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


                                                     S. Hrg. 116-49

                  REAUTHORIZATION OF THE SBA'S ACCESS
                          TO CAPITAL PROGRAMS

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 3, 2019

                               __________

    Printed for the Committee on Small Business and Entrepreneurship

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


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

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

                              ----------                              

                           Opening Statements

                                                                   Page

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

                               Witnesses
                                Panel 1

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

                                Panel 2

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

                          Alphabetical Listing

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

 
                  REAUTHORIZATION OF THE SBA'S ACCESS
                          TO CAPITAL PROGRAMS

                              ----------                              


                        WEDNESDAY, APRIL 3, 2019

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

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

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

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

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

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

    Mr. Manger. Thank you very much, Mr. Chairman, and thank 
you also, Ranking Member Cardin, for welcoming me back to one 
of the Senate hearings and members of the Committee for 
inviting me to testify here this afternoon.
    I have had the honor to serve for 2 years now as the 
Associate Administrator for the Office of Capital Access. 
Previously, I served at the agency as a regional administrator 
in New York and in Washington, D.C., as the Associate 
Administrator for Field Operations.
    From the beginning of my time with SBA, I have been able to 
witness the positive impact our programs have on small 
businesses across the country. In my current role, it is my job 
to administer programs that make capital available to small 
business entrepreneurs who would otherwise be unable to access 
capital to start or expand a business through conventional 
means. This is primarily achieved through our two main loan 
programs, 7(a) and 504.
    Our 7(a) program offers guarantees on loans to small 
businesses of up to $5 million, with guarantees ranging from 75 
percent to 90 percent, depending on the loan amount.
    In FY18, SBA guaranteed over 60,000 loans for over $25 
billion. Within this is our Community Advantage pilot program, 
which makes 7(a) loans of up to $250,000 available in 
underserved communities. For small businesses that need fixed 
interest rate loans for the acquisition or improvement of 
property, plant, or equipment, SBA offers the 504 loan program. 
These loans are made available through certified development 
companies, CDCs, which are SBA's community-based partners. In 
FY18, SBA made over 5,800 loans for almost $5 billion in this 
program.
    The SBA's Microloan program makes capital available 
directly to intermediaries, which in turn lend to small 
businesses. The program has been effective in providing capital 
to traditionally underserved communities with an average size 
microloan of just under $14,000. In FY18, SBA facilitated over 
5,400 microloans for over $75 million, and that was actually a 
record in the agency's history.
    Throughout our loan programs, we continue to modernize and 
streamline our 7(a) and 504 applications, and we have now done 
entirely this electronically. And our SBA One Platform has 
simplified our loan process. So many of our lending partners 
have been able to take advantage of that.
    Over the last 2 years, we have been able to cut our loan 
approval times in half through process improvements, which also 
greatly enhanced our ability to process loans following the 
recent lapse in appropriations.
    Now let me share a few ideas for the Committee to consider 
as you review the agency's capital access programs. First is a 
recommendation to increase the express loan limit from $350,000 
to $1 million. This cap has been set in statute for 15 years, 
with the exception of 1 year during the Recovery Act when it 
was increased to $1 million. This loan product is used by many 
small businesses that need a revolving line of credit. An 
increase will go a long way to helping them, especially 
businesses with seasonality.
    Next, I would like to ask you to consider increasing the 
504 loan amount for small manufacturers from $5.5 million to 
$6.5 million. Increasing the maximum loan amount would greatly 
benefit America's manufacturing industry and help small 
businesses access credit to reenter the marketplace. Loans to 
manufacturers perform very well and typically create more jobs.
    Another recommendation is within our Microloan program 
regarding the manner in which funds are made available during 
the course of the fiscal year. We would recommend eliminating 
the current 1/55th rule, and we will continue to review ways to 
provide for a better flow of funds throughout the year while 
still preserving funding access for all states.
    Also, regarding our 7(a) loan program, we will continue to 
discuss with the Committee various policy options outlined in 
the agency's budget submission. A foundation of the program is 
to account for risk and the accompanying cost share with our 
lending partners.
    Lastly, I would recommend providing SBA with flexibility to 
manage the 7(a) Secondary Market Guarantee Program by 
introducing a small fee not to exceed 0.05 percent on the 
outstanding balance of loan pool certificates.
    Mr. Chairman and Ranking Member Cardin, thank you again for 
the opportunity to testify today, to share an overview of our 
capital access programs and to outline a few policy 
recommendations.
    I look forward to answering your questions. Thank you.
    [The prepared statement of Mr. Manger follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Rubio. Thank you.
    Mr. Manger, as we undergo this reauthorization process, it 
is imperative that--I hope we will take a holistic view not 
only of programmatic changes, but needed modernizations, for 
example, on the IT systems, the internal processes used to 
manage these programs.
    Can I ask, what is the SBA doing to streamline processes in 
