For both programs in 2016, we have returned to zero
subsidy. That's a huge win for the taxpayer. I am confident,
with the continued support of this committee, SBA will continue
to improve its service to America's small businesses, which
will result in more jobs and economic growth. Thank you.
Chairman CHABOT. Thank you very much. Ms. Rusche, you are
recognized for 5 minutes.
STATEMENT OF LINDA RUSCHE
Ms. RUSCHE. Thank you, Chairman Chabot and Ranking Member
Velazquez, for the opportunity to be here today and testify
before the committee regarding the Office of Credit Risk
Management at SBA. As the president of OCRM, I am responsible
for the oversight and risk management of SBA's lenders and loan
guaranty portfolios of the 7(a) and the 504 development company
loan programs.
I have spent the better part of two decades in this
activity, lender oversight and loan program risk management,
first, from the Kansas City review branch, and, for the last 2
years, here in Washington.
SBA's Administrator Contreras-Sweet is a leader in
championing small business lending, while maintaining prudent
credit standards in our loan programs. SBA's particularly
interested in balancing the growing credit needs of America's
small businesses with prudent lending, always ensuring that we
are meeting the requirements of our mission in accordance with
the Small Business Act.
SBA's role is to fill an unmet need in the marketplace to
help creditworthy small businesses access credit when a
conventional loan is not available. SBA also is critical in
providing credit to underserved markets. As of September 30,
2015, we monitored a 7(a) loan portfolio in excess of $70
billion and approximately $26 billion in 504 debenture
guarantees. We monitored all 7(a) lenders and CDCs using our
loan and lender monitoring system, what we call LLMS, which
tracks the monthly performance of all 7(a) and 504 loans and
assigned a quarterly risk rating to each loan.
OCRM also updated our methodology for oversight of the SBA
operations of federally regulated 7(a) lenders and of CDCs this
past year. These methodologies feature a composite risk
measurement and a scoring guide known as PARRiS for 7(a)
program and SMART for the CDC, or 504 program. Benchmarks of
historical and projected performance have been developed for
PARRiS and SMART, and provide relative measures of lenders
financial risks, specific to each program. By using both
predictive and historical performance measures, OCRM obtains a
holistic picture of lender risk upon which we consider
oversight activities as needed.
Other accomplishments in 2015 include conducting over 1,200
assessments to renewed delegated authority for our 7(a) and
504, or CDCs; completion of over 145 corrective action
assessments from previous review activities; and approval of
our 100th community advantage lender.
Turning to supervision and enforcement, OCRM issued six
increased supervision actions to 7(a) lenders and CDCs this
past year for a failure to follow loan program requirements,
and debarred or suspended over 30 agents or representatives
from conducting further business with SBA.
In fiscal year 2016, OCRM will continue to conduct a
portfolio diagnostic of every lender using historical
performance, predictive credit scores, and the PARRiS and SMART
methodologies. OCRM also will continue to monitor lenders
through programmatic risk-based review.
In 2016, OCRM plans to conduct in-depth analysis using our
SBA loan database to investigate existing risk, identify
developing risk areas, and to inform program changes under
consideration. And SBA also continues in active discussion with
primary Federal regulators on such topics as information
sharing and vendor management. Through exchange of information,
we can bring improved oversight and monitoring to our
activities and theirs, minimizing duplication.
I thank you for the opportunity to share this information,
I will be happy to respond to any questions.
Chairman CHABOT. We thank you very much for your testimony
also, and now we will turn to the committee and I will begin
with myself here. I recognize myself for 5 minutes.
Ms. Mehlum, let me start with you. Last year, Congress had
to act very quickly when the 7(a) program reached its lending
cap to ensure that small businesses would be able to continue
receiving loans from that important program. What are ways that
the SBA is currently managing the 7(a) program to ensure that
this doesn't occur, or does occur, that Congress is notified in
a more timely manner so that we don't bump up against,
literally, the program closing down. And a lot of small
businesses--we got, I'm sure a lot of us, especially the
ranking member and myself, got a lot of calls from constituents
all over the country who were afraid the program was going to
end. Congress, for a change, got its act together and worked
with the administration, and the House and Senate worked
together in conjunction with the SBA. But we would like to
avoid that, if at all possible the next time, so we would like
to hear how we can avoid that from happening?
Ms. MEHLUM. Yes. We would like to avoid that as well,
because that was unsettling at the end of the year last year.
We watch those numbers every single day. We didn't really have
a formal mechanism last year. We started talking, I think,
informally with members here, probably 6 months before the end
of the year. This year, as you know, you have asked us and we
are working on the first report. We will be reporting to you
the numbers each quarter. So far we are looking like we are
within our need for 2016, but we will work with you and report
those numbers every quarter and work together to ensure that we
don't have kind of a last minute fire drill. We would like to
avoid that as well.
