    [Senate Hearing 116-49]
    [From the U.S. Government Publishing Office]

                                                         S. Hrg. 116-49

                      REAUTHORIZATION OF THE SBA'S ACCESS
                              TO CAPITAL PROGRAMS

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

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP
                              UNITED STATES SENATE

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 3, 2019

                                   __________

        Printed for the Committee on Small Business and Entrepreneurship

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

            Available via the World Wide Web: http://www.govinfo.gov

                                  __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    36-839 PDF                  WASHINGTON : 2019

    --------------------------------------------------------------------------------------

                COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                         ONE HUNDRED SIXTEENTH CONGRESS

                                  ----------

                         MARCO RUBIO, Florida, Chairman
                  BENJAMIN L. CARDIN, Maryland, Ranking Member
    JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
    RAND PAUL, Kentucky                  JEANNE SHAHEEN, New Hampshire
    TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
    JONI ERNST, Iowa                     CORY A. BOOKER, New Jersey
    JAMES M. INHOFE, Oklahoma            CHRISTOPHER A. COONS, Delaware
    TODD YOUNG, Indiana                  MAZIE K. HIRONO, Hawaii
    JOHN KENNEDY, Louisiana              TAMMY DUCKWORTH, Illinois
    MITT ROMNEY, Utah                    JACKY ROSEN, Nevada
    JOSH HAWLEY, Missouri
                 Michael A. Needham, Republican Staff Director
                     Sean Moore, Democratic Staff Director

                               C O N T E N T S

                                  ----------

                               Opening Statements

                                                                       Page

    Rubio, Hon. Marco, Chairman, a U.S. Senator from Florida.........     1
    Cardin, Hon. Benjamin L., Ranking Member, a U.S. Senator from
      Maryland.......................................................     3

                                   Witnesses
                                    Panel 1

    Manger, Mr. William, Associate Administrator, Office of Capital
      Access, Small Business Administration, Washington, DC..........     5

                                    Panel 2

    Huston, Ms. Julie, President & CEO, immito, Denver, CO...........    29
    Kibbe, Ms. Patricia ``Patti,'' President & CEO, Evergreen
      Business Capital, Seattle, WA..................................    42
    Villarreal, Mr. Robert, Executive Vice President, CDC Small
      Business Finance, San Diego, CA................................    54
    Evans, Ms. Connie, President & CEO, Association for Enterprise
      Opportunity, Washington, DC....................................    75

                              Alphabetical Listing

    Access to Capital for Entrepreneurs
        3 Corners, LLC-Pyramid Grocery...............................   146
        Craft Yarn Co................................................   147
        Edgy Girl Fitness Studio, LLC................................   148
        Holistic Occupational & Physical Therapy, LLC................   149
        The Marchen Sagen Academy....................................   150
        Client Spotlight: RL Commercial Systems......................   151
        Salon Honey..................................................   152
    Baltimore Business Lenders
        Initial Clients and Their Stories............................   153
    Cardin, Hon. Benjamin L.
        Opening statement............................................     3
    Duckworth, Hon. Tammy
        Prepared statement...........................................    96
    Evans, Ms. Connie
        Testimony....................................................    75
        Prepared statement...........................................    77
        Responses to questions submitted by Chairman Rubio, Ranking
          Member Cardin, and Senator Duckworth.......................   140
    Financial Technical Assistance Spotlight
        BBIF Florida.................................................   155
    Huston, Ms. Julie
        Testimony....................................................    29
        Prepared statement...........................................    32
        Responses to questions submitted by Chairman Rubio and
          Ranking Member Cardin......................................   113
    Kibbe, Ms. Patricia ``Patti''
        Testimony....................................................    42
        Prepared statement...........................................    44
        Responses to questions submitted by Ranking Member Cardin and
          Senator Inhofe.............................................   123
    Manger, Mr. William
        Testimony....................................................     5
        Prepared statement...........................................     7
        Responses to questions submitted by Chairman Rubio, Ranking
          Member Cardin, and Senators Risch, Coons, and Duckworth....   101
    Microloan Success Stories........................................   156
    Mission Lenders Working Group
        Statement dated April 3, 2019................................   160
    Rubio, Hon. Marco
        Opening statement............................................     1
    Villarreal, Mr. Robert
        Testimony....................................................    54
        Prepared statement...........................................    56
        Additional statement.........................................    97
        Responses to questions submitted by Ranking Member Cardin....   127

                      REAUTHORIZATION OF THE SBA'S ACCESS
                              TO CAPITAL PROGRAMS

                                  ----------

                            WEDNESDAY, APRIL 3, 2019

                          United States Senate,
                            Committee on Small Business
                                          and Entrepreneurship,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:50 p.m., in
    Room 428A, Russell Senate Office Building, Hon. Marco Rubio,
    Chairman of the Committee, presiding.
        Present: Senators Rubio, Risch, Ernst, Inhofe, Young,
    Hawley, Cardin, Cantwell, Duckworth, and Rosen.

    OPENING STATEMENT OF HON. MARCO RUBIO, CHAIRMAN, A U.S. SENATOR
                              FROM FLORIDA

        Chairman Rubio. Today's hearing of the Senate Committee on
    Small Business and Entrepreneurship will come to order.
        Thank you for your patience. I apologize. The good news is
    the Ranking Member and I were on the same committee previously,
    so we do not have to suffer the dirty looks of being late. That
    ran a little longer than it should have, but thank you for
    being here. I am pleased.
        This hearing is titled ``Reauthorization of the SBA's
    Access to Capital Programs,'' and it is the beginning of our
    reauthorization of the Small Business Act, our work to do that,
    and programs in the Small Business Investment Act.
        Today we begin that work with a robust discussion of the
    SBA's Access to Capital programs, and so to frame this
    discussion, it is important to first lay out the reasoning for
    the reauthorization process. It takes a lot of work, and I know
    there have been questions asked about it.
        Historically, this Committee, along with our colleagues on
    the House Small Business Committee, undertook the process of
    reauthorizing the Small Business Act, and they did so
    periodically. Most recently, the process was undertaken every 3
    years. That process, as is true of multiple other committees on
    different subjects and areas of jurisdiction, had fallen by the
    wayside, and the last time a reauthorization was completed in
    its entirety was 19 years ago in the year 2000.
        When that authorization expired in 2003, Congress began a
    long series of extensions of the Small Business Act. In 2011,
    Congress stopped reauthorizing the Small Business Act
    altogether, instead deferring to the Appropriations Committee
    to set authorization levels.
        It is my view that it is the responsibility of this
    Committee, and Congress, to review programs under the Small
    Business Act on a regular basis. This is not a hostile act. It
    is not meant to accuse anyone of anything. It is the job of
    this Congress to ensure that we are serving small businesses,
    as intended, and that taxpayer dollars are targeted to the most
    efficient and effective programs.
        When operating at their peak, the Small Business
    Administration's programs provide an integral service and
    opportunities to entrepreneurs and small businesses who play an
    important role in our Country's economy and the health and
    prosperity of our Nation.
        We know the statistics. According to the SBA's Office of
    Advocacy, small businesses comprise 99.9 percent of all firms
    and accounted for 65.9 percent of net new job creation from
    2000-2017.
        When we talk about small business being the backbone of the
    economy, this is not just a talking point. These statistics
    bear it out.
        However, we also know that net new small business formation
    is still below the 36-year average, which should concern us. In
    order to maintain a growing economy and competitive workforce,
    we need to have a robust and a growing small business sector.
        One of the major barriers that entrepreneurs and small
    businesses face is access to capital. Even with a booming
    economy, lending to small businesses is below pre-recession
    levels by approximately $65 billion.
        According to the Federal Reserve's latest reports on the
    availability of credit to small businesses, lending to small
    businesses is still 10.5 percent below 2008 levels, at which
    point the recession was hitting hard.
        Lending to startups and small businesses has clearly not
    recovered from the recession, and SBA's programs have filled a
    real gap in the small business lending market. The SBA serves a
    critical function by offering a range of loan products that
    provide financing to small businesses who are unable to access
    capital in the private marketplace.
        The four lending programs we will discuss today include
    programs with a wide range of uses and loan amounts. These
    programs are the 7(a) Loan Guaranty Program, the 504/CDC Loan
    guaranty program, the 7(a) Community Advantage pilot program,
    and the Microloan program.
        The 7(a) program is the flagship one, with more than $25
    billion in loans in fiscal year 2018. The entry point of this
    program is the inability for borrowers to receive credit
    elsewhere on reasonable terms and conditions, meaning they are
    unable to receive a conventional loan with terms that will work
    for them and their business.
        The 504/CDC program provides long-term, fixed-rate
    financing, ideal for large equipment and real estate purchases.
    This program also includes a job creation or public policy
    requirement in order for the loan to be financed.
        The 7(a) Community Advantage program provides small-dollar
    loans under $250,000 and requires 60 percent of these loans be
    made in underserved, or emerging, markets.
        And the Microloan program provides loans of up to $50,000
    to entrepreneurs and small businesses, with an average loan
    size of $14,000. The program also provides technical assistance
    to help borrowers before and after they receive the loan.
        These access-to-capital programs, including the four I just
    mentioned, and the Office of Capital Access represent the
    largest office and portfolio at the agency.
        Since we have not undertaken a full reauthorization of the
    Small Business Act in many years, it is integral that we assess
    the programs, that we look at the history and impetus for the
    creation of each program, that we discuss their current state,
    and pull suggestions and ideas for how to improve it, how to
    modernize it, and to do so for members and witnesses so that we
    can continue to fine-tune these programs to better serve small
    business.
        This process is going to give this Committee the
    opportunity to consider modernization of the programs, if
    necessary, as well as programmatic changes to improve the
    delivery and efficiency in their management at SBA.
        This is an opportunity for modernization and reform, and so
    it is vital that we continue to move forward, particularly on
    the access-to-capital programs relevant to and meeting the
    needs of tomorrow's entrepreneurs and small business owners.
        And now I turn it over to the Ranking Member.

    OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, RANKING MEMBER, A
                       U.S. SENATOR FROM MARYLAND

        Senator Cardin. Well, Mr. Chairman, first, let me thank you
    for your leadership in directing the Committee to start the
    process on the reauthorization of the SBA programs.
        Today we have our hearing on access-to-capital programs. On
    May 1st, we will have the entrepreneurial development programs.
    May 15th, we will have a hearing on the SBIR/STTR programs.
        I thank you for recognizing that it is our responsibility
    to recommend to the full Senate on a regular basis the
    reauthorizations and authorizations of SBA programs. We are the
    authorizing committee, not the appropriator, so it is important
    that we act.
        This hearing is both timely and necessary. As this
    Committee begins the reauthorization process, it is vital that
    we have a firm understanding on how SBA loan programs are
    working, what gaps they fill in the conventional credit market,
    the steps we need to take to make the SBA loan program more
    inclusive, and how SBA can collaborate better with its lending
    partners.
        The overreaching goal should be to modernize the SBA
    programs so that they meet the needs of today's small business
    owners.
        Reauthorization of the SBA lending programs is long
    overdue. Right now, the statutory program level for the 7(a)
    loan program is $17 billion, $8 billion less than the $25
    billion in 7(a) loans SBA backed last year. It is important
    that we as the authorizing committee set program levels that
    provide a roadmap to guide congressional appropriators and the
    SBA.
        Capital is the lifeblood for businesses. For many small
    businesses, an SBA-backed loan is the lifeline and the
    difference between success and failure. I see the benefit every
    day when I pass the headquarters for Under Armour. Without an
    SBA-backed loan, Under Armour may not have been able to go from
    a small business run, literally in a basement, to a global
    brand with thousands of employees in Baltimore that it is
    today.
        Last year alone, SBA-backed loans helped nearly 72,000
    small businesses access more than $30 billion in financing and
    supported more than 619,000 jobs. While the importance of SBA
    role in the American economy is without question, we must use
    reauthorization as an opportunity to improve the inclusiveness
    of SBA loan programs, which are not adequately reaching
    underserved communities, especially minorities, women, and
    veterans.
        Minority-owned firms are two to three times more likely to
    be denied credit, more likely to avoid applying for loans based
    on the belief that they will be turned down, and more likely to
    receive smaller loans and pay higher interest rates on the
    loans they do receive.
        Last September, I held a field hearing in Baltimore at
    Morgan State University to learn more about the struggles
    minority entrepreneurs face in accessing capital. Mr. Manger
    was gracious enough to testify at that hearing as well, and he
    has come back for another round with our Committee.
        The key takeaway from the hearing was that minority small
    business owners need SBA to fill the gap, where private lenders
    often fall short. Moreover, the witnesses stressed that the
    increased investment in minority-owned small businesses will
    help close the unemployment and wealth gaps.
        One way the SBA can fill those gaps is to build on the
    efforts such as the Community Advantage pilot program that have
    done a better job of reaching underserved communities than the
    traditional 7(a) program.
        In Fiscal Year 2018, when comparing the two programs, we
    find that black business owners received only 4.5 percent of
    SBA 7(a) approvals, while receiving 12 percent of the Community
    Advantage approvals. Quite a difference.
        Similarly, Hispanic business owners received 8.5 percent of
    the 7(a) approvals compared to 17 percent of the Community
    Advantage approvals.
        Today we will hear testimony that the 7(a) program has made
    progress in reaching underserved markets, such as black-owned
    businesses. While I am pleased that we are moving in the right
    direction, the fact remains that black people are receiving
    less than 5 percent of all 7(a) loans while making up 13
    percent of the U.S. population.
        Additionally, black-owned firms report the greatest
    challenges in accessing capital, according to the Federal
    Reserve. So we have a lot of work to do to ensure that 7(a) is
    filling the gaps that it exists to fill.
        We also need to explore the question of fee waivers for
    both borrowers and lenders to help address barriers to small
    business loans. The administration's Fiscal Year 2020 budget
    proposes $250 million in fee increases on borrowers and lenders
    as well as cuts in the Microloan program that would do great
    harm to American small businesses.
        I look forward to hearing from our witnesses today, and I
    look forward to working with the Chairman and all members of
    this Committee so that we do fine-tune through the
    authorization process the tools that are available to help
    America's small businesses.
        Chairman Rubio. Thank you.
        Our first panel, there is only one witness. It is Mr.
    William Manger. He is the Associate Administrator of the Office
    of Capital Access at SBA. He has been serving in this role
    since appointed by Administrator McMahon in March of 2017, and
    he has responsibility over the SBA loan program policy,
    technology, operations, and oversight. This includes the four
    flagship programs that we have discussed.
        Thank you for being here today. Welcome to the Committee.

