[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
A REVIEW OF SBA'S 504/CDC LOAN PROGRAM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JUNE 29, 2017
__________
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-027
Available via the GPO Website: www.fdsys.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
26-019 PDF WASHINGTON : 2017
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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
RALPH NORMAN, South Carolina
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, Majority Staff Director
Jan Oliver, Majority Deputy Staff Director and Chief Counsel
Adam Minehardt, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Dave Brat................................................... 1
Hon. Dwight Evans................................................ 2
WITNESSES
Ms. Natasha Merz, Vice President, Langley Federal Credit Union,
Newport News, VA, testifying on behalf of the National
Association of Federally-Insured Credit Unions................. 3
Mr. Wayne Williams, Senior Vice President, Business Finance
Group, Fairfax, VA............................................. 5
Ms. Barbara A. Vohryzek, President and CEO, National Association
of Development Companies (NADCO), Washington, DC............... 6
Mr. Sherwood Robbins, Managing Director, Seedcopa, Exton, PA..... 8
APPENDIX
Prepared Statements:
Ms. Natasha Merz, Vice President, Langley Federal Credit
Union, Newport News, VA, testifying on behalf of the
National Association of Federally-Insured Credit Unions.... 21
Mr. Wayne Williams, Senior Vice President, Business Finance
Group, Fairfax, VA......................................... 30
Ms. Barbara A. Vohryzek, President and CEO, National
Association of Development Companies (NADCO), Washington,
DC......................................................... 35
Mr. Sherwood Robbins, Managing Director, Seedcopa, Exton, PA. 38
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
A REVIEW OF SBA'S 504/CDC LOAN PROGRAM
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THURSDAY, JUNE 29, 2017
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax, and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:01 a.m., in
Room 2360, Rayburn House Office Building, Hon. Dave Brat
[chairman of the Subcommittee] presiding.
Present: Representatives Chabot, Brat, Kelly, Evans,
Murphy, Clarke, and Chu.
Chairman BRAT. Good morning. Thank you all for being with
us today. I call this hearing to order.
While our economy is showing signs of improvement, access
to capital continues to be a major challenge for small
businesses, startups, and entrepreneurs. Although we are
working feverishly to rollback red tape, small businesses face
an uncertain lending environment that is compounded due to
their reliance on traditional bank borrowing to raise capital.
This Committee is striving to create an environment where small
businesses can expand and create jobs.
One program to bridge the funding gap that too often acts
as a roadblock for small business is the SBA's 504/CDC Loan
Program. The 504/CDC Loan Program, which is the topic of
today's hearing, combines a partnership with community
development companies, also known as CDCs. The program is
uniquely structured to offer creditworthy businesses an
opportunity to access capital.
First, to be eligible to participate in the loan program,
the borrower or small business must meet certain job creation
or job retention requirements. However, if these requirements
cannot be achieved, the small business still has the ability to
participate if community development or public policy goals are
met, such as improving, diversifying, or stabilizing the local
economy.
Beyond the economic development requirements, the 504/CDC
Loan Program offers a distinctive finance structure where the
private lender is responsible for 50 percent of the total cost
of the project, the CDC is responsible for 40 percent, and
small business borrower is responsible for 10 percent.
I look forward to hearing more about this program from our
witness panel this morning, what is working, what is not
working, where can there be improvements. As we work to assist
small businesses, it is important to hear from those who have
on-the-ground experience with this program. I appreciate all
the witnesses for being here today. I look forward to your
testimony.
I now yield to Ranking Member Evans for his opening
remarks.
Thank you, Dwight.
Mr. EVANS. Good morning. Thank you, Mr. Chairman.
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.
However, obtaining conventional credit can be particularly
difficult for small businesses, making a Small Business
Administration lending program critical to filling this gap.
As a result of the SBA programs, entrepreneurs are provided
with greater access to capital through the extension of Federal
guarantees on a long-term basis. Namely, the SBA 504 program
helps small businesses obtain long-term financing for major
assets, such as real estate and equipment. It gives them much-
needed access to capital on par with their larger counterparts.
Most importantly, financing under this program is secured
through a unique three-part structure, requiring as little as
10 percent put down by the small business borrower. The rest of
the funds are provided by the banking partner at 50 percent,
and 40 percent by a certified development company, a local
nonprofit corporation.
The 504/CDC program was not only designed to assist small
firms in obtaining necessary capital; it was meant to spur
economic development and create and retain jobs. Since its
inception, the program has supported over 2 million jobs. In
fact, a 2-year study of the program concluded that two-thirds
of the borrowers reported job growth within 2 years of
receiving the loan and averaged nearly 12 million new jobs.
It should also be noted that the 504 program experienced
three consecutive years of growth and grew nearly 7 percent to
over 4.7 billion in the fiscal year 2016. Nevertheless, a few
issues have been presented to the Committee that may point to
ways that the program could operate more effectively.
For example, concerns have been raised about the decline in
loan value since the program's peak, as well as the secondary
mark in the use of 7(a) loans over 504 loans. And while the 504
loans were made through the United States and U.S. territories,
they tend to be concentrated in very specific areas of the
country. For instance, just over a handful of States accounted
for over half of those approved loans. I applaud the great
effort made by the lenders making these loans. Yet I am
disappointed that just over a quarter of 504 loans are not
going to minority firms, and that many lenders remain somewhat
hesitant to approve more than a few of them each year.
I hope to hear from witnesses about finding solutions to
improve the program and reach more underserved population.
Today's hearings provide us with an opportunity to hear
experiences of 504 partners and what can be done better to
facilitate the use of the program. Overall, we are seeking to
ensure that the 504 program works for the CDC's banking
partners, who in turn must make it work for their small
business borrowers.
On that note, I would like to thank our witnesses for
taking time to be here. Their views and experience will be
valuable to this Committee as we best consider entrepreneurs'
capital needs.
I yield back. Thank you, Mr. Chairman.
Chairman BRAT. Thank you Mr. Evans.
If Committee members have an opening statement prepared, I
ask they be submitted for the record.
I would like to take a moment to explain the timing lights
for you all this morning. You will each have 5 minutes to
deliver your testimony. The light will start out as green. When
you have 1 minute remaining, the light will turn yellow.
Finally, at the end of your 5 minutes, it will turn red. I ask
that you try to adhere to that time limit. If you go over a
hair, it is okay.
Start off with introductions. Our first witness is Natasha
Merz. Ms. Merz is the vice president of commercial lending at
Langley Federal Credit Union in Newport News, Virginia. She has
spent years working in the financial industry with both credit
unions and community banks. In 2014, she was named a National
Financial Services Champion of the Year by the Small Business
Administration. Ms. Merz is testifying today on behalf of the
National Association of Federally-Insured Credit Unions, and I
appreciate you being with us here today. Thank you.
STATEMENTS OF NATASHA MERZ, VICE PRESIDENT, LANGLEY FEDERAL
CREDIT UNION; WAYNE WILLIAMS, SENIOR VICE PRESIDENT, BUSINESS
FINANCE GROUP; BARBARA A. VOHRYZEK, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF DEVELOPMENT COMPANIES (NADCO); AND SHERWOOD
ROBBINS, MANAGING DIRECTOR, SEEDCOPA
STATEMENT OF NATASHA MERZ
Ms. MERZ. Good morning, Chairman Brat, Ranking Member
Evans, and members of the Subcommittee. My name is Natasha
Merz, and I am testifying today on behalf of NAFCU. I
appreciate the opportunity to share with you my experience with
the SBA's 504 Loan Program.
The SBA's 504 Loan Program helps lenders provide small
businesses with long-term financing to acquire and improve
major fixed assets such as owner-occupied commercial real
estate and heavy machinery. The program helps businesses by
giving them access to financing backed with as little as 10
percent owner equity. Under the program, a financial
institution partners with the CDC, a specialized SBA-certified
nonprofit corporation, to finance small businesses looking to
expand. Each partner makes a loan to a qualifying small
business. Typically, the lender's loan is secured by a first
lien, covering 50 percent of a project's cost. The CDC's loan
is secured by a second lien for up to 40 percent of the
project's cost. The CDC loan is also backed by 100 percent SBA-
guaranteed debenture. Participating with the CDC helps reduce
risk for the lender.
The SBA's 504 Program has helped us meet some specific
needs for our small business members at Langley. For example,
we were able to help a successful hotel operator who needed to
purchase office space and was declined by a conventional
lender. The borrower came to Langley asking for financing
options. With the help of the 504 Program, the borrower was
able to purchase an office building and lock in a great rate
for 20 years.
There are many more stories like these of small business
owners looking for that loan to enable them to start or grow
their business. At Langley, we are pleased that we have been
able to step up to meet this demand using the 504 Program.
Some of the benefits of the program for borrowers include
low fixed interest rates for long terms and affordable down
payments as low as 10 percent. Additionally, new businesses are
eligible, and the CDC can help make the application and
approval process seamless.
The program also has features that can make it attractive
for lenders. These include: the CDC being responsible for
determining SBA eligibility, meaning the lender does not need
an in-house SBA expert. The lender treats their portion of the
504 as a regular commercial loan, which does not have SBA
reporting requirements. There is a low loan-to-value on the
lenders' loan after debenture funding, and lenders can
participate out their portion of the 504. Additionally, the new
debt refinancing option has created more opportunities for
lenders to offer 504 loans.
While there are a number of benefits of the 504/CDC Program
for lenders and borrowers, there are challenges in areas where
we think it can be improved. These include: Partnering with the
right CDC is critical for the lender as not all CDCs are
consistent in their processes. The 10-year prepayment penalty
makes it less attractive for the borrower. Construction loans
in the 504 Program will not close with the SBA until
construction is completed and the borrower has moved into the
new facility. And lenders should be allowed to collect payments
and remit to the CDC on a monthly basis, as some borrowers
prefer not to make two payments.