the lending programs to improve the IT systems, to manage the 
programs in a way that promotes the efficient delivery? And I 
guess I start by--are all the lending programs online, and if 
not, why not?
    Mr. Manger. Thank you very much, Senator.
    So all of the programs are now handled electronically. That 
is something we have done in the last 2 years.
    We are making advances further in our 504 loan program to 
allow a central repository for all the documents involved in 
closing a 504 loan. That could be quite complex and timely, and 
we think it will be much more efficient if we can have a 
central repository for all the documents so that we can look at 
that in the centers as well as if we need to look at them from 
the Office of Credit Risk Management. So that is something that 
is ongoing right now.
    We are right now making enhancements to the MPER system, 
and I want to thank the Senate for allowing us to reprogram 
some of the money, $1.2 million, so that we can apply that to a 
new version of the recording system for the Microloan program. 
That is in process now, and we are working on that. And we hope 
to have something by the end of this calendar year for the 
Microloan program.
    Otherwise, we are also making IT enhancements to our 
lender-match program, and just briefly, to explain that to you, 
that is a program that allows a potential borrower to go 
online, put into the system what they are looking for in terms 
of a loan, and then that is fed out to--electronically out to 
approved SBA lenders so that they can then, if they are 
interested, reach out to that individual, that small business, 
and talk further about making a loan.
    Over the last couple of years, we have had 4 million hits 
on that site, and over 186,000 connections have been made 
between a small business owner and an approved SBA lender. We 
are going to make further enhancements to see if we cannot make 
that even more seamless and take somebody from again coming in 
and then actually closing a loan with the SBA.
    Chairman Rubio. The President's budget for 2020 included a 
request to increase fees to maintain zero subsidy in the 
program. According to the budget request, the programs are 
expected to have a $99 million subsidy in Fiscal Year 2020.
    Did the subsidy model change for Fiscal Year 2020?
    Mr. Manger. So, Senator, the subsidy model has not changed 
since 2014. There are always enhancements made to it, and we 
actually, obviously, each year have another whole cohort to 
factor into analysis in our review of the performance of the 
program.
    Right now, we have 26 years that we are able to look at, 
and we combine that obviously with assumptions from the Office 
of Management and Budget, and that really is how formulating of 
the subsidy model comes about.
    Chairman Rubio. Well, were performance metrics for the 7(a) 
program taken into account in the model?
    Mr. Manger. Absolutely. Twenty-six years of performance of 
the 7(a) program were taken into account, and we have seen----
    Chairman Rubio. Do you know how it is weighed?
    Mr. Manger. I do not. I do not have those weights.
    So just let me explain to you, Senator, because this is 
important too. The modeling is done completely separately from 
my office in the Office of the Chief Financial Officer. He has 
a modeling team that is removed from the Office of Capital 
Access, and they do all of the work in their office. They have 
someone who actually does the model. Then they have someone in 
the office who actually double-checks their work in that 
office. Then we actually send it out to an independent third 
party for verification and validation of the model before it is 
sent to OMB, where once again they validate the model that we 
are using. So it is really looked at many times, and 
eventually, it goes to our auditor who reviews the model as 
well.
    Chairman Rubio. So is that model available for the 
Committee, including the OMB projections, the SBA assumptions 
and how they were weighed? I mean, we are asking for a $100 
million subsidy to close the gap. I think it is important as we 
work through this process to have a better understanding of the 
OMB projections but also the assumptions made from the model.
    Mr. Manger. Right. So, Senator, again, as I said, all of 
the calculations in the modeling are done in the CFO's office. 
They have access to that. I actually do not have visibility 
into the actual modeling that goes on there, nor do I actually 
have access to OMB's assumptions. That is sent over by OMB to 
the Office of the Chief Financial Officer where it is input 
into the model, and that is where they run the numbers.
    I can share with you, though, that in our most recent 
report that we just received, because interest rates have been 
so low and because now they are starting to increase, that we 
are seeing more loans that are stressed because the small 
businesses are having to pay a higher interest rate, and that 
is having an effect.
    So, in fact, our 7(a) early default rate is now where it 
was in January of 2014. That was on the end of the Great 
Recession, but we have noticed for the last year and a half 
that our defaults in the 7(a) program have been increasing, 
increasing slightly, but after 18 months, it has actually 
gotten back to the same level we were at in January of 2014. So 
that is of some concern, and that is why we want to maintain, 
again, a very efficient program for the taxpayers and want to 
make sure that we have the fees to be able to pay for the 
losses.
    Chairman Rubio. Well, just to close a loop and then turn it 
over to the Ranking Member, as I understand it, you do not have 
insight. You know what the model consists of, more or less, on 
general terms.
    Mr. Manger. Yes.
    Chairman Rubio. And you see the end product.
    Mr. Manger. Yes.
    Chairman Rubio. But the actual model itself is run in the 
CFO's office, and OMB has its own assumptions. So you do not 
actually see the details of the guts of it. You only see the 
end product, and you know what it entails generally.
    Mr. Manger. That is correct.
    I mean, obviously, it takes into account interest rates. It 
takes into account the unemployment rate, different----
    Chairman Rubio. But how each of these things are weighed is 
not----
    Mr. Manger. I have no visibility into that. That is done in 
the CFO's office and then in conjunction with OMB.
    Chairman Rubio. Ranking Member.
    Senator Cardin. Well, thank you for your testimony. 
Particularly, I thank you for the specific recommendations that 
you have made.
    I certainly am very sympathetic to increasing the limits on 
the different programs you mentioned. I will want to talk about 
