[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


    SBA 7(A) BUDGET PROPOSAL AND THE IMPACT OF FEE STRUCTURE CHANGES

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

                                 HEARING

                               BEFORE THE

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             APRIL 10, 2019

                               __________

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            Small Business Committee Document Number 116-015
             Available via the GPO Website: www.govinfo.gov
                   HOUSE COMMITTEE ON SMALL BUSINESS

                 NYDIA VELAZQUEZ, New York, Chairwoman
                         ABBY FINKENAUER, Iowa
                          JARED GOLDEN, Maine
                          ANDY KIM, New Jersey
                          JASON CROW, Colorado
                         SHARICE DAVIDS, Kansas
                          JUDY CHU, California
                           MARC VEASEY, Texas
                       DWIGHT EVANS, Pennsylvania
                        BRAD SCHNEIDER, Illinois
                      ADRIANO ESPAILLAT, New York
                       ANTONIO DELGADO, New York
                     CHRISSY HOULAHAN, Pennsylvania
                         ANGIE CRAIG, Minnesota
                   STEVE CHABOT, Ohio, Ranking Member
   AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
                        TRENT KELLY, Mississippi
                          TROY BALDERSON, Ohio
                          KEVIN HERN, Oklahoma
                        JIM HAGEDORN, Minnesota
                        PETE STAUBER, Minnesota
                        TIM BURCHETT, Tennessee
                          ROSS SPANO, Florida
                        JOHN JOYCE, Pennsylvania

                Adam Minehardt, Majority Staff Director
     Melissa Jung, Majority Deputy Staff Director and Chief Counsel
                   Kevin Fitzpatrick, Staff Director
                            
                            
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Andy Kim....................................................     1
Hon. Kevin Hern..................................................     2

                               WITNESSES

Mr. Tim Gribben, Chief Financial Officer and Association 
  Administrator for Performance Management, U.S. Small Business 
  Administration, Washington, DC.................................     4
Mr. Tony Wilkinson, President & CEO, National Association of 
  Government Guaranteed Lenders, Stillwater, OK..................    13
Ms. Lynn G. Ozer, President, SBA Lending, Fulton Bank, Pottstown, 
  PA.............................................................    14
Ms. Gail Jansen, Vice President of Business Services and 
  Operations, Kinecta Federal Credit Union, Manhattan Beach, CA, 
  testifying on behalf of the National Association of Federally-
  Insured Credit Unions..........................................    16
Mr. Gordon Gray, Director of Fiscal Policy, American Action 
  Forum, Washington, DC..........................................    18

                                APPENDIX

Prepared Statements:
    Mr. Tim Gribben, Chief Financial Officer and Association 
      Administrator for Performance Management, U.S. Small 
      Business Administration, Washington, DC....................    27
    Mr. Tony Wilkinson, President & CEO, National Association of 
      Government Guaranteed Lenders, Stillwater, OK..............    30
    Ms. Lynn G. Ozer, President, SBA Lending, Fulton Bank, 
      Pottstown, PA..............................................    37
    Ms. Gail Jansen, Vice President of Business Services and 
      Operations, Kinecta Federal Credit Union, Manhattan Beach, 
      CA, testifying on behalf of the National Association of 
      Federally-Insured Credit Unions............................    47
    Mr. Gordon Gray, Director of Fiscal Policy, American Action 
      Forum, Washington, DC......................................    55
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    CBA - Consumer Bankers Association...........................    61
    CUNA - Credit Union National Association.....................    63

 
    SBA 7(A) BUDGET PROPOSAL AND THE IMPACT OF FEE STRUCTURE CHANGES

                              ----------                              


                       WEDNESDAY, APRIL 10, 2019

                  House of Representatives,
               Committee on Small Business,
                   Subcommittee on Economic Growth,
                                   Tax, and Capital Access,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:04 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Andy Kim 
[chairman of the Subcommittee] presiding.
    Present: Representatives Velazquez, Kim, Davids, Delgado, 
Crow, Hern, and Stauber.
    Chairman KIM. Good morning. The Subcommittee will come to 
order.
    I want to thank everyone for joining us this morning, and I 
want to especially thank the witness--witnesses who have 
traveled from across the country to be here today.
    Just before we jump into things, I do want to just remark 
that we will have votes coming up shortly. We are going to try 
to see if we can get through some of our opening remarks before 
we are able to--before we are called over to go and vote. So I 
am just going to just jump straight in here.
    On this Subcommittee, we are focused on making sure that 
small businesses, whether in my district or in Ranking Member 
Hern's district in Oklahoma, and every district across this 
country, can access the capital that they need to start, grow, 
and create new jobs. And we know that when capital is 
affordable and accessible, small businesses can do what they do 
best, which is strengthen our communities and fuel our economy.
    This is certainly something that I have witnessed firsthand 
in my own home State in New Jersey, where we have more than 
850,000 small businesses, making up 99 percent of our State's 
businesses, employ over half of our workers.
    Recognizing that access to capital is a challenge for many 
entrepreneurs, SBA offers a variety of loan programs designed 
to help borrowers who may have a difficult time securing 
financing through other conventional lending markets, which 
brings me to the reason that we are here today, and that is to 
ensure that SBA's flagship 7(a) loan guaranty program is 
functioning to best serve our small businesses and taxpayers.
    This critical program has been a vital source of capital 
access for thousands of small businesses in my home district 
since 2008. In 2018 alone, the 7(a) program has supported 204 
businesses in my district, totaling over $58 million in loans. 
Additionally, the program has served businesses in an 
incredibly wide range of industries ranging from catering 
companies to nurseries.
    Under the 7(a) program, SBA partners with banks and nonbank 
lending institutions who make up loans to small businesses, 
with SBA reimbursing a portion of the loan in the event the 
borrower defaults, also known as the guarantee. This guarantee 
minimizes the lender's risk in making the loan to the small 
businesses. And generally, SBA guarantees from 50 to 90 percent 
of each 7(a) loan made, depending on the loan characteristics.
    Now, to offset that cost of issuing these guarantees, SBA 
charges an upfront, one-time guarantee fee and an annual 
ongoing service fee for each 7(a) loan approved and dispersed. 
Now, traditionally, one of SBA's goal is to achieve a zero 
subsidy rate for its loan guaranty programs, including for the 
7(a) loan. This occurs when the programs are projected to 
generate enough revenue through fees and recoveries of 
collateral to issue that year's guarantee without requiring 
congressional appropriation.
    Now, to calculate that subsidy rate, SBA and the Office of 
Management and Budget use an econometric model that takes into 
account numerous macroeconomic and SBA-specific assumptions, 
and if they predict a shortfall, SBA requests an appropriation 
from Congress to address it.
    Now, excluding the period from 2010 to 2013, when our 
Nation was recovering from the Great Recession, SBA has 
operated at zero subsidy since 2005. However, in its 
congressional budget justification for fiscal year 2020, SBA 
predicts that without modifications to the current law, it 
cannot achieve a zero subsidy rate for the 7(a) program.
    I look forward to hearing from Mr. Gribben about what goes 
into the calculation and understanding of why cash outflows 
exceed inflows resulting in a positive subsidy in the 7(a) 
program for fiscal year 2020.
    In response to the positive subsidy, SBA proposed numerous 
and considerable fee increases on both borrowers and lenders, 
and this caused a great deal of anxiety among small businesses, 
small business borrowers, and the lending institutions that 
participate in the 7(a) program. Any increases in fees like 
those SBA has suggested to cover this shortfall could result in 
fewer small businesses applying for and getting access to 
capital, and that is why today's hearing is so timely and 
important.
    And I look forward to hearing from our witnesses on 
potential solutions to this issue. And we can all at least 
agree that these programs are incredibly important, and I look 
forward to working with my colleagues on both sides of the 
aisle to address the challenges facing our small business 
owners when it comes to securing capital.
    Again, I want to thank all the witnesses for being here. I 
now yield to the Ranking Member, Mr. Hern, for his opening 
remarks.
    Mr. HERN. Thank you, Mr. Chairman.
    Mr. Gribben, thank you for being here.
    Despite ongoing positive economic news, the Nation's 
smallest firms continue to face challenges when it comes to 
regulations, saving for retirement, access to capital. I know 
these challenges personally and professionally. I have been a 
small business owner for over 34 years. Additionally, I have 
served 17 years on bank executive boards; 13 years on 
McDonald's leadership team, which represents over 3,500 
franchises; 8 of those years as ombudsman; 5 years as Chairman 
of the Systems Economic Team; 5 years on the McDonald's Tax 
Policy Team; and 8 years on the McDonald's Insurance 
Corporation Board. I know these issues facing our Nation's 
smallest firms firsthand.
    In order to help fill the gap that exists for small 
businesses when it comes to access to capital, the Small 
Business Administration offers numerous financing and lending 
options. The flagship and largest program is the 7(a) loan 
program that does not provide direct loans to small businesses 
but provides guarantees on the loans made by partnering 
financial institutions to eligible small firms.
    The program has grown rapidly in recent years with the 
program's authorization cap going from $18.75 billion fiscal 
year 2015 to fiscal year 2020 budget request of $30 billion.
    Additionally, the 7(a) loan program has built-in fees to 
help offset the cost of any losses in the program per the 
Federal Credit Reform Act of 1990. Because fees have been 
sufficient over the last half dozen years, the program has been 
running on zero cost to the American taxpayer.
    Within the fiscal year 2020 budget submission, the model 
that calculates the cost of the program indicates that the 7(a) 
loan program will no longer be at a zero subsidy. Rather, the 
program may require $99 million appropriation for and by 
American taxpayers or an adjustment to the fee structure that 
hits program participants.
    According to CRS, the average loan size in the SA loan--
7(a) loan program is approximately $420,000. That is a total of 
$25.4 billion in loans last year, over 60,000 total loans. A 
bill is important to run this average to the SBA's legislative 
proposal that would bring the program to zero subsidy.
    While I acknowledge there are nuances to the fee structure, 
the average loan size of $420,000 does not seem to be impacted 
by the fee proposal if the maturity of the loan is more than 12 
months.
    The upfront fee that goes to borrowers on the small 
business owner for loans of $500,000 or less seems to remain at 
3 percent. Additionally, that fee that lenders have to pay, the 
ongoing fee, also does not appear to change for loans under 
$500,000.
    However, before we entertain the legislative options of 
either appropriation or fee change to close this potential $99 
million gap, we must explore the reasons behind the shortfall 
and gain a better understanding of the model used to calculate 
the cost.
    What variables or assumptions are used in a model and has 
the model changed over the years? I look forward to both panels 
that will explore these questions and more.
    And, Mr. Chairman, I ask unanimous consent to enter this 
letter from the Credit Union National Association, that is 
addressed to you and I, and it is challenging us to find an 
amiable solution to keep this program viable.
    Chairman KIM. So ordered.
    Mr. HERN. And, Mr. Chairman, I yield back.
    Chairman KIM. Thank you.
    We certainly are very blessed to have the extraordinary 
experience that the Ranking Member brings to the Small Business 
Committee, and he and I are committed to be able to work on 
this in a bipartisan way. Hopefully before votes, we will be 
able to finish on up, so I just wanted to have a chance to be 
able to introduce our first witness here.
    Our first witness is Mr. Tim Gribben. Mr. Gribben is the 
chief financial officer and associate administrator for 
performance management at the U.S. Small Business 
Administration. And in this role, he has the responsibility of 
all aspects of SBA's financial management, internal controls, 
and acquisition. He has been with the SBA since 2009, when he 
started as a director of performance management and deputy 
performance improvement officer.
    Mr. Gribben, why don't we just jump right in. You are 
recognized for 5 minutes.