    STATEMENT OF WILLIAM MANGER, ASSOCIATE ADMINISTRATOR, OFFICE OF
     CAPITAL ACCESS, SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

        Mr. Manger. Thank you very much, Mr. Chairman, and thank
    you also, Ranking Member Cardin, for welcoming me back to one
    of the Senate hearings and members of the Committee for
    inviting me to testify here this afternoon.
        I have had the honor to serve for 2 years now as the
    Associate Administrator for the Office of Capital Access.
    Previously, I served at the agency as a regional administrator
    in New York and in Washington, D.C., as the Associate
    Administrator for Field Operations.
        From the beginning of my time with SBA, I have been able to
    witness the positive impact our programs have on small
    businesses across the country. In my current role, it is my job
    to administer programs that make capital available to small
    business entrepreneurs who would otherwise be unable to access
    capital to start or expand a business through conventional
    means. This is primarily achieved through our two main loan
    programs, 7(a) and 504.
        Our 7(a) program offers guarantees on loans to small
    businesses of up to $5 million, with guarantees ranging from 75
    percent to 90 percent, depending on the loan amount.
        In FY18, SBA guaranteed over 60,000 loans for over $25
    billion. Within this is our Community Advantage pilot program,
    which makes 7(a) loans of up to $250,000 available in
    underserved communities. For small businesses that need fixed
    interest rate loans for the acquisition or improvement of
    property, plant, or equipment, SBA offers the 504 loan program.
    These loans are made available through certified development
    companies, CDCs, which are SBA's community-based partners. In
    FY18, SBA made over 5,800 loans for almost $5 billion in this
    program.
        The SBA's Microloan program makes capital available
    directly to intermediaries, which in turn lend to small
    businesses. The program has been effective in providing capital
    to traditionally underserved communities with an average size
    microloan of just under $14,000. In FY18, SBA facilitated over
    5,400 microloans for over $75 million, and that was actually a
    record in the agency's history.
        Throughout our loan programs, we continue to modernize and
    streamline our 7(a) and 504 applications, and we have now done
    entirely this electronically. And our SBA One Platform has
    simplified our loan process. So many of our lending partners
    have been able to take advantage of that.
        Over the last 2 years, we have been able to cut our loan
    approval times in half through process improvements, which also
    greatly enhanced our ability to process loans following the
    recent lapse in appropriations.
        Now let me share a few ideas for the Committee to consider
    as you review the agency's capital access programs. First is a
    recommendation to increase the express loan limit from $350,000
    to $1 million. This cap has been set in statute for 15 years,
    with the exception of 1 year during the Recovery Act when it
    was increased to $1 million. This loan product is used by many
    small businesses that need a revolving line of credit. An
    increase will go a long way to helping them, especially
    businesses with seasonality.
        Next, I would like to ask you to consider increasing the
    504 loan amount for small manufacturers from $5.5 million to
    $6.5 million. Increasing the maximum loan amount would greatly
    benefit America's manufacturing industry and help small
    businesses access credit to reenter the marketplace. Loans to
    manufacturers perform very well and typically create more jobs.
        Another recommendation is within our Microloan program
    regarding the manner in which funds are made available during
    the course of the fiscal year. We would recommend eliminating
    the current 1/55th rule, and we will continue to review ways to
    provide for a better flow of funds throughout the year while
    still preserving funding access for all states.
        Also, regarding our 7(a) loan program, we will continue to
    discuss with the Committee various policy options outlined in
    the agency's budget submission. A foundation of the program is
    to account for risk and the accompanying cost share with our
    lending partners.
        Lastly, I would recommend providing SBA with flexibility to
    manage the 7(a) Secondary Market Guarantee Program by
    introducing a small fee not to exceed 0.05 percent on the
    outstanding balance of loan pool certificates.
        Mr. Chairman and Ranking Member Cardin, thank you again for
    the opportunity to testify today, to share an overview of our
    capital access programs and to outline a few policy
    recommendations.
        I look forward to answering your questions. Thank you.
        [The prepared statement of Mr. Manger follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. Thank you.
        Mr. Manger, as we undergo this reauthorization process, it
    is imperative that--I hope we will take a holistic view not
    only of programmatic changes, but needed modernizations, for
    example, on the IT systems, the internal processes used to
    manage these programs.
        Can I ask, what is the SBA doing to streamline processes in
    the lending programs to improve the IT systems, to manage the
    programs in a way that promotes the efficient delivery? And I
    guess I start by--are all the lending programs online, and if
    not, why not?
        Mr. Manger. Thank you very much, Senator.
        So all of the programs are now handled electronically. That
    is something we have done in the last 2 years.
        We are making advances further in our 504 loan program to
    allow a central repository for all the documents involved in
    closing a 504 loan. That could be quite complex and timely, and
    we think it will be much more efficient if we can have a
    central repository for all the documents so that we can look at
    that in the centers as well as if we need to look at them from
    the Office of Credit Risk Management. So that is something that
    is ongoing right now.
        We are right now making enhancements to the MPER system,
    and I want to thank the Senate for allowing us to reprogram
    some of the money, $1.2 million, so that we can apply that to a
    new version of the recording system for the Microloan program.
    That is in process now, and we are working on that. And we hope
    to have something by the end of this calendar year for the
    Microloan program.
        Otherwise, we are also making IT enhancements to our
    lender-match program, and just briefly, to explain that to you,
    that is a program that allows a potential borrower to go
    online, put into the system what they are looking for in terms
    of a loan, and then that is fed out to--electronically out to
    approved SBA lenders so that they can then, if they are
    interested, reach out to that individual, that small business,
    and talk further about making a loan.
        Over the last couple of years, we have had 4 million hits
    on that site, and over 186,000 connections have been made
    between a small business owner and an approved SBA lender. We
    are going to make further enhancements to see if we cannot make
    that even more seamless and take somebody from again coming in
    and then actually closing a loan with the SBA.
        Chairman Rubio. The President's budget for 2020 included a
    request to increase fees to maintain zero subsidy in the
    program. According to the budget request, the programs are
    expected to have a $99 million subsidy in Fiscal Year 2020.
        Did the subsidy model change for Fiscal Year 2020?
        Mr. Manger. So, Senator, the subsidy model has not changed
    since 2014. There are always enhancements made to it, and we
    actually, obviously, each year have another whole cohort to
    factor into analysis in our review of the performance of the
    program.
        Right now, we have 26 years that we are able to look at,
    and we combine that obviously with assumptions from the Office
    of Management and Budget, and that really is how formulating of
    the subsidy model comes about.
        Chairman Rubio. Well, were performance metrics for the 7(a)
    program taken into account in the model?
        Mr. Manger. Absolutely. Twenty-six years of performance of
    the 7(a) program were taken into account, and we have seen----
        Chairman Rubio. Do you know how it is weighed?
        Mr. Manger. I do not. I do not have those weights.
        So just let me explain to you, Senator, because this is
    important too. The modeling is done completely separately from
    my office in the Office of the Chief Financial Officer. He has
    a modeling team that is removed from the Office of Capital
    Access, and they do all of the work in their office. They have
    someone who actually does the model. Then they have someone in
    the office who actually double-checks their work in that
    office. Then we actually send it out to an independent third
    party for verification and validation of the model before it is
    sent to OMB, where once again they validate the model that we
    are using. So it is really looked at many times, and
    eventually, it goes to our auditor who reviews the model as
    well.
        Chairman Rubio. So is that model available for the
    Committee, including the OMB projections, the SBA assumptions
    and how they were weighed? I mean, we are asking for a $100
    million subsidy to close the gap. I think it is important as we
    work through this process to have a better understanding of the
    OMB projections but also the assumptions made from the model.
        Mr. Manger. Right. So, Senator, again, as I said, all of
    the calculations in the modeling are done in the CFO's office.
    They have access to that. I actually do not have visibility
    into the actual modeling that goes on there, nor do I actually
    have access to OMB's assumptions. That is sent over by OMB to
    the Office of the Chief Financial Officer where it is input
    into the model, and that is where they run the numbers.
        I can share with you, though, that in our most recent
    report that we just received, because interest rates have been
    so low and because now they are starting to increase, that we
    are seeing more loans that are stressed because the small
    businesses are having to pay a higher interest rate, and that
    is having an effect.
        So, in fact, our 7(a) early default rate is now where it
    was in January of 2014. That was on the end of the Great
    Recession, but we have noticed for the last year and a half
    that our defaults in the 7(a) program have been increasing,
    increasing slightly, but after 18 months, it has actually
    gotten back to the same level we were at in January of 2014. So
    that is of some concern, and that is why we want to maintain,
    again, a very efficient program for the taxpayers and want to
    make sure that we have the fees to be able to pay for the
    losses.
        Chairman Rubio. Well, just to close a loop and then turn it
    over to the Ranking Member, as I understand it, you do not have
    insight. You know what the model consists of, more or less, on
    general terms.
        Mr. Manger. Yes.
        Chairman Rubio. And you see the end product.
        Mr. Manger. Yes.
        Chairman Rubio. But the actual model itself is run in the
    CFO's office, and OMB has its own assumptions. So you do not
    actually see the details of the guts of it. You only see the
    end product, and you know what it entails generally.
        Mr. Manger. That is correct.
        I mean, obviously, it takes into account interest rates. It
    takes into account the unemployment rate, different----
        Chairman Rubio. But how each of these things are weighed is
    not----
        Mr. Manger. I have no visibility into that. That is done in
    the CFO's office and then in conjunction with OMB.
        Chairman Rubio. Ranking Member.
        Senator Cardin. Well, thank you for your testimony.
    Particularly, I thank you for the specific recommendations that
    you have made.
        I certainly am very sympathetic to increasing the limits on
    the different programs you mentioned. I will want to talk about
    how we can better target to underserved communities.
        But let me start with the point the Chairman was raising in
    regards to the subsidy fee. I agree with the Chairman. We need
    to understand these numbers better.
        Congress made an intentional effort to keep the fee waiver
    program. The administration presented a budget last year that
    would have eliminated a good part of the fee waiver, except, I
    believe, on the programs that are required by statute, the
    veterans program where you are required to give the waivers,
    express loans to veterans.
        But Congress expressly provided the resources so that we
    could continue the fee waiver program, and it is something that
    we feel pretty strongly about, the cost of SBA loans.
        It seems to me that you are compounding the problem by
    requesting a separate fee on the lenders that is in your
    prepared testimony.
        I must tell you, I have been to several meetings of small
    businesses and bankers where they all tell me they are still
    concerned about the cost of small business loans through the
    SBA, and if we make it more expensive, are not we cutting out
    one of the major avenues for businesses that have no other
    option for mainstream financing?
        Mr. Manger. So, Senator, let me first say that fee waivers
    were not in place until 2014. There have never been fee
    waivers, and in fact, some of the fee waivers were brought
    about because of the new model that I spoke about earlier for
    the calculation of the subsidy model.
        Since that time, though, every year, we actually have less
    money, less money to allocate to fee waivers. So that is why it
    has had to be reduced.
        Senator Cardin. But the President's budget is cutting the
    budget, so putting even more pressure on you to----
        Mr. Manger. There was not an appropriation for fee waivers
    in the budget, sir.
        Senator Cardin. Well, if I understand the President's
    budget versus the FY19 budget, if you compare the two, the
    appropriators and Congress provided sufficient resources to
    fund your basic agencies and maintain a fee waiver program.
        Mr. Manger. That is correct.
        Senator Cardin. The new budget, as I understand it,
    submitted by the President has cut the SBA budget, assuming
    that they would not have the losses that they are currently
    paying on fee waiver. Am I reading that wrong?
        Mr. Manger. Well, all I can say is that in the budget,
    there are three scenarios. The current loss scenario shows that
    if we were to continue, just as we are now, we would need $99
    million in order to pay for what we anticipate would be the
    necessary amount to cover any losses in the program.
        As the statute is written, if there is not sufficient
    funding, we cannot offer the fee waiver to the veterans in the
    Express program. The only way we can do that is if it is not
    going to be an additional cost. So if we have to ask for $99
    million more, that is an additional cost, an additional
    appropriation. We are not allowed by statute to then give the
    fee waiver to the veterans.
        Senator Cardin. You are talking about the veterans Express
    loan.
        Mr. Manger. Yeah.
        Senator Cardin. I think we are two ships passing in the
    night here. I think Congress has expressly provided the
    resources within the SBA budget, so the fee waiver program can
    continue beyond the veterans' Express loans.
        Mr. Manger. That is not the case, sir.
        Senator Cardin. So you are saying that legally, even if we