Credit unions also have a special challenge with 504 loans
as they have an arbitrary member business lending cap.
Government-guaranteed portions of SBA loans do not count
towards this arbitrary limit. However, a loan issued by a
credit union in a 504 loan is a regular commercial loan that
counts toward it, as it does not have a government guarantee.
Congress should aid credit union SBA 504 lending by exempting
SBA 504 loans made by credit unions from the cap.
In conclusion, the SBA's 504/CDC Program provides much-
needed opportunities to established and fledgling businesses.
Still, there are several relatively simple steps that could
propel the program to its full potential. We would urge
Congress to ensure credit unions can meet the needs of their
small business members.
I thank you for your time and the opportunity to testify
before you here today, and I welcome any questions that you may
have.
Chairman BRAT. Great. Thank you, Ms. Merz.
Our next witness is Wayne Williams. Mr. Williams is a
senior vice president for the Business Finance Group in
Fairfax, Virginia. They also have an office location in
Midlothian, Virginia, which is in my district. Mr. Williams has
spent years working in the banking industry and has been with
Business Finance Group since the late 1990s. He is a former
chapter president of the American Institute of Banking and an
instructor for the Risk Management Association. He was also a
2009 Financial Services Champion award winner. And so thank you
very much for joining us today.
STATEMENT OF WAYNE WILLIAMS
Mr. WILLIAMS. Chairman Brat, Ranking Member Evans, and
other distinguished members of the Committee, good morning, and
thank you for inviting me to testify.
My name is Wayne Williams, and I am here on behalf of
Business Finance Group, a nonprofit certified development
company headquartered in Fairfax, Virginia. Our mission is
helping small businesses succeed, strengthening our
communities, and promoting economic development through job
creation. The 504 Loan Program is vital to that mission.
We are one of 230 CDCs nationwide. And while our markets
may be different and we vary in size, we all share a commitment
to assisting small businesses and promoting economic
development. Our story is their story.
Business Finance Group was originally certified in 1982 as
Fairfax Local Development Company operating in a single
northern Virginia county. In 1994, SBA designated us as the
statewide CDC for Virginia. Regulatory changes in 2003 created
local economic areas and statewide certifications, and we
gradually expanded into Washington, D.C., Maryland, and the
Panhandle counties of West Virginia. We have consistently been
the most active CDC throughout our jurisdictions as our board
and staff continues to earn the respect and trust of SBA, our
lending community, and our small business owners.
Business Finance Group, like the other 230 CDCs nationwide,
has assisted thousands of small business owners to access the
capital they need to expand and create jobs. Since 1982, we
have provided 504 loan approvals to over 2,800 companies,
totaling $1.6 billion. And, in turn, the small businesses in
our loan portfolio have created and retained approximately
42,000 jobs.
In addition to 504, we became an SBA Intermediary Lending
Pilot Program lender in 2013. Small loans for working capital
and equipment are not readily available from traditional
lending sources, but are essential for businesses to grow and
create jobs and promote economic development.
Last month, I celebrated 20 years with Business Finance
Group. During that time, we have grown from 8 to 26 employees.
Many of my coworkers have also been with us a long time. But we
all value that 504 lending not only helps small business
owners, it also strengthens communities, communities like
Midlothian, Virginia, where 504 assisted Adriana and Kent
Lavvorn. Their business, VMEK Sorting Technologies, is a
manufacturer of seed/grain counting machines for
agribusinesses. The company has developed software that allows
those machines to not only sort products based on shape and
color, but machines can also provide analytical data on the
sorted output, something their competitors' machines could not
do.
So their business was exploding, but they had insufficient
production capacity in their small leased space, and the owners
couldn't tie up all their cash in a real estate purchase when
their business was expanding rapidly. With 504's 90 percent
financing, it became a perfect solution. The company purchased
the larger facility, had expansion space, and the owners had
cash preserved for their business growth, and they added four
new jobs.
Or in communities like Alexandria, Virginia, where 504
assisted Karen and Bill Butcher and their company, Port City
Brewing Company. After a dozen banks turned them down in 2009,
we were able to say yes, and they became the first production
brewery to open in the modern era of D.C.-area breweries. And
they have been a leader in the modern-era of D.C.-area
breweries--I am sorry--been a leader in the expanding craft
brewery market throughout the mid-Atlantic and the United
States. Their award-winning brewery is now on tap from New York
to North Carolina, and on the shelf at Wegmans and Safeway.
They now employ 37 people and are in the middle of a major
expansion funded with two new 504 loans, and State and local
grant money, creating 26 additional jobs.
Beyond these specific examples, I will also share that I
have seen 504's ability to help preserve jobs in rural
communities like Tazewell, Virginia, or transform once-
neglected urban corridors like 14th Street Northwest or H
Street Northeast right here in Washington, D.C.
These were our stories, but they reflect an experience of
my colleagues from around the country. The 504 Loan Program
works. It creates jobs. It promotes small business. It promotes
economic development, and it operates at zero subsidy. We take
pride in that, and we accept responsibility to maintain it.
Thank you for inviting me to testify. I am happy to answer
any questions.
Chairman BRAT. Super. Thank you, Mr. Williams.
Our next witness is Barbara Vohryzek. Ms. Vohryzek is
president and chief executive officer for the National
Association of Development Companies, also known as NADCO,
which is the main trade association for Certified Development
Companies. With vast expertise spanning decades, Ms. Vohryzek
was the founder and executive director of the California
Statewide CDC and a founder and director of Community Business
Bank. Thank you very much for joining us today.
STATEMENT OF BARBARA A. VOHRYZEK
Ms. VOHRYZEK. Thank you, Chairman Brat, Ranking Member
Evans, and the other distinguished members of this Committee.
Thank you for asking me to testify. I appreciate it.
My name is Barbara Vohryzek, and I am here on behalf of the
National Association of Development Companies, also known as
NADCO. I represent--our association represents about 95 percent
of those 230 CDCs. As have been mentioned, they are nationwide.
They are largely nonprofit entities. I think we may have two
for-profit, or three, out of the 230, that are grandfathered in
from many years ago.
I understand the work of CDCs because, as was mentioned, I
ran California Statewide for 21 years, founded and ran it. And,
at the time, it was the only statewide when we founded it.
Because, at one time, statewides were developed, originally, to
be safety nets for interurban and rural areas. And that is why
California Statewide was created originally.
CDCs, as was mentioned, are here to support small business
and economic development. There is one CDC covering each
congressional district in the country, creating jobs and
supporting small business owners and other community
development activities. My colleagues here can speak at great
length about what happens every day. But what really unifies us
as an industry is the fact that we provide the 504 Loan
Program.
I am not going to go over the 50-40-10. That was very well
laid out. The number of jobs we have created, again, and the
number of loans, has already been discussed. So I won't cover
that again.
I will cover a couple of things related to that. The SBA,
right now, we have a 10- and a 20-year debenture. The SBA has
green-lighted--they are in the process of rolling out,
hopefully within the next 12 months, a new instrument, a 25-
year fully amortized 504 fixed-rate loan. The industry is very
excited about that. That will enable small business owners to
get lower payments on a monthly basis. And that is definitely
needed by some of our small businesses.
But one of the main benefits of the 504 Program, beyond
that fixed rate, is the fact there is no balloons. It is fully
amortizing. And so it is a product that the business doesn't
need to worry about having to refinance it in 5 or 10 or 15
years. Right now, we are 50-40-10. Our maximum loan is $5.5
million. The average loan is much smaller than that, well under
$1 million.
It was mentioned that our program involves debentures. Just
to make clear what happens there, they are federally guaranteed
debentures. The reason we get low fixed rates--right now it is
around 4.6 percent--to the borrower is because those are
federally guaranteed debentures that are pooled and sold on
Wall Street on a monthly basis. Any given month, we will sell
between $300 and $400 million. And we get great rates. And, of
course, right now, with the yield curve flat, we are getting
incredible rates for our small businesses. We are very pleased
about that. We know that because there are such low fixed rates
right now, that those businesses can grow and create more jobs
quicker, because they have more working capital available to
them.
I did want to mention that while we help many neighborhood
businesses, you know, the local--well, it used to be the local
video store. That is kind of being phased out. But, you know,
the grocer and different things that you find locally--that we
also have been--and I think Wayne mentioned Port City. But
another national brand many of you may have--and I can't tell
you how often the OtterBox was a 504. Otter is a 504 borrower.
And I would not have an intact iPhone that is 4 years old were
it not for this OtterBox. I can't tell you how many times it
has fallen from the StairMaster. But it just keeps on ticking.
Many of you may eat yogurt. Chobani yogurt is a 504
product. As well as if you are into music, South by Southwest
is a 504 product.
So we do 504. We create jobs through that program. But we
are also, as Wayne mentioned, involved in the Intermediary
Lending Program. We also have other programs that our CDCs are
involved in through SBA, like the Intermediary Lending Program,
as well as the Community Advantage program. But they also will
often be engaged with the Small Business Development Centers,
SCORE, other organizations that are devoted to small business
and economic development in their communities.
With that, I will end. And Wayne was precise. I think you
were almost just on 5. I will end slightly early. But I want to
just finalize with a statement about how great the 504 Program
is as a tool for small businesses and also for the communities
in which those small businesses are growing. And thank you,
again, for having me here.
Chairman BRAT. Thanks, Ms. Vohryzek. Very good.
And I will now yield to our ranking member for the
introduction of the final witness.
Mr. EVANS. Thank you, Mr. Chairman.
Good morning. I am pleased to introduce Sherwood Robbins,
managing director of the Southeastern Economic Development
Company of Pennsylvania.
Seedcopa is the leading certified development corporation
in the Commonwealth, approving over 325 loans over the last
decade, and borrowers committed to creating more than 4,600
local jobs. Mr. Robbins is responsible for overseeing
Seedcopa's menu of financing services, managing relationships
and economic development agencies, and banking partners,
expanding the organization's 504 Loan Program.
