    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                     AN OVERVIEW OF SBA'S 7(A) LOAN PROGRAM

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

                                    HEARING

                                   before the

           SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATIONS

                                     OF THE

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD
                                 MARCH 9, 2017

                                   __________

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 115-008
                  Available via the GPO Website: www.fdsys.gov

                                       ______

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                       HOUSE COMMITTEE ON SMALL BUSINESS

                          STEVE CHABOT, Ohio, Chairman
                                STEVE KING, Iowa
                          BLAINE LUETKEMEYER, Missouri
                              DAVE BRAT, Virginia
                 AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                            STEVE KNIGHT, California
                            TRENT KELLY, Mississippi
                                 ROD BLUM, Iowa
                             JAMES COMER, Kentucky
                     JENNIFFER GONZALEZ-COLON, Puerto Rico
                              DON BACON, Nebraska
                        BRIAN FITZPATRICK, Pennsylvania
                             ROGER MARSHALL, Kansas
                                     VACANT
                   NYDIA VELAZQUEZ, New York, Ranking Member
                           DWIGHT EVANS, Pennsylvania
                           STEPHANIE MURPHY, Florida
                            AL LAWSON, JR., Florida
                             YVETTE CLARK, New York
                              JUDY CHU, California
                           ALMA ADAMS, North Carolina
                          ADRIANO ESPAILLAT, New York
                            BRAD SCHNEIDER, Illinois
                                     VACANT

                       Kevin Fitzpatrick, Staff Director
                           Jan Oliver, Chief Counsel
                    Adam Minehardt, Minority Staff Director

                                C O N T E N T S

                               OPENING STATEMENTS

                                                                       Page
    Hon. Trent Kelly.................................................     1
    Hon. Alma Adams..................................................     2

                                   WITNESSES

    Ms. Sonya McDonald, Executive Vice President and Chief Lending
      Officer, Randolph Brooks Federal Credit Union, Universal City,
      TX, testifying on behalf of the National Association of
      Federally-Insured Credit Unions................................     4
    Ms. Cindy Blankenship, Vice Chairman, Bank of the West,
      Grapevine, TX, testifying on behalf of the Independent
      Community Bankers of America...................................     5
    Mr. Tony Wilkinson, President and CEO, National Association of
      Government Guaranteed Lenders, Washington, DC..................     7
    Mr. Edward C. Ashby, III, President & CEO, Surrey Bank & Trust,
      Mount Airy, NC, testifying on behalf of the American Bankers
      Association....................................................     8

                                    APPENDIX

    Prepared Statements:
        Ms. Sonya McDonald, Executive Vice President and Chief
          Lending Officer, Randolph Brooks Federal Credit Union,
          Universal City, TX, testifying on behalf of the National
          Association of Federally-Insured Credit Unions.............    22
        Ms. Cindy Blankenship, Vice Chairman, Bank of the West,
          Grapevine, TX, testifying on behalf of the Independent
          Community Bankers of America...............................    37
        Mr. Tony Wilkinson, President and CEO, National Association
          of Government Guaranteed Lenders, Washington, DC...........    51
        Mr. Edward C. Ashby III, President & CEO, Surrey Bank &
          Trust, Mount Airy, NC, testifying on behalf of the American
          Bankers Association........................................    57
    Questions for the Record:
        None.
    Answers for the Record:
        None.
    Additional Material for the Record:
        CUNA - Credit Union National Association.....................    63

                     AN OVERVIEW OF SBA'S 7(A) LOAN PROGRAM

                                  ----------

                            THURSDAY, MARCH 9, 2017

                      House of Representatives,
                   Committee on Small Business,
        Subcommittee on Investigations, Oversight, and
                                           Regulations,
                                                        Washington, DC.
        The Subcommittee met, pursuant to call, at 11:00 a.m., in
    Room 2360, Rayburn House Office Building, Hon. Trent Kelly
    [chairman of the Subcommittee] presiding.
        Present: Representatives Kelly, Chabot, Blum, Bacon,
    Marshall, Adams, and Velazquez.
        Chairman KELLY. Good morning. Thank you all for being with
    us today. I call this hearing to order.
        Our startups, our entrepreneurs, our small businesses, the
    true engines of our economy, continue to experience a rigid
    lending environment. While large companies are turning to debt
    and equity markets to raise capital, small businesses all over
    the country regularly turn to conventional bank lending to
    finance their projects. At times, small firms cannot access
    conventional lending, so they have nowhere to turn for the
    capital to grow their business or create jobs. Despite being
    creditworthy, they often do not have the proven track record
    for traditional lending. Instead of turning away the next great
    American company, lenders can work with small businesses and
    provide access to SBA's numerous lending programs.
        We are here to talk about one of these lending programs
    today. The Advantage Loan Program, widely known as the 7(a)
    Loan Program, provides creditworthy small businesses the
    opportunity to receive capital if traditional lending is not
    available. The program, which is currently running at zero cost
    to the American taxpayer, does not provide direct loans;
    rather, the SBA offers guarantees of repayments made to
    lenders. With the recent growth of the program in terms of loan
    approvals, loan amounts, and the congressionally authorized
    lending limit, it is important for our Committee to
    comprehensively review the program. Does SBA have the correct
    tools in place to provide oversight? Where should there be
    improvement? Is the Credit Elsewhere Test, the test which
    determines whether or not a small business is able to obtain
    capital from traditional options, strong enough?
        The hearing today will kick off a series of conversations
    focused on the 7(a) Loan Program.
        Today, the Subcommittee will hear directly from the
    lender's window, those financial institutions participating in
    the program.
        I appreciate each of the witnesses for being here today. I
    look forward to your testimony.
        I now yield to Ranking Member Adams for opening remarks.
        Ms. ADAMS. Thank you, Mr. Chair. And I want to thank
    Ranking Member Velazquez for being here as well. And to all of
    our witnesses.
        With the economy showing continued growth, it is important
    to ensure that small businesses have the tools and the
    resources that they need to prosper. And in order for small
    firms to play their traditional job-creating role, a number of
    factors must be in place. Perhaps the most important ingredient
    is the availability of capital. Lending through the Small
    Business Administration is always critical for entrepreneurs
    seeking affordable capital to start new ventures and expand
    existing businesses.
        SBA loan programs fill a critical gap in the market for
    small businesses that cannot access traditional lending
    sources. In particular, SBA's 7(a) Loan Program is a public-
    private partnership that helps private lenders provide capital
    to small businesses that would not normally qualify for credit
    on reasonable terms. In recent years, 7(a) loans have
    experienced unprecedented growth, making this hearing
    particularly timely today. While over 64,000 loans totaling $24
    billion was supported in fiscal year 2016, only 26 percent of
    7(a) loans went to minorities, and only 18 percent to women-
    owned firms. This is simply unacceptable.
        In addition to these underwhelming numbers, the SBG OIG has
    identified lender oversight as a serious management challenge
    for SBA. The OIG first raised their concerns in fiscal year
    2001, and the issue continues to this very day. As the 7(a)
    Loan Program grows, it is vital for the SBA to have the
    resources in place to conduct lender oversight and to guarantee
    that all entrepreneurs, no matter what gender or race, have
    equal opportunities to utilize the program.
        I look forward to hearing from our witnesses and gaining
    their insights on making the SBA's flagship program work even
    better for small businesses. It is vital that loans in the 7(a)
    programs are targeted to businesses who need them most,
    particularly those who have been unable to secure capital
    through private channels. Putting capital in the hands of
    businesses that need it most will help further the economic
    development of America's small businesses.
        So on that note, again, I would like to thank our witnesses
    for taking time to be here. Your views and experiences, of
    course, will be valuable to the Subcommittee as we consider how
    best to meet the entrepreneurs' capital needs.
        Thank you, Mr. Chair. I yield back.
        Chairman KELLY. Thanks to the ranking member. And this is
    such a bipartisan Committee, and I really thank the ranking
    member for her support and being here today and her timely
    comments.
        If the Committee members have an opening statement
    prepared, I ask that they be submitted for the record.
        I would like to take a moment to explain the timing lights
    to you. You will each have 5 minutes to deliver your testimony.
    The light starts out as green. It will turn yellow, and
    finally, after, when you have 1 minute remaining, that means
    start wrapping up, and finally, at the end of your 5 minutes,
    it will turn red. I ask that you try to adhere to the time
    limit and in my first Committee chairman not make me tap you
    out today.
        Our first witness--I am going to introduce the three and
    then I will allow the ranking member.
        Our first witness is Sonya McDonald. Ms. McDonald is an
    executive vice president and chief lending officer for Randolph
    Brooks Federal Credit Union in Universal City, Texas, which is
    located in southcentral Texas. She has been serving credit
    union members in various roles at Randolph Brooks Federal
    Credit Union for years, including numerous executive level and
    leadership positions. Along with being a recipient of the
    Presidential Volunteer Service Award, Ms. McDonald was named to
    the San Antonio's 40 Under 40 List and is a graduate of the
    University of Texas at Austin. She is testifying today on
    behalf of the National Association of Federally-Insured Credit
    Unions.
        Our next witness is Ms. Cindy Blankenship. Ms. Blankenship
    is the vice chairman of Bank of the West in Grapevine, Texas.
    Having opened Bank of the West in 1986 with her husband, Ms.
    Blankenship has been a leader in community banking for many
    years. Ms. Blankenship is a former chair of the Independent
    Community Bankers of America and has testified before numerous
    congressional committees. She has been recognized in the past
    as one of the 50 most powerful women in banking. Ms.
    Blankenship is testifying today on behalf of the Independent
    Community Bankers of America.
        Our next witness is Tony Wilkinson. Mr. Wilkinson is the
    president and chief executive officer of the National
    Association of Government Guaranteed Lenders. For over 25
    years, Mr. Wilkinson has been at the helm of the Association
    which represents the 7(a) lending industry. Before coming to
    NAGGL, Mr. Wilkinson was an executive at Stillwater National
    Bank. He has served as a member of the SBA's National Advisory
    Council and as a member of SBA's Investment Advisory Council.
    He has also been a recipient of SBA's National Financial
    Services Advocate of the Year Award.
        And I now yield to our ranking member.
        Ms. ADAMS. Thank you, Mr. Chair.
        I am so pleased to introduce Ted Ashby, a native of Mount
    Airy, North Carolina. I represent North Carolina, and we are
    happy to have a Tarheel in the place today. Mr. Ashby has a
    bachelor's degree in business administration and economics. He
    has held numerous positions in the banking industry, including
    branch administrator, chief lending officer, special assets
    manager, and senior vice president. In 1996, Mr. Ashby created
    Surrey Bank and Trust. As president and CEO, he has grown the
    bank to $278 million in assets, with six branches and a loan
    production office. He is testifying today on behalf of the
    American Bankers Association. Welcome, Mr. Ashby.
        Chairman KELLY. And again, thank you to the distinguished
    panel.
        And Ms. McDonald, you are recognized for 5 minutes, and you
    may begin.

