[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

                               __________

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            Small Business Committee Document Number 115-027
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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

                              ----------                              


                        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.
[GRAPHIC] [TIFF OMITTED] T6019.008

    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]