Prior to joining Seedcopa, Mr. Robbins spent over 20 years
in the banking industry where he served most of those years as
a government loan officer.
Welcome, Mr. Robbins.
STATEMENT OF SHERWOOD ROBBINS, MANAGING DIRECTOR, SEEDCOPA
Mr. ROBBINS. Chairman Brat, Ranking Member Evans,
distinguished members of the Subcommittee, good morning, and
thank you for the opportunity to testify the economic successes
that our CDC has in Pennsylvania and the job creation that we
facilitate through the SBA 504 lending program.
My name is Sherwood Robbins. I am the managing director of
Seedcopa. And we were certified as a Certified Development
Company through the SBA 34 years ago, and we are proud of that
fact. We serve the SBA's Philadelphia district and beyond.
While Seedcopa offers other Federal, State, and local loan
programs, the SBA 504 continues as our flagship.
I joined Seedcopa as a loan officer in 2007, just as the
Great Recession was approaching. In my time, I have witnessed
dozens of examples where small businesses received higher-
leverage funding and the security of a long-term fixed interest
rate. In some instances, these 504 benefits saved the
businesses from collapse. In others, it allowed the small
business to expand and create additional jobs.
In the last 10 years, our dedicated small-business size
staff of seven full-time employees have received 313 504 loan
approvals, which resulted in borrowers committing to over 4,500
jobs over that time period. Over the life of our program, we
have been part of more than 644 loans across the Commonwealth,
and created one full-time job for every $30,150 borrowed that
we have leant. And that far surpasses the SBA's minimum job
requirement, and we are proud of that fact as well.
The 504 is, once again, an even more powerful economic
lending tool through the reauthorization of 504 refinance
provided by Congress in 2015. This program allows the borrower
a financing opportunity to restructure existing conventional
commercial mortgage debt, possibly including up to 18 months'
worth of eligible future business expenses. This access to
capital and comfort, knowing that a portion of their project
will be fixed interest rate for the entire 20-year period, may
be invaluable as those businesses and our economy continue to
grow.
I would like to present two examples of small business
owners who utilized the 504 Program to grow or expand their
businesses.
A self-employed personal trainer in Bryn Mawr,
Pennsylvania, had a vision to take personal training to a
higher level by offering fitness services to large area
employees and co-develop onsite wellness programs. However, he
needed a building to operate and offer expanded services to the
smaller businesses in his market. Although his cash flow was
actually strong, he would struggle to inject the 20 percent
conventional equity into the project and actually still
maintain the capital to grow his business over time. And the
504 loan was a perfect solution for this borrower.
As per program requirements, the borrower was required to
create five new jobs over the next 2-year period. And I am very
happy to report that our borrower actually exceeded his
requirement by 400 percent, creating 21 jobs rather than the
five required, as business growth far exceeded even his
expectation initially.
The second example I would like to give you is a
manufacturer in Northampton County, a county formally known for
its steel industry. This company is a very
traditional manufacturer, rolling, bending, pressing steel,
to make commercial storage, racking, and mezzanine systems.
They employed 104 local persons, and their history actually
goes back to the early 1900s where they originally designed and
manufactured motorcycle parts. And then at some point, they
began manufacturing parts for the Ford Model T chassis. So we
have got a long history on this borrower as well.
The company leased its current location for many years, and
they had the first rights to buy the property. However, again,
injecting that 20 percent traditional equity would nearly
exhaust the company's necessary working capital. If the company
needed to move, the cost of moving that heavy equipment was
going to be drastic, over $1.5 million.
Additionally, if the company moved out of the area, they
had very much concern of those long-term, tenured employees
having their ability to relocate, and they had employment
issues, potentially, as well. The borrower really stated that
without the 504 Program, the company might have folded. With
his loan now approved by the SBA, the borrower is looking
forward to closing on the debenture and locking in their 20-
year fixed interest rate.
In these examples, there are benefits beyond the direct
employment numbers. The employees at these businesses are
earning living wage income. With the prosperity of their
employer and the confidence in this dependable income, their
sense of financial stability increases. That confidence and
their disposable income, in turn, stimulates the local economy.
The true impact of 504 lending goes beyond the job creation
and the number of jobs, out to inferred job creation throughout
the surrounding communities. The overall economic impact of the
504 Program, the SBA's continual willingness and effort to
improve the lending process, and this Subcommittee's support of
504 lending, will continue to have a positive impact on small
businesses, which are the backbone of our economy.
Thank you, once again, for accepting my testimony. I
welcome any questions from the Subcommittee.
Chairman BRAT. Thank you all very much for your testimony
today.
With that, we will go to questions.
And I will just throw out three quick ones. I will read off
the questions first and give you all about 1-1/2 minutes, if
you can squeeze it in there.
Let me ask the questions first, and I will give everyone a
minute to think over their question.
For Mr. Williams, in your testimony, you touched on the
refinancing policy change that recently took place. Can you
talk to us today about this policy change? What has been your
experience with the refinancing program, et cetera?
For Ms. Vohryzek, SBA's 7(a) Loan Program has experienced
rapid growth over the last few years. However, the 504/CDC Loan
Program has fluctuated somewhat. What is behind that pattern?
And then, also, if the project can't meet some of the
requirements discussed, they can still obtain a loan if they
meet a community development or policy goal. On average, how
often does a project fail to meet the job creation or retention
requirements and thus turn to those other policy goals?
And for Ms. Merz, I would like to ask you about the role
lenders play in this lending program. And can you just walk us
through, typically, what happens when a small business comes to
you in search of a loan? Do they usually know about the 504/CDC
Loan Program upfront?
And so, Mr. Williams, if you can start us off. And sorry
for the rapid fire, but----
Mr. WILLIAMS. Thank you, Chairman Brat. Well, as you know,
Congress made the program permanent in December of 2015, and
SBA put forth the regulation changes in June of 2016. We don't
have the final regulations--or the final is not out yet. SBA is
still working on that, and we are expecting it soon.
But the program is working. I think loans are being done,
albeit not at the pace that I think everyone was expecting. And
a lot of that is, I think, because the program is permanent
now, and there is no rush to--on behalf of the lending
community to use it. And I think we are all hoping that that is
going to correct itself.
Chairman BRAT. Thank you.
Mr. WILLIAMS. So I think that--and as we are working with
SBA and I think working through some of the tweaks to the
program and the final rules coming out, I think we will see
some improvement in those numbers.
Chairman BRAT. Great. Great. Thanks, Mr. Williams.
Ms. Vohryzek.
Ms. VOHRYZEK. So I start with the 7(a) question. Okay.
Well, it is a complicated question. And I would say that the
fact that the 504 Program has gone through fluctuations, I
think one of the things we saw, the reason the program is not
as high as it was during that period, somewhere around 2012-13,
is that during that period, we had the temporary refinance
program. And if you took those numbers out, the program would
probably look a little bit more flat.
The 7(a) Program is a program that has a higher cap than it
used to in the old days, which means that, you know, now they
can go up to $5 million. We see that they are doing a little
bit more real estate. It is also a program that involves banks.
And banks, coming out of the recession, were needing to book
loans and they were needing to show profitability. I think
there was a report yesterday about the ability to give
dividends. It was announced where, okay, they get to give
dividends. That is a big deal. And what it is talking about is
the strength of the banking industry.
Part of that strength for many medium and small banks in
the country can be the 7(a) Loan Program and the ability to
book loans under that, long-term loans, and then sell them into
the secondary market. So they don't have to hit a lending cap
within the bank, they can actually lend and then get those
loans off the books, long-term, through the secondary market.
The final aspect to that is because there is this secondary
market in premiums, it does drop it to the bottom line.
So I would say there are dynamics that will drive lenders
to move towards the 7(a) Program and away from the 504. But we
do find in rising interest rates, inevitably, there will be a
movement towards 504 because of the fixed interest rate.
And so we just have had a very long period of low interest
rates. I think that is--it is puzzling everybody at this point,
and globally, frankly, where there are some negative interest
rates. And so at this point, we believe that, over time, we
will see, as rates rise, that there will be more of a movement
into 504. I am trying to stay on the 1-1/2 minute mark.
Chairman BRAT. We can go on another cycle.
Ms. VOHRYZEK. Okay. And then let me go on the second
question. I don't have the data. Because you could have
something that met the jobs and you had a public policy goal.
So I could have a veteran-owned business that also met the
policy goal--or rather, that met the job goal. So that it would
be difficult to kind of carve that out.
Chairman BRAT. Yep.
Ms. VOHRYZEK. However, what I will tell you is, even if a
CDC has to use public policy goals on a number of projects,
they are held to the criteria to maintain their certification
of one job per $65,000. So as they move, if their CDC is moving
towards--I think you said something about one per $30,000. So
he is fine. He is not anywhere close one per $65,000. But in
areas of the country where you may have much higher real estate
prices, or equipment prices, for instance California, you may
start drifting. Because a $1 million building in Oklahoma, if
you go to the Silicon Valley, it could easily be $7 million.
And so you can see the job impact may be identical, but the
real estate cost is significantly different.
And so what we find is in areas of high real estate cost,
we will tend to have the drift towards $150,000, $160,000, and
then in the areas of the country that have less pricey real
estate and equipment, that we will see them lower. But I just
want to make the point that, again, a CDC has to maintain
within their standing 504 portfolio----
Chairman BRAT. Uh-huh.
Ms. VOHRYZEK.--one job per $65,000----
Chairman BRAT. Thank you.
Ms. VOHRYZEK.--period.
Chairman BRAT. Ms. Merz, we will get to you in the second
round.
I am going to defer to my ranking member, Mr. Evans, with
your questions. You can go ahead. I will come back on round
two. Thank you.
