[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
INVESTING IN COMMUNITY: THE SBA'S COMMUNITY ADVANTAGE LOAN PROGRAM
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HEARING
BEFORE THE
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATION
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 21, 2019
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 116-022
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
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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. Judy Chu.................................................... 1
Hon. Ross Spano.................................................. 2
WITNESSES
Ms. Angela Mavridis, Owner, Tribali Foods, San Marino, CA........ 5
Mr. Robert Villarreal, Executive Vice President, CDC Small
Business Finance, San Diego, CA................................ 6
Ms. Janie Barrera, President and CEO, LiftFund, San Antonio, TX.. 8
Mr. John Kropf, President, Growth Capital Corp., Cleveland, OH... 10
APPENDIX
Prepared Statements:
Ms. Angela Mavridis, Owner, Tribali Foods, San Marino, CA.... 19
Mr. Robert Villarreal, Executive Vice President, CDC Small
Business Finance, San Diego, CA............................ 22
Ms. Janie Barrera, President and CEO, LiftFund, San Antonio,
TX......................................................... 43
Mr. John Kropf, President, Growth Capital Corp., Cleveland,
OH......................................................... 53
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
INVESTING IN COMMUNITY: THE SBA'S COMMUNITY ADVANTAGE LOAN PROGRAM
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TUESDAY, MAY 21, 2019
House of Representatives,
Committee on Small Business,
Subcommittee on Investigations, Oversight, and
Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:06 a.m., in
Room 2360, Rayburn House Office Building, Hon. Judy Chu
[chairwoman of the Subcommittee] presiding.
Present: Representatives Chu, Craig, Spano, and Burchett
Chairwoman CHU. Good morning. The Subcommittee will now
come to order.
I thank everyone for joining us this morning, and I want to
especially thank the witnesses who have traveled from across
the country to be with us today.
On this Committee, we are focused on making sure that small
businesses, whether in my district in California, in Ranking
Member Spano's district in Florida, and in every district
across American can access the capital they need to start,
grow, and create new jobs. And we know that when capital is
affordable and accessible on reasonable terms, small businesses
can do what they do best--strengthen our communities and fuel
our economy.
This is something I have witnessed firsthand in my home
state of California where 3.9 million small businesses make up
99.8 percent of our state's business, and employ almost half of
our workers, making them an essential part of our economy.
Though accessing capital affordably and on reasonable terms
is a challenge virtually all entrepreneurs face, this is even
more difficult for women, minority, and veteran entrepreneurs,
as well as small businesses looking to revitalize the rural
parts of our country.
Recognizing the additional barriers to capital faced by
entrepreneurs in these communities, SBA initiated the Community
Advantage Loan Program as a pilot in 2011 to meet the credit
and technical assistance needs of small firms in underserved
markets.
The Community Advantage Program provides mission-based
lenders, mostly nonprofit financial intermediaries focused on
economic development, access to loan guarantees under the
general 7(a) program for loans of $250,000 or less. By
utilizing Community Advantage, these lenders fill a gap in the
market and help small businesses who face challenges accessing
traditional capital to eventually become bankable businesses.
A key aspect of the program is that lenders who participate
in the program must make 60 percent of their Community
Advantage loans in underserved markets. To access the program,
a business must prove creditworthiness and a sound business
idea, but unlike traditional lending, qualification for the
program is not limited by the size of the borrower's balance
sheet or amount of collateral involved. This makes a real
difference for businesses that might not otherwise qualify for
traditional lending. And so far, the program has been
successfully meeting its goal of maximizing the footprint of
SBA-backed lending to underserved markets.
SBA stated in its Congressional Budget justification for
fiscal year 2019, that this program reaches, and I quote,
``significantly more women and minorities than the traditional
7(a) loan program.''
Since it started in 2011, the program has been extended
numerous times but it is currently set to expire in September
2022.
That is why I am proud to be working with the Ranking
Member of the Senate Small Business Committee, Senator Ben
Cardin, on bicameral legislation to finally make Community
Advantage a permanently authorized SBA loan program under the
Small Business Act.
Which brings me to the reason we are here today, to hear
from Community Advantage lenders and a borrower about the
impact that this important program has on underserved
communities, and about the value this program is adding to our
local economies every day.
We can all agree that minimizing barriers to affordable
access to capital for underserved entrepreneurs is an
incredibly important function of this Committee. 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 thank the witnesses for being here, and I now
yield to the Ranking Member, Mr. Spano, for his opening
statement.
Mr. SPANO. Thank you, Madam Chairwoman.
The economy continues to reach new heights, and from
historic unemployment rates to encouraging GDP readings, the
Nation is moving in the right direction. But despite these
positive economic signs, the Nation's smallest firms continue
to face obstacles when it comes to financing their businesses.
With conventional lending options exhausted, they often turn to
the Small Business Administration and their many capital access
programs to finance their operations and their dreams.
SBA's largest government guarantee program is the 7(a) loan
program. In 2011, in using its own express authority, SBA
created a 7(a) subprogram targeted at underserved communities
called the Community Advantage Loan Program. Given that this
program is not congressionally authorized, it is currently
operating as a pilot program within SBA and thus, lacks the
many requirements needed for a government guarantee loan
program.
Since its creation, this pilot's expiration date has been
extended a number of times by SBA and was recently extended
until September of 2022. In this last extension, SBA also made
significant structural changes to the program to further
examine it, which included prohibiting new Community Advantage
lenders from participating to adjusting the loan loss reserve
ratio. Ultimately, the decision to authorize this program lies
solely with Congress. Small businesses, entrepreneurs, and
startups from Ohio to my state of Florida benefit from many of
SBA's capital access programs, including the Community
Advantage pilot loan program. A comprehensive discussion on
next steps for this program is required and that is what we are
doing here today.