    give the money in the budget, you have to follow the----
        Mr. Manger. The way the statute is written is we are only
    able to give the fee waiver to veterans on the Express program
    if there is no additional appropriation or cost to the program.
    There has to be, again, some sort of a surplus for us to be
    able to offer that fee waiver.
        Senator Cardin. And Congress cannot make that surplus
    through appropriation?
        Mr. Manger. Yes, of course, you can.
        Senator Cardin. That is what I am saying.
        Mr. Manger. No, you can do that. But I am just saying that
    the way the statute is written, the fee waiver----
        Senator Cardin. Is that not what we did last year?
        Mr. Manger. No. We have not----
        Senator Cardin. You had a fee waiver. How did you do it
    with the fee waiver last year?
        Mr. Manger. Because in the modeling, we showed that we
    actually had additional money so we could offer the fee waiver.
    Now because of the circumstances we see coming forward, we do
    not have that ability. We have to reduce what we give as a fee
    waiver.
        Senator Cardin. I want to move on to one more question.
        Mr. Manger. Sure.
        Senator Cardin. I am going to ask our staffs to drill down
    on that because the information I have shows that the budget
    request from the administration assumes that the fee waiver
    program is no longer there, except for the veterans' Express
    loan program, and therefore, they have reduced appropriations
    in other areas to the SBA. That is what at least I have been
    informed on the SBA budget.
        Senator Cardin. Yeah. The two other scenarios show the
    veterans' fee relief still being there, but it shows that we
    would have to increase the fees to generate the additional
    monies that we would need to offer the fee relief.
        Senator Cardin. What I want from you is, what do we need to
    do as a Congress to make sure the fee waiver program continues?
        Mr. Manger. For veterans?
        Senator Cardin. No. I am talking about the fee waiver
    program that has been applied since 2014.
        Mr. Manger. So, Senator, the fee waiver that we have been
    doing has only been available because we have a surplus.
        Senator Cardin. I understand what you are saying. So what
    do we need to do in order to make sure you can continue that
    fee waiver program?
        Mr. Manger. We would have to increase the fees to the
    program. We would have to increase the fees and then be able to
    offer fee relief to certain lower, smaller loans, as we have
    done in the past.
        Senator Cardin. I think there are other ways we can get
    that done.
        Mr. Manger. All right. We are happy to work with you,
    Senator.
        Senator Cardin. The other question--and maybe I will have
    to do it for the record because of the time restrictions.
        Mr. Manger. Sure.
        Senator Cardin. I want your views as to how--and let me
    just acknowledge you are making progress in reaching
    underserved communities in the 7(a) and 504 loan programs. The
    trend lines are positive. I acknowledge that.
        But the absolute numbers are way too low, and you have the
    Community Advantage program that is doing much better.
        You have taken steps through regulation to restrict the new
    lenders under the Community Advantage program, which I quite do
    not understand and some of the other restrictions. What can we
    learn from the programs that are working, Community Advantage
    pilot program, Microloan program which is also cut in the
    administration's budget, which reaches more minority and
    women--what can we learn in modifying the 7(a) and 504 program
    so that we can do a better job of reaching underserved
    communities?
        Mr. Manger. I think that is an excellent question, but let
    us just be clear that the Microloan program had a record year
    last year. And, in fact, we are not cutting the budget for the
    Microloan program.
        If you look at the budget that was submitted, in loan
    making and loan servicing, the numbers actually increase
    slightly. For loan liquidation, the number is flat, and the
    only category where you see any slight deviation is in the
    grant part of the Microloan program. But the reason why we were
    doing that is because the grant money is 2-year money, and we
    were able to roll over from last year into this year, $8
    million in the grant-making part.
        So we are absolutely fully funded as we were last year in
    the Microloan program, and that program is doing extremely
    well. It had a record year last year. We now saw a 16 percent
    increase in loans going to African Americans in that program.
    In fact, a full 38 percent of the Microloan dollars are now
    going to African American-owned small businesses. That program
    is doing extremely well.
        We have seen actually that over 8 percent of a recipient of
    a microloan comes back later to the SBA to use one of our
    larger loan programs. They come back and they get a 504 loan or
    a 7(a) loan, and so we have seen this continuum of growth
    because they have been able to build up a credit history with
    the Microloan program. So that is really a phenomenal program,
    and we want to see that program grow.
        In fact, I have had my folks in that office put together a
    marketing plan to go across the country to see how we can get
    that program to grow even further because we agree with you,
    Senator, that that is an excellent, excellent program.
        We made the changes to Community Advantage because we
    believe in the Community Advantage program. I believe in the
    Community Advantage program. We wanted to strengthen it so that
    it can stand on its own and be made permanent, but when we
    looked at how some of its performance was doing about a year
    ago, we had some concerns with some of the program.
        So we made those changes. They are not in rule. It is a
    pilot program. In fact, we extended the pilot program by 2\1/2\
    additional years so that we could, again, make sure that we
    make this program as strong as possible so that it can stand on
    its own and become a part of our full breadth of programs
    available to small businesses.
        Senator Cardin. Thank you.
        Mr. Manger. Thank you, sir.
        Chairman Rubio. Senator Duckworth.
        Senator Duckworth. Thank you, Mr. Chairman.
        Mr. Manger, last month, this Committee held a hearing on
    cybersecurity threats to small businesses. The discussion
    focused on the need for more information and access to basic
    cybersecurity assistance and training for small businesses.
    However, programs--I know your leadership at SBA has been
    dedicated primarily to deploying dollars to small business
    owners and entrepreneurs. However, a program like the Microloan
    program which pairs technical assistance with loans of $50,000
    or less serves as a vehicle to deliver critical education and
    training to small businesses, and I want to see how that can be
    applied towards cybersecurity training.
        We already know that small businesses must strengthen their
    cyber defenses, resiliency, and recovery in the face of a
    growing and ever-present cyber threat. Can you address what
    more SBA could do with respect to the Microloan program to
    ensure these borrowers have access to cybersecurity training in
    particular? Because we had a panel here where every one of them
    said, ``We need this.''
        Mr. Manger. Thank you very much.
        So with the Microloan program, you are exactly correct.
    There is a mandatory training and technical assistance that is
    made available through grant money to a recipient of a
    microloan, and we can certainly--we provide training to our
    microloan intermediaries all the time. And we can certainly
    work with them to make sure that they are making sure these
    small businesses are aware of cybersecurity and take full
    advantage of everything at their disposal so that they can
    guard against any cyberattacks at their small business.
        We understand that is obviously very important. We take
    that very seriously, obviously, at the SBA, and we would be
    able to do that, I think, through the technical assistance and
    training.
        We also have grants that go out for more assistance like
    this through our Office of Entrepreneurial Development, our
    SBDCs, Small Business Development Centers, our SCORE resource
    partners, as well as our women's business centers. And we can
    work with them to also educate small businesses further on the
    need for cybersecurity and protection against cyber threats. So
    I think we have a few avenues we can work on.
        And, also, I was the Associate Administrator for Field
    Operations. We can certainly work with our field to make sure
    that when they go out and make presentations to small
    businesses that they keep them aware of cybersecurity and the
    threat that that poses to their small business.
        Senator Duckworth. But are you doing that now, and is that
    part of the training that occurs when small businesses come to
    you? Because I get the sense that many small businesses, at
    least from that panel we had, do not know where to go, do not
    know who to trust, and do not know what type of training
    exactly they need, and choose, instead, almost to willfully
    just ignore it and maybe the problem will not--``Maybe I will
    not get hacked,'' and they move forward.
        I do think there needs to be more proactive initiatives on
    your part, and is that happening now?
        What you just told me is that we have all of these ways of
    doing it, but are you actually doing it in a proactive way?
    Because when we talk to small businesses or some of those
    associations, they are saying that actually they are not quite
    sure what to do or who to listen to or what those particular
    resources are.
        Mr. Manger. Right. So, quite honestly, I cannot tell you
    that we are doing all of that right now, but I can tell you
    that I will go back to the agency and make sure that we begin
    to incorporate that in the technical assistance and training
    that we provide to small businesses. I think you have a very
    good point, and I will make sure that I take that back to the
    agency.
        Senator Duckworth. Thank you.
        If you could keep my office informed and perhaps--I do not
    know if the rest of the Committee is interested or not in
    seeing the progress that you are making--because I will follow
    up to see if we have actually enhanced this process, because I
    think that the problem only gets worse over time.
        Mr. Manger. Certainly. I appreciate that. Yes, I will.
    Thank you.
        Senator Duckworth. Thank you.
        I yield back, Mr. Chairman.
        Mr. Manger. Thank you.
        Senator Inhofe [presiding.] Thank you, Senator.
        Just so I can explain to people what is going on here, we
    have votes in progress. Neither Ms. Duckworth nor I know how
    many votes are going to be, but----
        Senator Duckworth. One or more.
        Senator Inhofe. Yeah, something like that.
        [Laughter.]
        So I have already voted on this one, and so I do have----
    before we dismiss you as the first panel, I want to take my
    turn here.
        What I would like to do is go ahead and give the background
    of a case that you are familiar with so that I can get it in
    the record and find out a little more clearly where we are in
    resolving, hopefully, this issue, which I think should be
    resolved at some point.
        So I will go ahead, Mr. Manger. The SBA acted in two policy
    notices early in 2017 that have resulted in staffing firm
    franchisees' inability to qualify for SBA loans and other
    services that previously they qualified for. So we are talking
    about people out there who are no longer qualified, and that
    was one of the changes that took place in 2017.
        SBA's actions have overturned years of SBA precedent and as
    a result are preventing small businesses across the Nation,
    including those owned by veterans, women, minorities, from
    obtaining SBA loans.
        The issue at hand is whether the franchisers of staffing
    firm companies like Express Employment Professionals in
    Oklahoma City directly control their franchisees and as a
    result whether or not these franchisees should be classified as
    small businesses. Unlike what SBA's 2017 notice implies,
    Express Corporate does not directly control its franchisees.
    Direct Corporate does not hire or fire its franchisees'
    employees, and the 2017 notice does not take into account the
    unique product of staffing firm franchises. Express Corporate
    simply requires that its franchisees' employees get paid on
    time and in full in order to ensure compensation for those
    workers.
        The minimal level of oversight exercised by staffing firm
    franchises like Express Corporate should be clear that they do
    not directly control their franchisees, and I understand there
    are ongoing discussions between the SBA and Express on this
    issue. However, staffing firm franchisees are continually being
    denied SBA votes.
        So the votes have been denied in this process, and so I
    would--I guess the best way to start this off, Mr. Manger,
    should Congress provide SBA more clarity on this issue so as to
    ensure small businesses like Express and franchisees are not
    denied SBA loans? Do you think that Congress should provide
    clarity in this?
        Mr. Manger. So, Senator, let me just tell you what we have
    done in the last couple of years.
        Senator Inhofe. Yes.
        Mr. Manger. We did change the franchise policy at the
    agency. As you know, per the Small Business Act, we are only
    allowed to make capital available to a small business. We
    cannot make capital available to a business through affiliation
    that really is a big business.
        So we did change the franchise rules. We took in-house an
    SBA directory. I am happy to say that the eligible franchises
    on the SBA directory have increased 90 percent since we put the
    new policy in place. We went from having just over 2,000
    brands, eligible franchises on the SBA directory, and now we
    are up to over 3,800 brands that are eligible for SBA
    financing.
        Since the change was made, we have also seen an increase in
    the dollars going to franchises over the last 2 years of 43
    percent. So the franchise program is doing extremely well at
    the agency.
        I understand the situation that you are speaking about, and
    we are addressing that situation, sir. And I am pleased to say
    that we have an agreement in principle with this company, and
    we are prepared to move forward.
        Senator Inhofe. I see. Have you personally been involved
    with any of these principals?
        Mr. Manger. I had met with them actually when they came in
    to Washington. I met with them in a conference room at the SBA
    Headquarters, and I have had people in my office as well as the
    Office of General Counsel working diligently with them for the
    past few months, as you know, and again, at this point, we have
    an agreement. And we are going to move forward.
        Senator Inhofe. Well, we are looking forward to that, and I
    appreciate that very much. I was thinking if clarity is needed,
    it would probably have to be in the form of legislation, but I
    will assure you anything that we would do, we would be working
    closely with you because we have in the past and would continue
    to do that.
        Mr. Manger. I appreciate that very much, Senator. Thank
    you.
        Senator Inhofe. Now let me ask----
        Senator Cantwell. Thank you, Mr. Chairman.
        Senator Inhofe. Have you already had a chance to visit?