how we can better target to underserved communities.
    But let me start with the point the Chairman was raising in 
regards to the subsidy fee. I agree with the Chairman. We need 
to understand these numbers better.
    Congress made an intentional effort to keep the fee waiver 
program. The administration presented a budget last year that 
would have eliminated a good part of the fee waiver, except, I 
believe, on the programs that are required by statute, the 
veterans program where you are required to give the waivers, 
express loans to veterans.
    But Congress expressly provided the resources so that we 
could continue the fee waiver program, and it is something that 
we feel pretty strongly about, the cost of SBA loans.
    It seems to me that you are compounding the problem by 
requesting a separate fee on the lenders that is in your 
prepared testimony.
    I must tell you, I have been to several meetings of small 
businesses and bankers where they all tell me they are still 
concerned about the cost of small business loans through the 
SBA, and if we make it more expensive, are not we cutting out 
one of the major avenues for businesses that have no other 
option for mainstream financing?
    Mr. Manger. So, Senator, let me first say that fee waivers 
were not in place until 2014. There have never been fee 
waivers, and in fact, some of the fee waivers were brought 
about because of the new model that I spoke about earlier for 
the calculation of the subsidy model.
    Since that time, though, every year, we actually have less 
money, less money to allocate to fee waivers. So that is why it 
has had to be reduced.
    Senator Cardin. But the President's budget is cutting the 
budget, so putting even more pressure on you to----
    Mr. Manger. There was not an appropriation for fee waivers 
in the budget, sir.
    Senator Cardin. Well, if I understand the President's 
budget versus the FY19 budget, if you compare the two, the 
appropriators and Congress provided sufficient resources to 
fund your basic agencies and maintain a fee waiver program.
    Mr. Manger. That is correct.
    Senator Cardin. The new budget, as I understand it, 
submitted by the President has cut the SBA budget, assuming 
that they would not have the losses that they are currently 
paying on fee waiver. Am I reading that wrong?
    Mr. Manger. Well, all I can say is that in the budget, 
there are three scenarios. The current loss scenario shows that 
if we were to continue, just as we are now, we would need $99 
million in order to pay for what we anticipate would be the 
necessary amount to cover any losses in the program.
    As the statute is written, if there is not sufficient 
funding, we cannot offer the fee waiver to the veterans in the 
Express program. The only way we can do that is if it is not 
going to be an additional cost. So if we have to ask for $99 
million more, that is an additional cost, an additional 
appropriation. We are not allowed by statute to then give the 
fee waiver to the veterans.
    Senator Cardin. You are talking about the veterans Express 
loan.
    Mr. Manger. Yeah.
    Senator Cardin. I think we are two ships passing in the 
night here. I think Congress has expressly provided the 
resources within the SBA budget, so the fee waiver program can 
continue beyond the veterans' Express loans.
    Mr. Manger. That is not the case, sir.
    Senator Cardin. So you are saying that legally, even if we 
give the money in the budget, you have to follow the----
    Mr. Manger. The way the statute is written is we are only 
able to give the fee waiver to veterans on the Express program 
if there is no additional appropriation or cost to the program. 
There has to be, again, some sort of a surplus for us to be 
able to offer that fee waiver.
    Senator Cardin. And Congress cannot make that surplus 
through appropriation?
    Mr. Manger. Yes, of course, you can.
    Senator Cardin. That is what I am saying.
    Mr. Manger. No, you can do that. But I am just saying that 
the way the statute is written, the fee waiver----
    Senator Cardin. Is that not what we did last year?
    Mr. Manger. No. We have not----
    Senator Cardin. You had a fee waiver. How did you do it 
with the fee waiver last year?
    Mr. Manger. Because in the modeling, we showed that we 
actually had additional money so we could offer the fee waiver. 
Now because of the circumstances we see coming forward, we do 
not have that ability. We have to reduce what we give as a fee 
waiver.
    Senator Cardin. I want to move on to one more question.
    Mr. Manger. Sure.
    Senator Cardin. I am going to ask our staffs to drill down 
on that because the information I have shows that the budget 
request from the administration assumes that the fee waiver 
program is no longer there, except for the veterans' Express 
loan program, and therefore, they have reduced appropriations 
in other areas to the SBA. That is what at least I have been 
informed on the SBA budget.
    Senator Cardin. Yeah. The two other scenarios show the 
veterans' fee relief still being there, but it shows that we 
would have to increase the fees to generate the additional 
monies that we would need to offer the fee relief.
    Senator Cardin. What I want from you is, what do we need to 
do as a Congress to make sure the fee waiver program continues?
    Mr. Manger. For veterans?
    Senator Cardin. No. I am talking about the fee waiver 
program that has been applied since 2014.
    Mr. Manger. So, Senator, the fee waiver that we have been 
doing has only been available because we have a surplus.
    Senator Cardin. I understand what you are saying. So what 
do we need to do in order to make sure you can continue that 
fee waiver program?
    Mr. Manger. We would have to increase the fees to the 
program. We would have to increase the fees and then be able to 
offer fee relief to certain lower, smaller loans, as we have 
done in the past.
    Senator Cardin. I think there are other ways we can get 
that done.
    Mr. Manger. All right. We are happy to work with you, 
Senator.
    Senator Cardin. The other question--and maybe I will have 
to do it for the record because of the time restrictions.
    Mr. Manger. Sure.
    Senator Cardin. I want your views as to how--and let me 
just acknowledge you are making progress in reaching 
underserved communities in the 7(a) and 504 loan programs. The 
trend lines are positive. I acknowledge that.
    But the absolute numbers are way too low, and you have the 
Community Advantage program that is doing much better.
    You have taken steps through regulation to restrict the new 
lenders under the Community Advantage program, which I quite do 