     STATEMENT OF TIM GRIBBEN, CHIEF FINANCIAL OFFICER AND 
  ASSOCIATION ADMINISTRATOR FOR PERFORMANCE MANAGEMENT, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Mr. GRIBBEN. Thank you, Chairman Kim, Ranking Member Hern, 
and members of the Committee. Thank you for inviting me to 
discuss SBA 7(a) loan program and our fiscal 2020 budget 
proposal.
    I have served as the chief financial officer or the deputy 
CFO for nearly 7 years, and every year, with respect to our 
7(a) loan program, my office engages in a process to evaluate 
and project loan performance. This process occurs annually, 
notwithstanding administration, and is a routine executive 
branch function.
    My written testimony provides greater overall detail on 
that process, so let me provide some general context and walk 
you through the basic steps we take every year. First, we model 
for future loan performance. Next, we determine what fee 
structure to achieve zero subsidy, and then we review what the 
agency might be able to offer for fee relief if that fee--if it 
shows that the fees could be set to achieve fee relief.
    Every year, my office looks closely at the elements that go 
into our model, and we make refinements to more accurately 
capture and reflect the future loan performance. The goal is to 
determine the true cost of the program and then to set our fees 
accordingly. The model is thoroughly reviewed by the agency, by 
a third-party contractor, by the Office of Management and 
Budget, and also by our external auditor every year.
    Looking back at trends over the last couple of years, we 
have been near or at the ceiling for our statutory fee 
structure, and as a result, we have not been able to offer the 
same fee relief each year. These recent trends bring us to this 
year's budget discussion and the projection of a positive 
subsidy rate for the fiscal year 2020 program under current 
law.
    In order to operate our 7(a) program in fiscal year 2020, 
SBA will either need an appropriation of Federal dollars or an 
adjustment to the fee rates. In our annual budget submission 
and in our briefings that we did to the different Committee 
staffers over the last few weeks, the agency presented options 
for Congress so as to support an annual level of $30 billion in 
7(a) loans.
    The fee--the first option would involve a subsidy 
appropriation of $99 million; the second option involves 
statutory changes to the fee structure in order to maintain 
zero subsidy; and the third option involves a combination of 
statutory changes to the fee structure and an offset to the 
agency's business loan administration cost also to maintain 
zero subsidy.
    Our annual budget and my written testimony also prevents--
presents details on the proposed fee structure. We attempt 
within that fee structure to maintain the ability to 
incentivize small dollar loans and lending in underserved 
communities.
    In closing, Mr. Chairman, the agency's annual modeling and 
performance projects a positive subsidy rate for fiscal year 
2020. And it is important to note that even absent refinements 
that my office makes to performance assessments, the program 
still projected a positive subsidy for the next fiscal year, 
and the Committee and Congress will need to consider options 
for the agency's 7(a) loan program.
    Thank you again, Mr. Chairman, for inviting me to testify 
today, and I look forward to answering any questions that you 
may have.
    Chairman KIM. Okay. Great. Thank you for your testimony 
here. I am going to start off with a couple questions of my 
own, and it looks like we have a little bit more time to go, so 
we will get through as much as we can.
    Well, the reason we are here today is to examine the 
proposed changes to the 7(a) program and to ensure that any of 
these proposed changes would not further strain capital access 
for small businesses.
    Now, to that effect, the goal of the 7(a) program is to 
operate at zero subsidy, meaning that fees and collections 
cover the cost of running the program. And as we heard from 
your testimony, we are aware you are now predicting the program 
to generate sufficient revenue in fiscal year 2020, meaning 
that the program will be operating positive subsidy.
    I wanted to ask, will the 7(a) program have to shut down if 
the program remains in positive subsidy?
    Mr. GRIBBEN. Absent an appropriation for dollars, it would 
have to shut down, yes.
    Chairman KIM. So if Congress does not appropriate the money 
or the raised fees as you proposed, it would have to shut down?
    Mr. GRIBBEN. That is correct.
    Chairman KIM. So the program is not historically funded by 
appropriations, so I would like to take a deeper dive into the 
calculations that projected the need for additional funds to 
keep the program going.
    SBA's economic modeling and OMB's economic assumptions are 
leading to a bleak outlook for fiscal year 2020 performance--
program performance. And right now, it is still unclear to me 
what factors went into that model and the weight each of them 
carried when the model was calculated.
    You know, for example, the Small Business Act's 
requirements do not factor in good and bad economic times, so 
why would it make sense to propose a scenario where assumptions 
are tied to adverse economic trends if the Small Business Act 
itself doesn't contain such assumptions?
    Mr. GRIBBEN. Prior to 2014, the--our subsidy model was not 
as--did not take into account the macroeconomic assumptions, 
and as a result, it was leading to large upward subsidy 
reestimates. That is--that is the reestimate process that we do 
every year to see the assumptions that we made in prior years, 
is that meeting the actual performance projections, and the 
answer is that it was not.
    So we made a modification to the model in twenty--that we 
introduced in 2014 to take the long-term macroeconomic 
assumptions into account. When a loan is made in times when the 
economy is good and if the projections are a change in the 
assumptions over the long term, those loans have a tendency to 
default at a higher rate than when loans that are made when the 
economy is bad and the projections are assuming that the 
economy will improve over time.
    That is why, as part of the Federal Credit Reform Act, we 
are supposed to take things like that into account to bring the 
cost of the program into today, rather than having it borne by 
future reassessments being paid by the taxpayers that way.
    Chairman KIM. Well, I just want to dive into, you know, one 
of these particular issues that I am having trouble 
understanding through. Now, the programs--when we look at the 
5-year average recovery rate on the defaulted loans as reported 
to Congress last December was about 50 percent. But that seems 
to stand in contrast to the fiscal year 2020 budget, which 
assumes a projected recovery rate of only 37.29. So I just 
wanted to get a sense from you how that is being generated and 
why there is a discrepancy there.
    Mr. GRIBBEN. There is--it is two different ways at looking 
at the performance measures. So the 50 percent number that you 
are mentioning is looking at all the purchases that were made 
in a 5-year period of time, all the recoveries on those 
purchases made over a 5-year period of time, regardless of the 
year that those loans were approved. And in June of 2018, that 
was 50 percent, according to a 5-year rolling average. That 
number has also changed. It has decreased since that time.
    But in the model, we have to look at it from the aspects of 
that--what will happen with the cohort that--the loans that are 
made and approved in that year over the lifetime of those 
loans. That is a different way of looking at it. It is not 
looking at it from a portfolio perspective, which is what the 
Office of Credit Risk Management uses, it looks at it as what 
is this loan cohort going to look like over the future of the 
loans. And in that case, the--when you look at it from that 
perspective, that is where we calculate the 37 percent. That is 
what history is showing us.
    Chairman KIM. So I think the main thing that you are likely 
to hear from all of us today is just that, obviously, this is 
an incredibly important program, and a lot of small businesses 
depend on this type of access to capital. And when we are 
experiencing right now is something that really stands at a 
fundamental moment of what are we going to do with this going 
forward.
    So what we need from you is just an assurance that you are 
going to be able to provide us with the details that we need, 
the documentation that we need to understand what went into 
your calculations and why it is that we face this decision 
before us here in Congress right now.
    So I just want to have your assurances there that we are 
going to be able to get those documents and be able to work 
with you on an expedited timeline so that we can understand 
what went into this and we can understand the decisions that 
are placed before us that didn't have to come before us in any 
other previous year.
    Mr. GRIBBEN. We can provide more information. As an 
example, the briefings that I have been providing more details 
into the model. The models are very complex. They do use some 
information that are agency projections and projections from 
the Office of Management and Budget.
    And the models are thoroughly reviewed. The documentation 
on the assumptions of what changed from the prior year, the 
inputs into that model, those are all reviewed by external 
parties to determine that the agency is doing the best job it 
can to forecast future performance to make sure that we are 
accurately reflecting the cost of those programs today over the 
lifetime of the loans that are being--that the loans will be 
serviced.
    Chairman KIM. No, that is--I appreciate that insight. And I 
look forward to working with you on this more, because, you 
know, as we are being asked to consider, you know, $99 million 
in taxpayer money, we just need to make sure that we are doing 
our due diligence and thoroughly analyzing whether or not that 
is a good use of the taxpayer dollars and if every other effort 
has been made to try to avoid that from happening. And I think 
right now, we just want to think of this as a factfinding 
operation, be able to get everything that we need for us to be 
able to make those considerations.
    One last question for you. As we are going through this, 
based on what you know and the processes that you were running 
there, do you think that we need to be able to speak with OMB 
to be able to have a full picture of what is going on here?
    Mr. GRIBBEN. I personally don't believe that is necessary.
    Chairman KIM. Okay. Well, I am going to turn it over to the 
Ranking Member here for a couple questions.
    Mr. HERN. Thank you, Mr. Chairman.
    Mr. Gibben--Gribben, I am sorry--as mentioned in the 
opening statement, the 7(a) loan program has been growing 
rapidly over the last couple years, $18.75 billion, 2015, to 
$30 billion in 2020. And the congressional budget indicates the 
number will be $99 million that you need for the $30 billion 
program.
    In your testimony, you state there are three main inputs 
into the model: performance assumption, cohort composite 
assumptions, and macroeconomic assumption. Are these variables 
weighed the same?
    Mr. GRIBBEN. They are treated differently. The--but they 
all go into factoring what the cost of the program might be. 
The model looks at the actual performance of the portfolio over 
26 years. That has the bigger impact on the model than anything 
else, that and the projections for--when we--I said we--in 
2014, when we introduced the changes to the model to put 
greater weight on some of the macroeconomic assumptions, it was 
on long-term unemployment. So the history of unemployment and 
the projections of unemployment in the future have the biggest 
impact on the model than most of the other factors.
    Mr. HERN. Yeah. So I have a lot of questions around it. But 
in fiscal 2020, the congressional budget justification, you 
stated that you altered how your estimate--estimate purchase 
amounts. Can you describe in detail the old method versus the 
new method?
    Mr. GRIBBEN. The old method was taking a simpler approach 
to--what we have to try to figure out is, in the future, what 
percentage of the loans that are approved in that fiscal year 
are going to default and at what amount we would have to 
purchase them. The old model was assuming there was a period of 
time from the time that a loan went into default until it was 
actually purchased.
    When we look at the actual history, the time length between 
when a loan defaults and when it is actually purchased was 
longer than the model had been assuming. So taking that into 
account, what that means is the purchase amounts on average 
over this span of 20 years was about 8 percent higher than the 
model had been forecasting.
    So we changed the--we changed the way that we looked at 
the--that time to calculate what is an average default to 
purchase event and to be able to calculate what a purchase 
amount would have been. That was the refinement that we made 
for this 2020 model.
    Mr. HERN. You also state that you annually test the 
predictive ability of the existing assumptions and adjust the 
methodology as necessary. I think that is what you were just 
referencing.
    So I have got a couple questions. Since you also have a 
program, SBDC, where you are out helping folks understand their 
business models before they ever get a loan or go to a lending 
institution as a service to small businessmen and women in 
America, based on what you have seen with failure rates, have 
you adjusted that coaching model that you have out there to 