Chairman CHABOT. Good. Yeah, I think we should be working
together on this to make sure it doesn't happen again.
Ultimately, it got taken care of.
Ms. VELAZQUEZ. Mr. Chairman, may I ask a question related
to this?
Chairman CHABOT. I will yield to the ranking member.
Ms. VELAZQUEZ. So how much 7(a) capital is the SBA
estimating it will provide in fiscal year 2016?
Ms. MEHLUM. I think our estimation for this year is $26.5
billion, which is what we have in the 2016 omnibus.
Ms. VELAZQUEZ. Thank you.
Chairman CHABOT. Reclaiming my time.
Last year, Congress took a good idea from the SBA regarding
waiving upfront fees on express loans to veterans. Are there
other SBA initiatives underway within your offices that you
think the committee should be aware of which could bolster
access to capital for small firms across the country? Would you
like to take that again?
Ms. MEHLUM. This year we are continuing with our no fees on
loans under $150,000, that is, no fees to lenders and no fees
to borrowers. We know that those small loans that the ranking
member pointed out really do serve the underserved markets the
best. We have higher percentages in all the underserved markets
in the smaller loans. So we are trying to keep making these
loans attractive for lenders to make. They are very costly for
lenders to make, so we work hard to make those loans
attractive. We also have a smaller fee on veterans' loans over
$350,000, which was in addition to the app that you provided us
late last year for veterans fees under $350,000.
Chairman CHABOT. Thank you. As you know, the GAO did a
report and we had a couple hearings on this last week. And, you
know, I brought up the point that we have seen the IRS, and
OPM, and the State Department, even the White House hacked
recently within the last year or so. According to the report,
there were some concerns about how the SBA is protecting
sensitive information, which they certainly have access to a
lot of stuff that the business community, small businesses
wouldn't want to be out there to either their competitors or
the Chinese or anybody else. So could you tell us how quickly
you intend to improve in that area?
Ms. MEHLUM. Well, I appreciate that question, because one
of the big accomplishments of last year was that we managed to
get all the loan systems on to a new platform that has passed
total muster with our auditor, which audited the system. It has
also been tested and viewed by all the major banks that
interface with us. So the loan system is on a new system. It is
not on the system that had been criticized in the past in GAO
audits. We are very excited about that. We feel not that we are
not continuing to monitor it and looking at what we need to do
to make sure that we have as tight a security as possible, but
that system got totally migrated onto a new system last year.
Chairman CHABOT. Let me squeeze in one more question here.
I am almost out of time here. One challenge we heard repeatedly
is that the SBA's loan process takes too long, that people
literally give up. What are you doing to modernize the program?
We heard the computer systems don't talk to each other, and
been pretty much a mess, frankly. You really need to step up on
that. What action are you involved in at this time to improve
that?
Ms. MEHLUM. Chairman Chabot, I love that question because I
am a former banker. All my life, I was in lending. My last job,
I was a CEO of a bank that really was a business bank in
Oregon. And I loved having the SBA tools in my tool box, but
even my little bank got to the point where it was tough for us
to ask for an SBA guaranty on a small loan because of the
process. And that is one of the reasons why I accepted this
assignment was because I wanted to sure that the SBA loans can
be processed in a cost-effective way by lenders.
So we are attacking it in a number of ways. One is
modernization through technology. We have talked about SBA One.
It is a platform that allows lenders to apply for a guarantee
in an interactive interface online. It is kind of like
TurboTax, it is an online iterative approach. It also helps,
therefore, with eligibility issues and you don't have to go to
the 300-page SOP to find the solution. A lot of that is right
built into the system.
The other thing that we are doing, that we are working on
all the time, and we have got a couple of major initiatives
going on right now, is simplifying, simplifying and clarifying
our requirements. We are working hard on clarifying our
affiliation and our franchise rules, for example, as we speak.
So both in terms of technology and in terms of simplifying and
streamlining our process, those are the things that I feel like
I spend 99 percent of my time on.
Chairman CHABOT. Thank you. My time has expired, but I
would just urge you to do everything possible to reduce the
amount of time that it actually takes a small business to get
through the system, because it is one of the largest areas of
complaints I hear as chair of the committee. I'm sure my
colleagues do, too.
I will now recognize the ranking member for 5 minutes.
Ms. VELAZQUEZ. Thank you. So Ms. Mehlum, the system that
you said passed muster in terms of loan processing, is that SBA
One?
Ms. MEHLUM. SBA One is on that same platform. But also SBA
One--the thing that is new with SBA One is that is the
interface with the lender. The accounting system behind that,
which keeps track of our guarantee in every single loan
wherever it is, is the fiscal transfer agent system, and that
system that entire system has been moved to the new platform.