Mr. EVANS. Ms. Vohryzek, as you know, women-owned and
minority-owned businesses often face more challenges to access
credit. What steps are the CDCs taking to help with this issue?
Ms. VOHRYZEK. Thank you for that question. The CDCs have--
one of the reasons that the pilot program Community Advantage
was proposed was that CDCs wanted to be able to provide capital
at different areas of the capital access curve. So that the 504
Program tends to keep--to be there for more mature, growing,
larger businesses. That is what we find, in general, in the
program.
The CDCs, in order to meet the needs of more underserved
communities, needed to have the vehicle to do the smaller loans
and to be able to do working capital and startup and things
like that. And the Community Advantage program was designed--
its cap is $250,000. And it was designed as a program that
probably would involve a lot of technical assistance and assist
in moving people up the capital-readiness curve.
That is what its intention is, to take the minority and
women-owned businesses were on that curve and try to bring
them--move them along so that at some point in the future, as
they grow, they would be able to access 504 product, meaning
they would be ready to buy their own building or long-term
equipment, and we would be standing ready to help them.
CDCs also work with the Small Business Development Centers
to reach those communities. They have the Intermediary Lending
Program, ILP. Some of them are IRP, Intermediary--the rural
lending program through rural development, IRP. And so they
look at different products. Ultimately, our goal is to grow
these businesses, over time, women and underserved communities,
in order that they will become 504 eligible and they will be
able to access that financing.
So CDCs look at that continuum of capital readiness and
say, how can we meet these people where they are and then grow
them to the next level, and support them all during that
continuum with either direct technical assistance, or they work
with their partners in SCORE, or Small Business Development
Centers, or women business owned, veteran business assistance
centers, to help them get there.
Mr. EVANS. Thank you.
Mr. Robbins, in your testimony, you mentioned SBA's efforts
to work with CDCs to improve, streamline the 504 lending
process. Do you believe that these efforts are adequate and
that they are listening to your feedback?
Mr. ROBBINS. Thank you for the question. I do. We have
found communication has been really effective, over the last
number of years, where I have been participating at the level
that we are able to talk about ideas. We are able to talk about
questions, really looking for--and I think it is key as we have
the refinance opportunity in front of us so long as we stay on
the zero subsidy. It is making us put a focus on our
documentation, our credit underwriting and overall credit
quality. So I really do. I think we are at a position where we
continue that conversation. We understand that fine balance,
which is oversight and compliance, and the ability to offer
this capital to the small businesses of our country.
Mr. EVANS. Let me do a followup. What specific ways could
the lending experience be more improved? You gave an example,
of one in Northampton as well as in Bryn Mawr, and I know the
one in Bryn Mawr. Talk a little bit about how it can be
improved.
Mr. ROBBINS. I would say it is awareness. I really believe
it is awareness. We are talking a lot--I met with a
manufacturer this week who is very conventional in nature,
actually a very strong borrower, and has the ability to pay for
a lot of expansion via cash. So we had a conversation. It was
no longer than 45 minutes. He deemed it as a great opportunity.
I deemed it as a great opportunity, even though the borrower is
going to end up going conventionally. They liked the idea of
the program, were unaware of it. We walked out. And I look at
that as a true opportunity that the borrower is able to put the
conventional lending offer as an apple, compared to the 504
loan as an apple, and compare them directly. And he made a
strategic decision.
So what we are finding is the ability to talk to people,
give them the choice, and at the end of the day, what is best
for that borrower, for their financial needs, is a great
opportunity. So for us, it is getting out and actually telling
that story, working with partners as we had mentioned, working
with partners to go in the communities that have not been
served, going through SCORE or SBDC, working with strategic
centers of influence or partners that we talk to, to understand
who could really benefit from this program and telling of the
story.
Mr. EVANS. Mr. Chairman, I yield back the balance of my
time.
Chairman BRAT. Great.
Next, we will go to Mr. Trent Kelly, who spent the entire
night working on another committee and showed up early in the
morning to be here. Thank you, Mr. Kelly.
Mr. KELLY. Thank you. I also want to recognize our
chairman, our full Committee chairman, Chairman Chabot, on the
end. I offered him my time and he did not take it. But let me
tell you, we are just fortunate on this Committee to have a
great chairman and ranking member. And all Subcommittee chairs
and ranking members, it is a great working relationship here.
And I think it is about what we do.
I mean, America is small businesses. It is the American
dream. It is taking a small idea in a garage and turning it
into a--you know, a multinational, worldwide corporation, just
based on a dream and the ability. And that is what you guys--or
that is what the Small Business Administration, it funds those
dreams, and especially these loan programs.
I want to start with you, Ms. Merz. And I am just going to
go back--the chairman, Chairman Brat, asked a great question.
He said--you discussed the 504 refinancing program. Can you
describe for us how this policy change is impacting you in your
area?
Ms. MERZ. This is a great question. So I think lenders, in
general, are a critical partner to make the program a success.
Any policy changes, such as the refinance, enables us to sell
the program to more members and assist small businesses there.
Previously, 504 loans did not fund working capital. With the
help of refinance, there is a working capital component that
can now be included. And that is actually in big demand with a
lot of small businesses, because cash is everything for them.
So it provides more opportunities for us to continue to
partner with this program.
Mr. KELLY. And this is kind of--I come from a very--my
district is rural. But I come from an even ruraler area, where
I grew up. And sometimes dreams are beyond what we know we can
achieve or reach. And I think that is where having access to
loans and capital and knowing that those--those resources are
available to finance your dreams or help you to achieve those.
Can each of you talk about what we can do better to make
sure that rural areas, okay--and that would include other--
like, inner city is not rural, but it has some of the same
issues. And so can you let me know what we can do better to let
them know about the CDC Loan Program and how we can better
implement it towards those areas, rural and inner city?
Ms. MERZ. Speaking from a lender's perspective, I would say
that awareness and also specifically geared towards loan
officers. Because loan officers are our feet out there. They
are the ones that market the program to the borrower. They are
the ones that match the borrower with the correct program. The
right training of the loan officers and maybe more networking
opportunities would be a great, great help.
But what we do at Langley, we keep up with the changes of
the 504 Program. So we are aware how the program works and how
we can--we can benefit.
Mr. KELLY. Mr. Williams?
Mr. WILLIAMS. Thank you for the question. It is a vital
question.
And we, in our, you know, jurisdictions, have both. We
have, you know, eastern shore of Virginia, far southwest
Virginia, and, you know, inner city Washington, D.C. So we have
experienced that. And I think, you know, the answer for us has
been partnerships. And it is, you know, getting out and, you
know, networking with your Small Business Development Centers,
networking with your chambers of commerce, and spreading the
word, and educating those resource providers that are on the
ground, you know, boots on the ground, in those local
communities, but also taking advantage of technology.
There are rapid changes with technology you can take
advantage of, you know, and use that, use social media. Because
that can get you in those communities, you know, faster than
you can get there yourself in many cases. And we are starting
to take advantage of that as well.
Mr. KELLY. And I am going to get Mr. Robbins, because he
hasn't had very much mike time. If you can answer just real
quickly in these 37 seconds.
Mr. ROBBINS. Absolutely. I think I would like to mirror
some of what Mr. Williams said, is that idea that it is really
about leveraging the opportunities. So the groups that we try
to talk to, we, as a regular calling effort, try to get out to
the county or State-based economic development organizations
who are going to touch these people maybe on a more daily basis
than we have the ability to. We are a seven-person staff. We go
out through trade organizations, if we have that ability. And
then we go out also through chambers of commerce. So it really
is about kind of leveraging our opportunities to get out there
and talk about it.
I think whether we go back--it was a tough economic time.
But we were getting media attention during and approaching and
coming out of the recession about the SBA. So I think the SBA
was in the news scene. It was being talked about for a tough
economic time, but the SBA was out there. So I think as
borrowers, or potential borrowers, hear about this program,
know of the opportunity, have that confidence to say, I do have
this dream, I need to ask who to talk to, and go out there. It
is that communication that really makes us effective.
Mr. KELLY. And I have exceeded my time. I yield back.
Chairman BRAT. Thank you, Mr. Kelly.
We turn to Ms. Chu from California.
Ms. CHU. Thank you so much.
Ms. Vohryzek, it has been a pleasure to work with the NADCO
and the national association of the CDCs. And thank you for
your help in pushing for the CREED Act, the Commercial Real
Estate and Economic Development Act, which I was the author. I
was so thrilled when my bill was included in the 2016 Omnibus
package and signed into law by President Obama.
And, of course, as you said, the 504/CDC debt refinancing
program allows small businesses to refinance existing
commercial debt with long-term fixed rate financing so that
they can free up their capital. This had been a successful
pilot program in 2012, but then had been allowed to lapse. And
since then, we have been attempting to get it put back into
law. But, finally, with the help of this Committee, we were
able to get it into that Omnibus bill.
And since the refinancing program went into effect in June
of 2016, CDCs across the country have approved 231 loans for
small businesses. That amounts to 254 million in loans to help
businesses grow and expand.
So, Ms. Vohryzek, do you expect that this trend in
refinancing lending will increase?
Ms. VOHRYZEK. Absolutely. Oh. I forgot that last time, to
turn on the talk.
Thank you for that question. Absolutely. I do believe it is
going--and particularly as awareness. I think part of it is you
go in and you educate banks. And I remember when I was running
the CDC, I thought, okay, I have educated the banker about 504,
and I can let it--you know, I can move on to the next bank. But
what I found is if you didn't touch base with them pretty
regularly, they forgot. And so they--often I would check in and
say, hey, how you doing, Bill, you know, this is Barbara
Vohryzek with California Statewide. Bill said, Oh, you know, I
have got a deal on my desk, and, you know, it is a great thing
you called.
So it very much is about continuing the education process,
even when you think you already did it, and then following up.