maybe look a little more stringent at business plans to make 
sure they are more long-term viable as opposed to what is 
causing the failures now? Or would you say it is a naturally 
not predictable failure rates that are going on?
    Mr. GRIBBEN. I am struggling to answer that question just 
because I am not sure exactly what the Small Business 
Development Centers, when they talk to the small businesses 
about potential lending, what they might be discussing with 
them.
    Mr. HERN. Well, it just seems that if you have got 
businesses that are failing and you are responsible, you are 
going to come back and ask the American taxpayers for $100 
million or ask small businessmen and women to pay--I am just 
running some numbers--anywhere from 23 cents a day to 46 cents 
a day over a life of a loan because there is a higher failure 
rate than you originally had predicted, that we would somehow, 
in that same guise of helping people actually get to these 
loans, that you would help them maybe not make the same 
mistakes as their predecessor.
    I mean, you just referenced that you have taken 26 years of 
history and using that to formulate and sort of benchmark your 
model going forward, it seems like we would also take some of 
those failures maybe where you are advising some potential 
businessmen and women to not make those same mistakes again.
    Mr. GRIBBEN. Which is exactly what happens in the micro 
loan program. That micro loan program where the technical 
assistance is directly tied to the loans that are made, those--
that is the counseling and training that they get that are 
really focused on their business plans and their ability to 
repay the loans over time.
    And in terms of what I was referring to when we look at the 
assumptions that we make in the model to project future 
purchase events, the cash flows that are going to occur over 
the next 20 to 30 years of the lifetime of the loan, there are 
a number of different factors why a business might not be able 
to repay back a loan.
    And we are trying to determine from--and there is a lot of 
factors that go into it, from geography to industry to loan 
sizes, the different sub programs that comprise the 7(a) 
category. There are a number of different factors why a small 
business might fail.
    Mr. HERN. Sure. Well, I think that would help us 
understand, as the Chairman said, because as we are looking at 
failure rates that are beyond--or earlier than you originally 
projected that is causing the problem you are saying.
    One last thing and then I will yield back. Since the 7(a) 
loans are sort of lender of last resort because banks say they 
can't take them, then you are obviously looking at something 
that may be a little riskier than a traditional commercial 
bank, that there has been a little bit less take rate in 2018, 
which would probably indicate that commercial banks are a 
little more willing to take more risk now, marginally more 
risk.
    The failure rate, the predictability of the failure rate, 
also realizing that a traditional bank is not going to give you 
a 20-year fixed rate, so that is a unique thing, are you 
looking to see if banks have changed their model of evaluating 
the loans? I mean, it is a big portfolio. But I am just curious 
as the relationship of the bank and how they are looking at 
these business models.
    Chairman KIM. If you can just be brief in your remarks 
here.
    Mr. GRIBBEN. Okay. We do not look at it from that aspect. 
We look at it as the 7(a) portfolio. We look at the early 
indicators of default rates and use that to make projections 
for the 7(a) program itself.
    Mr. HERN. Mr. Chairman, thank you.
    Chairman KIM. I just wanted to recognize Representative 
Davids to be able to ask questions. You are recognized for 5 
minutes.
    Ms. DAVIDS. Thank you, Mr. Chairman.
    Well, I appreciate the testimony that you have provided 
today. And I would actually love to follow up on the Ranking 
Member's line of questioning, because I think there has been 
maybe a view that we don't have a holistic approach to how the 
lending is happening and how the fee structure is working and 
the modeling that is being put out.
    And I am not positive if that is where he was going, but it 
does seem as though with the--that there are maybe some missing 
links here for some of us. When we look at an unemployment rate 
that in the modeling is like optimistic maybe, and then we look 
at the projection of a--like a deteriorating or higher failure 
rate, I think the question is how--why do you think that is 
happening based on the modeling that you have got?
    And then I suppose a follow-up question is, do you think it 
would be helpful for your program to start working with other 
programs within the SBA that is providing service--I see the 
votes just got called--but providing services to folks who are 
seeking to use the SBA 7(a) program?
    Mr. GRIBBEN. So in answer to your first question, if you 
look at the history of the fee structure, where the fees have 
been set, and our ability to offer fee relief, the pattern is 
clear that over the last few years, we are not able--we were 
not able to offer the fee relief that we were able to offer in 
the prior year, because we were coming closer and closer to 
that point where the fees were not going to cover the expected 
future defaults.
    So that is where--when you look at that trend over time and 
you look at 2020, that is where the tipping point happened. And 
so there--and it is, I admit, it is an extremely complicated 
model. There are a number of things that go in to try to 
predict and project what might happen in the future, and there 
are a lot of assumptions that we have to make, which is why we 
have 26 years of data now to help us.
    In the very beginning of credit modeling, it was more 
difficult when we switched to the Federal Credit Reform Act way 
of calculating these future costs. This is also something--when 
you mentioned the banks, this is something that they are going 
to be faced with the new accounting rules of how they are going 
to have to calculate their loan loss reserves.
    But in terms of the subsequent question about the feeding--
the--and correct me if I am misstating, but it is how we 
partner with other loan program--the other programs within the 
SBA in regards to the 7(a) loan program. And under my office is 
also the Office of Performance Management, so we closely tie 
all the strategies, the priorities of the agency, and as that 
relates across the different program offices, whether it is 
capital access or the Office of Entrepreneurial Development, in 
order to make all of the programs successful, whether it is 
7(a), whether it is the 8(a) contracting loan program, in order 
to be able to achieve the mission of the agency to be able to 
support small businesses to be able to help them grow and 
achieve their goals.
    Ms. DAVIDS. Thank you. I yield back.
    Chairman KIM. Okay. We are going to try to do two more 
before we have to run for votes. So I just want to recognize 
Representative Stauber for questions here for 5 minutes.
    Mr. STAUBER. Thank you, Mr. Chair. I just have one 
question.
    Mr. Gribben, in your testimony, you state that performance 
assumptions you use over 25 years of historical 7(a) program 
and the macroeconomic data. But for the cohort composition 
assumptions you use characteristics, quote, from recent years. 
Please describe to the Committee why you use two different data 
sets.
    Mr. GRIBBEN. We use the historical data in order to be able 
to understand the performance of the loan based on conditions 
of, let's say, what unemployment GDP might have been at that 
time. And we use assumptions for the future to be able to 
better predict performance of the loans over the future period. 
So we use past assumptions to help better inform our 
predictions for the future.
    Mr. STAUBER. Thank you. That is my only question. I yield 
back.
    Chairman KIM. I just wanted to recognize Congressman Crow 
quickly here before votes.
    Mr. CROW. Thanks, Mr. Chairman. I will yield to my 
colleague from New York.
    Ms. VELAZQUEZ. Let me thank the gentleman for yielding.
    Mr. Gribben, based on looking at the reestimate data, it 
appears that SBA's model has been somewhat inaccurate. There 
have been downward reestimates every year since 2010. Isn't 
that correct? Yes or no.
    Mr. GRIBBEN. Yes.
    Ms. VELAZQUEZ. Okay. So given this, how can you defend 
raising fees again? Everyone in this room knows that you are 
going to end with a surplus, just like every year since 2010. 
Why do we have to play this game, sir? Whose idea is this?
    Mr. GRIBBEN. This was----
    Ms. VELAZQUEZ. Is this your idea or is this OMB?
    Mr. GRIBBEN. Oh, no, this is completely under the agency.
    Ms. VELAZQUEZ. Okay.
    Mr. GRIBBEN. So prior--but if you looked at--prior to when 
I mentioned that the model changed in 2014, prior to that time, 
there were large upward reestimates. It was when we changed to 
take the macroeconomic factors into account that you see the 
downward reestimates in 2010, 2011, 2012, 2013. They didn't 
exist before.
    Then if you look at it from the history since 2014, 2014, 
2015 had higher reestimates than you see now, because once we 
made that change to the model, we also fine tuned it. We look 
at--and we have to look at each----
    Ms. VELAZQUEZ. Let me just say, I want every piece of 
document, every piece of document submitted to the Committee 
that will justify raising the fees. I will not do anything, no 
legislation until we are convinced that that is the way to move 
forward.
    Let me say this to you, the mission of SBA is to provide 
resources and lending access to capital, affordable capital to 
those who cannot get it through traditional means. So the 
mission of the SBA is not going to be to make profit on the 
back of small businesses, and that must be clear.
    I yield back to the gentleman here. Thank you.
    Mr. CROW. One quick question, and it is regarding the 
Veteran Entrepreneurs Act program. And I know in the fiscal 
year 2020 budget request, the SBA says that it intends to offer 
the fee waivers for the veterans program, but in light of the 
clear direction that the SBA can implement these or the--the 
President's budget submission to Congress outlines the positive 
subsidy, obviously, which is what we are talking about here 
today for the 7(a) program. How do you think SBA can still 
offer those waivers under the veterans program?
    Mr. GRIBBEN. Because we provided the option to achieve zero 
subsidy. Under the zero-subsidy scenario we can offer the 
veterans fee waiver.
    Mr. CROW. So--but the entire budget--obviously, the entire 
request or the entire hearing today is about the fact that 
there is a positive subsidy, correct?
    Mr. GRIBBEN. It is about the options that Congress has in 
order to achieve zero subsidy or to appropriate money. I view 
the hearing about the options.
    Mr. CROW. All right. Mr. Chairman, I yield back.
    Chairman KIM. Okay. Thank you.
    Well, one thing is we are looking at these options because 
of, you know--because of, you know, what we are hearing from 
your particular administration. So, you know, this is something 
that we are going to have to look into very carefully.
    I do want to recess right now for votes. We will come back 
afterwards, if you don't mind sticking around a little bit 
longer, as we do have a few other members that look like they 
might want to ask questions. I just want to make sure they have 
that. So we will come back in just a little bit.
    [Recess.]
    [11:44 a.m.]
    Chairman KIM. Hi. Good morning. Thank you for your patience 
and sticking around with us as we wrangled our votes together 
down there on the House floor. Why don't we just jump right 
back in and just be able to get started here. I am just going 
to just briefly introduce the witnesses and then we can start 
with your remarks there.
    So our first witness today is Mr. Tony Wilkinson. Mr. 
Wilkinson is president and CEO of NAGGL, the only national 
trade association representing the SBA 7(a) lending industry. 
He has served in this role for more than 25 years and is 
responsible for working closely with agency executives and the 
Small Business Committee and ensuring the continued stability 
and availability of the 7(a) program.
    Our second witness is Ms. Lynn Ozer. She is the president 
of the SBA Lending Department at Fulton Bank headquartered in 
Lancaster, Pennsylvania. She also manages all the SBA lending, 
which covers my home State of New Jersey, Pennsylvania, 
Maryland, Delaware, Virginia, Washington, D.C., and 249 office 
locations.
    Also, our next witness is Ms. Gail Jansen. She is the vice 
president of business services and operations at Kinecta 
Federal Credit Union, where she is currently responsible for 
all areas of loan origination within business services, has 
over 25 years in commercial lending experience.
    And I would like to now yield to our Ranking Member, Mr. 
Hern, to introduce our final witness.
    Mr. HERN. Thank you, Mr. Chairman.
    Our next witness is Gordon Gray. Mr. Gray is the director 
of fiscal policy at the American Action Forum, which is the 
leader in pro-growth fiscal policies in Washington, D.C., and 
across the country. Mr. Gray is an expert on budget matters and 
has previously testified before the House Budget Committee. 
Prior to this current role, Mr. Gray held senior staff 
positions in the U.S. Senate, has spent time with the AEI, the 
American Enterprise Institute.
    Mr. Gray, we are pleased to have you testify, and we 
welcome your participation.
    Chairman KIM. Great. Thank you.
    Mr. Wilkinson, why don't we start off with you. You are 
recognized for 5 minutes.