Ms. VELAZQUEZ. So you are telling us today that you are on
a better path compared to LLMA's past decade experience?
Ms. MEHLUM. Yes.
Ms. VELAZQUEZ. In delays, and cost overruns, and
questionable results, you are saying we are in a better----
Ms. MEHLUM. Yes. It was a huge accomplishment, it was
really an initiative that took several years.
Ms. VELAZQUEZ. So let's talk about last week's GAO report
to us. Mr. Bill Shear talked about the 504 loan program. In
2014, GAO pointed out to some recommendations. Two years later,
those recommendations are still open. Can you explain to us why
that is?
Ms. MEHLUM. The only recommendation that I am aware of
regarding the 504 program is still open. And keeping in mind
that it takes time sometimes when we complete a recommendation
for them, then, to get back to us and agree that we have
completed it. But the one that I am aware of that is still open
has to do with economic--the requirements for CDCs to invest in
economic development in their communities. And we have just
issued a notice to get public feedback on how we do that
requirement, how we are going to meet that requirement. So we
are on the path to complete that GAO----
Ms. VELAZQUEZ. Have you met with GAO to discuss ways to
close those recommendations?
Ms. MEHLUM. My team has met with them recently. I have met
with them, but it has been probably 6 months since I've
personally met with them. But my team meets with them, and our
team meets in OCA every other week and talks about completing
the GAO audit items. We actually completed a whole bunch of
them last year. I have been here for 2 years, we have completed
more GAO audit items than we have created. That is my goal, is
to get them responded to and handled.
Ms. VELAZQUEZ. In response to GAO's recommendation that SBA
conduct more program evaluations, SBA said it is currently
restricted from collecting data from small business resource
partners, or does not have adequate information collection
systems making evaluations difficult. Can you elaborate on
that?
Ms. MEHLUM. That is something I am going to have to look
into, Ranking Member Velazquez. I am not aware of that
particular issue, but I will get back to you on it.
Ms. VELAZQUEZ. Because if that is the case, then you need
to tell us how can we improve your ability to collect data so
that you could perform the type of evaluations that are
important.
Ms. MEHLUM. I agree, and I will get back to you on that.
Ms. VELAZQUEZ. Thank you.
Director Rusche, in its March 2014 report, GAO stated that
SBA had planned to implement its new SMART process for
assessing the CDC program by June 1st, 2014. Has SMART been
fully implemented? And have you conducted any analysis of its
impact today?
Ms. RUSCHE. Thank you so much for that question, because I
am pleased to tell you that yes, SMART is fully implemented. We
are conducting assessments of CDCs in accordance with those
protocols. We issued a notice in August of this year to
formalize that to all individuals. We have not conducted a
formal assessment of the results of SMART itself, but we are
conducting oversight and further management activities with
CDC's relative to the results of the SMART reviews, which allow
us both onsite and offsite capability to interact with them and
keep costs low while activities efficient.
Ms. VELAZQUEZ. Thank you. I yield back.
Chairman CHABOT. The gentlelady yields back. The gentlelady
from California, Ms. Chu is the ranking member of the Economic
Growth, Tax and Capital Access Subcommittee, is recognized for
5 minutes.
Ms. CHU. Ms. Mehlum, I am thrilled to say that at the end
of 2015, Congress made permanent a program that I had been
championing with my bill, the CREED Act for the past two
Congresses. It is the 504 CDC debt refinancing program that
allows small business owners to refinance existing commercial
debt with long-term fixed rate financing so that they can
create jobs and boost economic growth. In its trial year of
2012, over 2,700 businesses refinanced nearly $7 billion in old
expensive debt, so it was clearly a very popular program, but
then allowed to expire at the end of 2012.
I would like to thank the chair and the ranking member for
their support in getting this bill to be in the bill that was
passed in 2015. So it's my understanding that SBA has begun to
craft the regulations for this program. Can you provide an
update on these regulations? Can you tell us how the process is
going? And do you have a timeline for the approval process for
the regulation? And how long after the regulation's release do
you think small businesses may be able to apply for the
program?
Ms. MEHLUM. I can give you some rough information. We have
been working on this with our general counsel and with OMB. We
are officially trying to be ready to launch and be able to
process refi loans in June, but my goal is to get it done
before that. It's just all the steps of getting the rule out.
One of the things that we are trying to do this time is to make
the process as simple and less complicated. It was very
complicated last time. We are trying to simply if where we can
and still meet our regulations. So we are hoping to have it
ready for prime time in June, but as I say, my goal is to get
it done before that.
Ms. CHU. That sounds great.