I want to thank our witnesses. You have traveled from
across the country to talk with us. Thank you very much for
being here. I look forward to hearing about your experience
with the program, what has worked and what has not worked. I am
also interested in hearing how you believe the structural
changes that the SBA put in place this past fall will impact
the program. As we have these conversations, it is important to
keep in mind that with any government program, comprehensive
oversight is critical in safeguarding American taxpayer
dollars.
Thank you, Madam Chairwoman, for having this timely
hearing. I yield back.
Chairwoman CHU. Thank you, Mr. Spano. The gentleman yields
back.
And if there are any Committee members that have an opening
statement, we would ask that they be submitted for the record.
I would like to just take a minute to explain the timing
rules. Each witness gets 5 minutes to testify and members get 5
minutes for questioning. There is a lighting system to assist
you. The green light comes on when you begin, and the yellow
light means there is 1 minute remaining. The red light comes on
when you are out of time, and we ask that you stay within that
timeframe to the best of your ability.
I would like to introduce our witnesses now.
I am so proud to welcome our first witness, owner of
Tribali Foods and my very own constituent, Ms. Angela Mavridis.
As a kind in her grandmother's kitchen, Angela discovered the
nurturing power of real foods. Today, her organic 100 percent
grass fed beef and organic 100 percent free range chicken
patties are a flavorful celebration of simple ingredients. As a
holistic nutritionist, Angela's ingredients for good nutrition
are simple--eat real, whole, unprocessed food consisting of
high quality proteins, colorful produce, a bit of fruit, nuts,
or seeds, and a healthy dose of good fats. She also believes it
is important to consider what foods make her happy, and after
35 years of abstaining from meat burger patties make Angela
very happy. Gathered from nature and seasoned with loving care,
Tribali Foods make healthier eating easier for everyone.
Tribali foods creates easy meal options with a commitment to
taste, nutrition, and transparent sourcing. Welcome, Ms.
Mavridis.
Our second witness is Mr. Robert Villarreal. Robert has
over 24 years of experience in community economic development
and nonprofit management, and is the executive vice president
of economic development for CDC Small Business Finance based on
Southern California. Here, he has held numerous roles over the
last 14 years. Currently, his responsibilities include grant
and capital development, strategic partnerships, and government
relations. In addition, he is the administrator of three
separate corporations, including the administrator of the State
Loan Guarantee Program and president of the Bankers Small
Business CDC of California, which is a CDFI. Prior to his
current role, Villarreal led the CDC's Community Lending
Program. Under his leadership, the CDC was the number one SBA
Community Advantage lender in the Nation. Villarreal is
currently a board member of Opportunity Finance Network, the
Community California Reinvestment Coalition, the San Diego
County Chicano Federation, and a member of Union Bank CSR
Advisory Board. Villarreal is a graduate of UC San Diego with a
graduate degree in political science and anthropology, and he
has a M.A. in international political studies from the Monterey
Institute of International Studies. Welcome, Mr. Villarreal.
And our third witness is Ms. Janie Barrera. Jamie Barrera
is founding president and CEO of LiftFund. The organization
provides loans and management training to enterprises from
startups to long established businesses. LiftFund operates in
Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana,
Mississippi, Missouri, New Mexico, Oklahoma, South Carolina,
Tennessee, and Texas. Since its inception in 1994, LiftFund has
disbursed more than 21,000 loans, totaling more than $3
million, with an impressive 94 percent repayment rate. Ms.
Barrera has received nationwide recognition for her
accomplishments, including the Small Business Administration
Financial Services Advocate of the Year, the Minority
Enterprise Development Consortium's Corporate Advocate of the
Year, and the San Antonio Business Hall of Fame. President
Barrack Obama appointed her to the President Advisory Council
on Financial Capability, and has served on the Board of
Directors for the Federal Reserve Bank of Dallas's San Antonio
branch. She received a bachelor's degree from Texas A&M
University Corpus Christi, and a master's degree in business
administration from the University of the Incarnate Word.
Welcome, Ms. Barrera.
I would now like to yield to our Ranking Member, Mr. Spano,
to introduce our final witness.
Mr. SPANO. Thank you, Madam Chair.
Our next witness is John Kropf. Mr. Kropf is president of
Growth Capital Corporation, a certified development company
that has been operating for over 35 years in Cleveland, Ohio,
and has provided more than $500 million in loans to businesses.
Prior to his service at Growth Capital, Mr. Kropf spent time as
a certified development company lender and microlender in
Pennsylvania, along with time spent at Wells Fargo. In addition
to his banking career, Mr. Kropf is a United States Army
veteran. I would like to thank you for your service, Mr. Kropf.
And we welcome your participation at today's hearing.
Madam Chair?
Chairwoman CHU. Ms. Mavridis, you are recognized now for 5
minutes.
STATEMENTS OF ANGELA MAVRIDIS, OWNER, TRIBALI FOODS; ROBERT
VILLARREAL, EXECUTIVE VICE PRESIDENT, CDC, SMALL BUSINESS
FINANCE; JANIE BARRERA, PRESIDENT AND CEO, LIFTFUND; JOHN
KROPF, PRESIDENT, GROWTH CAPITAL CORP.
STATEMENT OF ANGELA MAVRIDIS
Ms. MAVRIDIS. Thank you.
My name is Angela Mavridis, and I am the founder of a
national CPG, a consumer packaged goods company called Tribali
Foods. We are a real foods company, serving high quality,
flavorful, and effortless meal solutions. Tribali Foods is also
a certified women-owned business.
I grew up in the restaurant business as my father owned and
operated hamburger fast-food drive-thrus in the Pasadena area
of Los Angeles. My father came to this country from Greece at
the age of 17 to pursue his American dream. He opened his first
location in 1952 and realized that dream through the success of
his restaurants and real estate investments. He passed away 4
months ago, and I intend to honor his legacy and fulfill my
American dream of strong family values, entrepreneurship, and
giving back to my community.