   STATEMENTS OF TONY WILKINSON, PRESIDENT AND CEO, NATIONAL 
  ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS; LYNN G. OZER, 
    PRESIDENT, SBA LENDING, FULTON BANK; GAIL JANSEN, VICE 
PRESIDENT OF BUSINESS SERVICES AND OPERATIONS, KINECTA FEDERAL 
   CREDIT UNION; AND GORDON GRAY, DIRECTOR OF FISCAL POLICY, 
                     AMERICAN ACTION FORUM

                  STATEMENT OF TONY WILKINSON

    Mr. WILKINSON. Thank you, Chairman Kim, Ranking Member 
Hern. My name is Tony Wilkinson, and since 1987, I have served 
as the president and CEO of NAGGL, a national trade association 
representing lenders and other entities that participate in the 
SBA 7(a) loan program. Prior to this job, I was an SBA lender 
for a community bank based in Stillwater, Oklahoma.
    The President's fiscal year 2020 budget request included 
what we believe is an unnecessary positive subsidy of $99 
million for the 7(a) program. This is a major shift from the 
program's track record of operating at zero credit subsidy 
since fiscal year 2005, except during the years covered by the 
Recovery Act.
    This subsidy calculation is not a proposal like the rest of 
the budget request. Congress must react to this calculation. 
Congress will have to appropriate $99 million or amend the 
Small Business Act to raise the current fee caps on borrowers 
and lenders to cover the cost of the program.
    The President will need to sign into law one of these paths 
forward by September 30 or the popular 7(a) program will shut 
down on October 1. But first, we must collectively question the 
positive subsidy calculation. My plea is that you challenge 
both OMB and SBA to explain this subsidy estimate in detail.
    The fiscal year 2020 budget documents provide insufficient 
justification for an increase in estimated program costs. The 
proposed subsidy increase does not track with performance data, 
and the subsidy calculation lacks transparency as neither SBA 
nor OMB has disclosed the details of their calculation.
    We say this for three reasons. First, SBA has overestimated 
the cost of the portfolio year after year for nearly a decade. 
In the fiscal year 2020 budget, SBA reported for last year a 
$757 million excess subsidy reserve, meaning the program took 
money out of borrower and lender pockets and sent that money to 
the Treasury. Doesn't that sound like a tax, an unauthorized 
tax?
    For all programs at the SBA, the overestimation of cost 
recognized last year totaled almost $1.5 billion, that is with 
a B, billion dollars. This is not an isolated incident. Since 
fiscal year 2010, the SBA 7(a) model has overestimated the cost 
of the program by almost $3.2 billion. This is a staggering 
amount of money that means nearly a decade of unnecessary fees 
on small business borrowers and lenders.
    In fact, Congress has also been overcharged. In the few 
years when there were congressional appropriations, the fiscal 
year 2020 budget documents also show significant downward 
reestimates for those years, meaning that the--many of the 
appropriation dollars were not necessary.
    In a series of GAO--in a series of reports, GAO describes a 
pattern of discrepancies between actual performance and SBA's 
projected performance, resulting in repeatedly overestimating 
the cost of the program. One GAO report documents that SBA 
hired Pricewaterhouse to conduct a study which found the 
subsidy rate calculation is perceived by SBA to be a tool for 
gaming the congressional appropriations process.
    Another GAO report stated they could not determine whether 
a bias existed in the model by systematically excluding 
variables to influence the subsidy rate in a particular 
direction, and SBA could not provide adequate documentation to 
demonstrate the rationale for the model. These are alarming 
conclusions.
    Actual portfolio--actual performance of the portfolio is 
starkly different than the projected portfolio. For instance, 
the program's 5-year average recovery rate on defaulted loans, 
as reported to Congress last December, was 50 percent. In sharp 
contrast, the fiscal year 2020 budget assumes a projected 
recovery rate of only 37.29 percent.
    Why has the subsidy modeling ignored this established trend 
of steadily increasing recovery rates? Also, in fiscal year 
2018, SBA reported a chargeoff rate of 0.51 percent, a historic 
low. We simply cannot see that there has been a negative shift 
in the performance of the portfolio.
    Lastly, we are concerned that the model fails to take into 
account appropriate assumptions such as recent significant 
programmatic changes that have improved the performance of the 
portfolio. There is a troubling pattern in how SBA and OMB 
model the subsidy cost which GAO has highlighted over multiple 
administrations for the last 22 years.
    SBA's preferred method to cover the unnecessary positive 
subsidy is to raise fees on borrowers and lenders. But without 
justification, how can we simply accept this projection? Based 
on the data we can see, there surely must be an error in the 
fiscal 2020 calculation.
    Yes, Congress gave the executive branch authority to 
calculate subsidy cost, but Congress did not give unfettered 
authority for cost to be calculated without transparency or 
outside of congressional oversight. I urge you to challenge 
both SBA and OMB to explain the fiscal year 2020 subsidy model 
or this program and small business borrowers will suffer the 
consequences.
    Congress created the SBA in 1953 to aid, counsel, assist, 
and protect the interest of small business concerns. Levying an 
unauthorized tax does not comply with this mission.
    Thanks for inviting me here today, and I look forward to 
answering any questions.
    Chairman KIM. Thank you, Mr. Wilkinson.
    Ms. Ozer, over to you. You are recognized for 5 minutes.

                   STATEMENT OF LYNN G. OZER

    Ms. OZER. Thank you, Chairman Kim, Ranking Member Hern, and 
members of the Subcommittee. I appreciate this opportunity. My 
name is Lynn Ozer, and I am currently the president of Fulton 
Bank's SBA Lending Department, where I oversee all aspects of 
SBA lending in the mid-Atlantic region in the five States that 
our bank is located.
    I have believed and trusted in SBA's mission to aid and 
protect these borrowers for the entirety of my career. However, 
it is disheartening to see a fiscal year 2020 budget request 
from the SBA that takes advantage of these small business 
borrowers. The budget states positive subsidy calculation for 
the 7(a) program for fiscal year 2020 of $99 million, a marked 
shift from the program's track record operating at zero subsidy 
and no cost to the taxpayer.
    SBA has essentially told Congress that it has a choice, to 
either appropriate $99 million or hike up fees on borrowers and 
lenders or the program shuts down on October 1. My first 
thought as a seasoned lender is to question whether or not 
there have been any performance issues in the portfolio. 
Purchase rates are at a near all-time low. Recovery rates are 
at an all-time high. SBA reports a record low chargeoff rate in 
2018. When we see a positive subsidy, you would think that the 
portfolio would show some signs of worsening, but it does not.
    SBA has also overestimated the cost of every cohort of 
loans made for the past 9 fiscal years, which means SBA could 
have asked for much less from the borrowers and the lenders and 
still have covered the cost of the program at a zero subsidy. 
This tells me the current subsidy model used is not working as 
it should.
    I urge this Subcommittee to work with OMB and SBA to obtain 
the details of this subsidy calculation. The subsidy model has 
always been shrouded in mystery. Lenders are the stewards of 
this program, and Congress gives the program its authority to 
exist. Does it make sense that none of us know how the cost of 
this program is calculated?
    SBA has made it clear their preferred solution to cover the 
unnecessary positive subsidy is to hike fees on the borrowers 
and lenders. This is a tax on small business. Under SBA's 
proposal, some of my borrowers would have seen a 7 percent 
increase in fees, others a 16 percent increase, and some 
borrowers' fees would have doubled. This would mean shrinking 
access to capital.
    And the impact to lenders, under the SBA's proposal, the 
cost of my SBA department would increase by roughly 25 percent 
just on new loan originations in fiscal year 2020, with that 
number multiplying itself year over year into the future since 
these fees are charged on an ongoing basis annually for the 
rest of the life of the loan.
    When the costs increase on the lenders, that creates a 
domino effect, the results of which hurt the small business 
borrower in the end. The goal is to increase opportunities for 
small business. The budget request would do just the opposite. 
It would shrink access to capital, closing the door on many 
small borrowers and lenders.
    I also want to take a moment to respond to Mr. Gribben's 
comment about the portfolio doing worse in good times and his 
admission that his model does not take lender behavior into 
account. I am a lender. Lenders administer this loan program.
    When times are good and when times are bad, my credit 
policy does not change. This inverse relationship we have with 
the conventional market speaks to loan volume. When times are 
good, borrowers have options and our volume may plateau. When 
times are bad, borrowers have less options and our volume 
increases. But we are not talking about volume. We are talking 
about cost. When times are good, my credit committee is not 
going to allow us to approve riskier loans just to make up 
volume. Why?
    We still need to have a portfolio that meets safety and 
soundness standards for our regulators. SBA lending has certain 
rules that govern prudence regardless of economic swings, like 
always requiring a personal guarantee from the borrower, 
requiring borrowers to have skin in the game, prescribing debt 
service coverage ratios and collateral requirements.
    And there is just only so much risk a lender can take. 
Actual performance does not support their assumption that we 
make riskier loans in good times. The emphasis on macroeconomic 
trends seems inappropriate for this highly regulated loan 
program.
    Do not simply take these projections at face value, and I 
ask that you seriously challenge the subsidy rate. Small 
business borrowers, lenders, and the ability of the 7(a) loan 
program to serve access to capital needs are dependent on how 
you respond to this surprising calculation.
    Thank you.
    Chairman KIM. Thank you.
    Let's see, Ms. Jansen, over to you for 5 minutes.