      STATEMENTS OF SONYA MCDONALD, EXECUTIVE VICE PRESIDENT AND
     CHIEF LENDING OFFICER, RANDOLPH BROOKS FEDERAL CREDIT UNION;
       CINDY BLANKENSHIP, VICE CHAIRMAN, BANK OF THE WEST; TONY
         WILKINSON, PRESIDENT AND CEO, NATIONAL ASSOCIATION OF
    GOVERNMENT GUARANTEED LENDERS; EDWARD C. ASHBY, III, PRESIDENT
                     AND CEO, SURREY BANK AND TRUST

                      STATEMENT OF SONYA MCDONALD

        Ms. MCDONALD. Chairman Kelly, Ranking Member Adams, and
    members of the Subcommittee. Thank you for the invitation to
    appear before you this morning.
        My name is Sonya McDonald, and I am testifying today on
    behalf of NAFCU. I am the executive vice president and chief
    lending officer at Randolph Brooks Federal Credit Union. In
    this role, I am responsible for a $6 billion portfolio that
    encompasses consumer, mortgage, and commercial lending. I
    appreciate the opportunity to share with you my experience with
    the Small Business Administration's 7(a) Loan Program.
        RBFCU became a SBA preferred and express lender in
    September of 2005. We are delegated with SBA authority and are
    able to offer all of their products. In 2016, we were the
    number one SBA lending credit union in our 55 county district.
    SBA products allow us to leverage our lending dollars, mitigate
    the risk associated with the loans, and extend more credit to
    our community small businesses. Our current portfolio has 232
    active SBA loans with a balance of approximately $22 million.
        There are many stories of small business owners looking for
    that loan that will allow them to either start or grow their
    business. While other institutions may have scaled back their
    small-dollar business lending, credit unions have been willing
    to fill that void. At RBFCU, we are pleased that we have been
    able to step up to help meet the demand. SBA 7(a) loans make it
    easier for credit unions because the government-guaranteed
    portion of these loans does not count towards the arbitrary
    credit union member business lending cap.
        In San Antonio, we have a great bagel shop, the Bagel
    Factory, owned by an Air Force veteran and his wife. They went
    to 20 different places and were denied before coming to
    Randolph Brooks for an SBA loan. That business is now in its
    seventh year and thriving.
        Another example is a loan we did for a 100 percent disabled
    military veteran. With the help of a SBA express line of
    credit, he was able to secure 8(a) certification, and he can
    now fulfill software development contracts for the military.
        Two years ago, NAFCU signed a memo of understanding with
    SBA to help address the challenge of getting more credit unions
    involved in the SBA. The MOU formalized a joint partnership
    that aims to increase the availability of small-dollar loans by
    providing more outlets for entrepreneurs to access SBA products
    in their neighborhoods, and it makes the small-dollar loans
    more accessible to underserved communities, including women and
    minorities.
        We appreciate the work SBA has done and have some ideas on
    how to make the program stronger. One area where the SBA can
    help credit unions is to provide clarity. Sometimes when we
    email the SBA directly with a specific question about standard
    operating procedures, the response is nothing more than a
    screenshot of the website. We have also seen an example of a
    loan submitted through general processing where the SBA
    processor did not follow the SOP. It was a loan that required
    us to place a second lien on a borrower's rental property.
    Normally, we would use the tax assessed value on the home, but
    in this case, the processor insisted we use the value estimated
    by Zillow.com, which was not anywhere in the procedure manual.
        If SBA would publish a best practices and clarify guidance,
    it would go a long way to helping credit unions when they are
    making SBA loans.
        At RBFCU, we would also like to see the length of time it
    takes to approve a loan shortened. Right now it can take 8
    weeks or longer.
        For RBFCU and other credit unions, it would also be
    beneficial if the new SBA One software better integrated with
    the lending software used by the majority of lenders, something
    the old software used to do.
        In conclusion, small businesses are the driving force of
    our economy and the key to its success. The ability for them to
    have access to capital is vital for job creation. While SBA's
    7(a) program provides opportunities to established and
    struggling businesses, there are several relatively simple
    steps that could propel the program to its full potential, some
    of which the SBA can take without legislation. We urge Congress
    to do what is necessary to ensure these programs are
    successful.
        We thank you for your time and the opportunity to testify
    before you today on this important issue. I welcome any
    comments or questions you might have.
        Chairman KELLY. Ms. Blankenship, you are now recognized for
    5 minutes.

                     STATEMENT OF CINDY BLANKENSHIP

        Ms. BLANKENSHIP. Chairman Kelly, Ranking Member Adams, and
    members of the Subcommittee, I am Cynthia Blankenship, vice
    chairman, CFO, and corporate president of Bank of the West in
    Grapevine, Texas, an over $450 million community with 105
    employees and serving the Dallas-Fort Worth suburban area. I am
    also a former chairman of the Independent Community Bankers of
    America, and I am pleased to testify today on behalf of more
    than 5,800 community banks represented by ICBA.
        A robust 7(a) program with broad community bank
    participation will help small business thrive and create jobs.
    We are grateful for this Committee's strong support of the 7(a)
    program. Bank of the West is a 30-year partner with the Small
    Business Administration and a leading SBA lender in the Fort
    Worth District. We currently hold and service nearly $100
    million in high-quality SBA loans with a minimum loss ratio.
    Historically, Bank of the West 7(a) loans have created
    thousands of jobs in the communities we serve and help sustain
    and strengthen our local economy.
        Bank of the West uses the 7(a) Loan Program to supplement
    our lending and credit services by reaching a broader range of
    borrowers who would not qualify for a conventional loan. To
    safeguard the program from abuse, the SBA's Credit Elsewhere
    Test requires us to fully substantiate and document the reasons
    a given applicant cannot be served with conventional credit.
    The typical conventional small business loan has a maturity of
    1 to 3 years because it is funded with short-term deposits.
    However, 7(a) program loans have average maturities of 16 years
    or more. The program even allows for loan terms up to 25 years.
    These longer terms lower the entrepreneur's loan payments and
    free up needed cash flow to hire, invest, and grow the
    business. When another recession occurs, the longer loan term
    may help many small businesses weather the crisis.
        Bank of the West has been a preferred SBA lender for 30
    years. This program is available to lenders with a proven track
    record, a successful SBA lending whose lending policies and
    procedures have been thoroughly vetted by the SBA. Once
    approved, a preferred lender can use streamlined procedures for
    processing SBA loans and make final credit decisions in-house.
    This is a critical advantage because it allows us to avoid a
    delay of up to 3 weeks at the SBA approval offices.
        As an SBA preferred lender, we can be responsive to our
    credit applicants, and if they qualify, provide the funds in a
    timely fashion.
        Stable funding is critical to the success of the 7(a)
    program and the thousands of borrowers who rely on it. While
    the program is fully funded by user fees, an authorization
    level must be approved by Congress each year, and once that
    level is reached, no more loans can be approved.
        The program authority came to an abrupt halt in the summer
    of 2015 when it reached its authorization cap well before the
    end of the fiscal year. Congress was forced to pass an
    emergency increase to the authorization cap to restart the
    program. ICBA greatly appreciates the support and
    responsiveness of this Committee in passing that emergency
    increase. Thankfully, a hiatus was short lived. A longer
    program shutdown would have cut off the thousands of small
    businesses that rely on the program for payroll, investment,
    and expansion. We must work together to ensure that the program
    funding is never disrupted again. One way we might better
    achieve this funding stability is by creating a 2-year funding
    commitment and have it be renewed every year.
        I have focused my remarks today on the 7(a) program.
    However, taking a broader perspective, I urge this Committee to
    support regulatory and tax relief that would strengthen
    community banks and enable more small business lending in SBA
    programs and in conventional markets.
        ICBA's plan for prosperity is a robust set of legislative
    recommendations, many of which serve the same goal as the SBA,
    creating more small business credit that will in turn create
    economic growth and jobs. A copy of the plan is attached to my
    statement, and I would encourage you to read it and discuss it
    with the community bankers in your districts.
        Thank you again for convening this hearing. I am happy to
    answer any questions you may have.
        Chairman KELLY. Thank you, Ms. Blankenship. It is always
    nice to hear somebody who does not have an accent.
        Mr. Wilkinson, you are now recognized for 5 minutes.