        Senator Cantwell. No. I would so much like to.
        Senator Inhofe. Okay. We will recognize Senator Cantwell.
        Senator Cantwell. Thank you, Mr. Chairman, and thank you
    for holding this important hearing.
        Obviously, I would like to thank Mr. Manger for your work
    at access to capital, writ large. When I happened to be the
    chairman of the committee, we did a lot of great work on access
    to capital for women entrepreneurs, and I wanted to ask you
    what more do you think we could be doing right now as we
    increase both the sole-source access and then smaller loan
    sizes so that SBA--we found that SBA packages, women were not
    as enamored over the big $500,000 package and were much more
    comfortable with a smaller loan portfolio.
        I do also want to welcome Patty Kibbe, who is going to be
    on the next panel, Mr. Chairman, and look forward to hearing
    from her because, obviously, in various rural parts of the
    country, women need access to capital. And Evergreen Business
    Capital of Seattle is one of the largest 504 lenders. So I will
    look forward to hearing from her as well.
        But, Mr. Manger, what else? Has this been a priority for
    your administration, and what else do we need to be doing to
    increase access to capital, given the small percentage of loans
    that are taken out by women?
        Mr. Manger. Certainly. Thank you, Senator.
        Working with Administrator McMahon, she has been a huge
    proponent for making sure that women have access to capital as
    well as other resources provided through the agency, whether it
    is government contracting, entrepreneurial development help. So
    we have worked very closely on trying to increase the numbers
    of lending and loans going to women.
        We have had great success, as you were saying, in some of
    the smaller-dollar programs, the Microloan program, Community
    Advantage.
        In fact, going back to the franchises, we have seen an
    increase of 26 percent in women getting franchises. This is
    something that we have not seen ever. That that has increased
    this much. Usually, it has been men coming in for franchises,
    sometimes couples coming in, but now we have seen women on
    their own coming in. And the increase over the last year and a
    half has been 26 percent.
        So we believe we are doing a good job. There is always more
    work to be done, but we are definitely focused on trying to
    make sure that we get out as much capital to women as possible.
        Senator Cantwell. Is there a correlation on the franchise?
    Is there something that the agency has done to increase that?
        Mr. Manger. I was just saying when you were walking in that
    we actually have changed our policy, and we have now increased
    the number of eligible brands for SBA financing from just over
    2,000 brands to over 3,800 brands nationwide that are eligible
    for SBA financing. And we have seen a 43 percent increase in
    dollars going to franchises over the last 2 years, and that is
    also a reason why more women are now able to access that.
        We made it very easy. The 3,800 franchise brands are listed
    on our website. That was never the case. That was something I
    introduced. We now have 3,800 eligible franchise brands on our
    website that anyone can look at in the public and determine if
    they would like to be involved with one of those franchises.
        Senator Cantwell. So you think volume, or do you think
    there is something else to the brands themselves?
        Mr. Manger. You know, that is a good question. I would have
    to study that further.
        I think, honestly, though, making this much more accessible
    and having broader visibility to the public about what brands
    are eligible for an SBA loan has really created more of an
    incentive and an interest on behalf of everybody.
        Senator Cantwell. I appreciate that, and thank you for that
    leadership.
        I think for us, in doing the report that we did on the
    Committee, we found that women were only receiving something
    like 4 percent of SBA product. It was appalling to us to find
    that out, but we found a bunch of things that we tried to
    correct. Obviously, one of this was this sole-source issue, but
    the other--and the loan package size. But a lot of the
    counseling programs that existed were also much more geared
    towards--well, let us just say some of the ideas that women
    were bringing to the table, the advisory committees had a lot
    less familiarity with it. So I would be curious on that brand
    if you ended up listing brands that women were attracted to,
    for whatever reason, because their business interests lined up
    with that.
        I think we have to keep pushing this envelope to get--if 50
    percent of our society is going to be startups from women, I
    mean, if we want more startups and we want--we cannot leave out
    half of our society not borrowing to get that entrepreneurial
    spirit going. So I appreciate your efforts here.
        Mr. Manger. Absolutely.
        And let me just add, though, that in terms of, again, our
    Microloan program having a record year last year, we now are
    showing that almost 48 percent of our microloans are going to
    women.
        Senator Cantwell. That is great.
        Mr. Manger. So we are getting near that 50 percent mark,
    and so we are making progress.
        Senator Cantwell. Thank you.
        Thank you, Mr. Chairman.
        Chairman Rubio [presiding.] Senator Hawley.
        Senator Hawley. Thank you, Mr. Chairman.
        Mr. Manger, let me ask you about microloans, since you were
    just talking about those. My understanding is when the
    Microloan program was first authorized back in 1992, there was
    a requirement that half of all loans be made in rural areas.
        Now, I do not know if at some point along the way that rule
    was removed or maybe it is just being ignored, but the
    Congressional Research Service reported in a 2019 report that
    today, 81 percent of all microloan borrowers are located in
    urban areas.
        As you know, the largest intermediary for these microloans
    is based in my State, in St. Louis, Justine Petersen, and when
    my team asked the folks there and the SBA regional team members
    who are based in Missouri about expanding access to these
    programs for rural businesses and entrepreneurs, they were very
    frank. They said that they want to do it, but it is hard for at
    least two reasons. One is the 1-in-55 cap rule that keeps the
    funds tied up, but the main impediment, as you might imagine,
    is geography. Staff can either spend hours in the car visiting
    rural communities to facilitate these loans and provide all of
    the pre- and post-loan technical assistance, or they can just
    operate in major urban areas, where there is plenty of demand
    to keep them busy.
        And all of that is understandable. I am not here to
    criticize anybody for their choices, but what I want to know is
    what can we do to structure this program and provide resources
    needed to ensure that all of our citizens are benefiting,
    especially those in rural areas that is the majority of my
    State and where I grew up, where the need is very great.
        Mr. Manger. I appreciate that. And, Senator, let me just
    tell you that my grandfather was from Boonville, Missouri.
        Senator Hawley. Oh, very good.
        Mr. Manger. So I just wanted to add that.
        So for places like that and other rural parts of your
    State, we want to make sure that everybody has access to
    capital. So we are doing everything that we possibly can.
        We have an agreement now, as you may know, with the U.S.
    Department of Agriculture. There was a signed MOU between
    Administrator McMahon and Secretary Perdue. So we are actually
    now working together.
        And let me just give you one example of a success story
    that we had down--I am sorry. It is not in Missouri. It is in
    Louisiana, where Senator Kennedy--but in Louisiana, we actually
    worked with USDA to provide a grand total of $30 million to a
    manufacturer of denim, the material of blue jeans, and they are
    actually exporting that material.
        So this company, Vidalia Denim Mills, got $25 million from
    the USDA, $5 million through the SBA, and now they have been
    able to hire 300 workers in a rural part of northern Louisiana
    for this company to make denim to sell overseas. So that is a
    success story, and we want to see more of those successes. We
    will bring them out to Missouri.
        Senator Hawley. That is fantastic.
        Are there other steps that you can think of that this
    Committee should take or should look at to continue to expand
    that access for rural business folks?
        Mr. Manger. You know, Senator, at this point, we are trying
    to do it through our field operations. We have 68 district
    offices. I used to be the head of field operations at the
    agency. We have 10 regional administrators, and we are trying
    to get them out as much as possible.
        We are currently offering some fee relief to loans that are
    made in rural areas. We have included in the 504 program a
    relaxed job--dollars-for-job formula so that it encourages 504
    loans to be made in rural areas.
        We have also included in the Community Advantage pilot
    program an incentive to have Community Advantage loans made in
    rural areas because 60 percent of the loans had to be made in
    the low- to moderate-income areas.
        We have now included rural in that 60 percent as well. So
    we are taking lots of steps to try to make sure we are getting
    out to those rural areas, but I look forward to working with
    you and then the Committee to figure out how we can even do a
    better job.
        Senator Hawley. Great. Thank you very much.
        Thank you, Mr. Chairman.
        Chairman Rubio. All right. I hope you have something good
    for Nevada like Missouri.
        Senator Rosen. Thank you. Thank you, Mr. Chairman. Thank
    you for being here today.
        Actually, we have a lot of veterans in Nevada, so I want to
    talk about veteran-owned small businesses. Actually, there is
    roughly 2.5 million veteran-owned small businesses across the
    United States. In Nevada, we have over 220,000 veterans, and so
    this sector represents nearly one in 10 U.S. businesses
    generating an estimated $1 trillion in revenue. So we know our
    veterans are tremendously talented, but sometimes they need
    help transitioning from the military using those skills into
    civilian employment or launching a startup.
        Last year in the House, I cosponsored the Veterans Job
    Opportunity Act, which provides tax credits to veterans to open
    a small business in an underserved community. So this proposal
    would help veterans, their spouses, reserve, and national guard
    members invest and revitalize small business through their
    entrepreneurship.
        So I know that you offer specific training and loans for
    veterans as well. So can you tell us a little bit about what
    you are doing for veterans, and do you think that creating a
    tax credit like those in my bill last session would be helpful?
        Mr. Manger. Thank you very much, Senator.
        Again, in the Microloan program, we are doing very well in
    getting loans out to veterans. In fact, we are just about where
    we were last year, which has been the best year since before
    the great recession. So we have seen in the Microloan program,
    the loans to veterans come back very strongly.
        We do still offer, again, by statute, the fee relief to
    veterans in the Express program. Certainly, we would be pleased
    to talk to your further--you and your staff, the Committee--
    about possible tax credits for veterans.
        We have our Boots to Business program that actually has
    been very successful, and we again continue to promote that. I
    feel like we are doing quite a bit to try and get out to
    veteran communities and make sure that they are able to partake
    in the loan programs and access to capital that they need for
    their business.
        Senator Rosen. That is terrific. Thank you.
        I would like to switch over to some of our minority-owned
    businesses. Of course, we have a lot of that in Nevada. So one
    of the top concerns I hear about from small business owners and
    my local chambers is the need for quicker and easier access to
    capital.
        So despite you have lots of many great SBA programs, but
    there seems to be a disconnect between available capital and
    actually getting it in the hands of the minority business
    owners.
        So data consistently shows that African American- and
    Hispanic-owned businesses struggle. They really struggle to get
    access to the most affordable and quality capital, and only 7
    percent of the loan approvals go to minority businesses. And
    that does not really, nearly reflect the needs of the
    community.
        So how do you think you can address and rectify some of
    this imbalance for minority communities?
        Mr. Manger. So we want to make sure that, again, we have
    the most efficient process possible.
        You were talking about the speed. Unfortunately, we are
    competing against some lenders that operate online that have
    very high interest rates. It is very easy to get that capital.
    We want to make sure that we have the ability to make capital
    available on reasonable terms, and our programs offer those
    reasonable terms.
        In fact, our interest rates, where they are within the band
    that we allow them, are lower than what you would get on credit
    cards. Many small businesses, as you know, max out credit cards
    to get----
        Senator Rosen. Right.
        Mr. Manger [continuing]. The business to start their
    business. We want to make sure that the SBA programs are out
    there.
        For example, I mean, with the--again, I am going to talk
    about the Microloan program again because we are doing very,
    very well getting out those loans to small businesses at rates
    much lower than the predatory rates that you would receive on
    the street.
        Senator Rosen. So let me ask this question. Is it a problem
    of getting information out to the small businesses? Is there a
    central repository at the SBA website where I can direct small
    business owners so they do not have to go out and find it in
    other places in the community? Would it be helpful to have some
    kind of consolidating feature within the SBA for cyber hygiene
    loan access?
        Mr. Manger. Yeah.
        Senator Rosen. All the kinds of platforms that we know
    small businesses need to succeed, especially in their first
    year. Are you working on something like that, or how can we
    help you do that?
        Mr. Manger. No, no. I appreciate that, and we are
    constantly trying to put as much information on our website as
    possible.
        We update the CDCs, the certified development companies,
    that participate in our program. Again, we have the franchise
    list on the website so that anyone can look at eligible
    franchises, and if they want to start one of those franchises,
    they know that the SBA will guarantee the loans enabling them
    to purchase one of the licenses for one of those franchises.
        So, again, we can always do more. I think we are trying to
    get out as much information as possible through our district
    offices, and we are bringing people in through the Microloan
    program that graduate then later to larger programs.
        Community Advantage program is doing very well in areas
    bringing in----
        Senator Rosen. Shall we change that from pilot program to
    the----
        Mr. Manger. You know, we want to make that program strong
    enough so that it can be made a permanent program. That is our