not understand and some of the other restrictions. What can we 
learn from the programs that are working, Community Advantage 
pilot program, Microloan program which is also cut in the 
administration's budget, which reaches more minority and 
women--what can we learn in modifying the 7(a) and 504 program 
so that we can do a better job of reaching underserved 
communities?
    Mr. Manger. I think that is an excellent question, but let 
us just be clear that the Microloan program had a record year 
last year. And, in fact, we are not cutting the budget for the 
Microloan program.
    If you look at the budget that was submitted, in loan 
making and loan servicing, the numbers actually increase 
slightly. For loan liquidation, the number is flat, and the 
only category where you see any slight deviation is in the 
grant part of the Microloan program. But the reason why we were 
doing that is because the grant money is 2-year money, and we 
were able to roll over from last year into this year, $8 
million in the grant-making part.
    So we are absolutely fully funded as we were last year in 
the Microloan program, and that program is doing extremely 
well. It had a record year last year. We now saw a 16 percent 
increase in loans going to African Americans in that program. 
In fact, a full 38 percent of the Microloan dollars are now 
going to African American-owned small businesses. That program 
is doing extremely well.
    We have seen actually that over 8 percent of a recipient of 
a microloan comes back later to the SBA to use one of our 
larger loan programs. They come back and they get a 504 loan or 
a 7(a) loan, and so we have seen this continuum of growth 
because they have been able to build up a credit history with 
the Microloan program. So that is really a phenomenal program, 
and we want to see that program grow.
    In fact, I have had my folks in that office put together a 
marketing plan to go across the country to see how we can get 
that program to grow even further because we agree with you, 
Senator, that that is an excellent, excellent program.
    We made the changes to Community Advantage because we 
believe in the Community Advantage program. I believe in the 
Community Advantage program. We wanted to strengthen it so that 
it can stand on its own and be made permanent, but when we 
looked at how some of its performance was doing about a year 
ago, we had some concerns with some of the program.
    So we made those changes. They are not in rule. It is a 
pilot program. In fact, we extended the pilot program by 2\1/2\ 
additional years so that we could, again, make sure that we 
make this program as strong as possible so that it can stand on 
its own and become a part of our full breadth of programs 
available to small businesses.
    Senator Cardin. Thank you.
    Mr. Manger. Thank you, sir.
    Chairman Rubio. Senator Duckworth.
    Senator Duckworth. Thank you, Mr. Chairman.
    Mr. Manger, last month, this Committee held a hearing on 
cybersecurity threats to small businesses. The discussion 
focused on the need for more information and access to basic 
cybersecurity assistance and training for small businesses. 
However, programs--I know your leadership at SBA has been 
dedicated primarily to deploying dollars to small business 
owners and entrepreneurs. However, a program like the Microloan 
program which pairs technical assistance with loans of $50,000 
or less serves as a vehicle to deliver critical education and 
training to small businesses, and I want to see how that can be 
applied towards cybersecurity training.
    We already know that small businesses must strengthen their 
cyber defenses, resiliency, and recovery in the face of a 
growing and ever-present cyber threat. Can you address what 
more SBA could do with respect to the Microloan program to 
ensure these borrowers have access to cybersecurity training in 
particular? Because we had a panel here where every one of them 
said, ``We need this.''
    Mr. Manger. Thank you very much.
    So with the Microloan program, you are exactly correct. 
There is a mandatory training and technical assistance that is 
made available through grant money to a recipient of a 
microloan, and we can certainly--we provide training to our 
microloan intermediaries all the time. And we can certainly 
work with them to make sure that they are making sure these 
small businesses are aware of cybersecurity and take full 
advantage of everything at their disposal so that they can 
guard against any cyberattacks at their small business.
    We understand that is obviously very important. We take 
that very seriously, obviously, at the SBA, and we would be 
able to do that, I think, through the technical assistance and 
training.
    We also have grants that go out for more assistance like 
this through our Office of Entrepreneurial Development, our 
SBDCs, Small Business Development Centers, our SCORE resource 
partners, as well as our women's business centers. And we can 
work with them to also educate small businesses further on the 
need for cybersecurity and protection against cyber threats. So 
I think we have a few avenues we can work on.
    And, also, I was the Associate Administrator for Field 
Operations. We can certainly work with our field to make sure 
that when they go out and make presentations to small 
businesses that they keep them aware of cybersecurity and the 
threat that that poses to their small business.
    Senator Duckworth. But are you doing that now, and is that 
part of the training that occurs when small businesses come to 
you? Because I get the sense that many small businesses, at 
least from that panel we had, do not know where to go, do not 
know who to trust, and do not know what type of training 
exactly they need, and choose, instead, almost to willfully 
just ignore it and maybe the problem will not--``Maybe I will 
not get hacked,'' and they move forward.
    I do think there needs to be more proactive initiatives on 
your part, and is that happening now?
    What you just told me is that we have all of these ways of 
doing it, but are you actually doing it in a proactive way? 
Because when we talk to small businesses or some of those 
associations, they are saying that actually they are not quite 
sure what to do or who to listen to or what those particular 
resources are.
    Mr. Manger. Right. So, quite honestly, I cannot tell you 
that we are doing all of that right now, but I can tell you 
that I will go back to the agency and make sure that we begin 
to incorporate that in the technical assistance and training 
that we provide to small businesses. I think you have a very 
good point, and I will make sure that I take that back to the 
agency.