                      STATEMENT OF TONY WILKINSON

        Mr. WILKINSON. Good morning, Mr. Chairman, Ranking Member
    Adams, and other members of the Committee. I am Tony Wilkinson.
    I am the president and CEO of the National Association of
    Government Guaranteed Lenders. I am happy to be here today to
    talk about the very successful SBA 7(a) program. It is a
    public-private partnership that works as there are almost 2,000
    financial institutions who participate in the program, reaching
    about 65,000 small businesses annually. These lenders make
    private sector loans to small businesses who are credit worthy
    but fall into the well-known lending gap that small businesses
    face.
        Through the 7(a) program, lenders are able to meet the
    long-term financing needs of their small business customers.
    That means we can appropriately finance a long-term asset with
    a long-term loan. The significant majority of conventional
    loans, as Ms. Blankenship mentioned, have original maturities
    of 3 years or less, and the bulk of those loans actually have
    maturities of 1 year or less. So banks are really good at doing
    short-term financing, but with the SBA product we are able to
    do long-term financing. Again, financing those long-term assets
    with a long-term loan.
        And as Ms. Blankenship said, our original maturities in an
    SBA 7(a) program are 16 years. And so those longer maturities
    mean lower payments for those small business borrowers. And
    when small business can get the financing that they need, they
    can expand and grow and create jobs. It has been estimated that
    well over 500,000 jobs are created or retained annually thanks
    to the 7(a) program.
        Over the last several years, use of the program has grown
    dramatically. Loan volume in fiscal year 2016 was over 25
    percent greater than it was just in fiscal year 2014, meaning
    more and more small businesses are being served. But it also
    means we have been operating at or near our congressionally
    authorized annual authorization cap. This fiscal year, under
    the current continuing resolution, the 7(a) program has a $26.5
    billion authorization cap. Based on current loan volumes and
    projected growth, we anticipate lending about $26 billion net
    this year. So again, we are going to be getting very close to
    our annual cap.
        I want to make sure that we understand that that is a net
    number. Our gross lending will probably exceed the cap
    somewhat. And as loans for whatever reason do not get closed,
    they get canceled, and so we get down to a net number, but it
    is very likely that our gross lending will exceed our cap, but
    it is the net lending number that is important.
        As funding measures are considered with the April 28th
    expiration of the continuing resolution, a modest bump up in
    our authorization cap would be appreciated just to make sure
    that we have sufficient funds to get through this year as
    predicting future loan volumes, as you might imagine, is a very
    difficult task. Please keep in mind that the 7(a) program
    operates at a zero credit subsidy, meaning no appropriations
    are needed. The estimated costs of the program are paid for by
    the fees charged to lenders and borrowers. So let me repeat. No
    Federal appropriations are needed to fund credit subsidies for
    this program.
        It is a long-held belief in our association for this
    program to pass the test of time to be here for small
    businesses for many years to come, it has to be a program of
    integrity. The program must be used the right way. That is what
    we teach in our training programs. It is what we expect from
    our members. It is why we understand that it is in the
    program's best interest to have SBA engaged in a sustained,
    efficient, and cost-effective oversight program to maintain
    that integrity. NAGGL has worked, and will continue to work,
    with the SBA and this Committee and SBA's Office of Credit Risk
    Management to ensure that integrity.
        With that, I will close my remarks and be happy to answer
    any questions.
        Chairman KELLY. Thank you. And Mr. Ashby, you are now
    recognized for 5 minutes.