    objective, and we have taken steps to make that program have a
    stronger foundation so that it can be built upon and grow.
    Again, the pilot was expanded so that we can observe it a
    little bit longer and then, yes, make it a permanent program.
        Senator Rosen. Fantastic. Thank you.
        Mr. Manger. Thank you, Senator.
        Chairman Rubio. Thank you.
        Two quick questions. The first is on the--and this may have
    been asked while I was out, and I apologize. I think we will
    have another vote here in about 45 minutes.
        On the 504, we hear a lot about the CDC loan guarantee
    program. One of the complaints we have heard is that the
    application and the other processes are not completely online.
    The closing process can be complicated and cumbersome, and it
    is causing some lenders to move borrowers or move--to shift
    these borrowers over to the 7(a) product, even when the 504
    product might be a better fit. That is a concern we have heard.
    What are we doing to address it?
        And I apologize if that was already asked.
        Mr. Manger. No, no. It was not already asked, Senator.
    Thank you.
        So let me just start by saying that actually this year, so
    far in 2019, we have seen the 7(a) program down 8.5 percent,
    and the reason why we are seeing that is many people now are
    going to get conventional loans. Banks have opened up their
    credit box because the economy is doing well, and they are
    making these loans conventionally.
        What they are not doing, though, is making long-term loans
    at a fixed interest rate, and that is where the 504 loan comes
    in.
        I am happy to report this year that a 504 program is up 7.5
    percent, and that is because of the rising interest rate
    environment, people wanting to lock in a fixed interest rate
    for 25 years.
        You may know that Administrator McMahon, one of the first
    things she did when she came on board, she introduced the 25-
    year term. The longest term in that program prior to that was
    20 years, so we added 60 additional months in which to repay
    that loan. So that is one of the reasons why we have seen a
    huge upsurge in the 504 loan.
        So, for example, to date, we have seen about--since the 25-
    year debenture was introduced, we have seen almost 3,000 loans
    made for almost $3 billion, and that is in one year. One year.
        Chairman Rubio. In 504.
        Mr. Manger. In 504. And so that is people taking advantage
    of a fixed interest rate for 25 years. In fact, the rate right
    now is below prime. So someone can get a 504 loan for up to
    $5.5 million at comparable rate.
        Chairman Rubio. But I guess the point, that it is not the
    structure--right. And that obviously improved the structure and
    the----
        Mr. Manger. And it is up 7.5 percent.
        Chairman Rubio. Right. So I guess when we hear people say
    that they think the process is cumbersome and the paperwork is
    difficult, they have not been able to do it online, is that
    valid? Is that historic, and it has changed? I mean, or is it--
    --
        Mr. Manger. No, no. So now that the program actually is
    fully automated, the 504 program is fully automated, it is a
    more cumbersome product than the 7(a) program. There is no
    doubt about it. I mean, you know the way it is----
        Chairman Rubio. What does fully automated mean? You can do
    it online?
        Mr. Manger. Well, the lender, the CDC----
        Chairman Rubio. Right.
        Mr. Manger [continuing]. When they are putting in the data,
    yes, they do that online. Yes, correct.
        So you need a third-party lender to provide 50 percent.
        Chairman Rubio. Right.
        Mr. Manger. Forty percent is done through the CDC with
    SBA's guarantee, and then 10 percent----
        Chairman Rubio. But your interface with the lender is all
    electronic?
        Mr. Manger. Yes. That is correct. Yep.
        Chairman Rubio. Does each lender, then, intermediary
    lender, do they have different products or different ways to
    handle it with the borrower? How do they----
        Mr. Manger. Yes. How they interact with the borrower is
    really up to them.
        I will admit that sometimes we will wait for an
    intermediary to be able to provide all the data and the
    paperwork that is required to close a 504 loan because, again,
    a lot of times it is for----
        Chairman Rubio. But that is lender-dependent. That is their
    processes for gathering information, not yours.
        Mr. Manger. That is correct. That is correct.
        Chairman Rubio. The Ranking Member might have another
    question, and then we got to get to the other panel as well.
        Under the Microloan program, the intermediaries are being
    asked to collect and regularly submit data, correct, to the
    SBA? It is unclear, at least to me--perhaps this was covered in
    the past--about what happens with this information. It is not--
    my understanding, it is not related to industry or to Congress.
    So what types of data do we believe that they are collecting to
    help measure borrower outcomes? I guess walk us through what
    they do with the data, how we use it, why it is relevant.
        Mr. Manger. Right. So, actually, in fact, right now,
    Senator, we are working, as I mentioned earlier, to improve the
    electronic submission program referred to as MPERS for the
    Microloan program, and it really has not been updated in 25
    years.
        So we thank you for, again, the programming of the $1.2
    million. We are working on that for a new system. We are going
    to be able to capture more information on the microloan sheet.
        So, for example, we want to find out how many jobs were
    created. What type of revenues were enhanced because of the
    receipt of the loan? We want to be able to make sure that after
    the 6 years that is the term of a loan that the small business
    is actually still in business.
        We have seen some microlenders go out of business, but they
    continue to pay off the loan because they are dedicated to
    making sure they pay off that loan. So there are certain
    metrics that--you are correct--we need to capture, and our new
    system will allow us to do that. So I think we will be able to
    do that.
        The one thing that our Office of General Counsel says we
    cannot share is some of that data because we are not the maker
    of the loan. It is actually a not-for-profit lending
    intermediary that makes the loan. So the information really
    belongs to them, and we are not allowed to give out the
    information that they are capturing from their customers.
        Senator Cardin. I would just request if you would make
    available to the Committee the dollar amount under the fee
    program, under the veterans Express loan, how much that fees
    are being waived, the dollar amount in the last couple fiscal
    years, and then if we had fee waiver on the small loans, how
    much revenue is involved in the fee waivers? If you would just
    give us those two numbers, I would appreciate it.
        Mr. Manger. Sure. I will get that back to you, Senator.
    Absolutely.
        Chairman Rubio. I also had one more, since you are already
    sitting there, and we will get some of this for the record as
    well. But I know that, I guess, in September of last year,
    there was published a notice in the Register making some
    changes to the agency's Community Advantage program. Among the
    changes were a moratorium on new lenders entering the program.
        Kind of what was the intent of this change, and how have we
    assessed? Has that change been made, and is it now effective?
    How do we assess the program under that new parameter?
        Mr. Manger. I appreciate that question, Senator. Yes.
        So when I came in, the Community Advantage program, I was
    introduced to it as a pilot program. I was watching it. It is
    performing very well in getting loans made, but we wanted to
    look more deeply into how the actual loans were performing.
        So we had, in collaboration with our Office of Credit Risk
    Management, Dun & Bradstreet do a review of the performance of
    the program, and it showed that there were some problems,
    especially on some of the larger loans. Loans that had a low
    credit score, we were allowing lenders, the CA lenders, to make
    loans on a delegated basis with a credit score below 140.
        The problem with that was we noticed that the loans that
    were being made below 140 credit score had a default rate of
    over 10 percent. That caused us concern. This is a subset of
    the 7(a) program. We thought that was too high.
        What was amazing was the minute the credit score went above
    140, the default rate dropped to just over 4 percent. So what
    we did in this notice that you are citing from last fall, in
    September, was we said, ``Look, from now on, the delegated
    loans may only be made with a credit score above 140, where
    there is less risk. If the loan is going to be made below 140,
    we will still allow that, but it needs to go into one of the
    SBA centers to be really underwritten and looked at so that we
    do not have the threat of, again, over 10 percent default
    rate.'' So that was one of the changes we made.
        We also made some other changes that we think were very
    helpful to small businesses. We restricted some of the fees
    that they could be charged because we saw that there were some
    very high fees being charged to the small business to get one
    of these rather small loans.
        We also expanded the areas in which they could be made. For
    example, Senator Hawley was talking about rural loans. We
    included rural as another category of where we would encourage
    these loans to be made.
        And, finally, again, as I said earlier, we wanted to look
    at the program and really study it, just the way you would
    almost do a science experiment, and you need a static group so
    that you can study exactly how it performs.
        So we said, ``Look, right now, we are going to ask for a
    moratorium to be put in place so we can study this group, how
    it performs, and then make any adjustments necessary to make
    sure that this program is on a firm foundation and that it can
    go forward and become a permanent program in the SBA's array of
    programs.''
        Chairman Rubio. So it is the intent--you just said it could
    be a permanent program. Is permanency a goal?
        Mr. Manger. It is a goal of the agency, absolutely, and we
    want to be able to study it and make sure that it is as strong
    as possible so that it can be a permanent program. Yes.
        Chairman Rubio. And the moratorium was designed to free
    sort of the status quo so you could study and learn from it?
        Mr. Manger. Absolutely. So that we would have a controlled
    group participating in the program so that we could observe how
    the program performs.
        Over the years, since it was introduced in 2011-2012, there
    have been many, many new entrants into the program. That skews
    our ability to really study the program.
        Chairman Rubio. Right.
        Mr. Manger. If you have a static group in the program, as I
    said, like a science experiment, you can really study and see
    how the program is performing with the lenders.
        Chairman Rubio. So, to paraphrase it, you froze it in place
    so you could study it, learn what works and what does not,
    create those conditions, I imagine at some point lift that
    moratorium, open it up for new lenders under those new
    conditions, and have the confidence to come back and ask us to
    make it permanent?
        Mr. Manger. Absolutely. Thank you for the question,
    Senator.
        Senator Cardin. I would just observe that at least from a
    lot of the stakeholder groups that I have heard from in regards
    to the changes you made in the Community Advantage program,
    there did not appear to be consultation with the stakeholder
    community. I think they were kind of surprised to see the rules
    that come out.
        Your rationalization is something that I think is helpful
    to have discussions with stakeholders before you make that type
    of a major change.
        Mr. Manger. I appreciate that, Senator. Thank you.
        Chairman Rubio. All right. Well, thank you.
        We have been joined by our Chairman Emeritus, but he is
    going to submit a question for the record.
        Anything on foreign policy you want to ask the SBA?
    Nothing? All right.
        [Laughter.]
        How many offices do you have in Afghanistan?
        Senator Risch. We covered that at lunch, did not we?
        [Laughter.]
        Chairman Rubio. Thank you so much. I appreciate you being
    here. Thank you.
        Do you have anything else?
        Senator Cardin. No.
        Chairman Rubio. All right. We are going to welcome our
    second panel. We want to thank you for being here.
        Mr. Manger. Senator Risch, I am sorry I did not get any
    questions from you.
        Senator Risch. Well, I got a tough one, but we are going to
    do it for the record.
        Chairman Rubio. I will start introducing our second panel
    as they position, and I want to start out by saying to the
    second panel, we are going to try to--I am going to limit my
    questions, obviously, so that other members have time to fully
    ask theirs as they come and go.
        We have a series of votes, potentially beginning at around
    approximately 4:30 or so, which means about 4:45 is the limit
    for those of us who have to get over there and do it. So that
    should give us enough time to kind of get through this, but
    your input is very important. And we are glad that you are all
    here.
        Our panel today, Julie Huston is the president and CEO of--
    immito. Is that right? Did I say it----
        Ms. Huston. immito.
        Chairman Rubio. All right. You are going to tell us how to
    pronounce it.
        Out of Denver, Colorado. They phonetically spelled it for
    me here, but I guess I just botched it. Out of Denver,
    Colorado, she has worked for over 30 years in the small
    business lending sector, participated in three successful
    nonbank startups and one division turnaround, and spent 19
    years in executive leadership roles where she has worked to
    build programs, development products, and improve delivery
    systems for small business lending.
        Patricia Kibbe is president and CEO of Evergreen Business
    Capital based in Seattle, Washington, and I know Senator
    Cantwell was here earlier. If she is able to return--I know she
    had some other commitments on committees as well, but she
    wanted to have a few moments to also introduce. We will make
    that happen if she is able to return. Based in Seattle,
    Washington, but also serves Washington, Idaho, and Alaska, and
    has served in that role since 2013. And, in 2015, Ms. Kibbe
    helped set up Evergreen Business Capital Community Finance.
        Robert Villarreal is the executive vice president of CDC
    Small Business Finance in San Diego, California. As executive
    VP, he is responsible for grand and capital development,
    strategic partnerships, and government relations.
        And Connie Evans is the president and CEO of the
    Association for Enterprise Opportunity based here in
    Washington, D.C. Ms. Evans has worked on microlending policy
    since 1986, when she was the founding president of the Women's
    Self-Employment Project.
        So we want to thank all four of you for being here today. I
    know each of you have an opening statement you would like to
    give.
        So why do not I start with you, Ms. Huston, so you can tell
    me how to accurately pronounce that and then move from there.
        Senator Risch. Mr. Chairman, for the record, Julie does a
    fact-finding trip to Idaho every year, so we are always glad to
    have her.