                    STATEMENT OF GAIL JANSEN

    Ms. JANSEN. Good afternoon, Chairman Kim, Ranking Member 
Hern, and members of the Subcommittee. My name is Gail Jansen. 
I am testifying today on behalf of NAFCU.
    Thank you for the opportunity to share with you our 
perspective on SBA 7(a) loan program and the potential impacts 
of the proposed fee structure changes for fiscal year 2020.
    As the vice president of business services and operations 
at Kinecta Federal Credit Union, I am responsible for a 
portfolio of nearly $1 billion in member business loans, which 
includes nearly $35 million in SBA loans. Business lending is 
an important aspect of our service to members at Kinecta. A key 
part of that is our ability to offer SBA 7(a) loans.
    Kinecta started our business program in 2013. We are a 
preferred lender with the SBA. We are the number one credit 
union SBA lender in all of California. Our SBA loans range from 
a low of $50,000 to a high of $5 million, but the average size 
of our loans is $250,000. On average, we make about 20 loans a 
year, and currently, we have 100 SBA loans in our portfolio.
    The kind of companies that turn to us for SBA loans include 
small manufacturers, brick-and-mortar retail shops, independent 
restaurants, and professional service companies. A business 
owner will apply for an SBA loan with the credit union because 
they are looking for something different than what the bank can 
offer. They are often pleasantly surprised that a credit union 
offers small business loans, and as a result, they are willing 
to consider us as a viable alternative.
    Our ability to offer SBA loans allows us to meet the needs 
of our members, like the one who turned to us in July 2018 with 
a small, growing residential home remodeling company to 
refinance existing business debt and provide working capital to 
support new jobs and projects.
    At the time of the loan request, the company had only one 
full-time employee and one part-time employee. The subject debt 
to be refinanced was originated from an online lender that was 
charging the business owner an exorbitant interest rate of 44 
percent.
    After underwriting the loan request, Kinecta approved and 
funded the SBA loan in the amount of $110,000 at an interest 
rate of 7.75 percent. The refinancing of the business debt 
resulted in a significant savings for the business owner. As a 
result, the business has since hired two full-time employees 
and has begun saving money to purchase commercial real estate.
    Small businesses like this one are the backbone of our 
economy and an essential source of jobs. The SBA's loan program 
serve as an important resource that help credit unions provide 
small businesses with the vital capital necessary for growth 
and job creation, in many cases to businesses that would 
otherwise not be able to obtain financing.
    There are positives to SBA's overall fiscal year 2020 
budget request, such as the increase in the SBA express loan 
limit from $350,000 to $1 million. However, it was troubling to 
see the SBA's request to modify its statutory fee structures 
and potentially increase its fees because of a refinement to 
its economic modeling.
    The bottom line is that the fee increases as proposed by 
the SBA in this budget submission will impact both our small 
business members and the credit union. SBA's proposed fee 
structure will make it more expensive for members to get loans 
greater than $500,000 by increasing the guarantee fee on those 
loans. For loans greater than $1.5 million, the proposal 
introduces an even higher new fee rate.
    It is important to note that the small business member pays 
the guarantee fee one time, usually at funding. The moneys are 
often dispersed directly from the loan proceeds so the member 
does not have a direct out-of-pocket cost at origination. 
However, the lender, Kinecta in this case, pays an ongoing 
annual fee for each loan that is originated. This fee is 
currently 55 basis points.
    Under the SBA's proposal, the fee will be unchanged for 
loans up to $1.5 million, but it will increase to 83 basis 
points for loans over $1.5 million. The SBA proposal will make 
loans more expensive for lenders like Kinecta.
    In a high-cost real estate market, such as California and 
New Jersey, among others, $1.5 million is not a lot when you 
are talking about commercial real estate. Increasing the costs 
of these loans to both the small business and the lending 
institution will likely make it more difficult to get an SBA 
loan for commercial real estate in higher markets.
    We urge the SBA and Congress to work together to protect 
and strengthen the SBA 7(a) program. This includes examining 
all efforts to avoid the proposed fee increases on SBA's small 
business loans and the lenders that serve them.
    In conclusion, the ability for small businesses to borrow 
and have improved access to capital is vital for job creation. 
We recognize that maintaining a zero subsidy for the program is 
important, but we urge you to examine all potential alternative 
solutions to avoid a fee increase.
    I thank you for your time and the opportunity to testify 
before you here today, and I welcome any questions you may 
have.
    Chairman KIM. Thank you for your testimony.
    Mr. Gray, over to you for 5 minutes.