    Senator Duckworth. Thank you.
    If you could keep my office informed and perhaps--I do not 
know if the rest of the Committee is interested or not in 
seeing the progress that you are making--because I will follow 
up to see if we have actually enhanced this process, because I 
think that the problem only gets worse over time.
    Mr. Manger. Certainly. I appreciate that. Yes, I will. 
Thank you.
    Senator Duckworth. Thank you.
    I yield back, Mr. Chairman.
    Mr. Manger. Thank you.
    Senator Inhofe [presiding.] Thank you, Senator.
    Just so I can explain to people what is going on here, we 
have votes in progress. Neither Ms. Duckworth nor I know how 
many votes are going to be, but----
    Senator Duckworth. One or more.
    Senator Inhofe. Yeah, something like that.
    [Laughter.]
    So I have already voted on this one, and so I do have----
before we dismiss you as the first panel, I want to take my 
turn here.
    What I would like to do is go ahead and give the background 
of a case that you are familiar with so that I can get it in 
the record and find out a little more clearly where we are in 
resolving, hopefully, this issue, which I think should be 
resolved at some point.
    So I will go ahead, Mr. Manger. The SBA acted in two policy 
notices early in 2017 that have resulted in staffing firm 
franchisees' inability to qualify for SBA loans and other 
services that previously they qualified for. So we are talking 
about people out there who are no longer qualified, and that 
was one of the changes that took place in 2017.
    SBA's actions have overturned years of SBA precedent and as 
a result are preventing small businesses across the Nation, 
including those owned by veterans, women, minorities, from 
obtaining SBA loans.
    The issue at hand is whether the franchisers of staffing 
firm companies like Express Employment Professionals in 
Oklahoma City directly control their franchisees and as a 
result whether or not these franchisees should be classified as 
small businesses. Unlike what SBA's 2017 notice implies, 
Express Corporate does not directly control its franchisees. 
Direct Corporate does not hire or fire its franchisees' 
employees, and the 2017 notice does not take into account the 
unique product of staffing firm franchises. Express Corporate 
simply requires that its franchisees' employees get paid on 
time and in full in order to ensure compensation for those 
workers.
    The minimal level of oversight exercised by staffing firm 
franchises like Express Corporate should be clear that they do 
not directly control their franchisees, and I understand there 
are ongoing discussions between the SBA and Express on this 
issue. However, staffing firm franchisees are continually being 
denied SBA votes.
    So the votes have been denied in this process, and so I 
would--I guess the best way to start this off, Mr. Manger, 
should Congress provide SBA more clarity on this issue so as to 
ensure small businesses like Express and franchisees are not 
denied SBA loans? Do you think that Congress should provide 
clarity in this?
    Mr. Manger. So, Senator, let me just tell you what we have 
done in the last couple of years.
    Senator Inhofe. Yes.
    Mr. Manger. We did change the franchise policy at the 
agency. As you know, per the Small Business Act, we are only 
allowed to make capital available to a small business. We 
cannot make capital available to a business through affiliation 
that really is a big business.
    So we did change the franchise rules. We took in-house an 
SBA directory. I am happy to say that the eligible franchises 
on the SBA directory have increased 90 percent since we put the 
new policy in place. We went from having just over 2,000 
brands, eligible franchises on the SBA directory, and now we 
are up to over 3,800 brands that are eligible for SBA 
financing.
    Since the change was made, we have also seen an increase in 
the dollars going to franchises over the last 2 years of 43 
percent. So the franchise program is doing extremely well at 
the agency.
    I understand the situation that you are speaking about, and 
we are addressing that situation, sir. And I am pleased to say 
that we have an agreement in principle with this company, and 
we are prepared to move forward.
    Senator Inhofe. I see. Have you personally been involved 
with any of these principals?
    Mr. Manger. I had met with them actually when they came in 
to Washington. I met with them in a conference room at the SBA 
Headquarters, and I have had people in my office as well as the 
Office of General Counsel working diligently with them for the 
past few months, as you know, and again, at this point, we have 
an agreement. And we are going to move forward.
    Senator Inhofe. Well, we are looking forward to that, and I 
appreciate that very much. I was thinking if clarity is needed, 
it would probably have to be in the form of legislation, but I 
will assure you anything that we would do, we would be working 
closely with you because we have in the past and would continue 
to do that.
    Mr. Manger. I appreciate that very much, Senator. Thank 
you.
    Senator Inhofe. Now let me ask----
    Senator Cantwell. Thank you, Mr. Chairman.
    Senator Inhofe. Have you already had a chance to visit?
    Senator Cantwell. No. I would so much like to.
    Senator Inhofe. Okay. We will recognize Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman, and thank you 
for holding this important hearing.
    Obviously, I would like to thank Mr. Manger for your work 
at access to capital, writ large. When I happened to be the 
chairman of the committee, we did a lot of great work on access 
to capital for women entrepreneurs, and I wanted to ask you 
what more do you think we could be doing right now as we 
increase both the sole-source access and then smaller loan 
sizes so that SBA--we found that SBA packages, women were not 
as enamored over the big $500,000 package and were much more 
comfortable with a smaller loan portfolio.
    I do also want to welcome Patty Kibbe, who is going to be 
on the next panel, Mr. Chairman, and look forward to hearing 
from her because, obviously, in various rural parts of the 
country, women need access to capital. And Evergreen Business 
Capital of Seattle is one of the largest 504 lenders. So I will 
look forward to hearing from her as well.
    But, Mr. Manger, what else? Has this been a priority for 
your administration, and what else do we need to be doing to 
increase access to capital, given the small percentage of loans 
that are taken out by women?
    Mr. Manger. Certainly. Thank you, Senator.
    Working with Administrator McMahon, she has been a huge 
proponent for making sure that women have access to capital as 