     STATEMENT OF JULIE HUSTON, PRESIDENT AND CEO, immito, DENVER,
                                COLORADO

        Ms. Huston. Chairman Rubio, Ranking Member Cardin, and
    members of the Committee, thank you for allowing me to have the
    opportunity to testify. My name is Julie Huston. I am currently
    the CEO and president of immito, a nonbank 7(a) lender which
    holds a Small Business Lending Company license, providing
    access to capital nationwide.
        I am also currently the chairwoman of the National
    Association of Government Guaranteed Lenders, NAGGL, and in
    that role, I have the honor of representing over 800 financial
    institutions and partners that participate in the 7(a) lending
    industry.
        At the heart of the SBA's successes, the 7(a) lending
    program, the agency's largest public-private partnership, last
    year financial institutions provided about $25.4 billion in
    loans to over 60,000 small businesses nationwide, creating or
    retaining over 540,000 jobs.
        7(a) lenders are prepared to roll up our sleeves to discuss
    ways to modernize the program and improve the outcomes
    available to small business borrowers. In fact, this Committee
    and the 7(a) industry had a landmark year passing legislation
    to make a massive amount of positive changes to the Small
    Business Act, including but not limited to a historic oversight
    bill.
        I now need to address the 7(a) industry's number one
    priority. The President's FY20 budget request sent a shockwave
    through the industry when it included a subsidy calculation
    requiring an additional funding of $99 million for the 7(a)
    program. This is a major shift from the program's track record
    of operating at a zero subsidy, which means that the fees
    collected from borrowers and lenders cover the costs of the
    loans.
        The FY20 positive subsidy rate means SBA is proposing
    borrowers and lenders pay $99 million more in fees over and
    above the fees already collected.
        These fees are currently being collected at their statutory
    maximums, as authorized by the Small Business Act. What does
    this mean for this Committee and Congress? Unless the
    administration formally amends its projected FY20 subsidy rate,
    by September 30th of this year, Congress will need to either
    appropriate $99 million or amend the Small Business Act to
    raise the current fee caps on borrowers and lenders. Otherwise,
    the 7(a) program will shut down on October 1st.
        My plea to this Committee is that you challenge both OMB
    and SBA to fully disclose the subsidy assumptions and provide
    adequate oversight of the subsidy's calculation. The 7(a)
    subsidy and the FY20 budget does not follow logic on a number
    of fronts.
        Number one, the portfolio's performance data projects a
    sharply different picture than this positive subsidy estimate
    suggests. The performance of the 7(a) loan portfolio has never
    been better with the FY18 charge-off rate at an all-time low of
    0.51 of 1 percent.
        The 5-year average recovery rate on defaulted loans as
    reported to Congress last December was 50 percent. In sharp
    contrast, the FY20 budget assumes a project recovery rate of
    only 37.29 percent.
        In addition, since FY 2010, the model used by SBA and OMB
    has overcharged borrowers and lenders by $3.2 billion in just
    the last 9 years. This is a tax on small businesses borrowers,
    plain and simple. What this really means is that borrowers and
    lenders have been paying substantially more fees than required
    to cover the cost of 7(a) loans.
        In this year's budget, the FY18 subsidy estimate alone
    acknowledged a $757 million overcharge, with another $143
    million overcharge already predicted for the current FY19.
    Repeatedly overcharging borrowers and lenders means the model
    is not working and needs to be reviewed, and now they want $99
    million more.
        In a 2004 GAO report requested by this Committee to review
    SBA subsidy calculations, GAO and two other independent
    reviewers could not determine whether a bias existed in the
    model by systemically excluding variables to influence the
    subsidy rate in a particular direction. The report also states
    SBA could not provide adequate documentation to demonstrate the
    rationale for the model. These are alarming conditions and
    should be looked into as it applies to the FY20 calculation.
        What are the real-life consequences of raising fees on
    borrowers and lenders in SBA's proposed budget? Costs will be
    increased to small business borrowers, which will have a
    chilling effect on access to capital. If the program does not
    make financial sense for lenders, then they will participate
    less in the 7(a) program, and access to capital will be further
    restricted.
        Without appropriate oversight of OMB and SBA, a flawed
    financial model for the 7(a) portfolio will dictate access to
    capital rather than allowing this Committee and the Small
    Business Act to exercise that authority.
        SBA has been overcharging borrowers. Performance of the
    portfolio has never been better. This is a small business tax.
    Let us collectively make sure that this does not happen.
        Thank you.
        [The prepared statement of Ms. Huston follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. Thank you.
        Ms. Kibbe.

       STATEMENT OF PATRICIA KIBBE, PRESIDENT AND CEO, EVERGREEN
                     BUSINESS CAPITAL, SEATTLE, WA

        Ms. Kibbe. Good afternoon, Chairman Rubio, Ranking Member
    Cardin, and members. I am Patti Kibbe----
        Chairman Rubio. Chairman Emeritus.
        Ms. Kibbe. Chairman----
        [Laughter.]
        Well, he is from one of my states, so I feel obligated.
        I am a nonprofit certified development company
    headquartered in Seattle, Washington. We have offices and 32
    staff members that preside in Washington, Alaska, Oregon, and
    Idaho. I came to the CDC from the banking world. I was a
    senior-level banker, and I wanted to come to Evergreen because
    of its mission to help small businesses have access to capital.
    I felt that it helps America grow.
        Our CDC is an SBA 504 lender. We are an SBA Community
    Advantage pilot program. We also have other non-SBA small
    business loan programs. We also have Evergreen Business Capital
    Community Finance that we are in the process of submitting our
    application to become a Community Development Financial
    Institution, or a CDFI.
        Since 1980, Evergreen has supported borrowers to create and
    retain over 20,000 jobs. We have assisted nearly 2,800
    businesses with SBA funds totaling $2.6 billion, supporting
    projects of $7.5 billion.
        There are over 200 CDCs nationally, and my CDC is not
    unique. To our industry, we have impact at the local and
    regional levels. We play an important part. The role of our
    Nation's economy as nonprofit lenders, we use our excess
    capital on economic development to help the communities we
    support.
        The 504 program is an economic tool that helps small
    businesses reach--purchase commercial real estate or equipment
    with a fixed-rate long term, giving them stability and allowing
    them to preserve capital for working and operations.
        The 504 loan is a result of a partnership involving our
    third-party lenders, such as banks and credit unions, business
    owners, and the Federal Government. A typical structure, as
    Bill Manger said, is a 50/40/10. The lender provides 50 percent
    of the project financing. The CDC or SBA provides 40 percent,
    and the small business is 10 percent.
        The 504 portion is a guarantee by the SBA funded through a
    debenture sale on Wall Street and not directly by the
    government.
        The CDC works with borrowers for the life of the loan. I
    think that makes us very unique as well.
        The 504 story, I just want to tell you one. Monaco Tool
    Company, which is out of Eugene, Oregon, was started in 1986 by
    Joe Monaco out of his garage. He purchased a building after he
    really had business started going, and now this last year, he
    purchased another building. This helped manufacturing. This
    retained jobs, and it also created 12 new jobs, allowing the
    building that he bought to actually be futuristic in that he
    could grow even further.
        I could tell you stories like that all day long. The ones
    that I think might resonate with you on the Committee is
    Schneider's of Capitol Hill and La Loma Mexican Restaurant. I
    could tell you about successes like Chobani, which is a
    national.
        Amazingly, the 504 process has these successes while
    operating at a zero subsidy from the government. This program
    is self-funded, and by law, we are required to create one job
    for every $75,000 lent.
        Job creation and retention is unique to the 504 program and
    is a valuable tool for economic development.
        One of the areas that I think is of the biggest concern is
    the lack of modernization into policy and technology by SBA. We
    are required to implement duplication and multiple paper, and
    the electronic tracking of the loan process, while SBA has made
    some progress, there is a whole lot more progress that needs to
    be made.
        Modernization includes the practical methods of speeding up
    low-dollar, low interest rates. I just want to say as a former
    banker, the only way to eliminate risk is to not do the loan.
    There is risk. It is up to us to manage risk. The CDC industry
    is very committed to that. The SBA needs to manage risk, not
    eliminate risk. It is crucial to our businesses.
        The CDC work, I can assure you we want to eliminate the
    risk. We need to make the processes better for our small
    businesses so that they are not subject to predatory lenders.
    That is a huge concern out there, as I am working with
    businesses in the community.
        I ask for your leadership in assisting to fix the
    challenges of the growing economy. I have put more detail into
    my written testimony. I want to thank you for inviting me to
    testify, and I am happy to answer any questions.
        I also invite you and all members of the Committee to go
    visit your local CDCs. We are in your states, and you can see
    firsthand the work that we do.
        Thank you.
        [The prepared statement of Patricia Kibbe follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. Did I hear you correctly? Chobani, the
    yogurt people, are a part?
        Ms. Kibbe. Yes, sir.
        Chairman Rubio. We got to get this program going.
        [Laughter.]
        Senator Risch. They have a plant in Idaho.
        Chairman Rubio. They do.
        Senator Risch. They do.
        Chairman Rubio. All right. Mr. Villarreal.