At the young age of 13 and seeking a healthier way of
eating, I became a vegetarian. I was influenced by mainstream
media and the marketing messages of the early 1980s and 1990s
where meat, and specifically saturated fat, were vilified for
their perceived health consequences. Fat was feared and meat
was going to clog your arteries and give you plaque buildup. I
adhered to a vegetarian diet for 35 years. Fast-forward to 4
years ago when I studied nutrition and became a holistic
nutritionist. I came to learn that well-sourced, high-quality
animal meats provide the nutrient density and health benefits
that I lacked in my vegetarian diet. I tried my first organic,
100 percent grass fed, finished steak and never looked back.
With my new knowledge and perspective, I began to explore
opportunities in the sector I knew best, the food business. I
drew upon my Greek heritage and culinary background and
developed a line of seasoned burger patties and sliders. They
are made from organic, ethically sourced, humanely raised
animals, and are blended with only the freshest herbs, spices,
vegetables, and purees to bring out my globally-inspired
flavors. My products are also gluten, soy, and dairy free,
Paleo certified, and Whole30 approved. They include organic,
grass fed, and finished beef and free-range turkey and chicken
patties.
Since founding the company in 2016, I have managed to
catapult the brand toward mainstream success with an appearance
on the Today show, several industry awards standards like the
NEXTY, and retail agreements with Target and Walmart
nationally, as Whole Foods, Natural Grocers, Central Market,
and other independent grocers in the California area.
With my expansion and growth came the need to obtain
capital to fuel the success. I needed the capital to help
finance my next stage. I had momentum. I had brand recognition.
I had proven my concept. I had national placement. I just
needed a way to finance that next step.
Through my networking with other CPG companies,
particularly Terra's Whey, I became aware of the SBA financing
opportunities and their support of women-owned businesses. I
was introduced to her SBA small business loan provider, CDC
Small Business Finance in 2018 for help. Obtaining the SBA
financing through CDC Small Business Finance was a
straightforward process with affordable terms and conditions. I
remember the day I received the call that I had qualified for
the full amount. It was probably one of the most monumental
days of my life, as I had multiple purchase orders in front of
me and I was not sure how I was going to fulfill them. The SBA
loan came at the most opportune moment to help continue our
momentum as a brand. Since then, I have used the Community
Advantage Loan to fund production, establish sales and
distribution, and implement a strong marketing strategy. We
also qualified for the SBA Microloan program, which enhanced
our product by financing all our raw material purchases.
At the early stage Tribali was in, funding options were
difficult to come by. The timing and importance of our SBA
funding cannot be overstated. It jumpstarted our growth, fueled
our expansion--our products are now distributed in 35 states--
and enabled us to become a viable business. Our growth will
allow us to hire two new positions within our organization by
yearend with more, and hopefully many more to follow. Our
projections indicate that we will need additional funding and
financing as we expand our product line and distribute to more
retailers and geographical areas. We are prepared to take on
that financing.
I am a strong advocate for the SBA loan program. There are
thousands of fledgling business owners who this program was
designed for and who would otherwise have limited options to
start and grow their businesses, hire staff, and enhance their
communities. My own journey would be markedly different without
this program. Without these loans, our success thus far could
not have been possible. For that I am very grateful. I hope you
will continue this program for entrepreneurs with the passion
and vision to fulfill their American dream. Thank you.
Chairwoman CHU. Thank you, Ms. Mavridis.
And now, Mr. Villarreal, you are now recognized for 5
minutes.
STATEMENT OF ROBERT VILLARREAL
Mr. VILLARREAL. Good morning, Chairwoman Chu, Ranking
Member Spano, and members of the Subcommittee. Thank you for
convening this hearing to discuss SBA's Community Advantage
Program (CA), a small, yet impactful pilot program launched in
2011. The program has effectively increased SBA lending to
emerging markets in underserved communities, and we believe
should be granted permanency and full program authority within
the SBA's flagship 7(a) program.
I am here today representing CDC Small Business Finance, or
CDC, which for 40 years has been an advocate for small
businesses. We are located in San Diego, California, and
operate in California, Arizona, and Nevada. We deploy the array
of SBA products, including the 504, Community Advantage, and
SBA Microloan. In fact, we are the largest 504 and Community
Advantage lenders in the country.
Through these multiple programs, we have provided over $13
billion in capital to small businesses and created over 200,000
jobs.
Today, my colleagues will be discussing some of the more
technical aspects of Community Advantage. My comments today are
focused on the purpose and impact of the program.
When the CA program was launched in 2011, it was a bold
step for the SBA, as for the first time they extended the
administration's 7(a) program to community-based mission
lenders with a goal of assisting small businesses that were not
yet bankable, yet needed access to affordable and responsible
capital.
This was also an acknowledgement that the traditional 7(a)
lending industry was falling short in providing small dollar
loans to businesses in underserved communities.
After the Great Recession, SBA lending to emerging markets
had dropped significantly and the primary program the SBA had
to reach these markets, Community Express, had double-digit
losses and 85 percent of the production was concentrated with
just three lenders.
The SBA understood that mission lenders were the best
suited to meet the capital needs of business populations which
were not being met by traditional lenders. Mission lenders have
a deep knowledge of their communities, and as an explicit
purpose and mission, assist small businesses that are located
in underserved areas or are owned by women and minority
entrepreneurs. Mission Lenders measures success by how their
small business clients perform and not by return to
shareholders.
So what has been the impact? In regard to our organization,
CDC, we have funded 656 Community Advantage loans for over $91
million. This has resulted in 4,700 jobs supported and a less
than 4 percent charge-off rate.
As Chairwoman Chu mentioned, 60 percent of our lending must
go to a target market. We are over 70 percent.
In regard to the industry, over 5,300 loans have been made
to small businesses, totaling over $712 million. And as
mentioned, CA lenders are required to provide 60 percent of
loans to target markets, the industry is at 70 percent of
target market.