Now what regulations do you anticipate may be different in
the permanent program versus the previous temporary program?
Ms. MEHLUM. I think some of the regs that are different
from the old program have to do with some changes that we have
made during this last year. We had some look-back provisions.
When a company refis its debt, in our old program we required
them to show evidence of debt that might have been 5, 10, 15
years old. Between that old program and now, we have simplified
some of those rules already. So we will be implementing that
kind of streamlining in the new rules so that it is not so
onerous on the borrower to have to show evidence of what the
debt was on their books for. That is just one thing that comes
to mind.
I would like to respond more carefully to your question and
I would like to go back and ask my team for these details, if
you would like me to.
Ms. CHU. They would still have to show debt, but the way in
which they do it is more----
Ms. MEHLUM. If they have debt on their books, we have made
it simpler. So if they show debt on their tax returns--and I
don't want to go into the weeds because I will get it wrong--
but if they show debt on their tax returns, rather than having
them to have to dig back and show us the notes and the payment
records of loans that are over 2 or 3 years old, we will take
the fact that they have debt showing on their tax return and be
able to refi that debt without them having to dig for a lot of
old paperwork to confirm that that was actually debt that we
are refinancing.
Ms. CHU. I see. That sounds good.
And in what form will these regulations be released?
Standard operating procedure? Or interim? Final? Or what?
Ms. MEHLUM. This is one of the things we are looking at
right now. My understanding is that there will be a reg to
address a couple items, and then we will have to also make our
standard operating procedures fit that reg and have the details
that we need for processing, that's why it is going to take 4
months to 5 months to get this done.
Ms. CHU. And will you need additional staffing resources to
help with this process and this program?
Ms. MEHLUM. That would be nice. Right now we are doing it
with our existing staff. It is a high priority for the 504
program. One of the things that I did want to add is the 504
program has lagged a little bit in the last few years, and we
focused the last few years on governance of that program to
make sure that the CDCs are operating in a healthy manner. This
year we are really going help to focus on growing that program,
helping market that program, streamlining so that that program
can grow. It is a great program. I used it as a banker. I had
many customers that were able to get into their own real estate
because of that program. So in general, we are going to really
focus on helping that program grow this year.
Ms. CHU. Thank you.
Chairman CHABOT. Thank you.
The gentlelady's time has expired. The gentlelady from
California, Ms. Hahn, is recognized for 5 minutes.
Mr. HAHN. Thank you, Chairman Chabot, for holding this
important hearing. It was interesting last week that
Administrator Maria Contreras-Sweet testified to this
committee; the extremely positive steps that she has taken to
make the SBA a more accessible and efficient agency since
taking on her role. She reported a record year in small
business lending, a record year in investment, a record year in
contracting, all with zero taxpayer subsidies needed to sustain
this kind of momentum. I applaud her great record of helping
the needs of small businesses across this Nation.
In your testimony, Administrator Mehlum, you stated that
SBA loans to women and minority groups have increased by 20
percent each year under her leadership, and we find an even
more impressive number achieved when it comes to loans to
veterans, an increase of 103 percent. This is great for Los
Angeles County where we come from. It has more women-owned
businesses than any other county in the country, and where 55
percent of businesses are minority-owned. These statistics show
that SBA is moving in the right direction, even under the
oppressive sequestration.
We know that there is more work to do. And what I wanted to
ask you, Ms. Mehlum, is one of the things that you said was
that roughly one-third of our Nation's banks actively
participate in SBA's lending programs. This is despite SBA
working to recruit more lenders since 2014. In my district,
there are dozens of different banks that businesses turn to for
their banking needs. And many businesses have special
relationships with their bank of choice and have a history of
being long, loyal customers. So if only one-third of the banks
are participating with SBA, then a majority of the businesses
are likely banking with an institution that does not work in a
lending partnership with SBA. So why do you think there is only
a one-third of banks participating? What are you doing to
increase that? And how do credit unions--how are they a part of
this scenario?
Ms. MEHLUM. Okay. So, I really appreciate that question.
Again, as a former banker, I thought that having the SBA
guaranty, you know, a tool in my toolbox, was always a
phenomenal way to help a customer that I just couldn't quite
underwrite with depositors' dollars. And, really, the SBA
guaranty loan programs epitomize to me the best of public and
private partnerships because here we have lenders, regulated
lenders in the field making loans, and the SBA just steps in to
guarantee for the weakest of credit, the weakest of borrowers,
and at zero subsidy. So it is a fantastic program.
One of the problems over time that can happen in Federal
Government is that the program became harder and harder to
implement. Chairman Chabot has pointed out that he gets most of
the complaints because it takes so long to get a loan guaranty
approval, which is the problem that we are working to solve
with automation, technology, and streamlining and simplifying
our procedures. And the other thing that we have to do is we
just have to get out to those banks and market to them and show
them how SBA has changed and grown and improved.
