[Senate Hearing 116-49]
[From the U.S. Government Publishing Office]
S. Hrg. 116-49
REAUTHORIZATION OF THE SBA'S ACCESS
TO CAPITAL PROGRAMS
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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
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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
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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:]
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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:]
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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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