                    STATEMENT OF GORDON GRAY

    Mr. GRAY. Chairman Kim, Ranking Member Hern, and members of 
the Committee, I am honored to be before you today to discuss 
the budgetary considerations of the Small Business 
Administration's 7(a) loan program.
    This is an important program that provides access to small 
business entrepreneurs who otherwise have no recourse to 
adequate financing in the market, supporting hundreds of 
thousands of jobs throughout American communities. As a 
taxpayer-funded program, it should be subject to continuous and 
rigorous oversight, and I appreciate the Committee's attention 
to this program in today's hearing.
    In my testimony, I wish to make three basic observations. 
Federal Government is a prolific lender, providing guarantees 
on and direct loans of $4 trillion as of fiscal year 2018. The 
budgetary treatment of credit programs is somewhat unique in 
budgeting, adhering to the principles of accrual accounting as 
set forth in the Federal Credit Reform Act, FCRA, of 1990.
    FCRA accounting addresses the deficiencies of cash 
accounting in measuring the cost of credit programs, but 
necessarily introduces additional complications, some of which 
animate today's discussion. I will briefly discuss these 
observations in turn.
    The Federal Government currently has a combined $4 trillion 
in credit assistance outstanding as of 2018. In general, the 
goal of this assistance is to provide credit to borrowers who 
otherwise would not receive credit at market terms from 
lenders.
    The credit assistance takes two forms: direct loans where 
the Federal Government is the lender or loan guarantees where 
the government commits taxpayer funds to guarantee private 
lending. As of fiscal year 2018, the Federal Government has 
$1.4 trillion in direct loans outstanding and guarantees on 
$2.6 trillion as of last year.
    It is loan guarantees that concerns today's hearing, 
specifically the 7(a) loan program. The 7(a) program provides 
eligible small businesses with private sector financing with a 
public guarantee. The program includes several specialized 
features, but in general, provides up to 75 percent guarantee 
on loans up to $5 million. The program requires lenders to 
ensure borrowers demonstrate adequate ability to repay, 
management ability in equity, among other considerations. 
Credit is also contingent on borrowers demonstrating that 
credit is otherwise unavailable at reasonable terms.
    According to the SBA, the 7(a) loan program supported over 
60,000 loans totaling $25.4 billion in fiscal year 2018. The 
budgetary treatment of this program is prescribed in the 
Federal Credit Reform Act of 1990 and its amendments.
    In general, this reform requires recording credit 
assistance programs in the Federal budget on an accrual basis. 
Accrual accounting more accurately captures the taxpayer 
exposure for a given credit program by recognizing the value of 
the upfront outlay by the taxpayer but also the associated 
repayment stream, even if it is outside the budget window.
    This treatment also captures the value of preferential 
credit terms, such as longer loan maturities or interest 
deferral. It is important to recognize that this calculation 
more accurately reflects the totality of the Federal commitment 
for a given credit program. It also necessarily introduces 
additional complications.
    By nature, FCRA requires projecting all associated cash 
flows for a given loan over its duration. This also requires 
projecting likely delinquencies, defaults, prepayments, 
interest rates, and other factors to determine credit subsidy 
rates.
    Underpinning a number of these elements are OMB's economic 
assumptions, which the agency is required to use as part of the 
calculation. The strength of the economy substantially effects 
default rates, for example, and a worsening economic outlook, 
would all else equal, increase the subsidy cost to the Federal 
Government through higher defaults, among other considerations.
    The subsidy cost is thus exposed to fluctuations for any of 
these factors. Those will always persist, however, and 
measurement uncertainty in is not limited to this program or 
credit programs generally.
    Any time a measurement requires projecting into the future, 
some uncertainty, however, is introduced. Annual reestimates of 
these programs enhance the estimating process. Since FCRA was 
enacted, subsidy costs of the 7(a) program have been on net 
underestimated with a net positive lifetime reestimated subsidy 
cost. Yet these costs are quite small over the nearly three 
decades and relative to the overall size of the loan 
disbursements.
    It does appear, however, that this net underestimate is 
driven largely by the effects of economic downturns. 
Accordingly, it is important to understand the factors that 
animate these subsidy costs as policymakers consider how to 
adequately resource this important policy objective while 
safeguarding taxpayer funds.
    I believe the Committee's desire to hold this hearing 
reflects that intention, and I look forward to answering your 
questions.
    Chairman KIM. Thank you so much for your testimony.
    Thank you again to the four of you for coming out here. I 
just have a few questions and then I will turn it over to the 
Ranking Member, and we may have some more after that.
    But, Mr. Wilkinson, I would like to start with you. You 
know, you have now heard--we have all heard from the SBA's CFO 
and regarding the data that was used for the subsidy 
calculation, and I wanted to ask you about your response to 
that. Was there anything that he said that was new to you, 
anything that helped shed a little bit more light on their 
process there? And what are the questions that you have 
lingering from his testimony?
    Mr. WILKINSON. Thank you for that question. I have actually 
got a lot of comments on his testimony. First of all, he talked 
about tweaking the model in 2014 to accurately reflect program 
performance. That was his quote. But the reestimates tell a 
very different story.
    In fiscal year 2014, we started out at a zero subsidy rate. 
Now, remember, he said this was the year that they changed 
their model to more accurately reflect what was going on. The 
2014 subsidy rate has now been estimated to be a negative 2.08. 
So they missed by their own calculation so far of about $359 
million.
    In 2014, if you look at repurchase rates in 2018 versus 
2014, our repurchase rate has gone down 35 percent. So the----
    Chairman KIM. Between 2014 and----
    Mr. WILKINSON. And 2018. So our performance today is much 
better today than it was in just 2014. And even with the rates 
in 2014, they had a negative subsidy reestimate of $359 
million.
    In Mr. Gribben's verbal testimony, he did not give one 
single detailed reason why the subsidy rate increased. Mr. 
Gribben's comments on future repurchases may not be supported 
by the SBA's own data risk warehouse. Metrics in projected 
purchase rates, they have a very sophisticated model that the 
Office of Capital Access manages that will show a very 
different number for purchase rates than what is included in 
the model.
    So there are a lot of questions in here. It appears that 
they are ignoring the President's own economic assumptions, and 
they continue to factor in another Great Recession or another 
9/11 end of the model when the President's economic assumptions 
don't forecast that. They forecast strong GDP and a low 
unemployment rate.
    So we are confused as to how we can have an upward subsidy 
cost need when our performance tells us a very different story.
    Chairman KIM. Thank you for that.
    I wanted to turn to Ms. Jansen. I wanted to ask you, in 
your opinion, would a steady unemployment rate have any effect 
on the quality of your portfolio, the quality of your 
borrowers?
    Ms. JANSEN. Unemployment rate won't really factor in, other 
than access to capital. That is what we are really looking for 
as far as SBA goes.
    Speaking from my perspective with the members who walk into 
our member service centers and request SBA loans, they want to 
grow their own business, and in order to do that, they are 
going to have to have access to capital.
    Chairman KIM. I appreciate that.
    Ms. Ozer, I wanted to ask you a similar question to Mr. 
Wilkinson. I wanted to just hear from you just straightforward, 
you know, why do you think this subsidy calculation deserves to 
be challenged? How do you respond to what the CFO said today?
    Ms. OZER. Listening to what he said means that we have to 
either go on to appropriations or they have to raise fees. I 
have been doing this for longer than I want to admit, and I 
have seen this go--this whole program go through being on 
appropriations, not being on appropriations, raising fees, 
lowering fees. And all the instability in the Small Business 
Administration creates problems for borrowers and lenders and 
definitely, as Ms. Jansen said, shrinking the access to 
capital.
    The biggest problem that I see is the effect that it has on 
the borrowers, specifically the increase in the cost of fees. 
The fees for loans under $500,000, they will be the same. But 
for borrowers between $500,000 and $700,000, the fees increase 
dramatically. We have a lot of borrowers, in your area 
actually, that have felt that.
    The effect on the lenders is that the ongoing fees that we 
are charged on our loans is going to go up. And whatever 