But you are absolutely right. We have a lot of opportunity
by bringing back and bringing in more lenders. We do have
initiatives with credit unions right now, we are working with
credit unions, especially those who do business lending, and we
have increased participation among credit unions as well.
Mr. HAHN. Well, I appreciate that. And that was really the
nature of the only thing I really wanted to ask you. It is so
interesting that from the time I have been on this committee,
you know, sort of the number one issue with our small
businesses is not really any oppressive regulations or, you
know, other things that we might think are holding them back,
it is access to capital. Many of them want to get, you know,
even a small- or medium-sized loan. And we know that when they
get that loan, you know, they will expand and they will hire.
And I have seen that replicated many times in my own district.
So we just need to get more banks, you know, with the program
and show them that it is something positive for our economy.
And really one of the regrets I think--I wasn't here for
the bailout of our banks, but I think one of the regrets is
that in exchange for that taxpayer bailout, that we didn't put
a little more requirement or obligation on their end to get
back and lend those dollars back to--particularly the small
businesses in this country who we know are really the backbone
of this economy. So, thank you. We think you are going in the
right direction, but we want you to get more banks with the
program.
Chairman CHABOT. Thank you. The gentlelady's time has
expired. I would just note, I certainly agree with the
gentlelady from California's comment about the access to
capital is a big problem, but I personally have heard lots and
lots of examples of overregulation being a serious concern of
small businesses across the Nation, too. But I would just note
that for the record.
The gentlelady from New York, Ms. Meng, who is the ranking
member of the Agriculture, Energy and Trade Subcommittee, is
recognized for 5 minutes.
Ms. MENG. Thank you, Mr. Chairman, and thank you to our
witnesses for being here today. I just want to piggyback a
little bit off of what Ms. Mehlum's response to Congresswoman
Hahn about the recent changes to the Office of Capital Access.
At last week's hearing, we discussed a lot about the continuity
at the agency during administrative transitions. Can you
explain how these offices have been set up, or are improving in
handling these transitions?
Ms. MEHLUM. Thank you for that question. It just so happens
that our Administrator has already begun a process at the SBA.
In fact, we had a retreat last Friday to work with our career,
as well as our appointed leaders to ensure that there can be a
smooth transition, and that initiatives underway will continue.
And I can tell you that in the Office of Capital Access, we
have a wonderful team of executives, including Linda Rusche,
who has been with the agency for--I won't tell how many years--
who knows this program and given the right leadership from this
committee and the right resources, will continue to run these
programs effectively and positively for the taxpayer as well.
Ms. MENG. Thank you. Many businesses in my district have
been able to avail themselves of 7(a) and 504 loans, which are
critical sources of support for entrepreneurs. Despite the fact
that many entrepreneurs are also immigrants, I hear that these
minority-owned businesses often struggle to find the resources
they need. And last week, the Administrator did talk about
improvements that have been made. And I commend all of you for
that.
What more can the Office of Capital Access do to ensure
that you are reaching out to more and more entrepreneurs
throughout all of our districts?
Ms. MEHLUM. Well, this is a main objective and initiative.
We talk about it everywhere. We work with our trade partners.
As you know, we have a real strong association with NAGGL. They
have a committee that helps working with us to reach
underserved markets, to find those borrowers who don't normally
have access to capital. We are doing it with pricing, as I
mentioned, by keeping the small dollar loans less expensive. We
are doing it just with outreach and communication. We are doing
it in the community advantage program by requiring that 60
percent of those loans go to underserved markets. We are also,
you know, working very hard on our Microloan program, which is
the starting point for all borrowers, as having a major impact
on underserved market lending.
So we are working basically on several fronts, but it is
top of mind, and we track it, and we follow it, and we talk
about it. We look at numbers every single month. We talk about
it at conferences, we talk about it in our training, and it is
an important, important focus of the Office of Capital Access.
Ms. MENG. Thank you. I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back. The
gentleman from New Jersey, Mr. Payne, is recognized for 5
minutes.
Mr. PAYNE. Thank you, Mr. Chairman.
Ms. Mehlum, when I visit small businesses in my district,
by far, one of the most heard concerns naturally is the
barriers access to capital, and particularly accessing smaller
dollar loans. While six in 10 SBA loans are for $150,000 or
less, this is still below the benchmark set in 2007. And this
deficiency remains unchanged year after year. What steps is SBA
taking to increase loans for businesses that need them the
most, and, specifically, loans under 150,000?