                    STATEMENT OF EDWARD C. ASHBY III

        Mr. ASHBY. Chairman Kelly, Ranking Member Adams, and
    members of the Subcommittee, I am Ted Ashby, president and CEO
    of Surrey Bank and Trust, headquartered in Mount Airy, North
    Carolina. I appreciate the opportunity to present the views of
    the ABA on the importance of the SBA Advantage Loan Program,
    widely known as the SBA 7(a) program for community banks like
    mine.
        Our bank was chartered in 1996 with a focus on business
    lending. We are intentionally focused on building and
    maintaining long-term relationships with our customers. The
    success of Surrey Bank is linked to the success of our
    community. They are all our neighbors.
        Community banks like mine actively pursue small business
    loans, which is critical to the economic growth and job
    creation in our area. The SBA program supports this with the
    help to fill a critical gap particularly for early stage
    businesses that need access to longer term loans. The guarantee
    helps reduce the risk and capital required for banks and
    facilitates loans that may never have been made without this
    important level of support from the SBA.
        In 1999, Surrey Bank began using SBA to help local
    companies meet their credit needs. This is an integral part of
    our business model. We have 174 active loans with an average
    loan size of $200,000, which demonstrates that the 7(a) program
    is very important to us and to our community. In total, 19
    percent of our business loans are insured by the SBA, and 13
    percent of all our loans are insured by the SBA. Our active
    involvement in SBA has earned Surrey Bank the ``Community Bank
    of the Year'' award in North Carolina 12 of the past 14 years.
        Let me give you a couple of examples to show the importance
    of SBA to our community. We extended credit to a precast
    concrete company that opened its doors in 2007, a terrible time
    to open. With the recession, economic activity was weak and the
    borrower had difficulty generating enough working capital to
    fund new orders. Our bank used the SBA's Cap Lines Contract
    Loan Program to fund these individual orders until they could
    be completed and the business paid. This company now generates
    sufficient cash flow to fund its operations without the SBA or
    bank assistance.
        My second example, we extended credit to a woman-owned
    company that is engaged in traffic and safety control and
    highway and bridge construction. This company started in 2004
    with four employees and just two trucks. Since inception, we
    granted 23 SBA loans to this company to help fund their
    expansion. Today, the company has over $12 million in revenue,
    90 employees, and a fleet of over 100 vehicles and assorted
    other equipment. Quite a success story.
        But our success is replicated over and over across
    communities in America in the banking system. This is why the
    ABA supports the Small Business Committee's efforts to build on
    the positive aspects of the program and consider improvements
    that would benefit the business climate in our communities.
        I have noted in my written statement many positive features
    of the 7(a) program. The central focus of these features is
    that they reduce the cost of the transaction, lower general
    collateral requirements, provide faster response times, improve
    cash flow, and reduce the amount of working capital needed to
    operate the business. All of these facilitate loans that may
    have never been possible under conventional financing where
    under conventional financing you would require an abundance of
    collateral. You have a guarantor that has a strong secondary
    source of repayment, and you would most likely have shorter
    loan amortizations.
        However, improvements can be made to any program.
    Primarily, this is involved in the servicing aspects. These
    include consolidating loans, allowing portfolio lenders to
    obtain a guarantee to avoid regulations on loans to one
    borrower limitations, facilitating and offering compromise in
    cases where they may be in liquidation through multiple
    programs, and making the SBA One platform fully operational to
    reduce our paperwork.
        In conclusion, the SBA's 7(a) program is a success and
    should be supported in the future. It has encouraged economic
    growth and allowed Surrey Bank to meet the credit needs of many
    small and diverse businesses in our small portion of the state
    of North Carolina.
        ABA strongly believes that our communities cannot reach
    their full potential without the presence of a local bank. Last
    year 251 banks disappeared. Since Dodd-Frank was enacted,
    nearly 2,000 banks have merged or closed their doors. If the
    pressures on our small banks are not relieved, the loss will be
    felt far beyond the bank and its loss of employees for that
    bank. It will mean something significant has been lost in that
    community that was once served by the bank. That is why it is
    imperative that Congress take steps to enhance the banking
    industry's capacity to serve their customers and facilitate job
    creation and economic growth.
        Thank you. I will be happy to answer any questions.
        Chairman KELLY. I want to once again just thank the
    distinguished members of the panel. Thank you so much for what
    you bring.
        I think one of the main things that is important to me, and
    I recognize myself for 5 minutes, so I will hold myself to the
    same thing, but one of the most important things is this 7(a)
    Loan Program costs us, or costs the taxpayers nothing. So I
    think that is very important. So it is a great program because
    there is no cost associated with while creating small
    businesses or helping them to create small businesses it does
    not cost.
        And this first question is for the entire panel, but I will
    start with--I will let Ms. Blankenship answer first and then we
    can go along the list. From the lender's perspective, can you
    describe the Credit Elsewhere Test and the steps you take to
    verify whether a small business can obtain capital from another
    source?
        Ms. BLANKENSHIP. We look at the Credit Elsewhere Test and
    go through the parameters that SBA has lined out. And
    basically, that is how we qualify that small business as an
    alternative source of funding through the SBA. Many times those
    small businesses are not a good candidate for conventional
    financing because they do not have the collateral value or they
    are depending on future cash flows, projected cash flows. We
    personally do a lot of startups, as well as acquisitions for
    small businesses, as well as some franchise. And a lot of times
    there is not a historical record there. And personally, I was
    able to give my hair stylist Kim a loan to acquire a salon when
    the owner died. She was a young lady. She had good credit, but
    did not have a lot of collateral. So we were able to help her
    acquire that salon. She hired eight additional stylists, paid
    her SBA loan off early, and that is just one story where the
    Credit Elsewhere Test is a good tool, and we do use it so we
    can slot that customer in the right type of either conventional
    or SBA loans.
        Chairman KELLY. Yeah, and I guess for the public, the few
    people who are watching this hearing, is the credit elsewhere
    means you are not competing with other sources. If they can get
    credit in another place, then they have to do that. They cannot
    use this program. They have to only use this if it is the only
    resource that they can use to get there. Is that correct?
        Ms. BLANKENSHIP. That is correct.
        Chairman KELLY. Okay. Do one of you other three, does
    anybody want to take a stab before I ask the next question?
        Ms. MCDONALD. From my perspective, we are no different than
    our friends in the banking industry. We look at the loan and we
    see, first of all, can we do it in a conventional manner? And
    if we cannot--and it is usually because they do not have the
    down payment, they need a longer term, et cetera--but from a
    credit union's perspective, we follow the same rules as our
    friends in the banking industry.
        Chairman KELLY. And Mr. Ashby, I think you had a comment?
        Mr. ASHBY. We do not specifically look at the Credit
    Elsewhere Test. When we underwrite a loan, we are looking at
    the collateral coverage cash flow and secondary source of
    repayment. And a lot of the conventional financing is
    homogenized because regulators like to know what our loan
    policies are. And all our loan policies are generally the same
    as you go from bank to bank. So you can identify really very
    quickly which loans need this kind of support and help from the
    SBA on extended terms.
        Chairman KELLY. Thank you very much.
        Mr. Wilkinson, in your testimony, you described the PARRIS,
    P-A-R-R-I-S, review system as a tool in SBA's oversight tool
    box. What other tools does SBA and the Office of Credit Risk
    Management utilize to conduct lender oversight?
        Mr. WILKINSON. Sorry about that. A relatively new system
    that they put in place over the last 4 or 5 years, but it is an
    analytically driven program that they used to target what
    reviews are going to happen amongst their lenders. And that is
    where then they can choose what kind of reviews which lenders
    are going to get. And it appears to be working quite well. The
    one issue that we would be concerned about is making sure that
    the Office of Credit Risk Management has sufficient resources
    to do its job. With the growth we have had in the program, we
    need to make sure that their resources have increased
    commensurately so that they have the appropriate staff to
    continue to do the job that they need to do.
        Chairman KELLY. And I yield back myself the time that I
    have not used. And I now recognize our ranking member from
    North Carolina, Ms. Adams, for 5 minutes.
        Ms. ADAMS. Thank you, Mr. Chair. And thank you all for your
    testimony.
        Mr. Ashby, in your written testimony you mention positive
    aspects of the 7(a) program and other SBA programs, including
    SCORE. Do you have any success stories or specific examples of
    how SCORE counseling has benefitted small business clients? And
    what improvements can be made there?
        Mr. ASHBY. Comments were primarily related to feedback that
    we have gotten from customers that have gone through that
    process, and they think it is very valuable to have someone
    that has basically fought the fight and learned how to navigate
    through their business careers and how to help these people
    overcome some of the obstacles that happen in their business
    because we go through cycles, and some of these retired people
    have seen many business cycles. And so my experience is that we
    get great feedback. We are not present during those counseling
    sessions, but we do get feedback that it is most important to
    them to have a mentor.
        Ms. ADAMS. Okay. Let me ask you. You know, I had a
    listening session last week, some people would refer to it as a
    townhall, up in the upper part of my district in Huntersville,
    and we had a lot of veterans to come in to talk to us. Do you
    deal much with veterans? Have they been interested in the
    program through your bank?
        Mr. ASHBY. We have had--I think we probably made three or
    four loans to veterans last year. There is a special carve-out
    for veterans on fees for loans amount of a certain dollar
    amount. So we do have interest from veterans.
        Ms. ADAMS. Okay. You also note that the SBA One program
    platform is not fully operational. What enhancements should be
    made to the system?
        Mr. ASHBY. Well, right now, basically, we can only get the
    issuance of the guarantee, and I think it was originally
    designed that you can go soup to nuts. You can do the initial
    qualification and then you can print all the closing documents
    all on one platform. And so I guess the second half of that
    platform is not fully complete at this time.
        Ms. ADAMS. Okay. To what extent, I mean, as a follow-up,
    has the SBA sought feedback from lenders to improve the system?
        Mr. ASHBY. We get constant feedback from our district
    director, Lynn Douthett. And so we are being called on all the
    time to talk about what types of loans we are seeing. If we
    need any training, they oftentimes request Surrey Bank train
    some of the new people that are coming into the SBA lending
    arena because we have been at it a long time and we are a small
    bank. And we try to help them get the proper resources in-house
    in order not to run in trouble with the SOP and have problems
    going forward, so----
        Ms. ADAMS. Okay. Thank you.
        Mr. ASHBY.--we have a good relationship.
        Ms. ADAMS. Great. Thank you.
        Mr. Wilkinson, for a small business to participate in the
    7(a) program it must not be able to obtain conventional
    lending. How does a lender determine if a borrower cannot get
    credit elsewhere?
        Mr. WILKINSON. Okay. The Credit Elsewhere Test is that the
    borrower cannot find financing under reasonable terms and
    conditions. So a lender will take a look at each small business
    borrower and determine whether it fits into their own
    conventional credit policies. For instance, many of our credit
    policies say we do not lend to new business startups. In the
    SBA program, year-to-date, we are about 36 percent new business
    startups. So that is sort of one of the automatics that fit. As
    has been mentioned, sometimes it is collateral coverage.
    Sometimes it is cash flow coverage. There are some statistical
    numbers that lenders look at, and perhaps if those numbers do
    not reach a benchmark that is sufficient for conventional
    financing, then they would be candidates for the SBA program.
        Ms. ADAMS. Okay. Given that it is the lender's best
    interest to make the determination that the borrower cannot
    obtain credit elsewhere so that they can make the loan, add to
    its assets or make money off of the loan, to what extent does a
    potential conflict of interest exist there?
        Mr. WILKINSON. I guess the first thing is banks are in the
    business of lending money, and with every loan that they make
    they hope to generate a profit from those. I think what you are
    referring to is the ability to sell loans into a secondary
    market where the banks can recoup the funds that they have lent
    plus generate a profit on those. Those loans that are sold are
    typically sold by lenders who have liquidity issues. Lenders
    who do not have liquidity issues typically hold their loans.
    That is why only about 40 percent of the loans in the 7(a)
    market are sold into the secondary market. Most of the loans, a
    majority of the loans are actually held and not sold.
        Ms. ADAMS. Okay. All right. I am out of time. Mr. Chair, I
    yield back. Thank you.
        Chairman KELLY. I thank the ranking member.
        I do want to recognize both our chairman, Chairman Chabot,
    from the great State of Ohio, and our Ranking Member Velazquez
    from New York. And I thank both of them for honoring me by
    being here today.
        And now I recognize the gentleman from Kansas, Dr.
    Marshall.
        Mr. MARSHALL. Mr. Chairman, I am so excited to be here. It
    is a breath of fresh air to talk about a government-private
    partnership that is working. I am just here to celebrate. I
    needed a breath of fresh air.
        Thank you so much for the people that have made the effort.
    We need to keep accentuating the positive, and I appreciate
    some of you brought solutions. Ms. Blankenship talked about a
    2-year funding commitment. What a novel idea to give you all
    certainty. I hope that the chairman and our staff take notes of
    these possible solutions. And Ms. McDonald, you talked about
    best practices. Give me the best practices and we will do it.
    What a novel idea. Timeliness. These people that need the
    money, they need to get in the game now because 6 months from
    now may be too late for this business opportunity.
        You talked about software. Good luck with that. I have been
    fighting that one wherever I go.
        I do not know about you all, but my community woke up
    November the 9th, and it was a breath of fresh air. My
    entrepreneurs have been drowning in regulation, and all of a
    sudden they started popping up, coming out of nowhere.
        And Ms. Blankenship, have you seen an increased number of
    entrepreneurs out there since November the 9th? What is going
    on in the business world in Grapevine, Texas?
        Ms. BLANKENSHIP. Well, I am proud to say we have seen an
    uptick and a demand for entrepreneurs. And really, I think,
    personally what I have seen coming through our loan committee,
    whether it be SBA or conventional lending, is there is just a
    renewed energy out there. During the crisis years, we saw a lot
    of our small businesses really pull back on expansion and
    investment and resources into their business because they did
    not know what the economy was going to do. And I think there is
    a new confidence. We are seeing people that would not have
    taken a gamble on starting a new business or just trying to
    acquire another business. We have seen quite an increase in
    that. And I think that accounts for the increase in the
    program. The program has been critical to us for 30 years. Some
    banks, you know, we see players come in and out of the market
    but we have been in it for 30 years. And I think the reason it
    works for us and some of the other people that stay in it is
    because you have to make a commitment and have your own
    resources in-house and just use the program as it was intended.
    And it is hugely successful.
        Mr. MARSHALL. Well, thanks. And we do understand
    commitments to your community to do these types of projects.
        Ms. McDonald, talk about agribusiness. I am just curious.
    Do you see much SBA loans like this for agribusiness,
    agriculture? Is that a big part of your market or not so much?
        Ms. MCDONALD. It is not a big part of our market.
        Mr. MARSHALL. That is too bad.
        Mr. Ashby, I am not sure how rural you are. Do you see much
    agri-economics going on with yours?
        Mr. ASHBY. We have seen a lot of activity in the poultry
    industry and we have participated, I think, probably maybe, I
    think, two or three loans last year. There is competition in
    that field with FSA.
        Mr. MARSHALL. Okay.
        Mr. ASHBY. USDA makes those loans, also. But that was a
    large growth industry in North Carolina last year.
        Mr. MARSHALL. Ms. McDonald, let me come back to you. You
    talked about your bagel loan, and that is just a great, great
    story. Walk me through this business model just a little bit.
    And I am sure you are not supposed to give me too many
    specifics. Mr. Ashby talked about a $200,000 average loan, but
    a business like the bagel industry, that is not a $400,000--I
    mean, are these $40,000 and $60,000, $80,000, 90,000 loans?
    Give me just kind of a feel for what your more typical loan
    looks like.
        Ms. MCDONALD. At Randolph Brooks, our average SBA loan is
    $90,000. So these are not high-dollar loans.
        Mr. MARSHALL. Yeah. Let's kind of walk through the terms
    and differences between this and a more bank-traditional loan.
    I mean, I had some experience going through these. You know,
    first of all, the differences are does the SBA still guarantee
    85 percent of the loan? Or about how much does it do now?
        Ms. MCDONALD. It depends on the amount. So if it is less
    than $150,000, then it is 85 percent; if it is more than
    $150,000, it is 75.
        Mr. MARSHALL. Okay. And, you know, typically, you would
    walk into a bank. These are kind of high-risk loans. If they
    are a well-qualified person, a bank might be asking 20, 30
    percent down. How much down are these type of loans going to--
    how much capital?
        Ms. MCDONALD. So at Randolph Brooks, our conventional loans
    are 20 percent down. With the SBA guarantee, it can be 10
    percent down. And because we can extend the term, it makes the
    payment much more palatable.
        Mr. MARSHALL. Exactly. So you addressed the term. What
    about interest rates? You know, as best as applies and apples,
    is it about the same as a conventional loan? Is it more? Is it
    less?
        Ms. MCDONALD. I mean, it is a little bit more. You are
    taking on the risk.
        Mr. MARSHALL. Meaning a little bit more, like half a point,
    50 basis points, or what?
        Ms. MCDONALD. I could not answer that.
        Mr. WILKINSON. The interest rates are statutorily set.