happens to cost more money to the lenders, eventually gets put 
back onto the borrowers, and their fees rise.
    I have to run a budget and explain to my shareholders, my 
board of directors, and all my stakeholders why are the costs 
of this program increasing. And if we look at what Mr. Gribben 
said, it flies in the face of what our own statistics, given to 
us from the SBA about how our portfolio and our peers' 
portfolio performed, that I have been reporting to the Credit 
Oversight Committee, what they are saying flies in the face of 
all the actual facts. So it is going to be very difficult for 
me to explain that.
    Chairman KIM. Thank you for explaining that to me.
    So I am going to turn it over to the Ranking Member here 
for some questions.
    Mr. HERN. Thank you, Mr. Chairman.
    Mr. Wilkinson, welcome from Oklahoma. It is good to see 
you.
    Ms. Ozer and Ms. Jansen, I will tell you that this whole 
Congress needs more people like you testifying from people who 
actually experience what is going on with the legislation that 
has passed and what actually happens. It is so refreshing to 
hear--even though you are with the majority party here as their 
witnesses, it is so great to hear you actually talk about what 
happens out of Congress, and I just so appreciate it. It is so 
refreshing to hear you all. I wish every committee had folks 
like you testifying on the realities of what comes out of 
Congress.
    Mr. Gray, question for you. And by the way, I chaired a 
loan committee for 10 years on a bank, so I so appreciate it. 
It is music.
    Mr. Gray, do you know any of the requirements surrounding 
what an agency can and can't use as assumptions for modeling 
purposes?
    Mr. GRAY. So as I understand it, the 1997 Balanced Budget 
Act tried to apply more uniformity to the methodologies that 
the agencies have. I am aware of the fact that OMB's economic 
projections are one of those factors that they are required to 
consider.
    Mr. HERN. Are agencies provided guidance on how to select 
their assumptions?
    Mr. GRAY. Like I said, I believe those--they are given 
parameters set in statute by, for example, by FCRA and its 
subsequent amendments, like the 1997 Act, and, the previous 
witness spoke to some of this, there is some discretion at the 
agency level as well.
    Mr. HERN. So we will talk about the discretion. Economic 
assumptions, are they a major driver for their models?
    Mr. GRAY. I think the state of the economy performance of--
or the outlook on credit markets, credit conditions certainly 
underpin their assumptions.
    Mr. HERN. Because I will tell you, as a member of Budget, 
where we get to see all the assumptions from both side----
    Mr. GRAY. Right.
    Mr. HERN.--both parties, there isn't a doom and gloom from 
either party, yet the financial guru from SBA says--appears to 
think there is. So I would like to get his thinking. Maybe he 
has a crystal ball the rest of us don't have, because I would 
be interested.
    In your testimony, you touched on the reestimate process. 
Can you share with us how that reestimate process impacts a 
credit subsidy calculation?
    Mr. GRAY. Sure. So every year, on an ongoing basis, the 
agencies do revisit their past calculations, what elements of 
that may have changed. And so we basically get a performance 
exam of all of these programs since they were put on an accrual 
basis under FCRA.
    In the credit supplement we get, tables 9 and 10, I think, 
of past performance, and we can see how these were estimated at 
their inception and then over the lifetime of their 
performance. And those have been pretty instructive in thinking 
about how to think about these programs over time and under 
various economic conditions.
    Mr. HERN. Thank you, Mr. Gray.
    Mr. Wilkinson, in your testimony, you state that the 
subsidy calculation was amended in the past. Can you describe 
the events in the environment surrounding this amendment?
    Mr. WILKINSON. Yes, sir. Back in 1997, a similar discussion 
was ongoing. At some point in time, the agency decided that 
they had made an error in their calculation and they filed a 
formal budget amendment adjusting the subsidy rate.
    Mr. HERN. Who was involved in that, do you remember?
    Mr. WILKINSON. The Office of Management and Budget and SBA. 
I would say that the Senate Small Business Committee under 
Senator Kit Bond at that time was a driving force in getting 
that done.
    Mr. HERN. So what was the outcome of that?
    Mr. WILKINSON. At that particular time, we were on an 
appropriations so we were able to leverage those appropriation 
dollars much farther.
    Mr. HERN. Okay. So was it similar to today's conversation 
or dissimilar or----
    Mr. WILKINSON. It is very similar. GAO has documented this 
in a series of reports. We have had multiple former SBA 
employees tell us that the way the system works is OMB dictates 
to SBA a subsidy rate, and it is SBA's jobs to adjust the 
assumptions to get to the rate that they have been told to get 
to. And that is why you saw the Pricewaterhouse report come to 
the conclusion that the SBA and OMB is gaming the process.
    Last week, in a Senate Small Business Committee, Mr. Manger 
from the SBA testified that the macroeconomic assumptions come 
directly from the Office of Management and Budget and that he 
has no knowledge what those are, basically, you know, leaving 
that all to the Office of Management and Budget.
    So what we have got is a subsidy calculation that is 
shrouded in mystery. We can't see the details. We don't know 
how in the world they can say all of a sudden we are going to 
have a 10 percent spike in our net losses when our performance 
trends are going exactly the opposite direction.
    Mr. HERN. Before I close, I would just like to say thanks 
to each of you again for being here and your honesty. And 
certainly, I can see in your--when you are reading your 
testimony that you really have a lot of passion. So thank you 
so much.
    Mr. Chairman, I yield back.
    Chairman KIM. Thank you.
    I have a few more questions I just want to get into here. 
Ms. Ozer, back to you. As you were mentioning, you know, you 
have a sizable footprint in New Jersey. And I am trying to 
think about this a lot in terms of how it is going to affect 
the borrowers, how it is going to have a real impact where the 
rubber hits the road.
    So I wanted to ask you, how do you think this proposal will 
impact the extent to which you were able to reinvest in local 
communities like ours, specifically how exactly would increased 
fees affect their desire to apply for 7(a) loans and your 
ability to provide more loans?
    Ms. OZER. Thank you for your question. Specifically, I can 
give you an example. We just did a loan to a trucking company 
in Robbinsville, New Jersey, right outside of Bordentown. This 
business has been growing tremendously. With online businesses, 
trucking and delivery is just an exploding industry.
    They were renting space to keep all their trucks. They 
needed to buy the building they were in because their lease was 
up, and they wanted to buy it as well as the adjacent property, 
and the cost was over $3 million. They put a substantial amount 
of money down, and we made them a loan. Their fees for that 
loan of $2.9 million were--let me see. I have that here 
actually--$81,000.
    The company, under the new fee structure, would be paying 
an additional $5,500, $5,578.11 to be exact. That money could 
be used for them to buy another truck, hire another driver, 
expand their business in many other ways, instead of having to 
pay for the subsidy rate or whatever in additional fees.
    How that affects us, when we get a loan this big, our cost 
to this program would increase by 25 percent on an ongoing 
basis. Having that loan on our books, that larger loan, that is 
real estate secured, as opposed to some of the very small loans 
that aren't real estate secured and may not perform as well 
help balance risk. If we can't make these larger loans because 
of the cost to the bank and the cost to the borrower, we will 
have less capital to invest in other areas in New Jersey.
    We have to make a certain amount of money to keep my 
department going. And if our infrastructure and our efficiency 
ratio goes up, my bank directors and so forth are going to say 
to me, what is going on here. You are not making enough money. 
And they are going to cut the amount of staff that I have and 
my ability to provide ongoing community investment to projects 
like this.
    The smaller loans in your area that are $300,000, they 
don't pay nearly as much fees and their fees won't be affected. 
But if we can't balance out our investments with larger loans 
and smaller loans, we are going to have to have--there is going 
to have to be give somewhere. And who is going to pay for it 
but the small business borrowers. They are going to have less 
access to capital.
    Chairman KIM. A lot of my concerns here. That is very 
helpful, because I always want to make sure that we understand, 
you know, the tangible impacts, really understand what that is 
going to translate to in terms of the borrowers and small 
businesses.
    And as I have talked to a lot of small business owners, 
they talk to me about the importance of having that 
predictability for them to be able to do planning, you know, 
that they are dealing with razor-thin margins here, and, you 