     STATEMENT OF ROBERT VILLARREAL, EXECUTIVE VICE PRESIDENT, CDC
                 SMALL BUSINESS FINANCE, SAN DIEGO, CA

        Mr. Villarreal. Good afternoon, and thank you, Chairman
    Rubio, Ranking Member Cardin, and members of the Committee.
        My comments today are focused on the SBA Community
    Advantage program, or CA for short, a pilot program launched in
    2011. The program has effectively increased SBA lending to
    emerging markets and we believe should be granted full program
    authority within the SBA 7(a) flagship program.
        I am here today representing both the largest CA lender in
    the Nation, CDC Small Business Finance, and the Mission Lenders
    Working Group, a group of CA lenders which has represented
    almost 50 percent of all the loans made today.
        My organization, CDC, has for 40 years been an advocate for
    small businesses. Headquartered in San Diego, we operate in
    California, Arizona, and Nevada.
        We provide all of the SBA programs: the 504, the CA, and
    the Community Advantage. And we have provided over $13 billion
    in capital to small businesses and helped create over 200,000
    jobs.
        When the CA program was launched in February of 2011, it
    was a bold step for the SBA because for the first time, they
    extended the administration 7(a) program to mission lenders.
    Three types of mission lenders were allowed into the program:
    Certified Development Companies; SBA microlenders; and
    Community Development Financial Institutions, or CDFIs. And
    these three types of organizations have made an impact under
    the CA program.
        For example, our organization has funded 656 CA loans for
    $91 million with 51 percent of those loans going to startups as
    defined by the SBA. As an industry, we have helped 5,200 small
    businesses, with nearly $700 million in small business lending,
    all with a loss rate of 1.5 percent through last fiscal year.
        As a percentage, we are one-third of 1 percent of all 7(a)
    lending, yet this small program has had a great impact on many
    small businesses.
        So, as this Committee looks to modernize the SBA to keep it
    relevant, I ask that they recognize that it is this delivery
    system of working with mission lenders that makes the program
    unique. Via a high-touch model that pairs business advising
    with affordable capital, mission lenders have expanded the
    credit market by allowing more small businesses access to
    capital, and we have demonstrated that we play an important
    role in the entrepreneurial ecosystem.
        Most importantly, many of us prepare our borrowers for
    lending at the next stage working with banks.
        Since its launch, the program has undergone numerous
    changes, many of which are the result of the SBA and mission
    lenders working together. It is in this spirit of cooperation
    that a number of responses were put into our written testimony.
        Right now, I want to just focus on two. First, we want to
    work on modifying the same institution debt refinancing policy.
    Right now, the program says that we have to wait 12 months
    before we can refi one of our own loans with a CA loan. This
    hurts small businesses, such as the one by Elena and Grayson
    who came to us with three online FinTech loans, and they were
    paying $20,000 a month on these loans. We were able to get them
    into an affordable CA loan, but that took about 3 months to do.
    If we had been able to do a bridge loan with our own money and
    then take it out with a CA loan 3 months later, we would have
    saved them $32,000 in that 90-day period. So we want to work
    with the SBA in changing that program.
        Finally, I want to speak about permanency. The CA program
    is 8 years old and has met the expectations of the
    administration. It has delivered nearly $700 million in
    affordable and responsible capital to small businesses in the
    emerging markets, all with the loss rate of less than 2
    percent. The program can and should be established as the
    relevant small-dollar 7(a) program for the SBA, particularly as
    other programs aim for larger markets.
        We are prepared to work with this Committee and the SBA in
    structuring language and developing a program that works, most
    importantly that works for small businesses.
        In closing, I would like to quote from the study requested
    by the SBA to evaluate the program and published May of last
    year. It states, ``The combination of what the CA program
    provides--financing with reasonable terms at a critical stage
    in a businesses' trajectory, through a trusted and accessible
    partner, with targeted technical assistance--makes the program
    an effective and important resource for small businesses.''
        Thank you, and I look forward to answering your questions.
        [The prepared statement of Mr. Villarreal follows:]
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        Chairman Rubio. Thank you.
        Ms. Evans.