    There is a maximum rate of prime plus 2-3/4. The average
    interest rate today is running at prime plus 2.
        Mr. MARSHALL. Thanks. That solved it. Thank you.
        Chairman KELLY. The gentleman's time is expired.
        I now recognize the ranking member from New York, Ms.
    Velazquez.
        Ms. VELAZQUEZ. Thank you, Mr. Chairman.
        Ms. Blankenship, thank you for being here today, and it is
    really nice to see you again.
        I understand that SBA has been slow to fulfill their
    mandate to maximize the effectiveness of SBA LINC and SBA One.
    It is critical that SBA is using the best technological
    solutions to do so. How important is it to community banks and
    other SBA lenders that SBA continues to streamline their
    processes using technology to maximize the usefulness of SBA
    LINC and SBA One?
        Ms. BLANKENSHIP. Well, I think especially of our community
    bank, timeliness is everything. So any advances and
    streamlining procedures that the SBA can finish up this SBA One
    and the LINC--it is not fully operational right now. We are
    using a third-party software and we are basically running those
    parallel. And we do get continued and regular communication
    from SBA encouraging us to use SBA One. And in talking to our
    lenders on the SBA side, they are very encouraged by the final
    product should it become fully functional. But right now it is
    not fully functional, but it looks like it will greatly
    increase our efficiencies. It will increase our turn times, and
    I think someone mentioned that funding is critical many times,
    especially in a small business startup or acquisition.
        Ms. VELAZQUEZ. Funding is critical, and in terms of funding
    for SBA?
        Ms. BLANKENSHIP. Well, the funding for SBA is critical, but
    our ability to fund----
        Ms. VELAZQUEZ. Sure.
        Ms. BLANKENSHIP.--in a timely manner is very critical as
    well.
        Ms. VELAZQUEZ. Yes, I agree.
        Mr. Wilkinson, we have heard from many lenders about SBA's
    SOPs under lender guidelines. What is your view of those SOPs,
    and can they be improved?
        Mr. WILKINSON. Well, just as a point of clarification,
    there are regulations that SBA has issued over the years, and
    they are fairly short. And then in addition to those
    regulations they have put out what they call Standard Operation
    Procedure Manuals, and those are not so short. They are pretty
    thick. And those are the ones that we have to pay very, very
    close attention to. Sometimes those SOPs get changed rather
    quickly, and sometimes without notice. We see it from emails
    coming in from some of our members. But for the most part, SBA
    does try to work with us and find ways to streamline the
    program.
        If we go back to just fiscal year 2012, this was a $15
    billion program. I tip my hat to the last couple or three folks
    that have been in charge of the Office of Capital Access at
    SBA. They were all former bankers. They understood our issues
    when we brought them to them, and really worked to try to
    streamline it.
        So from a $15 billion program in 2012--and we have a
    request out for next year to make it a $30 billion program. So
    while the SOPs can be somewhat onerous and we pull our hair out
    sometimes in trying to figure out what some of the changes are,
    the fact is that things have gotten a lot better and we are
    looking at an industry that has doubled since 2012.
        Ms. VELAZQUEZ. Glad to hear that.
        Mr. Wilkinson, I know that several members today have
    raised the Credit Elsewhere Test, but I want to ask you about
    whether or not you believe that there are instances where some
    lenders are not adhering to this test.
        Mr. WILKINSON. Could there be some lenders who are
    originating loans that could be done conventionally? I could
    not say unequivocally the answer is no. I mean, there is most
    likely somebody who has made a loan today where a borrower
    could get a conventional product. But that is where the role of
    lender oversight at SBA comes into play.
        As Ms. Blankenship described, every loan file has to
    explain why they cannot make that loan on a conventional basis,
    and they have to cover the things that cause that reason, be it
    lack of collateral or lack of cash flow that meets their
    conventional standards. Perhaps it is because the borrower
    needs the 25-year maturity rather than the much shorter
    maturity that banks like to do on conventional financing. That
    documentation needs to be in the file. And if it is not there
    and that lender goes to ask for the guarantee to be honored,
    chances are the answer is going to be no to the guarantee
    request.
        Ms. VELAZQUEZ. Okay. Thank you, Mr. Chairman. I yield back.
        Chairman KELLY. I thank the gentlelady.
        I now recognize the great gentleman from Nebraska, Mr.
    Bacon.
        Mr. BACON. Thank you for being here. I appreciate your time
    and traveling here. I am grateful to you.
        Most of my questions were already asked. I just want to
    express my concern with your comments, Mr. Ashby, about the
    banks that are closing, our community banks and the
    consolidations, a lot of it a result of Dodd-Frank. I think
    that is an underreported story, and we here should be concerned
    about it in Congress. I mean, for small communities, it is a
    bad trend and I think we have got to fix that. So I would have
    a commitment to help you out with that.
        On that note with Dodd-Frank, when I talk to our folks in
    the Second District of Nebraska, I hear from the banks it is
    very hard to give small loans anymore separate from the SBA
    because of the Dodd-Frank regulations. I think that forces a
    lot of our small businesses to go to the SBA, which is a
    government program and policy causing a problem and then using
    another government solution to help fix it. Is this a correct
    observation? Do I have that right? For anybody who would like
    to answer.
        Mr. WILKINSON. Our program has grown dramatically over the
    last few years and I do not know that we could singularly say
    that it was because of Dodd-Frank. I think there are a lot of
    things. The economy is improving. There are more entrepreneurs
    looking to borrow today. Our loan volume, our growth is up
    year-to-date about 7 to 8 percent over last year. Are there
    provisions of Dodd-Frank that are pushing lenders to shrink
    their conventional credit box and expand their SBA box? I would
    say the answer is probably yes. To what extent I could not
    quantify that.
        Mr. BACON. Okay.
        Mr. ASHBY. At Surrey Bank, we do not think there is as
    large a business opportunity in lending to individuals for
    personal needs as there are in small business lending because
    these regulations are very complex and the risk of running
    afoul of those regulations is significant.
        Mr. BACON. One more question. I think each of you touch on
    it just a little bit, but I would love to have clarity
    together. If you could say or tell us one thing you would like
    us to help improve with the SBA and the 7(a) process what would
    it be?
        Ms. BLANKENSHIP. I would like to see us be able to
    refinance an existing SBA loan on our books. We probably lose
    three to four loans a year because the rules will not allow us
    to take out another SBA loan, and it becomes particularly
    cumbersome when it has been sold into the secondary market. But
    as a result, we end up losing not only the customer but the
    deposits, so the deposits go out of our community bank. That is
    deposit dollars that could have been leveraged into other loans
    and expansion into the community. And that is really a key
    obstacle for us right now. So we would like to see that
    refinance rule revisited.
        Mr. BACON. Thank you. Great input.
        Ms. McDonald?
        Ms. MCDONALD. As I mentioned earlier, it would be great to
    have any unwritten rules or best practices published so that we
    do not find out after the fact. It would save us a lot of time.
    It would save the SBA a lot of time.
        Mr. BACON. I think everybody would like that.
        Ms. MCDONALD. Yes.
        Mr. BACON. Any job they are in.
        Mr. Wilkinson?
        Mr. WILKINSON. Well, mine is more at a programmatic level.
    Over the last few years we have bumped into our authorization
    cap repeatedly, and we had proposed--last year it was included
    in--the budget request for the current year has been improved
    by OMB and actually was introduced in the Senate as potential
    language to give the administrator of the SBA the opportunity
    to increase our authorized cap with notice to the
    Appropriations Committees by a certain percentage, 10, 15
    percent. So, for instance, this year, she could raise it
    another $3 billion, or up to $3 billion with notification to
    the Appropriations Committee so long as the program is
    operating at a zero credit subsidy.
        So no appropriations are needed. It would give us that
    flexibility so we are not worrying about did we guess exactly
    right on the amount of loan volume we are going to see 18
    months down the road, because that is a hard task to do. And
    with that kind of flexibility in the authorization cap, it
    would make my life a lot easier.
        Mr. BACON. Thank you. And with about the 40 seconds
    remaining, Mr. Ashby?
        Mr. ASHBY. We are a portfolio lender. We are a small bank
    and so I am kind of a small bank advocate. But I think one of
    the things that changed this past year was the inability for
    banks to write an SBA loan if it would get over their loans to
    one borrower limitation. And in a lot of these small
    communities that may have $100 million in assets and say $8
    million in capital, that does not give you a very large loan
    limit that you can make to some of these customers in your
    market that may actually need that loan. So I think for
    portfolio lenders it would be great if there could be a carve-
    out for certain sized banks.
        Mr. BACON. Okay. Thank you very much. I appreciate your
    recommendations, and I yield back.
        Chairman KELLY. If it is okay with the panel, I think we
    are going to do another round of questions. Ms. Adams and I
    have both agreed. Is that okay with you guys? And so I will
    recognize myself for 5 minutes.
        My first question is, and we kind of talked around this,
    but is the Credit Elsewhere Test, is it strong enough? And I
    would just like to hear your comments on that.
        Mr. Wilkinson, I guess we will start with you.
        Mr. WILKINSON. Well, I think it is. Clearly, it is raising
    a lot of questions here on the Hill as to whether it is or not.
    But I think from the lender's side we understand that we have
    to document in the file why that borrower cannot get
    conventional financing. And could we put some other language
    and statute to make that even more clear? That is a possibility
    and we would be happy to help draft some language with that,
    but it is pretty clear in our books. We treat what SBA means by
    credit elsewhere and the things that are detailed out in the
    SOP on how you document that.
        Chairman KELLY. So you feel like it is strong enough and it
    is clear enough that you understand it and it is the right test
    right now, is that correct?
        Mr. WILKINSON. I understand it, and I think our members
    understand it.
        Chairman KELLY. Ms. Blankenship?
        Ms. BLANKENSHIP. I think it works for us right now. If you
    look back at our historical volumes, they did not increase or
    decrease because of this test. And remember, when you are a
    small community bank, you have a fiduciary responsibility to
    your customer. I mean, we go to church and schools. Our kids go
    to school together. We cannot take advantage of our customer.
    So it is our job to put that customer in the right finance tool
    to get them their credit availability. Our reputation and
    integrity is riding on this as well.
        Chairman KELLY. Mr. Ashby, do you agree?
        Mr. ASHBY. I agree. When you look at our percentage of
    loans that we have with a SBA guarantee that are business-
    related purposes, it is 19 percent. And so when you just look
    at the broad category of business opportunities in our area
    that is not as vibrant as others, that is a very believable
    percentage.
        Chairman KELLY. And Ms. McDonald?
        Ms. MCDONALD. I think everybody has said it really well. We
    have a fiduciary duty to do the right thing. Everybody here
    agrees with that. We have to be able to note in the loan file
    or document the reasons why we went with an SBA loan, if we
    were ever audited, we can confidently give the information.
        Chairman KELLY. Thank you. And I still start with you
    again, Ms. McDonald, since I left you the last, my second
    question is does the SBA have the correct tools in place to
    provide oversight?
        Ms. MCDONALD. I think so. We have a very good relationship
    with the SBA. We are constantly talking to them about ways to
    improve the process. I would say yes.
        Chairman KELLY. Mr. Ashby?
        Mr. ASHBY. Well, SBA has had explosive growth over the last
    few years. You know, I think they are doing a good job. Mr.
    Wilkinson spoke to the PARRIS SCORE. And I do not know if those
    are confidential reports sent out quarterly to the banks that
    are participating in the programs, but they cover a lot of
    important things: your performance, your asset management and
    regulatory compliance risk management, and any special items
    and risk factors that the SBA sees out there. So I think it is
    well done.
        Chairman KELLY. And either one of you two are welcome to
    comment.
        Ms. BLANKENSHIP. Well, just as a preferred lender, you
    know, we have to have integrity in our portfolio and meet
    certain standards and not go over loss ratios. So I think that
    the oversight is working for us now. With the growth in the
    program you may need to enhance the resources at SBA, but for
    players like us, I think we are not feeling lack of oversight.
        Mr. WILKINSON. I think it is a critical part of our
    business. We have a conference call every other week with the
    Office of Credit Risk Management to talk about issues that are
    out there. We stay very focused on oversight. Do they have
    enough tools and resources? We would like to see them. You
    know, they had approved prior to the hiring freeze six full-
    time equivalents to come on to be the lead auditors. Right now
    they hire contractors to do those. Hopefully, when the hiring
    freeze is lifted, SBA can hire their own staff that is
    dedicated specifically for doing those reviews.
        We hear from our members that a lot of times they are
    training the consultants on what they ought to be examining
    that lender for, which does not seem to work well at all. So we
    are hopeful that they will be able to get that done.
        We know that the Office of Credit Risk Management is
    supposed to get a certain allocation of resources every year.
    We would like to make sure that the Office of Credit Risk
    Management is actually getting those resources to make sure
    that they do have the tools necessary to stay on top of our
    growth.
        Chairman KELLY. And I yield back. And now I recognize Ms.
    Adams.
        Ms. ADAMS. Thank you, Mr. Chairman.
        Ms. McDonald, credit unions are a vital part of our
    Nation's lending to small businesses and share the same
    mission, people helping people. How can Congress make it easier
    for credit unions to participate in SBA loans, SBA programs?
        Ms. MCDONALD. Well, I think we have to look at raising the
    member business cap. At Randolph Brooks, we are 6-1/2 percent
    loaned out, so we are not near the cap, but there are a lot of
    small credit unions out there who cannot get into SBA lending
    because as soon as they put in the resources and spend the
    money and spend the time, they get a couple of loans and then
    they would have to shut down their program.
        Ms. ADAMS. Okay. Encouraging more credit unions to
    participate in SBA programs is critical to serving many
    businesses in underserved markets. So what impact will
    increased credit union participation mean to small firms?
        Ms. MCDONALD. Well, it gives people the opportunity--it
    gives credit unions the opportunity to serve their members. I
    mean, that is why Randolph Brooks got into member business
    lending. Our members were asking for this type of loan. And so
    the more players that are out there able to offer these loans,
    the more you are going to have them in the communities that we
    serve.
        Ms. ADAMS. Let me ask. Do you all recruit members? You say
    your members are asking. I am just curious.
        Ms. MCDONALD. So we have membership, and we serve them for
    their personal loans, their auto loans, their mortgage loans,
    and some of those same members, because they trust us, have
    come to us and say, you know, we would like to have our
    business needs served by you.
        Ms. ADAMS. Okay. Do you do any special outreach or it is
    kind of word of mouth?
        Ms. MCDONALD. Not particularly for business loans. We do
    outreach for members in general and then they come to us for
    their business needs.
        Ms. ADAMS. Okay. Thank you.
        Ms. Blankenship, in your written testimony, you note the
    increase in authorization for the 7(a) program that was
    required in July 2015. Could you please elaborate on the
    importance of stable funding and the proposal for a 2-year
    funding commitment?
        Ms. BLANKENSHIP. Our loans go a loan committee and we
    approve those loans in, let's just say it is 30 or 60 days in
    advance of closing the SBA loan. So at any given time we have
    approved loans that have not closed. And as Mr. Wilkinson said,
    sometimes those loans fall out. For whatever reason, they end
    up not closing. But we have this listing of loans that our loan
    committee has approved and we have told the customer was
    approved, but then in order to get it fully funded, we have to
    get the authorization from SBA. And so you are always fighting.
    We are trying to project, too, into the future, how much
    funding will be available based on the total market demand. And
    it is continually and annually a challenge that is I think
    particularly a challenge for smaller community banks and other
    SBA participant lenders. And if we could go to a 2-year
    funding, that would give us--the regulators like to see us plan
    and do our risk assessments annually, and it would just help us
    with our funds management, our liquidity, and our funding
    needs.
        Ms. ADAMS. Okay. Thank you very much.
        Mr. Wilkinson, what efforts have the National Association
    of Government Guaranteed Lenders made to expand the universe of
    small business lending to traditionally underserved markets?
        Mr. WILKINSON. Thank you for that question. We have been
    working diligently with the SBA on what we call our smart
    business toolkit. It is a program that we put together to help
    small businesses understand how to get credit ready, and we
    have paid for the underwriting of that course and have given it
    to SBA. We have had it translated into Spanish. We have been
    working with the Urban League to get that program out into
    their membership as well. We have had veteran outreach
    programs. We take lending to underserved markets very seriously
    and I think it is showing in that the numbers across the board
    are up in many of the underserved areas.
        Ms. ADAMS. Okay, great. Thank you very much, Mr. Chair. I
    yield back. My time is up.
        Chairman KELLY. I thank the ranking member and gentlelady
    lady from North Carolina again. Thank you for today.
        Thank you, witnesses, for being here today and sharing your
    thoughts and views. I believe it is important to hear directly
    from lenders participating in the program. Your role is
    extremely important to our hardworking small businesses that
    are striving every day to create themselves and to grow, to
    expand and create jobs for others in my district and the
    ranking member's district and in districts all across this
    great Nation. It is vital that the 7(a) Loan Program operate in
    an efficient manner and on behalf of all our small businesses
    and the American taxpayer. We will use this conversation from
    today as we continue to review and examine SBA's loan programs.
        I ask unanimous consent that the members have 5 legislative
    days to submit statements and supporting materials for the
    record.
        Without objection, so ordered.
        This hearing is adjourned.
        [Whereupon, at 12:04 a.m., the Subcommittee was adjourned.]