well as other resources provided through the agency, whether it 
is government contracting, entrepreneurial development help. So 
we have worked very closely on trying to increase the numbers 
of lending and loans going to women.
    We have had great success, as you were saying, in some of 
the smaller-dollar programs, the Microloan program, Community 
Advantage.
    In fact, going back to the franchises, we have seen an 
increase of 26 percent in women getting franchises. This is 
something that we have not seen ever. That that has increased 
this much. Usually, it has been men coming in for franchises, 
sometimes couples coming in, but now we have seen women on 
their own coming in. And the increase over the last year and a 
half has been 26 percent.
    So we believe we are doing a good job. There is always more 
work to be done, but we are definitely focused on trying to 
make sure that we get out as much capital to women as possible.
    Senator Cantwell. Is there a correlation on the franchise? 
Is there something that the agency has done to increase that?
    Mr. Manger. I was just saying when you were walking in that 
we actually have changed our policy, and we have now increased 
the number of eligible brands for SBA financing from just over 
2,000 brands to over 3,800 brands nationwide that are eligible 
for SBA financing. And we have seen a 43 percent increase in 
dollars going to franchises over the last 2 years, and that is 
also a reason why more women are now able to access that.
    We made it very easy. The 3,800 franchise brands are listed 
on our website. That was never the case. That was something I 
introduced. We now have 3,800 eligible franchise brands on our 
website that anyone can look at in the public and determine if 
they would like to be involved with one of those franchises.
    Senator Cantwell. So you think volume, or do you think 
there is something else to the brands themselves?
    Mr. Manger. You know, that is a good question. I would have 
to study that further.
    I think, honestly, though, making this much more accessible 
and having broader visibility to the public about what brands 
are eligible for an SBA loan has really created more of an 
incentive and an interest on behalf of everybody.
    Senator Cantwell. I appreciate that, and thank you for that 
leadership.
    I think for us, in doing the report that we did on the 
Committee, we found that women were only receiving something 
like 4 percent of SBA product. It was appalling to us to find 
that out, but we found a bunch of things that we tried to 
correct. Obviously, one of this was this sole-source issue, but 
the other--and the loan package size. But a lot of the 
counseling programs that existed were also much more geared 
towards--well, let us just say some of the ideas that women 
were bringing to the table, the advisory committees had a lot 
less familiarity with it. So I would be curious on that brand 
if you ended up listing brands that women were attracted to, 
for whatever reason, because their business interests lined up 
with that.
    I think we have to keep pushing this envelope to get--if 50 
percent of our society is going to be startups from women, I 
mean, if we want more startups and we want--we cannot leave out 
half of our society not borrowing to get that entrepreneurial 
spirit going. So I appreciate your efforts here.
    Mr. Manger. Absolutely.
    And let me just add, though, that in terms of, again, our 
Microloan program having a record year last year, we now are 
showing that almost 48 percent of our microloans are going to 
women.
    Senator Cantwell. That is great.
    Mr. Manger. So we are getting near that 50 percent mark, 
and so we are making progress.
    Senator Cantwell. Thank you.
    Thank you, Mr. Chairman.
    Chairman Rubio [presiding.] Senator Hawley.
    Senator Hawley. Thank you, Mr. Chairman.
    Mr. Manger, let me ask you about microloans, since you were 
just talking about those. My understanding is when the 
Microloan program was first authorized back in 1992, there was 
a requirement that half of all loans be made in rural areas.
    Now, I do not know if at some point along the way that rule 
was removed or maybe it is just being ignored, but the 
Congressional Research Service reported in a 2019 report that 
today, 81 percent of all microloan borrowers are located in 
urban areas.
    As you know, the largest intermediary for these microloans 
is based in my State, in St. Louis, Justine Petersen, and when 
my team asked the folks there and the SBA regional team members 
who are based in Missouri about expanding access to these 
programs for rural businesses and entrepreneurs, they were very 
frank. They said that they want to do it, but it is hard for at 
least two reasons. One is the 1-in-55 cap rule that keeps the 
funds tied up, but the main impediment, as you might imagine, 
is geography. Staff can either spend hours in the car visiting 
rural communities to facilitate these loans and provide all of 
the pre- and post-loan technical assistance, or they can just 
operate in major urban areas, where there is plenty of demand 
to keep them busy.
    And all of that is understandable. I am not here to 
criticize anybody for their choices, but what I want to know is 
what can we do to structure this program and provide resources 
needed to ensure that all of our citizens are benefiting, 
especially those in rural areas that is the majority of my 
State and where I grew up, where the need is very great.
    Mr. Manger. I appreciate that. And, Senator, let me just 
tell you that my grandfather was from Boonville, Missouri.
    Senator Hawley. Oh, very good.
    Mr. Manger. So I just wanted to add that.
    So for places like that and other rural parts of your 
State, we want to make sure that everybody has access to 
capital. So we are doing everything that we possibly can.
    We have an agreement now, as you may know, with the U.S. 
Department of Agriculture. There was a signed MOU between 
Administrator McMahon and Secretary Perdue. So we are actually 
now working together.
    And let me just give you one example of a success story 
that we had down--I am sorry. It is not in Missouri. It is in 
Louisiana, where Senator Kennedy--but in Louisiana, we actually 
worked with USDA to provide a grand total of $30 million to a 
manufacturer of denim, the material of blue jeans, and they are 
actually exporting that material.
    So this company, Vidalia Denim Mills, got $25 million from 
the USDA, $5 million through the SBA, and now they have been 
able to hire 300 workers in a rural part of northern Louisiana 
for this company to make denim to sell overseas. So that is a 