And I think both of them really talked about--both Sherwood and
Wayne talked a lot about getting--and, actually, Ms. Merz also
talked about education of the people who are actually on the
ground.
And as this--we are watching an upward trend in the debt
refi, and so we absolutely believe it is going to grow. And
particularly as rates begin to rise and as balloons come due,
we are going to see more and more small businesses coming in
and taking advantage of it. But it is on us, as an industry, to
make sure that we are calling those banks and credit unions and
other lenders and reminding them, hey, we have got this great
product for your small businesses, so don't forget we are out
here. It is just a matter of communication and keeping that
open all the time.
Ms. CHU. And another great thing that happened with the
2016 inclusion in the Omnibus bill is that it made the program
permanent. Have you seen the benefits for your industry since
then?
Ms. VOHRYZEK. I think knowing that it is permanent takes
away a certain level of anxiety, quite frankly. And it is also
much more helpful when you are going to discuss it with a bank
or with other community partners that they know this isn't
going to disappear and that this is a permanent program. And
so, absolutely, permanency settles everybody.
And it also enables, over time, for there to be
improvements over time. Because we know it is a permanent
program and things will change. Markets change. Small
businesses change. And the program has the ability to change as
well.
Ms. CHU. Do you think there is more that we in Congress or
perhaps the administration could do to help more small
businesses take advantage of this program?
Ms. VOHRYZEK. I think just talking about it in your
districts would be fantastic.
And also, remembering that you have got a whole network of
CDCs nationwide that are more than happy to help you and bring
you to visit some small businesses and just talk about it. And
SBA has been doing its own form of marketing. And the
Administrator has been out there. And so the more that we are
talking about it, the more small businesses that will be aware
of it. And lenders. We want to make sure the lenders are aware
of it too.
Ms. CHU. And SBA has been attempting to streamline the 504
loan application process. But there are still some potential
lenders that argue that utilizing the program is too
burdensome. How would you respond to this concern?
Ms. VOHRYZEK. I would say that the SBA is in the middle of
what I call the--or what we call the 504 modernization project.
And it is being phased in as we speak. And so, for instance, E-
Tran is going to be turned on--or is operating right now, a
dual system, in that it will become the new system.
But, beyond that, the new Central Servicing Agent contract,
the CSA contract, that was let recently, included in it
technology budget, basically, for that contractor. And so they
are going to be involved in what will ultimately be a birth-to-
grave system of document management and data management. And so
from so many aspects, it will enable a more, as the
Administrator said, efficient and effective system. It
absolutely will. Because for reviews or for a loan, you will
just reach into the cloud and be able to access data and access
documents related to that small business loan.
And so the SBA is currently moving towards a much more
efficient and unified system for the 504 Loan Program. So
lenders and small business borrowers are going to find it gets
more and more streamlined over time.
And thank you for allowing me to go over.
Ms. CHU. Thank you. I yield back.
Chairman BRAT. Thank you, Ms. Chu.
Now we turn to the full chairman of Small Business, Steve
Chabot, with some questions.
Mr. CHABOT. Thank you very much, Mr. Chairman.
Obviously, CDCs and the 504 Loan Program have been critical
to an awful lot of small businesses all across the country. My
first question, I would invite anybody who wanted to talk about
this, would you comment on sort of the way urban areas
traditionally have utilized CDCs and the loan program versus
more rural areas? I would welcome that from really anybody who
would like to comment.
Ms. MERZ. Well, speaking from a lender's perspective--first
of all, thank you for the question--I think we see more
participation in the 504 Program from an urban area versus a
rural area. And I think that is simply because there is more
awareness. There is more outreach in urban areas. There is also
the lender's footprint tends to be more in urban areas. So we
reach out to our members. Word-of-mouth is a huge component
when we sell a commercial lending program to our members. And
that tends, for us, from--you know, from a credit union
perspective, that happens more in urban areas than rural.
Mr. CHABOT. Thank you.
Anybody else want to comment?
I will move on to another one. Relative to publicizing the
availability of the 504 Loan Program, any recommendations that
you would make? We have, obviously, a new administrator at the
SBA. And she has really come in, I think, and trying to shake
things up and make things better. And I am very encouraged,
thus far, with what I have seen.
Any recommendations there as to how we can better publicize
this? And even beyond that, any recommendations, overall, and
changes you would like to see at the SBA? And I will invite
that from anybody.
Ms. MERZ. This is a great question. Thank you for that. I
think there are some challenges when we are selling the 504
Program to our members. Where we would like to see
improvements, a lot of our members don't quite know about
different SBA programs. They know that the SBA is there to
promote small businesses, there is government-guaranteed
lending available. So it is the lender's job to pair the
borrower with the right program.
Then it becomes a challenge to explain the process.
Because, usually, it is one property, let's say commercial real
estate. It is one property that the borrower is looking to
purchase. And the common question that we get is, well, how
come there is two agencies now, and will I be making two
payments on one property? So we have to explain the process,
maybe somewhat of a complex process, especially to a member
that did not know about the 504 Program before.
So I think a big improvement would be for lenders to have
the ability to collect the payments and then distribute to the
CDCs so then it is one property, one payment.
Another improvement, I would say, would be the prepayment
penalty. A lot of borrowers are hesitant about the 10-year
prepayment penalty. I would say this is more of a psychological
factor, from what we have seen. Buying a property and I have to
commit to stay at the property for 10 years. So I think an
improvement to kind of lower the prepayment penalty to, let's
say, 5 or 7 years would be great.
Mr. CHABOT. Thank you. I have got about another minute on
the clock. Any other members like to see some improvements?
Mr. ROBBINS. Thank you very much. I would say it is that
conversation. What we find is that we just need to be out there
every day. It does not keep me up at night, rather it wakes me
up every morning to think, when I meet someone in at a chamber
function or a business mixer or something, and they are talking
about the idea that, I just bought the building, I wish I would
have known about the 10 percent ability, that capital staying
on my balance sheet would have been very powerful.
So, for us, it is really about getting out there, meeting
people. And that is either leveraged through organizations. So
I don't have the direct marketing channel and a game plan here
today, but it really has that idea that if people know that
this exists, and it is of benefit to them as they grow and
expand, that is powerful. That is very powerful.
Mr. CHABOT. Yes, sir. Mr. Williams.
Mr. WILLIAMS. I will just offer that in terms of most of
the changes that I think that we have seen that might be needed
are minor tweaks in operational changes with the agency, and,
you know, standard operating procedures, SOP. And I think the
agency is working through that now. And they have been very
receptive to working through that, because I know there is a
big, massive rewrite that they are going through. And they have
been welcoming of comments, and I think that has been a very
good sign, and we have been very appreciative of that.
Mr. CHABOT. Thank you. My time has expired. I yield back.
Chairman BRAT. Thank you, Mr. Chairman.
We will turn to Mrs. Murphy from Florida. Thank you.
Mrs. MURPHY. Great. Thank you, Mr. Chairman.
So as was mentioned on the panel previously, there is a
difference between the distribution of these loans between
rural and urban areas. Do you also see a difference maybe from
State to State or maybe geographically across the country? And
then, my understanding is that there is some geographic
restrictions on CDC entities as to how far their reach for
their loans can be. And do you think that plays a role in
creating some of the inequities in the disbursement of access
to these loans? And then, what do you think can be done to
ensure that these underserved areas have equal access to
capital through the CDC? Anyone?
Ms. VOHRYZEK. Well, that is a multilevel question. Yes, we
definitely do see concentrations in the country. Some of it has
to do with just the nature of, if you look at the number of
small businesses, the sizes of those small businesses, and the
growth patterns, and the tendency to focus on real estate. So
we will see concentrations in states like California or
Florida. We definitely see some of that.
One of the things we have seen over time, and rural areas
was brought up, has been brought up by a number of you, that in
rural areas, and particularly before the Great Recession, we
saw that banks would actually extend to very high loan to
values for real estate. And even coming out of the recession as
the recovery was getting stronger, we were seeing some banks
that were going to 85 percent loan to value. And, of course,
504 is 90 percent loan to value. We don't see that as much in
some of those territories where you see a great deal of 504
volume, where a bank will not go that high and, therefore, the
504 becomes, really, the critical vehicle for that business to
be able to do 10 percent down.
And so I think the dynamics are different. And we see that
across states. And we see that in rural versus urban areas. And
the nature of the bank or the credit union of the lenders are
different in those territories as well.
The second part of your question was relative to does the
amount of CDC activity or--they are out of their geographic.
All CDCs are statewide now. Some are multistate or have area
extensions. I am not sure how much that actually factors into
what you are speaking to. I am not sure if, you know, making a
CDC a four-state entity instead of a two-State is necessarily
going to increase volume. I think concentrated efforts and--
where the agency or the public policy goals are pointing
towards rural development are pointing towards downtown
revitalization. Those kinds of things will, in fact, increase
activity.
In California, when I was doing intercity, downtown
redevelopment were part of the public policy goals under one
broad--I think it was called business district revitalization.
And so we saw a lot of activity, particularly in--I know it
is--you know, we don't talk about it anymore, but enterprise
zones. I did a lot of activity in the enterprise zones, and it
really focused, particularly in L.A., in Pacoima in East L.A.,
in South Central L.A., we did a lot of volume, not just because
of jobs, but also because of the public policy goals related to
downtown revitalization. And the same thing happens in rural.
And I forgot the third part of your question. I apologize.
Mrs. MURPHY. You covered the question. But thank you. I
appreciate that.
Ms. VOHRYZEK. Thank you.
Mrs. MURPHY. And, Ms. Merz, my next question is for you. In
your testimony, you had suggested the need for greater
flexibility for 504 funding for certain types of businesses.
And you specifically cited the example of a loan made to a
restaurant, but there were restrictions where they couldn't use
the funds for items such as smaller furniture or equipment.
When a situation like that occurs, what other loan products
are you able to offer the borrower?