One of the successes of the CA program has been its lending
to Black and Latino small businesses, which coincidentally are
not designated target markets in the program, although we
believe they should be. In fiscal year 2018, 12 percent of
Community Advantage loans were to Black-owned businesses, and
17 percent to Latino businesses. Compare this to 7(a) SBA
Express for loans under $250,000, where loans to black
businesses was just 4 percent, and lending to Latino businesses
was 9 percent.
Greater distinctions are seen in loans for startups, which
are critical to keep the economy going. For CDC, over half of
our portfolio is comprised of startup businesses as defined by
the SBA, which is less than 2 years in business.
Further, in fiscal year 2018, 44 percent of our approved
loans were to pure startups, meaning the businesses had not
opened their doors at the time of application. This leaves
Community Advantage lenders to fill the void in the very
important continuum of capital.
There are currently 99 active CA lenders across the
country, and CA loans have been made in 47 different states.
While there is an understanding that Community Advantage loans
are riskier, the cumulative charge-off rate on CA loans through
fiscal year 2018 has been less than 3 percent. I credit this to
the experience of the mission lenders like the ones seated here
today.
In closing, I would like to quote from my colleague from
Montana, Dave Glaser, who is also a Community Advantage lender.
He notes that as mission lenders, we are double bottom-line
organizations, yet the SBA and others continue to focus on just
one of the two lines, the 3 to 4 percent loss rate. Rather, we
encourage them, and more importantly, this Committee, to focus
on the second line, the 97 percent success rate and the
incredible impact we have had for the 5,300 small businesses in
the United States, just like the one seated here to my left.
Thank you, and I look forward to your questions.
Chairwoman CHU. Thank you, Mr. Villarreal.
Ms. Barrera, you are recognized for 5 minutes.
STATEMENT OF JANIE BARRERA
Ms. BARRERA. Thank you very much.
Good morning, and thank you for the opportunity to speak
before you on behalf of LiftFund and the CDFI community in
support of the 7(a) Community Advantage program.
This year marked our 25th anniversary in fulfilling our
vision of opening doors, leveling the financial playing field,
and building a community of shared success through
entrepreneurship. Since 1994, we have provided 20,000
resilient, yet underbanked entrepreneurs with over $300 million
in capital, allowing them to build assets and create and retain
jobs in their communities. Our loans range from $500 to half a
million dollars. The average loan size is under $25,000. The
average FICO score of one of our borrowers is 590, and we have
a 96 percent repayment rate. So we have learned how to mitigate
risk. Since we are not a bank and do not have depositors, we
have partnered with over 78 banks and credit unions, government
loan programs, foundations, and impact investors to access the
funds that we need to lend in the community.
So unlike our for-profit businesses, in terms of our model,
business model, we, as a not-for-profit, our business model is
to lose our best customers. The for-profit world wants to keep
them. We want them to graduate and go into the traditional
banks.
So we started in Texas 25 years ago, and now we are in 13
states across the southeast. We provide capital in some of the
most economically segregated communities in our country,
including the Mississippi Delta and the colonias along the
Texas border. We serve urban cores, like New Orleans, Dallas,
and Houston, along with areas that have been devastated by
natural disasters, like in Florida.
Since the early 2000s, LiftFund has worked closely with the
U.S. Small Business Administration. First, we started out with
the SBA Microloan program. Then, we expanded to the SBA 504
program in 2008. We operate two small Business Women's Centers,
and in 2011 became part of the pilot program for the 7(a)
Community Advantage.
Our approach is simple, yet impactful. Coupling mission-
driven capital with business and financial education, or
technical assistance, to help business owners.
Because of the Community Advantage program, we have served
an additional 260 entrepreneurs over $33 million through this
program. In October 2011, we made one SBA Community Advantage
loan at $210,000. Last year, we made 53 loans totaling $8
million. Because these loans are guaranteed, we are able to
sell them to the secondary market, allowing LiftFund to have
the liquidity to make loans to minority, rural, and veteran
business owners.
LiftFund was one of the first recipients of the 7(a)
program in 2011. Since then, we have done 260 loans resulting
in over $33 million. We disbursed these to deserving
entrepreneurs, like Shelenia and Rico Nelson, a veteran-
minority couple in Round Rock, Texas, who wanted to open their
own donut shop to provide a meaningful career path for their
disabled son. As a startup, the Nelsons were not able to
receive funding from their bank and were referred to LiftFund
for support. We provided the Nelsons a $70,000 SBA community
loan to do the buildout and open Crack the Dawn Donuts, now in
its third year of operation.
So these borrowers have created over 1,200 jobs and
retained an additional 1,444 new jobs in the communities. The
loans that we in the 7(a) community loan program are going to
diverse communities. Fifty-eight percent of our clients are
minorities. Thirty-five percent are women. Eighteen percent are
veterans or their spouses. And 31 percent identify themselves
as low to moderate income individuals. But over 60 percent
loans are in the low to moderate income level neighborhoods.
Our support goes beyond the urban core. Last year, 10
percent of our lending volume of the 7(a) program was to
businesses in rural areas. Take Anamia Martinez Ortiz, for
example, a small business owner in McAllen, Texas. She came to
LiftFund in 2014 with less than a year under her belt as a
business owner. She had approached several banks and was turned
down. Banks are regulated, and she did not qualify. LiftFund is
able to accept requests from startups and those with lower
credit scores. Our underwriting looks at capacity and how they
will repay the loan. So she started out with us and now she has
10 locations throughout the Rio Grande Valley.
While our clients may have challenges, our repayment rate
has continuously remained at or above 96 percent in our
portfolio. I am proud of the entrepreneurial culture we have
developed at LiftFund. We are responsible stewards of our
lending funds, constantly improving our processes and
evaluating to meet our client's need. We created our own risk
model and underwriting criteria, and to this day continue to
make adjustments on our data. We complement our internal
controls with the SBA CA tools as well like the scorecard.