Ms. MEHLUM. So that's the issue that I am trying to
articulate that we are emphasizing very much making those
loans. We have reduced fees on small dollar loans; we have
initiatives with our veterans' business development group to
ensure that we are reaching veterans groups. We have a special
office in the SBA that helps us reach women's groups.
In the Office of Capital Access, we have the Office of
Economic Opportunity which is--our director there, Grady
Hedgespeth, basically his team focuses full-time on ensuring
that our loan products, all of them, 7(a), 504, community
advantage and microloans are reaching into the underserved
markets. It is a challenge, we have work to do, we are making
good progress. It has been a priority of our Administrator, and
it has been my priority, and we are going to see growth again
next year. And if you can help us figure out how to do it
better, we are definitely open for suggestions. But it is a
priority, and we are trying to hit it on various fronts.
Mr. PAYNE. The information that I receive in terms of
preparing for this hearing is, since 2007, there hasn't been
much change.
Ms. MEHLUM. Well, you are talking about the percentages of
those loans, but one of the things that has happened since 2007
is somewhere in there, the maximum loan size has gone up. I
think it went up from $2.5 million to $5 million--was it 2010?
I wasn't with the SBA then, and I don't recall exactly, but
just by the very nature that we now do loans between $2.5
million and $5 million, I think excuse those statistics that
you are looking at. For us, we made 22 percent more loans in
2015 than we did in 2014 in the size category of 150 and below.
Mr. PAYNE. Okay. Since you brought it up, I will ask this
question: In the last year's budget justification, SBA stated
they will continue implementing revised 504 regulations, but
did not provide any details. What steps has the SBA taken to
address these problems in the 504 CDC program?
Ms. MEHLUM. Could you be a little more specific? You are
asking about 504 regulations that we did not implement?
Mr. PAYNE. Right. You state--it is stated in the
justification that you will continue implementing revised 504
regulations, but you were not--it was not detailed.
Ms. MEHLUM. Okay. So I know this last year, we implemented
a number of 504 regulations, most of them having to do with
governance of CDCs, they were in effect in April, of 2015?
2014.
Ms. RUSCHE. Published in 2014.
Ms. MEHLUM. Published in 2014. I am looking to my experts
here. And we have implemented a number of 504 governance
regulations since we last testified. Is that what you are
referring to? I am sorry, I am not quite catching your
question.
Mr. PAYNE. Well, you are familiar with the year's budget
justification----
Ms. MEHLUM. Right.
Mr. PAYNE. --that you do that, right? And so, in it, you
stated that you would continue to--implementing revised 504
regulations. Obviously, there are issues with the program,
correct?
Ms. MEHLUM. Yes. I mean, we have issues everywhere,
everybody--we have issues. We are working on our issues all the
time. Yes, we did, just last year, do a number of implementing
504 regulations.
Mr. PAYNE. Okay. Well, obviously, there is still an issue
about getting clarification and some specificity in what those
changes are, because you are still having a problem right now
being specific about it. But we would hope that you would
continue to work towards working on those issues, and I will
yield back.
Chairman CHABOT. The gentleman yields back. I would like to
thank you both for participating in the hearing this morning.
The government has long recognized the need to aid
entrepreneurs and small businesses across the Nation so that
they have access to capital necessary to create jobs. And it is
the principal thing, I think, the SBA does is the loan
programs, the guaranties that you are responsible for. As you
know, the GAO report released recently informed this committee
that there is still some significant mismanagement issues at
the SBA. For example, they had made 69 recommendations, and of
those, only seven had been implemented. A lot of the committee
members were quite concerned about that last week. And we urged
rapid improvement on those recommendations. They have yet been
implemented.
So, there is obviously still considerable room for
improvement. This committee would urge you to take action on
these items, because after all, the principal purpose of the
SBA and the oversight responsibilities of this committee is to
make sure that we are serving the small businesses all across
this country. Please work very hard at this, and we will keep
an eye on you. So thank you very much for your testimony here
this morning.
I would ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record. And if there is no further business to come
before the committee, we are adjourned. Thank you very much.
[Whereupon, at 10:54 a.m., the committee was adjourned.]
A P P E N D I X
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Thank you for the opportunity to testify before this
Committee, Chairman Chabot and Ranking Member Velazquez. As the
Associate Administrator for Capital Access, I am responsible
for the SBA's loan and surety bond guaranty programs which
consist of the 7(a), 504, Microloan, and Surety Bond Programs.
As a former community banker who relied on these tools for many
years, I have seen firsthand how these programs help support
small businesses and working families across America. My time
at SBA has only deepened my respect for the programs and their
direct impact.