Ms. MERZ. So Langley Federal, we are a partner with the
SBA, and we offer a wide range of products. So in situations
like this, we would be looking at an SBA product to see if we
can do like, let's say, an SBA express loan to assist the
borrower to purchase those assets.
Mrs. MURPHY. Thank you.
Thank you. I yield back the reminder of my time.
Chairman BRAT. Thank you very much.
I think with that round, we will conclude our testimony. So
thank you very much, everyone, for being here today. I think it
went very well. Very good witnesses and the information today.
As direct participants in SBA's 504/CDC Loan Program, your
insights and ideas were very valuable to everyone on the
Committee. In order to conduct proper oversight, it is
important to take a step back. And so today, our conversation
will be important as the committee continues to examine all of
SBA's lending programs.
I ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the
record. Without objection, so ordered.
This hearing is now adjourned. Thank you all very much.
[Whereupon, at 11:05 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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Introduction
Good morning, Chairman Brat, Ranking Member Evans and
members of the Subcommittee. My name is Natasha Merz, and I am
testifying today on behalf of the National Association of
Federally-Insured Credit Unions (NAFCU). Thank you for holding
this important hearing today. I appreciate the opportunity to
share with you my experience with the Small Business
Administration's (SBA's) 504 Loan Program.
I currently serve as Vice President of Commercial Lending
at Langley Federal Credit Union located in Newport News, VA. I
joined Langley in June 2011, with over 16 years of experience
in commercial and SBA lending with various lenders in New
Jersey and Virginia. When I arrived at Langley, I helped create
the infrastructure necessary to accommodate in-house commercial
loan origination, underwriting, servicing and collection
functions. Since then, Langley's member business loans (MBLs)
have grown from $7 million to nearly $110 million. I actively
pursue SBA Lending at Langley including SBA 7(a), Express and
504 loans. I was awarded a Financial Services Credit Union
Champion of the Year award in 2014 and Langley was named a Top
Credit Union in SBA Lending in 2014 and 2016 by the SBA
Richmond District Office. I believe that the SBA's mission to
promote small businesses closely resonates with any credit
union's goal to support business members in their communities.
As you may know, NAFCU is the only national organization
that exclusively represents the interests of the nation's
federally-insured credit unions at the federal level. NAFCU is
celebrating its 50th anniversary this year. NAFCU member credit
unions collectively account for approximately 70 percent of
federally-owned credit union assets. NAFCU and the entire
credit union community appreciate the opportunity to
participate in this discussion regarding the 504/CDC loan
program under the Small Business Administration.
Background on Credit Unions
Historically, credit unions have served a unique function
in the delivery of necessary financial services to Americans.
Established by an act of Congress in 1934, the federal credit
union system was created, and has been recognized, as a way to
promote thrift and to make financial services available to all
Americans, many of whom would otherwise have limited access to
such services. Congress established credit unions as an
alternative to banks and to meet a precise public need--a niche
credit unions continue to fill today for nearly 108 million
Americans. Every credit union is a cooperative institution
organized ``for the purpose of promoting thrift among its
members and creating a source of credit for provident or
productive purposes.'' (12 Sec. USC 1752(1)). While over 80
years have passed since the Federal Credit Union Act (FCUA) was
signed into law, two fundamental principles regarding the
operation of credit unions remain every bit as important today
as in 1934:
credit unions remain totally committed to
providing their members with efficient, low-cost,
personal financial service, and,
credit unions continue to emphasize
traditional cooperative values such as democracy and
volunteerism. Credit unions are not banks.
The nation's nearly 6,000 federally-insured credit unions
serve a different purpose and have a fundamentally different
structure than banks. Credit unions exist solely for the
purpose of providing financial services to their members, while
banks aim to make a profit for a limited number of
shareholders. As owners of cooperative financial institutions
united by a common bond, all credit union members have an equal
say in the operation of their credit union--``one member, one
vote''--regardless of the dollar amount they ave on account.
These singular rights extend all the way from making basic
operating decisions to electing the board of directors--
something unheard of among for-profit, stock-owned banks.
Unlike their counterparts at banks and thrifts, federal credit
union directors generally serve without remuneration--a fact
epitomizing the true ``volunteer spirit'' permeating the credit
union community.
Credit unions continue to play a very important role in the
lives of millions of Americans from all walks of life. As
consolidation of the commercial banking sector has progressed,
with the resulting depersonalization in the delivery of
financial services by banks, the emphasis in consumers' minds
has begun to shift not only to services provided, but also--
more importantly--to quality and cost of those services. Credit
unions are second-to-none in providing their members with
quality personal financial services at the lowest possible
cost.
Credit unions also play an important role in the on-going
recovery from the financial crisis. As widely recognized by
elected officials in Washington, credit unions did not cause
the financial crisis. Because they did not engage in the same
risky practices as big banks, credit unions fared well during
the crisis and, as a result, had the capital available to lend.
Surveys of NAFCU-member credit unions have shown that many
credit unions saw increased demand for mortgage loans and auto
loans as other lenders were leaving the market. A number of
small businesses who lost important lines of credit from other
lenders turned to credit unions for the capital that they
needed.
Our nation's small businesses represent 99.7 percent of all
employer firms, employ nearly half of all private sector
employees, pay more than 40 percent of total U.S. private-
sector payroll, and have generated over 60 percent of net new
jobs annually over the last decade. It is inarguable that the
strength of the economy directly correlates to the health and
well-being of America's small businesses. Many small business
owners are members of credit unions around the country and rely
on their services to help make their small businesses
successful. Our nation's credit unions stand ready to help and,
unlike some other institutions, have the assets to do so.
Unfortunately, an antiquated and arbitrary member business
lending cap prevents credit unions from doing more for
America's small business community.
Artificial Member Business Lending Cap at Credit Union Hurts
Small Business
When Congress passed the Credit Union Membership Access Act
(CUMAA) (P.L. 105-219) in 1998, it put in place restrictions on
the ability of credit unions to offer member business loans.
Credit unions had existed for nearly 90 years without these
restrictions. Congress codified the definition of a member
business loan and limited a credit union's member business
lending to the lesser of either 1.75 times the net worth of a
well-capitalized credit union or 12.25 percent of total assets.
CUMAA also established, by definition, that business loans
above $50,000 count toward the cap. This number was not indexed
and has not been adjusted for inflation in the more than 18
years since enactment, eroding the de minimis level. Where many
vehicle loans or small lines of credit may have been initially
exempt from the cap in 1998, many of those that meet the needs
of small businesses today are now included in the cap due to
this erosion. To put this in perspective relative to inflation,
what cost $50,000 in 1998 costs $74,500 today, using the most
recent consumer price index data. That is close to a 50% rate
of inflation change that is completely ignored by current law
and greatly hamstrings a credit union's ability to meet its
members' needs.
It should be noted that the government-guaranteed portions
of SBA loans do not count toward the member business lending
cap, but the non-guaranteed portions do. This could ultimately
lead to a situation where a credit union may be an excellent,
or even preferred, SBA lender and ultimately has to scale back
participation in SBA programs as it approaches the arbitrary
cap. This arbitrary cap can have its biggest impact on SBA 504
loans since the first mortgage issued by the credit union in a
504 loan is a regular commercial loan that counts toward the
cap. Congress could aid credit union SBA 504 lending by
enacting legislation to exempt SBA 504 loans from counting
toward the credit union member business lending cap. Given the
nature of the program, 504 loans should be treated differently
than regular commercial loans when it comes to the credit union
member business lending cap.
A 2011 study commissioned by the SBA's Office of Advocacy
affirmed the important role of credit unions to small
businesses. (James A. Wilcox, The Increasing Importance of
Credit Unions in Small Business Lending, Small Business
Research Summary, SBA Office of Advocacy, No. 387 (Sept.
2011)). The SBA study indicates that credit union business
lending has increased in terms of the percentage of their
assets both before and during the 2007-2010 financial crisis,
while banks' lending decreased. This demonstrates not only the
need for lifting the MBL cap in order to meet credit union
members' demand, but also that credit unions continued to meet
the capital needs of their business members even during the
most difficult of times. One of the findings of the study was
that bank business lending was largely unaffected by changes in
credit unions' business lending. Additional analysis in the
study also found that credit unions' business lending can
actually help offset declines in bank business lending during a
recession.
We would urge the Subcommittee to support legislation to
remove or raise the arbitrary cap on credit union member
business lending.
Small Business Administration's 504/CDC Loan Program
The Small Business Administration developed the Certified
Development Company (CDC)/504 Loan Program to promote economic
development and create and retain jobs. The program helps
lenders provide small businesses with long-term financing to
acquire and improve major fixed assets, such as owner-occupied
commercial real estate and heavy machinery. The program helps
businesses by giving them access to financing backed with as
little as 10 percent owner equity.
Under the program, a financial institution partners with a
CDC, a specialized SBA-certified nonprofit corporation, to
finance small businesses looking to expand. Each partner makes
a loan to a qualifying small business. Typically the lender's
loan is secured by a first lien covering 50 percent of a
project's cost. The CDC's loan is secured by a second lien for
up to 40 percent of the project's cost. The CDC loan is also
backed by a 100 percent SBA-guaranteed debenture.
The program helps financial institutions attract and serve
small business borrowers that need financing for plant and
major-equipment acquisition that may not meet conventional
underwriting criteria. Participating with a CDC can help reduce
risk for the lender.
Investors purchase interests in the debenture pools and
receive certificates representing ownership of all or part of
the pool. The SBA and CDCs use various agents to facilitate the
sale and service of the certificates and the orderly flow of
funds among the parties. After a 504/CDC loan is approved and
disbursed, accounting for the loan is set up at the Central
Servicing Agent, not the SBA. The SBA guarantees the timely
payment of the debenture. If the small business is behind in
its loan payments, the SBA pays the difference to the investor
on every semiannual due date. In FY2016, the SBA approved 5,938
504/CDC loans amounting to roughly $4.74 billion.