At LiftFund, we take great pride in portfolio quality.
Despite our clients' challenges, their repayment rate is high.
In 2017, we increased our internal minimum SBA score for a 7(a)
loan from 120 to 140. We did this a full year before the SBA
made the same decision.
We urge Congress to make the 7(a) Community Advantage
program permanent and increase the loan amount from $250,000 to
$350,000. It is essential to reach those often left behind--
minorities, women, and rural communities--and provide a pathway
to prosperity for deserving and committed entrepreneurs.
I want to personally thank you for the opportunity to speak
and I appreciate being here. Thank you.
Chairwoman CHU. Thank you, Ms. Barrera.
Mr. Kropf, you are now recognized for 5 minutes.
STATEMENT OF JOHN KROPF
Mr. KROPF. Thank you, Chairwoman. Good day, Chairwoman Chu
and Ranking Member Spano. I am John Kropf, president of Growth
Capital Corp in Cleveland, Ohio, a mission-based, not-for-
profit lender. And I am here today to share my experience with
how growth capital is investing in community with our
participation in the SBA Community Advantage program.
Back in 2010, I was actually quite astounded to learn that
SBA was rolling out what I considered to be an innovative and
cost-effective solution to the problems of small businesses,
especially those in underserved markets, having access to
affordable financing to find, fund, and grow their companies.
In expanding the 7(a) loan program to not-for-profit mission
lenders like Growth Capital, Community Advantage linked a vital
Federal Government loan guarantee mechanism to a healthy
market-based, mission-based product delivery platform focused
on serving those small businesses oftentimes neglected by
traditional bank lenders or outright by nontraditional
predatory lenders.
How astonishing it was to see such innovation coming from a
Federal bureaucracy like SBA. There was no new department
created and no new big government program initiated. No new
spending required to launch SBA Community Advantage. Instead,
we witnessed the confluence of community-focused, impact-driven
organizations like CDC Small Business Finance, LiftFund, and
Growth Capital with the community-focused, impact-driven
mandate of SBA.
We did not initially apply for participation in the program
because of regulatory restrictions, but in 2012, when SBA
allowed for the use of loan service providers, along with the
sale of SBA loan guarantees on the secondary market we jumped
right in and were approved to participate. And jump right in we
did. Having immediate impact on our communities with our CA
lending and joining other prestigious industry leaders that
have programmed today more than $680 million to over 5,100
small businesses, 70 percent in underserved markets. Our
average size CA loan is only $133,000 and demonstrates our
commitment to small dollar lending to small sized companies.
But these numbers mean a lot more. These numbers are
actually much more. These numbers have names and faces. They
belong to people like my esteemed colleague, Bob Villarreal's
borrower here today from Ms. Chu's district. They belong to
borrowers like mine. Amy Wong of Dot Org Solutions in Akron,
Ohio, who testified here before this Committee last year on the
importance of the SBA Community Advantage program. These names
and faces include other such borrowers like Destiny Burns, a
retired Naval Officer who owns Cleveland Urban Winery, or
Kathryn Green of Sassafras Land Design, or Jake Fitzpatrick,
owner of Clifton Cleaners, and Mark Steinberg of Queen City
Gutters in Cincinnati, Ohio.
Every one of these borrowers, and indeed, almost all of our
CA borrowers are what I describe as the ``just miss'' bank
loan. Companies that are creditworthy but just miss the bank
lending requirements, and many times these small loan requests
miss the bank profitability requirements and are thus neglected
by traditional bank lenders. And many of our banking partners
make direct referrals to Growth Capital for CA loans. If these
companies are not referred to a CA lender, many times they find
alternative high-rate lenders and become outright exploited by
nontraditional predatory lenders. We, ourselves, at Growth
Capital just received a solicitation last week for an online
loan. The rate was 48.7 percent when I checked online.
So what is needed? There are several important items that I
feel are needed and critical to expand our CA lending.
One, increase the guarantee percentage. Currently, it is at
75 percent on loans up to $250,000, and 85 percent on loans
below $150,000. A guarantee of 85 percent for all CA loans
would dramatically help the liquidity of CA lenders throughout
the country. CA loans currently require a guarantee of 85
percent under $150,000, and actually, 90 percent on
international term loans. Growth Capital recently closed an
international trade loan, and we actually represent 40 percent
of all CA international trade loans disbursed under the
program, and that carries a 90 percent guarantee. We would like
to do more of those. That small company in Cleveland is
actually an exporter selling equipment to Saudi Arabia, Egypt,
Hungary, and Romania. And our loan $250,000 required just
$25,000 in capital.
In closing, while I understand the current political
conditions we are under, we, CA lenders, must currently
operate, I understand the true bipartisan approach to
supporting small businesses that this Committee takes. True
bipartisan support is for the CA borrowers previously
mentioned, Amy Wong of Dot Org Solutions; Destiny Burns, the
retired Naval Officer; Kathryn Green of Sassafras Land Design;
Jake Fitzpatrick and Clifton Cleaners; and Mark Steinberg of
Queen City Gutters in Cincinnati, Ohio. They actually need more
than bipartisan support. They, and CA lenders need tri-partisan
support. We need to try. We need to try harder as CA lenders.
We need to try more as an industry. We need to advance our
Community Advantage lending and really try to do more investing
in community. We will try to recognize the importance of
financing underserved small business concerns that are
inherent, the risk involved in financing underserved
businesses, and the capacity of experienced mission-oriented
lenders to manage risk and build sustainable, bankable
businesses through our SBA Community Advantage program that I
am confident this Committee will support.
In conclusion, I wish to personally thank Chairwoman Chu
and Ranking Member Spano and all the honorable members of this
important Committee, and know that we all share the same
passion and commitment to investing in community. Thank you
all, and I am happy to participate in field your questions.