                                A P P E N D I X

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        Mr. Chairman, Ranking Member Alma Adams, and members of the
    Committee--my name is Tony Wilkinson and I am President and
    Chief Executive Officer of the National Association of
    Government Guaranteed Lenders (NAGGL), a national trade
    association of approximately 800 banks, credit unions, and non-
    depository lenders who participate in the Small Business
    Administration's 7(a) loan guarantee program.

        The American entrepreneurial spirit is stronger than ever.
    Unfortunately, there is a very real gap in conventional bank
    lending in this country and even the most qualified business
    owners often struggle to secure financing that meets their
    business needs. A small business seeking capital is often
    offered loans with terms of 90-days to 3 years when they really
    need much longer term financing to thrive. The needs of this
    country's small businesses have always been a depository
    mismatch for banks that simply cannot, or may be reluctant to,
    tie up their capital in long-term loans for borrowers,
    especially in the wake of the Recession.

        At the heart of the SBA's success is the 7(a) loan program,
    the agency's largest public-private partnership with close to
    2,000 active participating private-sector financial
    institutions. These lenders make private-sector loans to small
    business borrowers who are creditworthy and healthy, but that
    fall through the very wide and well-known lending gap that
    American small businesses face. Instead of 90-day to 3-year
    term loans, the 7(a) loan program loan has an average term of
    16 years--in other words, the kind of long-term financing that
    small businesses need to grow and thrive, but that generally
    cannot be found in the conventional market.

        In Fiscal Year 2016, financial institutions large and small
    provided a little over $22.9 billion in loans to about 64,000
    small businesses nationwide through the 7(a) loan program.
    Unlike other federal programs that pass the cost on to the
    taxpayer, the 7(a) loan program is completely self-funded by
    the fees collected from lenders and borrowers. In fact, the
    7(a) loan program has returned more than $1.55 billion--that's
    with a ``b''--to the Treasury since Fiscal Year 2010. In other
    words, the 7(a) loan program is currently a revenue stream for
    the federal government.

        Numbers don't lie. About 500,000 jobs are estimated to be
    created or retained annually thanks to the 7(a) loan program.
    In addition, there are other benefits that are often hard to
    measure, like increased tax revenue governments, and community
    growth driven by small business expansion in small towns across
    the country.