success story, and we want to see more of those successes. We 
will bring them out to Missouri.
    Senator Hawley. That is fantastic.
    Are there other steps that you can think of that this 
Committee should take or should look at to continue to expand 
that access for rural business folks?
    Mr. Manger. You know, Senator, at this point, we are trying 
to do it through our field operations. We have 68 district 
offices. I used to be the head of field operations at the 
agency. We have 10 regional administrators, and we are trying 
to get them out as much as possible.
    We are currently offering some fee relief to loans that are 
made in rural areas. We have included in the 504 program a 
relaxed job--dollars-for-job formula so that it encourages 504 
loans to be made in rural areas.
    We have also included in the Community Advantage pilot 
program an incentive to have Community Advantage loans made in 
rural areas because 60 percent of the loans had to be made in 
the low- to moderate-income areas.
    We have now included rural in that 60 percent as well. So 
we are taking lots of steps to try to make sure we are getting 
out to those rural areas, but I look forward to working with 
you and then the Committee to figure out how we can even do a 
better job.
    Senator Hawley. Great. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Rubio. All right. I hope you have something good 
for Nevada like Missouri.
    Senator Rosen. Thank you. Thank you, Mr. Chairman. Thank 
you for being here today.
    Actually, we have a lot of veterans in Nevada, so I want to 
talk about veteran-owned small businesses. Actually, there is 
roughly 2.5 million veteran-owned small businesses across the 
United States. In Nevada, we have over 220,000 veterans, and so 
this sector represents nearly one in 10 U.S. businesses 
generating an estimated $1 trillion in revenue. So we know our 
veterans are tremendously talented, but sometimes they need 
help transitioning from the military using those skills into 
civilian employment or launching a startup.
    Last year in the House, I cosponsored the Veterans Job 
Opportunity Act, which provides tax credits to veterans to open 
a small business in an underserved community. So this proposal 
would help veterans, their spouses, reserve, and national guard 
members invest and revitalize small business through their 
entrepreneurship.
    So I know that you offer specific training and loans for 
veterans as well. So can you tell us a little bit about what 
you are doing for veterans, and do you think that creating a 
tax credit like those in my bill last session would be helpful?
    Mr. Manger. Thank you very much, Senator.
    Again, in the Microloan program, we are doing very well in 
getting loans out to veterans. In fact, we are just about where 
we were last year, which has been the best year since before 
the great recession. So we have seen in the Microloan program, 
the loans to veterans come back very strongly.
    We do still offer, again, by statute, the fee relief to 
veterans in the Express program. Certainly, we would be pleased 
to talk to your further--you and your staff, the Committee--
about possible tax credits for veterans.
    We have our Boots to Business program that actually has 
been very successful, and we again continue to promote that. I 
feel like we are doing quite a bit to try and get out to 
veteran communities and make sure that they are able to partake 
in the loan programs and access to capital that they need for 
their business.
    Senator Rosen. That is terrific. Thank you.
    I would like to switch over to some of our minority-owned 
businesses. Of course, we have a lot of that in Nevada. So one 
of the top concerns I hear about from small business owners and 
my local chambers is the need for quicker and easier access to 
capital.
    So despite you have lots of many great SBA programs, but 
there seems to be a disconnect between available capital and 
actually getting it in the hands of the minority business 
owners.
    So data consistently shows that African American- and 
Hispanic-owned businesses struggle. They really struggle to get 
access to the most affordable and quality capital, and only 7 
percent of the loan approvals go to minority businesses. And 
that does not really, nearly reflect the needs of the 
community.
    So how do you think you can address and rectify some of 
this imbalance for minority communities?
    Mr. Manger. So we want to make sure that, again, we have 
the most efficient process possible.
    You were talking about the speed. Unfortunately, we are 
competing against some lenders that operate online that have 
very high interest rates. It is very easy to get that capital. 
We want to make sure that we have the ability to make capital 
available on reasonable terms, and our programs offer those 
reasonable terms.
    In fact, our interest rates, where they are within the band 
that we allow them, are lower than what you would get on credit 
cards. Many small businesses, as you know, max out credit cards 
to get----
    Senator Rosen. Right.
    Mr. Manger [continuing]. The business to start their 
business. We want to make sure that the SBA programs are out 
there.
    For example, I mean, with the--again, I am going to talk 
about the Microloan program again because we are doing very, 
very well getting out those loans to small businesses at rates 
much lower than the predatory rates that you would receive on 
the street.
    Senator Rosen. So let me ask this question. Is it a problem 
of getting information out to the small businesses? Is there a 
central repository at the SBA website where I can direct small 
business owners so they do not have to go out and find it in 
other places in the community? Would it be helpful to have some 
kind of consolidating feature within the SBA for cyber hygiene 
loan access?
    Mr. Manger. Yeah.
    Senator Rosen. All the kinds of platforms that we know 
small businesses need to succeed, especially in their first 
year. Are you working on something like that, or how can we 
help you do that?
    Mr. Manger. No, no. I appreciate that, and we are 
constantly trying to put as much information on our website as 
possible.
    We update the CDCs, the certified development companies, 
that participate in our program. Again, we have the franchise 
list on the website so that anyone can look at eligible 
franchises, and if they want to start one of those franchises, 
they know that the SBA will guarantee the loans enabling them 
to purchase one of the licenses for one of those franchises.
    So, again, we can always do more. I think we are trying to 
get out as much information as possible through our district 