Thank you.
Chairwoman CHU. Thank you to all our witnesses. I am truly
impressed by your testimony and your commitment to Community
Advantage.
And now, I will begin by recognizing myself for questions
for 5 minutes.
So Ms. Mavridis, thank you for being here today, and
congratulations on your hard-earned business success. Can you
share with us the state of your business before you received
the Community Advantage loan and how being able to take out a
Community Advantage loan made a difference for you in your
business planning?
Ms. MAVRIDIS. Certainly. Prior, the business was self-
funded by personal funds, and I presented to the first market,
which was Whole Foods, the idea. So they believed in me and
gave me up to a year to go and build the brand, build the
company, find my sources, and start production. And my personal
funds took me that far, and once I had the order in Whole
Foods, I got on their shelves and was able to sell into other
multiple markets. And at that time I was borrowing from Father,
from Dad, and repaying, and reborrowing again and repaying, and
after that door closed my next step was to take a line of
credit from the bank. But due to my assets that was not enough.
So I became aware of the SBA loan and the CDC lender and that
amount enabled us to fulfill the orders that I had gotten to
make us a national brand. I was sitting with Target orders and
Walmart and did not know how to finance them. So, once that
money came in we were able to fund the production, make the
distribution happen, and secure those sales. So it has helped
my brand definitely get to the next phase. And without it we
would not have had money to fulfill those orders.
Chairwoman CHU. So you ran out of your personal funds and
Father funds? Was there any other plan B had there not been the
Community Advantage loan?
Ms. MAVRIDIS. Right. And raising capital at that time to do
a family and friends round or to start giving some equity up
from your company, bigger CPG investors were not looking at us
because we did not have at least a $2 million run rate yet. So
it was right at that special spot where I had proof of concept,
proof of product, but not proof of sales to get investors. And
also, at that point you do not want to start giving up equity
of your business, so this was the best choice.
Chairwoman CHU. Well, then I would like to ask the
panelists, all the panelists, you have valued experience with
the Community Advantage program with different perspectives as
lenders and borrowers. Can you tell us briefly if you would
support the Community Advantage program being made permanent,
how would permanency help small business in underserved areas?
Mr. KROPF. Chairwoman, like any business, us CA lenders are
in business. We are operating our own shops. We are private,
independent operations. And like any market, like any industry,
having the ability to have some level of permanency in the
market to understand that the decisions we make today we can
carry through tomorrow. And without the permanency of the
Community Advantage program, there is a lot of uncertainty in
the industry and in the marketplace. So we could certainly
benefit from that certainty.
Ms. BARRERA. And I would like to add the fact that we, as
you heard before in the testimonies, we are the stepping stone
into the banks. And so by having a permanent program like this,
we can do the things that the banks cannot do in getting them
prepared by reporting back to the credit bureaus their payment
history with us because that is how we improve our credit
scores is by borrowing money, paying it back on time, and
providing that technical assistance.
So like I said in the beginning, we are trying to get rid
of our best customers and graduate and so we can be that
stepping stone for banks.
Mr. VILLARREAL. I would echo the statements by Janie and
John. Two important things that permanency does. One is almost
all of us get our capital from banks and, you know, banks
should be and will be reluctant to extend longer term credit to
us if the program is going to expire in 24 or 30 months. So it
adds some stability to the program. And also, permanency will
increase a number of Community Advantage lenders. As all of us
can testify here, jumping into 7(a) lending as a CA lender is
expensive, and it is a commitment of time and resources. And
you are not going to do that unless you have some permanency to
the program, so that is why it is critical.
Chairwoman CHU. Well, I have run out of time so I would
like to now call upon the Ranking Member, Mr. Spano, for 5
minutes.
Mr. SPANO. Thank you, Madam Chairwoman.
Ms. Mavridis, thank you again for being here. I am just
curious how you heard about the SBA and the loan options that
were available to you through the SBA.
Ms. MAVRIDIS. I actually listened to a podcast from a
mentor of mine of how to grow your CPG business, and the name
of the company was Terra's Whey. And Terra herself was on the
podcast talking about the loan. But honestly, had I not heard
that, I do not know how I would have become aware of this.
Mr. SPANO. Thank you.
Ms. Barrera, you had mentioned that LiftFund has created
your own risk model in terms of assessment of risk. I guess my
question, how does your risk model differ from the traditional
risk model? What is the difference and what has allowed you to
be as successful as you have been in this space?
Ms. BARRERA. Well, the traditional lenders, as in the
banks, have certain criteria that they have to follow because
of regulators. You know, either the OCC, the FDIC, the Federal
Reserve, and those are very stringent. They are in the box. You
have to fit that box. And if you do not, you do not get the
loan.
At LiftFund, since we are a not-for-profit, we can look
outside the box. We still look at FICO scores but that is not
going to be the reason that we make a loan. We look at capacity
of the repayment and so on.
And so what has happened since we have been around for 25
years, we have been collecting data of the unbanked and
underbanked for 25 years. And I had a real smart intern about
2010 that came in and I said, create a profile of a good paying
customer and a not-so-good paying customer using SASS. And that
is what happened. Eventfully, now it is aggregated over all
these years that, you know, with AI and so on, we have been
able to have our own internal technical algorithm for a
scorecard. So, you know, a Florida application comes in, it
comes in to San Antonio, we do the underwriting there through
the algorithm. It pops up red, yellow, green. Green, continue
the process; red and yellow, loan officer contact them. Why is
it red and yellow? So that is why we are able to do all these
little bitty loans across our footprint and still not make any
money because we are not for profit and we have a lot of, you
know, folks that we have to handhold through the process as
well in terms of getting their financials ready and so on. But
we have been using technology to be able to provide this pretty
good accurate underwriting scorecard.