        SBA 7(a) lending is a rare program where the federal agency
    has figured out how to get out of its own way and leverage
    private-sector expertise: lenders know how to make loans. SBA
    does not pick ``winners and losers'' because SBA does not make
    the loans and its 7(a) loan program is open to any eligible,
    creditworthy small business borrower. The 7(a) program does not
    supplant the lending market; it supplements it. SBA
    conditionally guarantees a percentage of the loan, leaving a
    healthy level of risk on the lenders as incentive to serve as
    prudent stewards of the program.

        I must stress this point because it is critical to
    understanding the lender's `skin in the game': SBA's guarantee
    is a contingent guarantee, which means that if a lender fails
    to fully follow 7(a) program requirements and meet its
    responsibilities, the SBA can--and does--reduce the amount of
    the guarantee payment to lenders. In the most egregious cases
    of imprudent lending, the SBA completely denies its liability
    under the guarantee. Therefore, the very nature of the
    guarantee relationship serves to assure that lenders comply
    with the various SBA regulations while engaging in quality
    lending. The guarantee program is a sharing of risk and not a
    complete transfer of risk. Beyond responsibilities to the SBA
    and the taxpayer, as responsible stewards of the program,
    lenders have an ongoing responsibility to their federal and
    state regulators, their internal regulatory oversight groups,
    and even their shareholders to ensure that safe and sound
    lending practices are maintained. In part, this `skin in the
    game' is what makes the private sector such ideal partners in
    the 7(a) loan program.

        NAGGL is pleased to testify in front of the Subcommittee on
    Investigations, Oversight, and Regulations because we recognize
    the benefit of quality lender oversight and strongly support
    the continuing implementation of SBA's oversight program. Since
    the introduction of federal credit reform, our member
    institutions have witnessed the impact that portfolio
    performance has on subsidy rates and program fees. And, just as
    important as maintaining healthy portfolio performance, proper
    lender oversight is needed to protect the main purpose of the
    7(a) loan program--its public policy mission to serve those
    small business borrowers in the community who cannot otherwise
    receive credit elsewhere on reasonable terms and conditions. An
    appropriate oversight approach must also include consideration
    of how well the public policy goals of the program are being
    met. In other words, effective oversight ensures that
    Congressional intent is met.

        As Members of the House Small Business Committee, and of
    the Congress as a whole, the maintenance of the SBA programs
    and the responsibility to oversee the agency starts and stops
    with you. As the 7(a) lending industry, we strongly join you in
    calling on both SBA lending partners and the SBA itself to
    continue their efforts to maintain the integrity of the
    program. Our joint goal is for the 7(a) loan program to stand
    the test of time in order to serve many more thousands of small
    businesses across the country. And, NAGGL members fully
    understand that it is in their individual and collective best
    interests that SBA continue to engage in a sustained, effective
    lender oversight program to meet that goal.

        History shows that the lending community is aware of the
    need to work with the SBA to police itself. For example, it was
    the 7(a) industry that raised concerns about the SBA's
    implementation and management of the now discontinued LowDoc
    Program soon after it was introduced. Why? There were no
    written policies for quite some time after the LowDoc pilot
    program was implemented. Similarly, in the 1990s, it was NAGGL
    that raised concerns to SBA and Congress about the practices of
    the industry's then largest lender. Also, in 2007, I testified
    before the Senate Small Business Committee to advocate for
    continued onsite reviews of 7(a) lenders, insisting that
    offsite reviews alone would not be enough to capture
    potentially risky behavior. I could go on, but the evidence is
    clear: lenders and the industry do care about the integrity of
    the 7(a) loan program.

        At the same time, it is also important that the lender
    oversight pendulum does not swing too far in the opposite
    direction resulting in lenders and borrowers finding the
    program unattractive, or resulting in duplication of existing
    oversight activities from other regulatory agencies (as well as
    a duplication of the costs already associated with those
    activities). It is an established fact that the bank and credit
    union industries already have substantial lender oversight from
    the Office of the Comptroller of the Currency (OCC), the
    Federal Deposit Insurance Corporation (FDIC), the National
    Credit Union Administration (NCUA), the Federal Reserve Board
    (FRB), and various state banking regulators. NAGGL has always
    believed that SBA should be required to demonstrate that it is
    adding value to current federal and state oversight efforts,
    not merely duplicating existing efforts.

        So, what is a current snapshot of SBA oversight? The SBA
    Office of Credit Risk Management (OCRM) is working overtime at
    smart, effective oversight of a fast-growing program.

        One notable improvement is OCRM's coordination with other
    federal bank regulators. In 2007, when testifying in the
    Senate, I advocated for SBA to partner with the federal and
    state banking regulators on procedures and lenders of interest
    to ensure that the safety and soundness testing of SBA
    portfolios was being conducted in a way that was consistent
    with the requirements imposed on participating lending partners
    by their regulators. I said then:

              ``We recognize that an inter-regulatory agency
            partnership will require the commitment and cooperation
            of several agencies; however, we believe that this type
            of arrangement is necessary to provide the most cost
            effective and meaningful determination of risk. We
            would hope that the SBA is willing to pursue this
            avenue prior to arbitrarily requiring that
            participating lenders bear the cost of additional
            regulatory examination.''

        In the final months of 2016, nearly ten years after that
    testimony, SBA entered a Memorandum of Understanding (MOU) with
    the FDIC to coordinate information sharing on mutual `lenders
    of interest'. NAGGL continues to encourage SBA to negotiate
    similar MOUs with the OCC and the Federal Reserve Board. This
    kind of coordination reduces duplication of federal efforts and
    is critical to an SBA oversight process capable of keeping up
    with lending program growth.

        It is important to note that just a decade ago, the SBA's
    oversight efforts only applied to the largest lenders, even
    though its own statistics showed lenders with portfolios under
    $1 million still pose a significant risk to the 7(a) loan
    program. And it was only recently, in December 2014, that the
    SBA created and implemented the PARRiS review system, a risk-
    basked review protocol that oversees all 7(a) lenders and takes
    into account qualitative and quantitative performance data.
    PARRiS stands for ``Portfolio Performance,'' ``Asset
    Management,'' ``Regulatory Compliance,'' ``Risk Management,''
    and ``Special Items.'' The PARRiS methodology is meant to
    better identify a lender's specific risk areas, assess the
    level of risk a lender poses to SBA, and to make
    recommendations for corrective action. Lenders are scored ``1''
    through ``5'' as part of a data-driven lender-profile
    assessment. Lenders are also subject to multiple levels of
    scrutiny and reviews, from analytical and virtual to full
    onsite reviews.

        By most regulatory practice standards, having been
    implemented just two years ago, the PARRiS system is in its
    infancy. We encourage you, as authorizers, to allow the PARRiS
    system to continuing to develop ever greater sophistication and
    to support SBA's ongoing improvement efforts. For instance,
    this past January and after nearly two years of advocacy on the
    issue, NAGGL successfully shepherded through a policy change in
    PARRiS that establishes a lender mission rating in the
    methodology used to risk rate lenders. Prior to this change,
    PARRiS' lender risk rating did not account for traditionally
    lower performance of loans to underserved markets, yet lenders
    were simultaneously strongly encouraged to focus on underserved
    markets. Now, with this policy change to PARRiS a reality,
    lenders are given ``credit'' if they meet certain benchmarks in
    lending to an underserved market (small loans, loans to rural
    communities, minority-, women-, and veteran-owned businesses,
    startups and export businesses)--in other words, the oversight
    review process will no longer be at odds with the public policy
    mission of SBA lending.

        But these are only pieces of an effective lender oversight
    puzzle. Authorizers, appropriators, and the SBA must commit to
    an open flow of communication regarding what is needed to get
    the job done. For example, does OCRM have adequate resources to
    conduct the full range of their oversight activities? Is there
    enough OCRM staff? These questions are especially relevant as
    we see continued increased demand for the SBA programs from
    small business borrowers.

        Since Fiscal Year (FY) 2014, the authorization cap has
    increased by 51% (Note: while the program operates at zero
    subsidy, it relies on an authorization cap set by the
    Committees on Appropriations in close conjunction when the
    authorizers every FY). The net dollars in loans that were
    disbursed from participating banks to small business borrowers,
    the amount of lending increased by about 28%. This growth is a
    result of a confluence of factors, but most pertinent to this
    conversation is that as a gap financing program lending where
    borrowers cannot find capital conventionally, we should be
    growing at a time when conventional lending to small businesses
    plummeted post-Recession and has yet to reach pre-Recession
    levels. The very fact that volume increased at a time when
    conventional lending receded from the market clearly
    demonstrates that the 7(a) loan program is indeed doing its job
    as a gap financing program.

        No one could predict how many small business borrowers
    would turn to the 7(a) loan program in the wake of the
    Recession, nor how many lenders would see the SBA as an avenue
    for being able to help small business borrowers that they were
    otherwise turning away. While the gap in access to capital has
    always existed for small business borrowers, the climate post-
    Recession exacerbated this gap.

        With the leadership and action of the House Small Business
    Committee, the Senate Small Business Committee, the House and
    Senate Committee on Appropriations, and House and Senate
    Leadership, the 7(a) program has continued to serve small
    business borrowers despite the fact that borrower demand
    reached the program's authorization cap prior to the end of the
    fiscal year in both FY 2014 and FY 2015. In both of those
    fiscal years, the House and Senate were able to pass language
    that allowed for the program to be reinstated and avoid a mid-
    fiscal year shutdown. Allow me to take a moment to thank you
    all for your continued support of the program.

        7(a) volume is a sign of great success for the program.
    This period of growth is also the perfect time to ensure
    oversight is run appropriately as our potential balance sheet
    has more than doubled in size over approximately two-and-a-half
    years. As a trade association, NAGGL believes it is perfectly
    reasonable to ask questions about whether the oversight
    capabilities of SBA have grown commensurate with the increased
    volume of the lending program.