At SBA, we view our role as one of filling an unmet need in
the lending market place--the goal is to help small businesses
access credit when a conventional loan is otherwise unavailable
due to insufficient collateral or equity, start-up status or a
host of other credit challenges. Administrator Contreras-Sweet
has asked my office to focus on ways to streamline and
modernize our programs, recruit new lending partners, increase
our service to minorities and underserved markets, and develop
policies that are in line with the experience of small
businesses in today's economy.
Last year, our flagship 7(a) program approved over $23.5
billion dollars in gross loans--a record loan volume in SBA's
history. However there is still much work that needs to be
done. I want to extend my gratitude to this Committee for
leading Congress in providing additional lending authorization
to meet this market place need. Your action, which provided the
necessary guarantee authority in 2015, helped SBA fulfill its
mission and ensure small businesses continue to benefit as our
economy recovers.
In addition in our Surety Bond Guaranty Program, SBA
guaranteed 11,000 bonds representing some $1.3 billion dollars
in contracts awarded to small businesses. I am appreciative of
this committee's support of the surety program changes in the
National Defense Authorization Act. This law increased the
guaranty percentage in the Surety Bond Preferred Program from
70 percent to 90 percent--a significant win for small
businesses.
SBA's growth in small dollar loans, or loans of $150,000 or
less, is also worth highlighting. Studies show that nearly 90
percent of business loan applications are for these small
loans, and with gaps in the lending market place, many of the
nation's underserved small businesses often rely upon high-cost
alternatives.
Under the Administration's leadership, SBA has actively
encouraged lenders to expand access to these loans. And, I am
pleased to report that since last year small dollar loans have
increase by twenty-two percent. Similarly, there have been
significant gains in 7(a) lending to underserved groups;
specifically:
Loans to women increased by twenty-percent
over the previous year;
Loans to veterans increased by 103 percent;
and
Loans to all minority groups increased by
twenty three percent from 2014 to 2015.
SBA's commitment to underserved lending is also evident in
our recent extension of the Community Advantage Pilot Program
to 2020. Created in 2012, lenders participating in Community
Advantage are required to make at least 60 percent of CA loans
in underserved markets. In FY2015 the program approved more
than $100 million in lending in just one year, surpassed $200
million since its inception in 2012, and recruited its 100th
lender.
SBA's Microloan Program completed a Rule change effective
July 2015, that for the first time allows microloans to be made
to parolees and probationers. This new rule makes aligns with
White house and Interagency initiatives to make capital
available to credit ready individuals in some of our hardest to
reach communities.
Last year, we launched SBA One: an end-to-end modernization
of the 7(a) Loan program's fiscal transfer agent system. Its
goal is to make doing business with government easier by
reducing the cost, time, and uncertainty in submitting a loan
guaranty application. SBA One incorporates electronic
signatures to complete documentation, interactive online
decisioning logic to determine a small businesses's eligibility
for a loan guaranty, as well as auto-populated forms to reduce
redundant processing. We have consulted our lending partners in
developing and refining SBA One, enrolled hundreds of lenders
to use the system, and have approved over 1000 loans via SBA
One since October 2015.
We can continue to encourage small business growth by
encouraging new lenders to join the program. Currently a little
more than 1/3 of the nation's banks are active participants in
SBA's lending programs. Despite recruiting many lenders since
2014, there is opportunity for better coverage by increasing
this participation level.
We continue to clarify and simplify our rules and Standard
Operating Procedures for our lending programs without adding
financial or reputation risk.
And, we continue to eliminate `non-value add' tasks at our
nine processing centers nationwide. This initiative for center
efficiency is a multi-year undertaking which seeks to reduce
the time it takes for lenders to process, service and collect
SBA guaranteed loans.
For the 504 Development Company Loan Program, we are
working hard since the passage of the FY 16 Omnibus to
implement 504-Refi.
Finally, we continue to improve the oversight function for
SBA's loan programs, which will be addressed in more detail by
my colleague, Linda Rusche, who is the Director of the Office
of Credit Risk Management.
We must keep these programs relevant and cost effective for
lenders who make loans to small businesses. For 2016 both the
7a and 504 programs have returned to zero subsidy--a win for
the taxpayer. I am confident that with the continued support
this Committee has provided us, the SBA will continue to
improve its service to America's small businesses, which will
continue to provide jobs and economic growth.
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Good morning, Chairman Chabot and Ranking Member Velazquez,
and thank you for the opportunity to testify before this
Committee on the Office of Credit Risk Management (``OCRM'') of
the U.S. Small Business Administration (``SBA''). As Director
of OCRM, I am responsible for the oversight and risk management
of SBA's lenders and loan guaranty portfolios of the 7(a) and
Development Company (or ``504'') Loan Programs. I have spent
the last two decades involved in lender oversight and loan
program risk management at SBA, first from my hometown Kansas
City, Missouri, and for the last two years here in Washington,
DC.