Mr. SPANO. Is it fair to say that based on what you just
said then that the capacity to repay is really the primary
function that you are looking for----
Ms. BARRERA. Yes, sir.
Mr. SPANO.--as opposed to payment history?
Ms. BARRERA. That is right.
Mr. SPANO. Even though that is a very complicated algorithm
that I cannot understand and maybe most of us here cannot, but
that is basically the----
Ms. BARRERA. Basically, that is what it is. You know, how
long they have been living in their place, how long the
business and so on. But, you know, it takes a lot of other
things, too, because some of them are startups and have been in
operations, you know, less than a year. So it takes in all
these other factors.
Mr. SPANO. Thank you so much.
Mr. Kropf, you describe, if you would for the Committee,
your institution's working relationship with SBA? What I mean
by that is how often do you interact with them? Describe, if
you would, their oversight process of your organization.
Mr. KROPF. Sure. Thank you, Congressman.
Yeah. SBA is our primary regulator, so that is one part of
the relationship. SBA has a very stringent regulatory regime
for certified development companies, as well as CA lenders. So
from that standpoint, that is really the beginning of the
relationship from a regulatory oversight perspective.
But we are also partners, especially with the Community
Advantage program. We are partners in investing in community.
So one of those loans that I had mentioned, Clifton Cleaners,
he went to SBA because he could not get a loan from the bank.
He went to our local district office. They referred him to us.
They understand the type of borrower that Community Advantage
can really assist, and they provided that referral to us. We
closed the loan just 2 weeks ago. So that is another important
relationship, not just the regulatory oversight but the
partnerships to invest in community I think is also very
important.
Mr. SPANO. And real quickly, in your written testimony you
describe a relationship with Fifth Third Bank.
Mr. KROPF. Yes.
Mr. SPANO. Can you describe that relationship very quickly,
and then the benefit to the community?
Mr. KROPF. Yes. Fifth Third Bank provides capital for us to
lend for our Community Advantage program. It is very innovative
in its approach where we have a warehouse line of credit that
we draw on throughout the year to fund our Community Advantage
loans. We sell on the secondary market, vitally important for
liquidity. We repay a portion of that line of credit. The
unguaranteed portion stays on that line throughout the year. We
service interest. At the end of the year they term it out for
us long-term to match the loans that we have on the books, the
Community Advantage loans.
Mr. SPANO. Thank you, Madam Chair.
Chairwoman CHU. Thank you. The gentleman's time has
expired. But the good news is I believe we will have time for a
second round of questions.
So now, the gentleman from Tennessee is recognized, Mr.
Burchett from Tennessee.
Mr. BURCHETT. Thank you, ma'am. Thank you, Madam Chairwoman
and Ranking Member. I appreciate all you all coming out for
your testimony.
One question I had, Ms.--tell me how to say your name,
ma'am. Ms. Mavridis?
Ms. MAVRIDIS. Yes.
Mr. BURCHETT. All right. I get that. All right.
I grew up in Knoxville and we have a huge Greek community
there, and I am very fond of them. Actually, my daddy was dean
of student conduct, and a lot of the Greek merchants, they
started nice restaurants. And I do not know about anywhere
else. I think everybody else goes hungry if they do not have a
lot of Greek folks in the community because that is all the
restaurants they run and they are awesome. And as a matter of
fact, my first traditional Greek meal I ever had was at the
Pizza Palace in Knoxville. I always kid about that. It is
actually not, you know, it was just pizza, but it was
wonderful. And it still is. It is where we go on date night or
when it is my night to cook.
But anyway, I am always remembered by the Greek folks
because in 1976, my momma had cancer and daddy took momma to
Memphis and there was my brother and sister and I kind of had
to fend for ourselves and the Greek community was so wonderful.
They brought all this wonderful food. And honestly, I never
knew if it was for breakfast, lunch, or dinner, or it was
desert, because they would put the name on it, and of course,
you know, it was just delicious. I know I ate baklava for
supper every night if I could. So that was wonderful and it was
a great community.
But you had mentioned that, you said, and I am sorry about
you losing your daddy as well. I lost both my parents and that
is a hole that just seems to never get filled. So I have
sympathy with you.
But you mentioned that your father, you borrowed from him
and then if the SBA had not come along, but you stopped there.
What other options would you have had if the SBA had not come
along?
Ms. MAVRIDIS. I think you can do a round for family and
friends and put a business deck together where you raise
capital from those around you that believe in your concept. And
I was not at the point yet to get investors in to take equity
because I did not have proof of sales.
Mr. BURCHETT. Right. You would have to give them a piece of
the action; right?
Ms. MAVRIDIS. Right. Right. And no one wants to do that.
Mr. BURCHETT. No.
Ms. MAVRIDIS. At such an early stage in the business.
Mr. BURCHETT. An attorney told me, he said, you pay them,
do whatever, you know, points on the loan, whatever, but never
give away your ownership because 50 percent plus one and you do
not own it anymore. So I understand it.
Mr. Kropf, in your testimony you mentioned a Community
Advantage International Trade loan. Can you explain or describe
that type of loan? Does it have different terms?
Mr. KROPF. Yes. Thank you, Congressman.
The International Trade Loan has been a subset of 7(a) for
many years. It currently carries an incentive to support
exporters. It provides a 90 percent loan guarantee to the
lender. It has been open for banks, been open to bank
participation for years through the Export Assistance Centers
throughout the country. We have one in Cleveland.
But about 4 years ago, we did the first ever Community
Advantage Loan under the International Trade Loan program. We
were the first ones to do it and we had to work pretty hard to
figure that out. But after we did, SBA surprisingly
incorporated the International Trade Program terms to Community
Advantage lenders. And we were able to process that recent loan
under our own delegated lending authority. So we were able to
support that small exporter who exports asphalt equipment to
the Middle East and Eastern Europe when he could not obtain a
bank loan. If not for this $250,000 community advantage loan,
this company would not have been able to make exports and
import wealth into our country, and I think that is vitally
important, congressman.