        NAGGL and SBA lenders are incredibly proud of who we serve
    and the role we play in each of your individual districts. Over
    the past several years, lending to nearly every underserved
    market--from veterans, rural communities, urban areas, women,
    Hispanics, and African Americans, to name a few--has increased.
    While we can always do more to improve access to capital to
    these markets, we are confident that the 7(a) lending industry
    is fulfilling the intent of Congress to serve the country's
    small businesses. Put simply, the issues that 7(a) loans solve
    are the issues that every Main Street across the country
    struggle with, and which every legislator, whether Republican
    or Democrat, wants to desperately find an answer to over the
    next four years--jobs, community rejuvenation, and opportunity.

        Chairman Kelly and Ranking Member Adams--I would be pleased
    to answer any questions.

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                                  Testimony of

                              Edward C. Ashby, III

                                On behalf of the

                          American Bankers Association

                                   before the

           Subcommittee on Investigations, Oversight and Regulations

                                     of the

                          Committee on Small Business

                     United States House of Representatives

                                 March 9, 2017

        Chairman Kelly, Ranking Member Adams, and members of the
    Subcommittee, I am Ted Ashby, President and CEO of Surrey Bank
    & Trust, Surrey Bank is a community bank headquartered in Mt.
    Airy, North Carolina with $278 million in total assets. I
    appreciate the opportunity to present the views of the American
    Bankers Association (ABA) on the state of the Small Business
    Administration's (SBA) 7(a) Loan Program and the importance of
    this program to my community and banks like mine, The ABA is
    the voice of the nation's $16 trillion banking industry, which
    is composed of small, mid-size, regional and large banks that
    together employ more than 2 million people, safeguard $12
    trillion in deposits and extend more than $9 trillion in loans.

        Our bank was chartered in 1996 with a focus on business
    lending. At my bank, as is true of my banker colleagues around
    the country, we are intensely focused on building and
    maintaining long-term relationships with our customers. We view
    our customers not as numbers but as individuals and business
    owners. The success of Surrey Bank is inextricably linked to
    the success of the communities we serve. They are, after all,
    our friends and neighbors.

        Small businesses are an engine of growth and job creation
    for the U.S. economy. In order for small businesses to grow,
    they require safe and reliable funding. Community banks in
    particularly focus intensely on small business lending.
    According to the FDIC, community banks increased small loans to
    businesses (defined as less than $1 million) at more than twice
    the rate of non-community banks in 2016 and account for 43
    percent of all small loans to businesses.

        The SBA programs are an important part of business lending
    for many banks. It helps fill a critical gap, particularly for
    early stage businesses that need access to longer-term loans.
    The guarantee helps reduce the risk and capital required for
    banks and facilitates loans that might never have been made
    without this important level of support.

        In 1999, Surrey Bank began using SBA and other government
    sponsored credit enhancement programs as a tool in its strategy
    of helping local companies meet their credit needs. As a
    portfolio lender, this allowed our bank to attract a wider
    range of customers and improve the financial condition of the
    bank. SBA granted Surrey Bank its Preferred Lender Status in
    2003 after determining the bank had sufficient experience and
    resources to properly administer the program. Since that time,
    the bank has actively participated in the SBA 7(a) Loan Program
    and has earned ``Community Bank of the Year'' award in North
    Carolina twelve of the past fourteen years.

        Participation in the SBA 7(a) Loan Program is an integral
    part of our business model as a commercial bank. The bank has
    $212 million in outstanding loans, of which about 67% (or $142
    million) is for business related purposes. Currently, the bank
    has $34.7 million in SBA loans of which $26.5 million is
    guaranteed by SBA. Thus, a total of 18.7% of our business
    related loans and 12.5% of all loans have SBA guaranties.

        The success of the SBA 7(a) Loan Program for my community
    and Surrey Bank is evident by the 174 active loans with an
    average loan size is $199,366. As an example, the bank extended
    credit to a pre-cast concrete company that opened in 2007.
    Economic activity was far below expectations and the borrower
    experienced difficulty generating working capital to invest in
    new work orders. The bank used SBA's Cap Lines Contracts Loan
    Program to fund the individual orders. This company now
    generates sufficient cash flow to funds its operations without
    SBA or bank assistance. Also, the bank extended credit to a
    start-up operation engaged in traffic and safety control for
    highway and bridge construction. The company started in 2004
    with four employees and two trucks. Since inception, the bank
    has extended them 23 SBA loans over 12 years to fund expansion.
    The company now has annual revenue over $12,000,000, a fleet of
    over one-hundred vehicles and 90 employees. Our success is
    replicated over and over across communities in this country.
    This is why ABA supports the Small Business Committee's effort
    to build on the positive aspects of the Program and consider
    improvements that would benefit the business community.

        In my comments below, I will outline some of the positive
    aspects of the program and provide some suggestions for
    improvements to make the program even more effective.

        Positive Aspects of SBA 7(a) Loan Program

        Let me begin by complimenting the staff in the SBA's North
    Carolina District Office. Our bank has received a high level of
    support and encouragement from District Director Lynn Douthette
    and her staff. The professionalism and dedication to help small
    businesses and banks is part of the equation of success of the
    SBA programs. In addition, the complementary local programs,
    particularly the free counseling through SCORE (Service
    Organization of Retired Executives) has proven very helpful in
    mentoring business clients.

        Here are some key features of the SBA Program that are very
    positive:

              > The Express Loan Program is very effective. It
            reduces the level of paperwork, utilizes the internal
            loan policies of the originating bank and reduces the
            cost of the transaction to the small business customer.

              > Loans to start-up businesses require a business
            plan as part of the approval process. This requirement
            has proven very useful in helping the owner to consider
            various facets of the business that are essential to
            achieve profitability and grow the company.

              > The program allows the use of projections in start-
            up businesses to underwrite cash flow to support the
            credit request. Under conventional financing, banks
            would normally require an abundance of collateral or a
            guarantor with a high level of liquidity to grant
            credit.

              > The credit score generated by the SBA software to
            determine eligibility is very helpful in providing fast
            response times to prospective borrowers.

              > The program provides for extended loan
            amortizations on secured loans at a higher percentage
            of the useful life of the collateral. This improves the
            borrower's cash flow.

              > The advance rates on secured loans are higher than
            general loan policy. This reduces the amount of working
            capital a small business needs to invest into the fixed
            assets of the business.

              > The program provides for a long-term commitment
            without the time, expense and uncertainty associated
            with of balloon payments typically used in conventional
            financing.

              > Loans can be underwritten based on cash flow
            without relying on collateral coverage or book equity
            in the business as a condition for credit.

              > The use of ``Delegated Authority'' for Preferred
            Lenders allows the bank to modify loans. This provides
            the borrower an opportunity to work through short term
            cash flow issues and or reschedule debt payments
            without being forced into liquidation.

              > Veterans enjoy reduced fees on loans between
            $150,000 and $700,000.

        Opportunities for Improving the SBA 7(a) Loan Program

        Below are some examples of how the program can be improved,
    primarily relating to the servicing of SBA loans:

              > SBA loans cannot be consolidated or refinanced by
            the same lender. In instances where the borrower is
            experiencing rapid growth, the bank is required to make
            multiple loans on the same collateral. Frequently,
            loans are cross collateralized, which make extending
            additional loans more complex. Servicing and
            administration of the loans is difficult for the
            borrower and the bank.

              > SBA guidelines no longer allow a bank to obtain a
            guaranty to avoid regulatory loans-to-one-borrower
            limitations. This is a disadvantage to small banks that
            are portfolio lenders attempting to meet the credit
            needs of customers in their market. A carve-out for
            banks that are under $1 billion in assets engaged in
            portfolio lending should be considered.

              > The use of subcontractors in the liquidation
            process at times resulted in confusion over the correct
            version of the Standard Operating Procedures (SOP) used
            to determine eligibility for repurchase. This caused
            delays in the liquidation process. We suggest sub-
            contractors receive additional training on identifying
            the appropriate SOP in affect when the loan was
            originated.

              > A loan is liquidated based on the type of loan
            program. When a borrower has multiple loans,
            liquidation can involve multiple service centers in
            different states. This creates a duplication of work
            for the bank. More importantly, borrowers have a
            difficult time making an ``Offer in Compromise'' until
            all claims are processed.

              > The SBA One platform is not fully operational,
            which results in duplication of work to produce the
            forms required to properly close the loan.

        Conclusion

        The health of the banking industry and the economic
    strength of the nation's communities are closely interwoven. We
    strongly believe that our communities cannot reach their full
    potential without the local presence of a bank--a bank that
    understands the financial and credit needs of its citizens,
    businesses, and government. The SBA 7(a) Loan Program is a
    success and should be vigorously supported in the future. It
    has encouraged economic growth in our community and allowed
    Surrey Bank to meet the credit needs of many small businesses.
    The positives of the program are many and the areas of
    improvement are primarily related to servicing aspects of the
    program.

        Before closing, I want to express the concern shared by
    many of my banking colleagues that the community banking model
    we know today will collapse under the massive weight of rules
    and regulations. Lack of earning potential, regulatory fatigue,
    lack of access to capital, limited resources to compete,
    inability to enhance shareholder value and return on
    investment, all push community banks to sell. The Dodd-Frank
    Act has driven all of these in the wrong direction and is
    leading to consolidations with very real consequences for local
    communities.

        Last year 251 banks disappeared; since Dodd-Frank was
    enacted, nearly 2,000 banks have merged or closed their doors.
    For community banks, it goes beyond just our parochial
    interests. We are very much a part of our community. It is why
    every bank in this country volunteers time and resources to
    make their communities better. If the relentless pressures on
    our small banks are not relieved, the loss will be felt far
    beyond the impact on any bank and its employees. It will mean
    something significant has been lost in the community once
    served by that bank. This is why it is imperative that the
    Administration and Congress take steps to ensure and enhance
    the banking industry's capacity to serve their customers,
    thereby facilitating job creation and economic growth.

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