504/CDC Lending at Langley Federal Credit Union
Langley currently has a total Commercial Loan Portfolio of
nearly $110 million, of which $3.5 million is in various SBA
programs: 504, 7(a) and Express. This represents a total of 114
commercial loans, of which 30 are SBA loans (over 26% of total
loans). Without the SBA programs we would not have been able to
service these members. When a small business comes to us at
Langley, we work with them to place them in the right type of
loan, whether a conventional loan or SBA product.
The SBA 504 program has helped us meet some specific needs
for our small business members at Langley FCU. Some examples
include:
A member with a small information technology
and telecommunications business was leasing an office
space to use for their primary business operations. The
initial lease term expired and the landlord was looking
to raise the rent, which would have been a strain on
the borrower's cash flow. The 504 program helped this
borrower, who did not qualify on conventional terms, to
purchase a building to move their operations into and
reduce leasing expenses.
The landlord of a member with a granite and
tile contracting business was looking to sell the
property the member's business was operating out of and
offered it to the borrower. The borrower did not have
the required 20% cash down in order to qualify for
conventional financing. However, he was the perfect fit
for the SBA 504 program. Furthermore, owning the
building and taking advantage of the 20-year fixed rate
on the SBA portion has resulted in other income
opportunities and improved cash flow for our member.
A successful hotel manager and operator who
needed to purchase an office space for his operations
was declined by a conventional lender who was not
lending to hotels or hotel operators. The borrower came
to Langley asking for financing options. With the help
of the 504 program, the borrower was able to purchase
an office building and lock in a great rate for 20
years on the SBA portion.
There are many more stories like these of small business
owners looking for that loan to enable them to start or grow
their business. The demand is out there. Unfortunately, in this
current environment, many banks have scaled back their smaller
dollar business lending that credit unions are readily able and
willing to fill. At Langley, we are pleased that we have been
able to help step up to meet this demand.
Benefits of the 504/CDC Program
Benefits of the SBA's 504/CDC program include:
1. Low fixed interest rates for 20 years on
commercial real estate and 10 years on equipment for
the SBA portion;
2. Down payments as low as 10%, thereby making 504
loans more affordable to borrowers;
3. New businesses are eligible for the program, even
when they may not be eligible for conventional
financing;
4. There is a simultaneous closing with the CDC which
makes the process easy for all parties; and,
5. The right CDC partner can make the application and
approval process seamless for the borrower as they can
bring their expertise to assist with the loan.
The SBA 504 program also has features that can make it
attractive for lenders. These include:
1. Determining SBA eligibility is the responsibility
of the CDC. This makes it easier on the lender and a
great program for those lenders that are looking to get
into SBA lending and may not have in-house SBA
expertise;
2. Since a lender does not need to have staff with
specialized SBA expertise, they can save on the cost of
hiring an SBA expert;
3. There is no need for monthly Colson reporting and
SBA approved loan accounting processes--the lender
treats the first mortgage (their portion of the 504) as
a regular commercial loan;
4. There is a low loan-to-value (LTV) on the lender's
loan after debenture funding;
5. Lenders can participate out the first mortgage
(their portion of the 504) thus increasing their
interest rate yield;
6. The new 504 refinancing option allows for existing
debt refinance, financing of fixed assets and working
capital;
7. The 504 loan can be assumed by the buyer if the
borrower decides to sell; and,
8. In the event of liquidation--lender has the
benefit of the low LTV and can follow their own
processes and has no risk of SBA guaranty denial/
repair.
Challenges and Recommendations
While there are a number of benefits of the 504/CDC program
for lenders and borrowers, the program does present some
challenges and have areas where we think it can be improved.
Challenges for lenders and borrowers include:
1. Partnering with the right CDC is critical for the
lender. A poor lender-CDC relationship can make the
process slow and inefficient for the borrowers and the
lender--not all CDCs are consistent in their processes;
2. The 10-year prepayment penalty for the borrower is
not attractive and harder to sell for a lender--a 5- or
7-year prepayment penalty would be a better option;
3. Construction loans in the 504 program will not
close with the SBA until construction is completed and
the borrower has moved in to the new facility.
Construction monitoring is the lender's responsibility.
This means that the lender needs to have a
sophisticated and rigorous construction monitoring
ability in order to have the project completed per the
SBA authorization. Lack of expertise and resources,
especially with lenders new to commercial lending, may
compromise the project or halt the process. We have
heard stories of lenders who have been hampered by
this--they approved a loan for a new auto body shop,
but the existing shop had to close during construction
and revenues plummeted, leading to a deteriorated
financial situation, which led the CDC to decide on its
own to back out citing a ``material adverse change'' to
the project. It would be helpful for the CDCs to assist
with the construction monitoring process;
4. Some borrowers prefer not to have to make two
payments on one property. This could be amended if
lenders would be allowed to collect payment and remit
to the CDC on a monthly basis;
5. Other borrowers hesitate about additional legal
expenses and closing costs that arise out of the need
to have two closings; and
6. Some lenders may not know how to market an SBA
loan to the borrower--better SBA or CDC outreach and
support or networking opportunities for loan officers
would be helpful in marketing SBA loans to borrowers.
With a 504 loan, the lender does not have a guarantee in
place from closing--the CDC holds the guarantee. If a lender
uses the 7(a) program, they hold the guarantee immediately on
day one of the loan. On a 504 loan, the SBA issues an
Authorization for Debenture which lists the financial
institution to be paid off once the debenture funds. The SBA
guaranty is issued to the CDC. The financial institution gets
the promise that their lien will be paid off as long as there
has not been a material adverse change to the borrower's
finances. With a 7(a) loan, the lenders are issued the SBA
guaranty directly. If a problem arises, the lender has the
control to manage its own credit and still maintain the SBA
guaranty.
The 504 program has restrictions that do not allow lenders
to use their underwriting standards. Some 504 loans will
benefit the member if the financial institution has stricter
underwriting standards, while some will not if a lender is
comfortable with the credit criteria of the borrower but the
504 program or CDC is not. Giving financial institutions some
greater flexibility in this area is something that should be
considered.
With a 504 loan, the borrower pays a penalty if they pay if
off within 10 years. A 7(a) loan secured with commercial real
estate has an imposed 3-year pre-payment penalty, while a 504
loan for commercial real estate has a 10-year pre-payment
penalty on the CDC's second lien. The CDC's pre-payment penalty
descends 1% every year. As noted above, dropping this window to
5- or 7-years could help the borrower.
There should also be some greater flexibility for use of
504 funding for certain types of businesses. For example, if a
lender issues a 504 loan for a hotel, the proceeds can be used
for bedding, equipment, etc. However, if the loan is made to a
borrower with a restaurant, they cannot use the funds for
smaller furniture, fixtures and equipment such as chairs, small
equipment, working capital, etc. Greater flexibility for use of
funds in this situation would be helpful.
The SBA is an Important Partner for Credit Unions
I am pleased that NAFCU signed a memorandum of
understanding (MOU) with SBA in February 2015. 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. The partnership also helps small business owners
get capital for investments into their new or existing business
they may have otherwise put on a high-interest credit card or a
personal credit line. And finally, it makes the small dollar
loans more accessible to underserved communities, including
women and minorities.
Conclusion
Small businesses are the driving force of our economy and
the key to its success. The ability for them to borrow and have
improved access to capital is vital for the job creation that
will lift our nation out of the economic malaise in which we
find ourselves today. While the Small Business Administration's
504/CDC program provides much needed opportunities to
established and fledgling businesses, there are several
relatively simple steps that could propel the program to its
full potential. We are confident this Subcommittee will do what
is necessary to ensure that these programs are successful,
while ensuring eligibility requirements and other qualifying
criteria are not overly burdensome on the financial
institutions that participate in them. We would urge Congress
to ensure credit unions can meet the needs of their small
business members.
We thank you for your time and the opportunity to testify
before you here today on this important issue to credit unions
and our nation's economy. I would welcome any questions that
you may have.
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Chairman Brat, Ranking Member Evans, and other
distinguished members of the committee. Thank you for inviting
me to testify today.
My name is Barbara A. Vohryzek and I am here on behalf of
the National Association of Development Companies, or as we're
commonly known, NADCO. I serve as President and CEO and, in
that role, represent more than 95% of the 230 Certified
Development Companies in the country. These Certified
Development Companies, or CDCs, are non-profit entities
dedicated to economic development in their local communities.
The work of a CDC is familiar territory to me--I founded and
ran California Statewide CDC for over 21 years. There is at
least one CDC covering each congressional district in the
country, creating jobs and supporting small business owners. My
colleagues on this panel can speak at great length about their
CDC's daily work, but while CDCs can be rural or urban, large
or small, what unites them all is their participation in SBA's
504 loan program.
The 504 loan program is an economic development tool that
provides small businesses with long-term, fixed-rate loans to
help them acquire major fixed assets for expansion or
modernization of their businesses. These loans are most
frequently used to acquire land, buildings, machinery, or
equipment. A 504 loan can be 10 or 20 years, and SBA has
recently announced it will also add a 25 year term, which is a
beneficial addition for small business owners. Pairing the
fixed rate aspect with these term options gives a small
business owner stability, allowing her to budget, without
concerns about rising rates or balloon payments.
A loan package that includes a 504 is made up of three
parts, which we often describe in shorthand as ``50-40-10.''
First, a bank provides approximately 50% of the loan package.