Mr. BURCHETT. All right. I yield back to the Chairlady.
Thank you so much.
Chairwoman CHU. Thank you. The gentleman's time has expired
and the gentleman yields back.
Now I recognize myself for 5 minutes for a second round of
questioning.
Mr. Villarreal, a critical component of the Community
Advantage pilot program was to expand the 7(a) program to
mission-based lenders which are CDFIs, SBA 504, CDCs, and
microlenders. Can you talk more about how mission-based lenders
are best situated to meet the needs of small businesses that
are in underserved areas or are owned by women and minority
business owners?
Mr. VILLARREAL. Certainly. Thank you for the question.
As I mentioned in my oral testimony, we are all mission-
based, nonprofit lenders with an explicit purpose to work and
serve these communities that we are talking about. So a lot of
us are CDFIs. And as a CDFI, you know, over 60 percent of your
lending must be to these underserved target markets.
I think the other bonus that we bring that a traditional
7(a) lender, a bank, cannot do is the business advising and
technical assistance. It is a critical, critical piece that I
think separates us from a traditional 7(a) lender. It is
something that they cannot do and something that they are not
modeled to do. And I will give you an example. We financed a
woman minority pottery studio. Helped her create her website.
She was still doing her books on Excel. We provided her
QuickBooks so she could do her books more professionally, and
then we helped her figure out how to best do her pricing. That
is something a traditional bank could not do and would not do.
So I think that is one of the primary things that separates us
and why it is so important that the CA be made permanent. It is
not something that a bank can do. It differentiates us in terms
of our delivery system. We are a different delivery system, and
I think that is the secret sauce within the Community Advantage
program.
Chairwoman CHU. Thank you for that.
And I would like to ask any or all of the lenders here, I
would like to hear more about the work that our Community
Advantage lenders do to reach businesses in underserved
markets. I understand that at least 60 percent of your lender
loans must be in an underserved market as defined by SBA. But
based on your testimony, all of you target underserved markets
very intentionally and do so even before becoming a Community
Advantage lender. Can each lender tell us what percentage of
your Community Advantage loans are in undeserved markets?
Mr. KROPF. Sure, Congresswoman. We are over 70 percent of
our CA lending is to underserved markets. And one of the ways
that we reach those markets is we partner with Community
Development Corporations throughout the markets we serve. These
are community-based organizations that support local businesses
in their neighborhoods. We provide the resources for the
Community Development Corporation to have that outreach in
their neighborhoods. They provide referrals to us as a
Community Advantage lender. They provide real value in that
process, and for that they earn a small packaging fee that
helps support their operations in the local community. So that
has been a real good tie for us in being able to reach
undeserved markets in Cleveland.
Ms. BARRERA. Thank you, congressman.
So over 60 percent of our population is in the low to
moderate income level neighborhoods, and we, actually, in San
Antonio, our offices are located in the poorest zip code in San
Antonio. So our staff also are out in the communities in those
poorest districts. Because who qualifies for loans from
LiftFund but people that are underserved? If you have a good
credit score, we are not going to accept you as a customer. If
you are going to come in, you know, already qualifying for a
bank, we are going to send you off. Our mission is to help the
underserved become part of our financial mainstream.
Mr. VILLARREAL. The only thing I would add is a couple of
things. We work very well with some of the SBA programs. We
think the SBA did a great job when they created Lender Match.
It used to be called Link and then it came out as Lender Match.
That has been wonderful and we get a lot of leads through that.
We work with the Women Business Centers and the Small Business
Development Companies, the SBDCs. So they are great referral
sources.
And I think the other thing that differentiates us is, for
example, we set up our business advising where if a client
walked in and they were of the underserved or emerging market
and they were not quite loan ready, we off ramp them. It is a
term we use. We off ramp them to business advising and got them
ready and then put them back into the loan process. And last
year, in fiscal year 2018, we did nearly $5 million of loans
that way to folks that we would have in the past maybe passed
up on or referred out to an SBDC. We work with them internally
and they ended up getting a loan.
Chairwoman CHU. Excellent.
And I have heard from lenders who would like to see women-
owned and minority-owned businesses, specifically Black,
Hispanic, Asian-Pacific, American or Native American owned
businesses added to the list of undeserved markets for purposes
of Community Advantage loans. What are the thoughts of any of
you on this?
Mr. VILLARREAL. We think that is critical. As I mentioned,
some of the numbers, in terms of lending to Black businesses,
Community Advantage is triple what the SBA Express is for loans
under $250,000, and it is almost double for Latino. I think for
women, Community Advantage is probably 35 to 40 percent. I am
not sure exactly what it is for 7(a). SBA Expresses are
$250,000, but it is probably more than double that. So I think
that is critical. It is something that is measured by the SBA
under the traditional 7(a) market. We do not understand why it
is not a target market under CA.
Chairwoman CHU. Okay. Well, thank you all so very much.
This brings us to a close. We want to thank all of you, the
witnesses, for taking time out of your schedule to be with us
today.
SBA's loan program, including the 7(a) program is designed
to reach borrowers who cannot affordably and reasonably access
credit from a conventional lender. The Community Advantage
takes that important step further by reaching borrowers that
even the general 7(a) program does not reach.
As I said in my opening statement, this program reaches
significantly more women and minorities than the 7(a) program,
and as we heard today, it is also making a serious impact in
our Nation's rural communities. Ensuring that this program will
be available to future generations of entrepreneurs from
underserved communities is a top priority of mine on this
Committee. I look forward to working to ensure that this
program becomes a permanent part of SBA's menu of loan
products.
Well, I would ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered.
And if there is no further business to come before the
Committee, we are adjourned. Thank you.
[Whereupon, at 11:00 a.m., the subcommittee was adjourned.]
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