know, of their ability to plan not just 1 year out but 10 years 
out in the growth, it really depends on that predictability.
    And my concerns here are certainly about what is going to 
happen given this, you know, fiscal year 2020 structure. But 
the lack of transparency and the lack of understanding of what 
is going into this concerns me about if we are going to be 
right back at here a year from now or 2 years from now and 
just, you know, what is going to be happening going forward.
    As we understand that, you know, we are--in many ways, it 
looks like, from what you are saying, that we are, you know, 
forcing or we will potentially be forcing small businesses and 
the borrowers into riskier loan products, and that is something 
that is going to be, you know, very damaging going forward.
    I wanted to ask, on that front, what are you hearing from 
borrowers in terms of their reactions to, you know, what has 
been happening here with the 7(a) and these developments? Are 
they understanding sort of the magnitude in which this is going 
to affect them and, you know, affect their abilities to be able 
to have access to capital? Please, anyone.
    Ms. JANSEN. Honestly, most of the borrowers that we deal 
with at the credit union don't really understand an SBA loan. 
When they come in and they ask for a business loan, we have 
referred them out to the SBDC to get their financials together 
to answer those questions, but there is an education process 
for a lot of the smaller people that we deal with, our members.
    You know, as a nonprofit, we want to help them build their 
business. They come to us and they trust that we are going to 
guide them in the right direction. So honestly, most of the 
borrowers that we deal with, they don't understand how this 
would affect them.
    Ms. OZER. As soon as they get here, as soon as they get to 
us, though, they quickly understand. When they hear the amount 
of the fees that they are paying and the fact that, you know, 
let's hurry up and get this in because if this passes on 
October 1, this is going to cost you twice as much money as it 
would if we do it now.
    I mean, then they will understand the urgency. And what 
they can do with an additional $5,500, it doesn't sound like a 
lot to a lot of people, but for small businesses, that could be 
a large part of their cash cycle. They could pay payroll for 
another month and it makes a huge difference and it has a huge 
impact.
    But I agree with Ms. Jansen, you know, they don't 
necessarily understand the workings, but they do trust that the 
bank is looking out for them and putting them into the proper 
product. I mean, we as a commercial lending institution offer 
them conventional financing. They only come to my department 
when my bank is not going to be able to do it.
    So they are already sort of in a difficult spot, and then 
you tell them how much it is, and they feel like they are 
getting hammered over the head. But the problem for us is 
exactly what you said, and it is not just the borrowers who 
have to plan; it is banks and their lending institutions that 
have to plan.
    And we have to budget and we have to know how much this 
program is going to cost so we can allocate human resources to 
making more of these loans and doing outreach into the 
communities that need these loans the most. And we can't afford 
to add personnel if we are going to keep paying fees to the 
government.
    Chairman KIM. That is right. And the same way that the 
borrowers turn to you and trust you about this analysis and 
understanding what they are going to need to do, they should 
also be trusting the SBA. They should be trusting us here in 
Congress to do our due diligence, that we recognize that the 
mission of the SBA is to help small businesses across this 
country, make sure that they can get a leg up, that they have a 
fair shot at being able to run a successful business and be 
able to grow.
    You know, the mission was not to create a revenue stream 
for the government on the backs of small businesses. Instead, 
everything should be geared towards what it is that we can to 
do to be able to help them. And what I assure you and assure 
you--this Committee on both sides of the aisle, we are 
committed to that. We are committed to ensuring that SBA stays 
true to the mission of helping small businesses across this 
country, giving them a fair shot, giving them a chance to 
really be able to succeed on this front.
    I wanted to ask a question, I wanted to ask this panel a 
question, a question that I asked the CFO, which is, do you 
think it will be the benefit to this Committee and for us here 
in Congress to hear from OMB on this?
    Mr. WILKINSON. I do. I think that is where the answers are, 
based on what we hear from former SBA employees, that is OMB 
and their macroeconomic assumptions that are driving the 
subsidy calculation. So I think it would be critical that you 
hear from OMB. Hopefully, we can get some straight answers.
    Chairman KIM. Is that the idea for every--does everyone 
else share that conclusion?
    Ms. OZER. I agree wholeheartedly.
    Chairman KIM. Does anyone disagree?
    Mr. GRAY. No.
    Chairman KIM. Well, no, thank you for that and your expert 
thoughts on this.
    I did want to just open up one last time, if there is 
anything else that anyone wanted to add for the record before 
this Committee before we start to move to conclusions.
    Mr. WILKINSON. The performance of the portfolio remains 
strong. We have actually had a very good working relationship 
with the Office of Capital Access at SBA. Over the last several 
years, we have worked hand-in-hand to improve the performance 
of portfolio, tightening up program parameters where they 
needed to be. I think that is reflected in the performance of 
the program.
    Unfortunately, we now have a subsidy calculation that does 
not reflect reality. There are some ulterior motives that we 
don't see, and it is not borne out by the statistics in front 
of us. So I beg this Committee to dig deep into the subsidy 
calculation and find out what is going on. We need the details. 
There has got to be a paper trail somewhere of how these 
assumptions are come to and put into the model.
    I heard Mr. Gribben talk about all the auditors. From our 
understandings, they are checking the spreadsheets. They are 
not determining what the inputs are into the model. That is 
vastly different. We need to figure out what the inputs are and 
how those were derived. So there is a lot of detailed 
information that needs to be looked at.
    Thank you.
    Chairman KIM. Anyone else?
    Ms. JANSEN. Yeah. I would definitely like to dovetail on 
that and say, you know, we support examining every available 
option to avoid the fee increases, not passing them on to the 
small businesses, crippling their abilities, and passing them 
on to the small lenders, you know, large or small lenders. We 
have got to make this capital available to increase small 
businesses' opportunities.
    Chairman KIM. Great. Thank you.
    Well, I appreciate, again, your time to be able to come and 
traveling here and be able to inform us and be able to help us 
do our jobs and make sure we are looking out for small 
businesses here.
    We know that the 7(a) program is the economy's main vehicle 
for entrepreneurs to be able to access affordable capital on 
reasonable and fair terms. It is also an engine of job creation 
responsible for supporting over 540,000 jobs in 2018 alone; 
therefore, preserving the integrity of 7(a) is a top priority 
of this Committee. And any proposals that threaten that 
integrity, especially by raising fees on small business 
borrowers, will be reviewed with the highest degree of 
scrutiny.
    And I certainly look forward to working with my colleagues 
on both sides of the aisle. And I think you, you know, 
certainly heard that the Ranking Member and myself are very 
much on the same page in making sure that we are going to get 
all the information that we need to be able to make an 
assessment about this and understand whether it is fair.
    You certainly heard the words from the Chairman of--
Chairwoman of the Committee of the whole that this is something 
that certainly has our attention and that we will be very 
focused on going forward.
    This is just going to be the initial steps. As I mentioned 
in the panel one, very much factfinding at this point. We 
certainly will be, if you don't mind, calling upon you again, I 
am sure, to be able to get your thoughts as we move forward and 
get more information about what is best.
    So I certainly feel passionate about this. I certainly want 
to make sure we are looking out for small businesses and also 
understanding on the lenders side, you know, how this is 
affecting your work and your ability to plan, your ability to 
be successful, which we certainly want to see done. So we are 
going to work on both sides of the aisle, find a solution that 
will protect small business borrowers and the 7(a) program.
    I am going to ask unanimous consent that members have 5 
legislative days to submit statements and supporting material 
for the record. And without objection, it is so ordered.
    And if there is no further business to come before the 
Committee, we are adjourned. Thank you.
    [Whereupon, at 12:29 p.m., the Subcommittee was adjourned.]
                            
                            
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