The 504 loan is the next portion. This can be up to 40% of the
package total, up to a maximum of $5.5 million for businesses
that meet certain criteria, though most 504 loans do not come
close to this cap. The 504 loan is guaranteed by SBA and funded
through a debenture sale on Wall Street, not by funds from the
government. CDCs ``quarterback'' this part of the loan package
by working with the borrower to get SBA's approval, ensuring
the loan is funded through the private markets, and servicing
the loan after closing. The final part of the loan is funded by
the small business borrower herself. Through the balance of
this structure, fees, and rigorous SBA oversight of CDCs and
the loan portfolio, the 504 loan program operates at zero
subsidy. The fact that 504 requires no subsidy from the
taxpayer is a point of pride, and we hope and work to ensure
the loan portfolio continues to operate that way each year.
Beyond these structural aspects of the loan, the
distinguishing feature of the 504 loan program is jobs. By law,
each $65,000 in financing through the 504 loan program must
create or sustain one job, or meet one of several public policy
goals. Job creation and retention is the primary metric of the
504 loan program if a CDC does not maintain this 1 to 65,000
ratio of jobs to loaned dollars, it cannot operate as a CDC any
longer. 504 is a jobs program at its core, and eery day CDCs
work with borrowers to get financing that will help them hire
new workers, or save jobs that would be lost but for the
existence of the 504 loan they receive.
The statistics of this program speak for themselves. Since
1991, 504 loans have created or sustained 2.1 million jobs
through 128,000 loans, delivering $70 billion in financing to
Main Street, according to SBA data. These businesses include
the local toy store where you buy Christmas gifts and the
animal hospital that does house calls to your farm. They are
the pillars of the community whose products you order online
when you're homesick, and what make your current neighborhood
special and unique. There are also some 504 loan recipients
whose names are likely familiar to everyone in this room,
regardless of hometown. If we all pulled out our cell phones
right now, I bet we'd see the words ``Otterbox'' stamped across
several cases, like mine. A few more of you may have had a
Chobani yogurt for breakfast. For the music lovers in the room,
a trip to South by Southwest is likely on your bucket list, and
the foodies likely have dinner at The French Laundry on theirs.
All of these products and places, and the jobs created through
them, received 504 financing. Many of these businesses would
not exist at all without it.
All CDCs pursue their economic development mission through
SBA's 504 loan programs, the primary focus of our hearing
today. However, I would be remiss if I did not highlight that
CDCs often also participate in other federal, state, and local
economic development programs. While 504 was designed to be the
larger SBA loan and have a strong jobs impact through the small
business' acquisition of real estate and equipment, many CDCs
also look for opportunities to serve entrepreneurs who need
smaller loans earlier in their development. Within SBA
programs, CDCs are active participants in the Community
Advantage pilot loan program, the Microloan program, and
Intermediate Lending Pilot (ILP) Program. In addition,
incubators, CDFIs, and EDA revolving loan funds are all
represented by multiple CDCs in our community, among many other
programs. Economic development is the watchword for the CDC
industry, as this range of programs and the range of programs
provided by the two CDCs at the witness table with me
demonstrate.
The 504 loan is a wonderful tool for both a small business
owner and for communities looking to grow and create job
opportunities. Thank you again for the privilege of joining you
today. I look forward to your questions.
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Chairman Brat, Ranking Member Evans, and distinguished
members of the Subcommittee, good morning. I am Sherwood
Robbins, here as Managing Director of South Eastern Economic
Development Company of Pennsylvania, (Seedcopa). I am pleased
to have the opportunity to discuss the economic development
success that our CDC has in Pennsylvania and the job creation
we facilitate with the 504 lending program.
Seedcopa was founded 1983 by the Chester County Economic
Development Council as an affiliate, not-for-profit dedicated
to SBA 504 lending as an SBA Certified Development Company
(CDC). Seedcopa is primarily a 504 lending company covering the
entire Commonwealth of Pennsylvania. Seedcopa utilizes other
Federal and State economic development loan programs (such as
the Pennsylvania PIDA program) when they are advantageous to
Pennsylvania's start-up and expanding businesses, yet the SBA
504 program remains our flagship economic development tool.
I joined Seedcopa in 2007 as a loan officer, just as the
onset of the great recession. During that time, and continuing
through the present, I have witnessed dozens of examples of
small businesses that received high leverage funding through
the 504 program that either saved the small business or allowed
the small business to expand and create additional employment.
Even in today's stable economic climate, the 504 program
continues to do the same, sponsoring growth in business
revenue, economic stability, and living wage employment.
In just the last ten years since I have been a part of
Seedcopa, our dedicated staff of seven full-time employees
received 313 loan approvals under SBA's 504 lending program. As
you are aware, SBA 504 loans require borrowers to create jobs
to receive funding under the program. Seedcopa's loan approvals
over the past ten years have resulted in borrowers committing
to the creation of more than 4,500 local jobs. Over the life of
Seedcopa's program, our 504 lending program has created one new
fulltime job for every $30,149 we have lent, far surpassing
SBA's minimum job creation requirements.
Since inception, Seedcopa has collaborated with SBA to
approve 644 loans that cover the landscape across Pennsylvania.
It is near impossible to drive through our area and not see
multiple borrowers that have been funded by the 504 program
through Seedcopa. These borrowers are active, vibrant, and have
become key employers and good corporate citizens, supporting
jobs and much more.
As we continue expanding our reach with the 504 program, I
am very excited about the re-authorization that Congress
provided in 2015 of the 504 refinance program. There are a
significant number of businesses in our region whose real
estate has been financed through traditional commercial loans
that are ballooning over the next two years. With real estate
values still recovering from the great recession, renewal of
these loans may be difficult for the current leaders due to
their regulatory loan-to-value limitations. I anticipate that
the 504 refinance will be very useful in assisting businesses
in refinancing their high loan-to-value real estate debt,
preserving their ability to operate and the people they employ.
I would like to take a few moments to reflect on three
examples of small business owners who have utilized the 504
program to grow their businesses. A local entrepreneur from
Bryn Mawr, PA located in Ranking Member Evans' District, was
self-employed as a personal trainer. This gentleman had a
vision to take personal training to a higher level by offering
the services to large area employers and co-develop fitness and
wellness programs at the employer's locations; however, he
would need a building from which to operate the business and to
offer expanded services to smaller employers who did not have
readily available space onsite to accommodate the program for
their employees. The owner's most significant problem was that
he had limited resources. Although cash flow was strong, the
constant need to reinvest in the business and expand training
did not leave him in a position where he could afford to fund a
20% deposit on the new building and continue to fund the
business' growth and reinvestment needs. The 504 Loan was the
perfect solution for this borrower. The program's 90% financing
of both the real estate and a large portion of the loan costs
reduced the owner's cash investment by more than 50%, allowing
the acquisition of the building and the continued,
uninterrupted operation of his business at a high level.
This borrower closed on the 504 Loan in 2014 with a
requirement to create five new jobs in the next two years. At
the two-year anniversary date of the loan closing, the borrower
reported that he had exceeded his job creation requirement by
400% and had hired 21 new employees due to the increase in
demand for the business' services!
Another example of the impact of 504 lending in our area of
operations is a local salon and day spa business with seven
locations in southeastern Pennsylvania. The most recent
locations is in Perkiomenville, PA in Congressman Fitzpatrick's
District. Four of the seven locations have been financed by
Seedcopa through the SBA 504 loan program. The owners utilize
the 504 loan program's long term, 20-year fixed rate financing
as a means to increase the financial stability of the business.
In addition, the higher leverage financing enables the owners
to maintain working capital in order to support growth and
expansion of the business. The business growth facilitated
through the SBA 504 loan program has seen this borrower develop
from a small ``Main Street'' salon with only a few employees
into a significant, woman-owned small business with 238
employees.
The last example is a manufacturer in Northampton County,
PA, a county formerly known for its steel industry. This
company is a traditional manufacturer, rolling, shaping and
pressing steel to make commercial storage, racking and
mezzanine systems, employing 104 local persons. The company's
history goes back to the early 1900s as a designer and
manufacturer of motorcycle parts, later manufacturing
components for the Ford Model T chassis. The SBA 504 is very
important for this borrower. The company has leased its current
location for many years and had the first rights to purchase
the building. When the building was offered for purchase, the
company's principal struggled with two issues. First, injecting
the traditional 20% equity into the property would nearly
exhaust the company's necessary working capital. Second, the
cost and effect of moving to a new location would be drastic.
The prohibitive cost to move the heavy equipment to a new
location was estimated at over $1,500,000! Additionally, if the
company moved out of its current territory, the loss of
employees who could not relocate was very concerning. The
borrower stated that, without the 504 program, the company
might have folded. With this loan now approved by the SBA and
the bank funding minor improvements included in the project,
the borrower is looking forward to closing on the SBA debenture
to lock in their 20-year fixed interest rate very soon.
In each of the examples, it is important look beyond just
the direct employment numbers. Traditionally, in the fitness
and salon industries, the employees are hourly, 1099
independent contractors who are paid by the number of fitness
classes they teach or the number of heads that they coif with
no benefits. These two visionary entrepreneurs have leveraged
the SBA 504 program to develop a new model of operations
whereby the personal trainers and salon employees are now
fulltime, regular employees with access to medical benefits and
retirement savings. In the traditional manufacturer example,
the 504 loan was the difference between employees losing their
livelihoods and a community losing one of the few remaining
manufacturer of the area's heritage industry--steel.
The employees in these examples have dependable, recurring
income that increases not just their sense of financial
stability, but also their disposable income which is in-turn
spent at other small businesses throughout the area. The true
impact of 504 lending, in these and many other examples, goes
beyond the number of jobs created at a borrower site to include
the inferred job creation that occurs throughout the
surrounding community and the overall increase in consumer
confidence that generates and maintains consumer spending
across the economy. The overall economic impact of the 504
program, SBA's continual willingness and effort to work with
NADCO and CDCs to improve and streamline the lending process,
and this Subcommittee's understanding and support of SBA 504
lending will continue to have a strong and significant positive
impact on small businesses, which are the backbone of our
economy.
Thank you once again for accepting my testimony. I am happy
to answer any questions the Subcommittee may have.
[all]