     STATEMENT OF CONNIE EVANS, PRESIDENT AND CEO, ASSOCIATION FOR
                 ENTERPRISE OPPORTUNITY, WASHINGTON, DC

        Ms. Evans. Good afternoon, Chairman Rubio, Ranking Member
    Cardin, and members of the Committee. My name is Connie Evans,
    and I serve as the president and CEO of AEO, the leading voice
    of innovation in microfinance and microbusiness in the country.
    Since 1991, AEO and its members have helped millions of
    entrepreneurs contribute to economic growth while supporting
    themselves, their families, and their communities.
        We are also an authentic innovator, responsible for
    creating myWay to Credit, the first bank referral marketplace
    for small business lending, linking bank declines to CDFI
    mission lenders.
        Today's hearing on capital access is critical, as the
    Committee and this Congress consider broad improvements to the
    SBA. While our members utilize many programs to meet
    entrepreneurs where they are, I am here today to focus on the
    SBA Microloan program.
        Established in 1991 as a 5-year pilot, the program was
    originally created to assist women, low income, veterans, and
    minority entrepreneurs and offset disadvantages faced by very
    small businesses and gaining access to credit by making funds
    available to nonprofit community-based lenders who in turn make
    small loans to eligible borrowers.
        The program also provides technical assistance to microloan
    borrowers.
        The program was made permanent in 1997, and AEO has been
    its focal advocate over the last 27 years. Since we are unique
    in receiving direct loans from the SBA, we also have specific
    eligibility standards. Our lenders must have made and service
    loans for at least 1 year and have provided technical
    assistance for 1 year.
        Congress wanted to ensure rural and urban areas could both
    benefit and put exact wording in the statute for that. They
    created the 1/55th rule, which limits the amount of loans each
    State can make for the first 6 months of the year. Congress
    also wanted to ensure that not all technical assistance dollars
    were spent before a loan was originated and created the 25/75
    rule, which caps at 25 percent the amount of assistance that
    can be provided to a business before a loan is actually made.
        As we move now from its origins to today, there are 144
    active microloan intermediaries serving 49 states, the District
    of Columbia, and Puerto Rico. Last year, the SBA made 58 loans
    to intermediaries, our members, totaling $37.7 million, and in
    turn, lenders provided 5,500 loans totaling more than $75
    million with an average of $14,000 per loan.
        Since the program's inception, a total of $845 million in
    loans to small businesses have been made, which has helped
    create or retain about 246,000 jobs. Minority-owned firms
    received nearly 49 percent of the microloans issued, while
    women entrepreneurs received about 47 percent of loans in 2018.
        We are delivering on our mandate to reach communities in
    those market segments without traditional credit access or
    capital access. Behind this data, though, are enumerable
    stories, like that of Fatimah Ray, who was turned down for her
    initial loan to launch a fitness studio until ACE in Georgia,
    one of our members, helped improve her credit score and secure
    a loan for $20,000 to open the doors of Edgy Girl Fitness
    Studio. She is already--see, you looked up. She is already
    expanding, but we can and must do more.
        The program must align with total--today's marketplace and
    the needs of diverse business owners. Additional funding and
    streamline reporting requirements will help the SBA and its
    intermediaries better serve entrepreneurs in their communities.
        The 1/55th rule as well distorts the lending market,
    delaying for months loans in various states. Repealing this
    rule can be done, while making sure all states have access to
    the needed resources based on historical need.
        Similarly, the 25/75 rule, now the 50/50 rule, thanks to a
    legislative change from this Committee, it is still a reporting
    burden on both lenders and the SBA and ignores how we help
    future borrowers become credit-ready with business training and
    with guidance. This is an essential function to support non-
    bankable borrowers.
        Notably, the 1/55th and 50/50 rule eliminations are
    recommended by the SBA, and we are aligned with the agency on
    these views.
        As I turn to robust funding, we know it is critical, and
    AEO was joined by others in the microloan community in
    requesting $45 million for lending and $35 million for
    technical assistance in Fiscal Year 2020. However, in response
    to Mr. Manger's testimony, I must acknowledge that there is a
    budget cut in the current budget, although he indicated that
    there was no such budget cut. It goes from $42 million to $40
    million in lending, $31 million down to $25 million in
    technical assistance, and it totally zeroed out the prime
    program. Again, we are requesting $45 million for lending and
    $35 million in technical assistance.
        Many of our ideas are included in Senator Duckworth's
    recently introduced bill, the Microloan Program Enhancement Act
    of 2019. As a resident of Illinois, I want to send my regards
    and thank you for these efforts to the Senator on behalf of the
    hundreds of thousands of underserved entrepreneurs that benefit
    from this critical program and the modernizations called for in
    the bill.
        AEO is grateful for this Committee's continued bipartisan
    support of this very essential program, and I appreciate the
    opportunity to testify today.
        I will be submitting additional success stories from across
    the country in the coming days. I look forward to answering any
    questions.
        [The prepared statement of Ms. Evans follows:]
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        Chairman Rubio. Thank you all for being here.
        Let me start with this chart on the 504 closing process,
    which I like to call the Chobani impediment chart.
        [Laughter.]
        But what the chart does is it illustrates the closing
    process for a 504 construction loan.
        So, as you can see--and I think, Ms. Kibbe, you would know
    from personal experience--it is long--it appears--I mean, just
    look at the chart. It looks long. It is complicated. It is an
    arduous process. That is what we are hearing. That is what the
    chart indicates. Approximately 56 separate documents.
        So in the context of what we are trying to do here in
    reauthorization, I guess the first thing I would ask is--
    because you heard the SBA talking. This is good news. There is
    more utilization of this program than in the past, evidence at
    least that there has been a reduction in sort of pushing them
    to the other product because of interest rates and market
    conditions and the like.
        But it strikes me that even at the interface between the
    lender and the SBAs is now digitized and done electronically,
    the front-end process and the cumulative process appears to
    remain cumbersome.
        So, as we go through reauthorization, I think you already
    did in your opening statement, but speak a little bit more to
    the detrimental effects that this process has on borrowers, on
    CDCs, on bank partners, and then sort of dig in a little deeper
    on suggestions you have on policy that could improve this
    process.
        Ms. Kibbe. I would love to. Thank you, Chairman Rubio.
        I will say that this process is very accurate with one
    exception. It is very optimistic because it does not take into
    account a construction loan, and a construction loan can take
    up to 6 to 18 months to get the construction done before we
    even get to this process. So this would be what we classify in
    my certified development company as just a straight purchase,
    you know, vanilla ice cream kind of deal, and it is not Rocky
    Road because it should be Rocky Road. So this is very
    optimistic because it does not take into account the
    construction.
        I would say, just my two comments--and we can go into more
    detail with our staff and yourself later, but the forms are
    very cumbersome. They are not now in a repository, as Mr.
    Manger said that it should be, because that would eliminate
    some of it.
        The other thing is that the Office of General Counsel, I do
    not think really looks at lending practices. I think they look
    at, like to my other point, eliminating risk. So they have
    layered on some things to this process that are really very
    antiquated and need to be addressed.
        Chairman Rubio. Okay. So you are saying this is actually
    optimistic?
        Ms. Kibbe. Optimistic.
        Chairman Rubio. All right. You said the forms are not--you
    are referring to the front-end forms, the collection between
    the borrower and the lender?
        Ms. Kibbe. Right. If those were put into some type of a
    repository so that they could be looked at throughout the
    process--what happens----
        Chairman Rubio. They are uniform?
        Ms. Kibbe. They are uniform. Some of them are a little
    antiquated.
        But what happens is we are having to, at the end of the
    process, give all of the closing documents that we have already
    given at the front of the process. So you are basically kind of
    restarting the whole thing over again, and then there are
    certain forms that we have to repeat several times throughout
    the process. So it gets very cumbersome.
        And we can provide a lot more detailed information outside
    of the hearing.
        Chairman Rubio. Ms. Huston, you have already--I think you
    spent the bulk of your opening statement talking about this. I
    want to revisit it for just a moment. In your testimony, you
    talked about the implications of the President's budget
    request, the positive subsidy for the 7(a) program, which is
    going to require addressing it. It is going to require
    congressional action, whether it is appropriations or an
    increased fee.
        I wanted to give you an opportunity to go--you talked about
    just the lack of understanding, but you said that the subsidy
    calculation in itself, we have reason to believe is flawed, and
    as a result, people are being overcharged.
        I just want to give you a chance to kind of go deeper into
    that because we clearly would also--I mean, you heard the
    testimony before you, the administration and the SBA, about how
    they do not have access to the analytic tool. They just see the
    back-end product, but somebody has it, and somebody needs to
    understand what they are accounting for, what they are
    weighing, and how they are making these determinations.
        What about the results leads you to that conclusion that
    this deserves to be challenged?
        Ms. Huston. There has been historical GAO reports, at least
    three that we have been able to reference, where this has been
    a challenge in terms of understanding and getting behind the
    SBA subsidy calculation.
        I referenced in my testimony or my oral the 2004 report,
    but I will add another one to that right now. There was an SBA
    agency--excuse me. They hired Pricewaterhouse to conduct a
    diagnostic review of the SBA's existing internal controls, and
    in September of 1997, that study said that the credit subsidy
    process is not viewed as a way of assessing the future risk and
    costs of the program for management purposes. Rather, the rate
    calculation is perceived by SBA to be a tool for gaming the
    congressional appropriation process.
        I quoted that, in large part, because it is rather
    controversial in my mind.
        The other thing that Mr. Manger mentioned, which is why
    this feels convenient, is that--he mentioned 2014 in that the
    SBA and the OMB projected a zero subsidy with lower GDP growth,
    higher unemployment, based on--and then based on actual
    performance, they now say we have a negative subsidy. That
    means they overcharged in 2014 by nearly 2 percent. They are
    comparing an increase in default rates that they anticipate
    right now to 2014, which they have had tremendous positive
    performance in. So I find it interesting that they reference
    2014 specifically.
        So now with the higher GDP growth projection, lower
    unemployment, and better program metrics, they say we have a
    positive subsidy. So it is not adding up.
        Chairman Rubio. Mr. Villarreal, the SBA says the Community
    Advantage loans continue to exhibit more risk, with the last
    12-month default rate standing at around 4 percent; the default
    rate for the underserved small loans under the larger 7(a)
    program, around 3 percent. Obviously, zero percent would be
    considered no risk or low risk, and greater than 4 percent
    being high risk.
        I know this is a tough question to answer, but for a
    program like this to be viable or to be some hope, one day be
    extended, what would be an appropriate default rate and amount
    of risk for something like the Community Advantage program?
        Mr. Villarreal. Thank you for the question, Chairman.
        So those numbers, I think, are incredible, the fact that we
    have that default rate at 4 percent. The Community Advantage
    program is being asked to serve the hardest to serve. In fact,
    for almost all of us, 50 percent of our referrals come from
    traditional banks. So these are not conventional or even 7(a)
    SBA. They are being referred to us.
        The SBA microloan historically, which has been around a few
    decades, I think has a loss rate of between 5 and 7 percent. We
    think that Community Advantage may be better than that.
        In fact, we have sat with Mr. Manger and the SBA staff, and
    we have asked them if they could come up with a risk
    assessment, so we know as a lender what to be shooting for.
        Chairman Rubio. But you heard the testimony. They have
    frozen it. They want to look at it, and one of the things they
    talked about is the credit score number. Above 140, everything
    was great; below 140, they have problems. So they want to
    change the process by how they handle that.
        I wanted to ask about that, the 140 credit score at
    origination. What has been your experience with a credit score
    of borrowers under this program and its correlation to
    defaults? Even that calculation is different from what we would
    think of as a consumer credit score.
        Mr. Villarreal. Right. The score that is referenced is
    called the SBSS score, which is a predictive index from the
    SBA. Actually, as an industry, we were not opposed to the
    changes, that change that the SBA did in terms of requiring us
    to send loans----
        Chairman Rubio. I am sorry. Which change? You are about to
    say it, I guess.
        Mr. Villarreal. Yeah.
        Chairman Rubio. But the change where anything under 140
    would have to go for secondary screening?
        Mr. Villarreal. Correct, correct.
        As an industry, not a lot of us were operating in that
    space. Of about the 20 or so defaults that we have had, only
    one has been below 140, had a score of 138.
        We have not seen a correlation, really. We looked through
    our defaults between credit score and defaults. In fact, the
    majority of our defaults have had personal credit scores of
    above 700 and above a 160 SBSS score.
        Really, where we see a correlation more in defaults is with
    industry. So there is greater risk in the food industry,
    restaurants, and we have seen greater risk in health and
    fitness, yoga or Pilates. So that is where we have seen the
    risk but we have not seen a correlation with credit score at
    this point.
        Chairman Rubio. So you did not have a problem on the
    change, but you frankly do not--it sounds like what you are
    saying is that the credit score, when it comes to this program,
    is not really--the risk is really more industry-specific than
    it is based on the credit score. In essence, if you are in the
    wrong industry with a high credit score, your chances of
    default could be much higher, riskier than someone with a lower
    credit score in the right industry.
        Mr. Villarreal. You know, as a mission-based lender, we
    look at the entire picture. So credit score is just one of the
    things that we are looking at. We are looking at a number of
    factors, including industry, including work experience and
    history of management. So, for us, really it is just one factor
    that we look at.
        Chairman Rubio. Yeah. Again, I mean, just thinking through
    it, obviously, we have got some work to do to think about it.
    On the one hand, if you want this program--if we want this
    program to be viable and be able to make the case or the
    argument--and the Ranking Member believes in this--that this
    should be made permanent, then you have got to have a program
    that has some acceptable risk, even though we know it may be
    riskier, given the population and the industries you are trying
    to serve.
        The flip side of it is that if you try to make decisions on
    the basis of industry, which seems to be a leading indicator of
    risk, you end up sort of picking winners and losers between
    industry. So it is a tough balancing act, obviously.
        Mr. Villarreal. It is, but what we do--because mission
    lenders are so uniquely poised with both the capital, but the
    most important part, that business advising, that technical
    assistance, I think that when we find industries such as the
    restaurant industry or the health and fitness, it just means we
    underwrite more carefully, take more time, and apply more
    business advising with that client.
        Chairman Rubio. Yeah. The irony is the restaurant and the
    fitness. So you overeat, and then you have to go work out,
    either one. So that just tells you.
        [Laughter.]
        All right. Ms. Evans, you mentioned intermediaries are
    frustrated with what they call the 1/55th rule and how it does
    not efficiently encourage microlending in rural areas. A good
    argument, I think could be made that this rule is not operated
    entirely the way it was intended, and in fact, some could make
    the argument that it is counterproductive for the
    intermediaries that are trying to work with business in certain
    areas across the country, rural areas.
        But an alternative mechanism is also sort of difficult to
    come up with on the fly. It still needs to make sure that we do
    not leave these communities behind. In your estimation, do you
    have some ideas about--and you sort of touched on it a little
    bit already, but what a workable statutory alternative would be
    that at the same time achieves the goal of geographic disbursal
    of these loans?
        Ms. Evans. Thank you, Mr. Chairman, for the question. It is
    a great question.
        Before I answer that question, could I just correct one
    piece of information about the default rate for the Microloan
    program?
        Chairman Rubio. Yes.
        Ms. Evans. It is a little high that you quoted. It is
    actually about 2.7 percent. So the Microloan program is doing
    well, and the default rate, if you want to compare that in
    terms of thinking about Community Advantage.
        But on to your question, sir. Serving rural areas is a key
    priority of the Microloan program. As I mentioned in my oral
    testimony, it is actually in the statute. It is important to
    remember that the statute for this program already requires
    equitable distribution of intermediaries.
        We would encourage, as is in Senator Duckworth's
    legislation, SBA reporting on where the gaps are.
        There is also some misconception about states impacted by
    the 1/55th rule. It is not just states with urban populations.
    In 2017, Kentucky and Nebraska delayed loans because of this
    rule, one of the reasons Senator Fischer has championed
    removing this provision.
        And in 2018, Vermont, North Dakota, Georgia, New Mexico,
    and again, Nebraska were delayed. So far this year, Montana,
    New Hampshire, and Maine have all delayed deploying capital to
    entrepreneurs. They are just a few examples that I am
    mentioning, but coming from states where rural entrepreneurship
    is actually happening.
        Now, instead of providing a new rule, which like the 1/55th
    rule may have made sense at the time, we would urge focusing on
    collecting the data about how this program is actually serving
    rural entrepreneurs. Past data has shown great demand for this
    program in rural areas. So we would want to know the challenge
    better before creating a statutory solution, which may take
    another 27 years to change.
        Chairman Rubio. Twenty-seven years.
        Ms. Evans. Yes.
        Chairman Rubio. All right. Well, I think it is one of those
    things--it is one of the reasons why the reauthorization is so
    important. It is to kind of look through the options that exist
    under current law and how that could be reinterpreted or
    reapplied, and our goal here is to really continue to fine-tune
    this.
        It sounds, if I could paraphrase what you are saying, that
    the solution may already be there, but applying it differently
    than we are doing now, as opposed to going out and trying to
    create a new rule to replace what we are doing today.
        Ms. Evans. Exactly. But also, again, just eliminating the
    rule altogether.
        Chairman Rubio. Let me ask you one more question on data. I
    do not know if you saw the question that I had to the agency
    about--and it really goes back on data to the 2017 report in
    which the Inspector General found deficiencies in the
    collection of data by intermediaries and in the SBA's
    evaluation about data. So the weak links in data collection and
    program evaluation, if they remain, make it difficult for
    Congress to make decisions on a variety of different issues and
    for the Committee to make informed decisions as well about
    programs.
        So if you could talk a little bit about, first of all,
    that--and I know that this is different across the spectrum,
    but generally because one of the answers we got is they did not
    know what kind of data the intermediaries were collecting. What
    kind of data do intermediaries collect, and then how is that
    reported to SBA?
        Ms. Evans. Sure. Most intermediaries maintain a database
    with significant qualitative and quantitative information,
    including location, whether it is rural or urban, gender, race,
    jobs created, jobs saved, sales, and other impact data.
        The data is reported via the SBA's data collection system,
    MPERs, what we heard Mr. Manger mention, which is not an ideal
    system to use as it is not intuitive and it is time consuming.
        Intermediaries can only view this data. They do not have
    access to other locations or another location in terms of other
    intermediaries reporting on that data.
        Chairman Rubio. You can only view your data?
        Ms. Evans. You can only review your own data, correct.
        Chairman Rubio. What you do not have is a sort of holistic
    view of what all the data means put together?
        Ms. Evans. You do not only have a whole sense of the whole
    picture of the program in terms of the data, what is taking
    place. It is also very time consuming. We heard Mr. Manger talk
    about that they have made changes and are making other changes,
    but a new user-friendly database with spreadsheet upload
    capabilities would allow the intermediaries to report from a
    database like Nortridge loan software, something that they are
    already using to manage their program effectively and
    efficiently and be able to upload from that system into the SBA
    database without having to re-key every single entry.
        The data should also, of course, we think be made publicly
    available, so not only could the intermediary view this data
    across the program, but so could Congress.
        Chairman Rubio. It is just interesting because, literally,
    the 21st century is becoming a data-driven century. Everything,
    decisions we are making on a bunch of things are being driven
    by data because of new analytic tools that are being applied to
    make decisions.
        I know that across various industries, writ large--in fact,
    across almost every industry, data-driven decisions are going
    to be driven by analytic tools that are constantly going to be
    improved to make decisions on which way to go, what is the
    right direction, potentially even lending practices that will
    take into account factors that the human mind or traditional
    measures may not take into effect. So it is just interesting as
    a brainstorming exercise to think how analytics could
    eventually improve how we use data if it can be appropriately
    collected and updated in real time across the board to tell us
    more about a borrower than simply an old-school credit score
    might be or just look at an industry and say just because they
    are in a certain industry, that in and of itself is going to
    make us feel a certain way versus another.
        Obviously, there are always concerns that the analytic tool
    that could be applied is prone to bias itself, and so that has
    to be developed. But they are going to be developed across the
    board for all sorts of things, including risk assessment and
    health care and travel and the like. So it will be an
    interesting exercise as we move forward to see what the role
    could be, but it all begins with accurate real-time data
    collection that is available for collaboration, so you are not
    just siloed off geographically or across one intermediary.
        I appreciate the time you have all given us here today, and
    I apologize with the vote schedule. We have been a little bit
    chaotic moving back and forth, but again, I am grateful to all
    of you for being a part of this important hearing.
        We probably will submit some additional questions to you
    for the record. I know the Ranking Member is going to. He had
    an issue, State issue that he had to go address, and so he
    could not be here. But I know he is going to be submitting some
    as well.
        But your expertise in the real world, your application of
    these programs on how they are functioning is going to be
    really important to us, and so any further input that you would
    have for us on an ongoing basis would be very useful. And we
    are grateful.
        This is enough formality here, but the hearing record is
    going to remain open for 2 weeks. Any statement or questions
    for the record should be submitted by Wednesday, April 17th, at
    5:00 p.m.
        Thank you all so very much. We are very grateful to you for
    your time.
        With that, this hearing is adjourned.
        [Whereupon, at 4:43 p.m., the Committee was adjourned.]

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