SBA's Administrator Contreras-Sweet is a leader in
championing small business lending while maintaining prudent
credit standards in our loan programs. SBA is particularly
interested in balancing the growing credit needs of America's
small businesses with prudent lending, always ensuring that we
are meeting the requirements of our mission as defined in the
Small Business Act.
SBA's role is to fill an unmet need in the market place--to
help creditworthy small businesses access credit when a
conventional loan is not available--generally due to lack of
collateral, start-up business status, industry type, or other
issues. SBA is critical in providing credit to underserved
markets, in a commercially prudent and reasonable manner.
My mission, and that of the entire Office of Credit Risk
Management, is to effectively manage program credit risk,
monitor lender performance, and enforce lending program
requirements. In short, our mission is to maintain the
integrity and viability of the 7(a) and 504 Loan Programs.
As of September 30, 2015, OCRM monitored a portfolio of
3,949 lenders that provide 7(a) guaranty financing in excess of
$70.2 billion and 247 Certified Development Companies
(``CDCs'') responsible for approximately $26 billion in 504
debenture guarantees. This includes supervision of 14 Small
Business Lending Companies (``SBLCs''), over 50 Non-Federally
Regulated Lenders (``NFRLs'') and over 100 Community Advantage
Lenders.
During fiscal year 2015, the Office of Credit Risk
Management monitored all SBA 7(a) Lenders and CDCs using our
Loan and Lender Monitoring System (``L/LMS'') which tracks the
monthly performance of all 7(a) and 504 loans and assigns a
quarterly credit score for each loan. A quarterly purchase
rating for each lender is also generated using this L/LMS data.
In fiscal year 2015 OCRM also updated our methodology for
oversight of the SBA operations of Federally Regulated 7(a)
Lenders, and of CDCs. These methodologies feature a composite
risk measurement methodology and scoring guide known as
``PARRiS'' for 7(a) Lenders and ``SMART'' for CDCs. (The PARRiS
components cover the following areas: Portfolio Performance,
Asset Management, Regulatory Compliance, Risk Management, and
Special Items. The SMART components cover the following areas:
Solvency and Financial Condition, Management and Board
Governance, Asset Quality and Servicing, Regulatory Compliance,
and Technical Issues and Mission.)
Benchmarks of historical and projected performance have
been developed for the PARRiS and SMART methodologies, and
provide relative measures of lenders' financial risk specific
to each program. By using both predictive and historic
performance metrics, OCRM obtains a holistic picture of lender
risk, upon which to consider additional oversight activities.
OCRM also updated risk-based review protocols to align with
PARRiS and SMART, and conducted 565 risk-based reviews and
exams using these protocols during the recent fiscal year.
Other accomplishments from FY 2015 include conducting over
1,200 assessments to renew delegated lending authority for our
delegated 7(a) Lenders and CDCs; completion of 147 Corrective
Action follow-up assessments from previous review activities,
and approval of the Agency's 100th Community Advantage Lender.
Turning to our supervision and enforcement
responsibilities, OCRM issued 6 increased supervision actions
to 7(a) Lenders or CDCs for failure to follow SBA Loan Program
Requirements, debarred our suspended over 30 agents or
representatives from conducting further business with SBA, and
issued letters to 20 CDCs for failure to meet regulatory
requirements for minimum loan activity. We continue to actively
manage these actions, as appropriate.
To accomplish our responsibilities, OCRM operates with a
staff of 27 supplemented by five support contracts for reviews,
exams and enforcement activities. We also remain the primary
user of the L/LMS contract service that provides credit scoring
and the lender purchase rating.
In fiscal year 2016, OCRM will continue to conduct a
portfolio diagnostic of every lender using historical
performance, the predictive credit scores for all 7(a) or 504
loans, and the PARRiS and SMART methodologies to evaluate the
relationship of each lender's metrics to established
benchmarks. OCRM will also continue to monitor lenders through
programmatic risk-based reviews, using PARRiS and SMART to
target existing and emerging risk, as identified.
In 2016 OCRM plans to conduct in-depth analyses using SBA's
loan database to investigate existing risk, identify developing
risk areas, and to inform program changes under consideration.
We will be publishing our Final Rule this fiscal year on Agent
Revocation and Supervision authorities, to strengthen existing
procedures and align them with other federal agencies.
SBA also continues in active discussions with primary
federal regulators on such topics as information sharing and
vendor management. Through exchange of information we can bring
improved oversight and monitoring to both our activities and
theirs, minimizing duplication.
Thank you for the opportunity to share this information
today regarding how OCRM supports SBA's role of providing
access to capital for small business owners of this great
country. I will be happy to respond to your questions.