offices, and we are bringing people in through the Microloan 
program that graduate then later to larger programs.
    Community Advantage program is doing very well in areas 
bringing in----
    Senator Rosen. Shall we change that from pilot program to 
the----
    Mr. Manger. You know, we want to make that program strong 
enough so that it can be made a permanent program. That is our 
objective, and we have taken steps to make that program have a 
stronger foundation so that it can be built upon and grow. 
Again, the pilot was expanded so that we can observe it a 
little bit longer and then, yes, make it a permanent program.
    Senator Rosen. Fantastic. Thank you.
    Mr. Manger. Thank you, Senator.
    Chairman Rubio. Thank you.
    Two quick questions. The first is on the--and this may have 
been asked while I was out, and I apologize. I think we will 
have another vote here in about 45 minutes.
    On the 504, we hear a lot about the CDC loan guarantee 
program. One of the complaints we have heard is that the 
application and the other processes are not completely online. 
The closing process can be complicated and cumbersome, and it 
is causing some lenders to move borrowers or move--to shift 
these borrowers over to the 7(a) product, even when the 504 
product might be a better fit. That is a concern we have heard. 
What are we doing to address it?
    And I apologize if that was already asked.
    Mr. Manger. No, no. It was not already asked, Senator. 
Thank you.
    So let me just start by saying that actually this year, so 
far in 2019, we have seen the 7(a) program down 8.5 percent, 
and the reason why we are seeing that is many people now are 
going to get conventional loans. Banks have opened up their 
credit box because the economy is doing well, and they are 
making these loans conventionally.
    What they are not doing, though, is making long-term loans 
at a fixed interest rate, and that is where the 504 loan comes 
in.
    I am happy to report this year that a 504 program is up 7.5 
percent, and that is because of the rising interest rate 
environment, people wanting to lock in a fixed interest rate 
for 25 years.
    You may know that Administrator McMahon, one of the first 
things she did when she came on board, she introduced the 25-
year term. The longest term in that program prior to that was 
20 years, so we added 60 additional months in which to repay 
that loan. So that is one of the reasons why we have seen a 
huge upsurge in the 504 loan.
    So, for example, to date, we have seen about--since the 25-
year debenture was introduced, we have seen almost 3,000 loans 
made for almost $3 billion, and that is in one year. One year.
    Chairman Rubio. In 504.
    Mr. Manger. In 504. And so that is people taking advantage 
of a fixed interest rate for 25 years. In fact, the rate right 
now is below prime. So someone can get a 504 loan for up to 
$5.5 million at comparable rate.
    Chairman Rubio. But I guess the point, that it is not the 
structure--right. And that obviously improved the structure and 
the----
    Mr. Manger. And it is up 7.5 percent.
    Chairman Rubio. Right. So I guess when we hear people say 
that they think the process is cumbersome and the paperwork is 
difficult, they have not been able to do it online, is that 
valid? Is that historic, and it has changed? I mean, or is it--
--
    Mr. Manger. No, no. So now that the program actually is 
fully automated, the 504 program is fully automated, it is a 
more cumbersome product than the 7(a) program. There is no 
doubt about it. I mean, you know the way it is----
    Chairman Rubio. What does fully automated mean? You can do 
it online?
    Mr. Manger. Well, the lender, the CDC----
    Chairman Rubio. Right.
    Mr. Manger [continuing]. When they are putting in the data, 
yes, they do that online. Yes, correct.
    So you need a third-party lender to provide 50 percent.
    Chairman Rubio. Right.
    Mr. Manger. Forty percent is done through the CDC with 
SBA's guarantee, and then 10 percent----
    Chairman Rubio. But your interface with the lender is all 
electronic?
    Mr. Manger. Yes. That is correct. Yep.
    Chairman Rubio. Does each lender, then, intermediary 
lender, do they have different products or different ways to 
handle it with the borrower? How do they----
    Mr. Manger. Yes. How they interact with the borrower is 
really up to them.
    I will admit that sometimes we will wait for an 
intermediary to be able to provide all the data and the 
paperwork that is required to close a 504 loan because, again, 
a lot of times it is for----
    Chairman Rubio. But that is lender-dependent. That is their 
processes for gathering information, not yours.
    Mr. Manger. That is correct. That is correct.
    Chairman Rubio. The Ranking Member might have another 
question, and then we got to get to the other panel as well.
    Under the Microloan program, the intermediaries are being 
asked to collect and regularly submit data, correct, to the 
SBA? It is unclear, at least to me--perhaps this was covered in 
the past--about what happens with this information. It is not--
my understanding, it is not related to industry or to Congress. 
So what types of data do we believe that they are collecting to 
help measure borrower outcomes? I guess walk us through what 
they do with the data, how we use it, why it is relevant.
    Mr. Manger. Right. So, actually, in fact, right now, 
Senator, we are working, as I mentioned earlier, to improve the 
electronic submission program referred to as MPERS for the 
Microloan program, and it really has not been updated in 25 
years.
    So we thank you for, again, the programming of the $1.2 
million. We are working on that for a new system. We are going 
to be able to capture more information on the microloan sheet.
    So, for example, we want to find out how many jobs were 
created. What type of revenues were enhanced because of the 
receipt of the loan? We want to be able to make sure that after 
the 6 years that is the term of a loan that the small business 
is actually still in business.
    We have seen some microlenders go out of business, but they 
continue to pay off the loan because they are dedicated to 
making sure they pay off that loan. So there are certain 
metrics that--you are correct--we need to capture, and our new 
system will allow us to do that. So I think we will be able to 
do that.
    The one thing that our Office of General Counsel says we 
cannot share is some of that data because we are not the maker 
of the loan. It is actually a not-for-profit lending 
intermediary that makes the loan. So the information really 
belongs to them, and we are not allowed to give out the 
information that they are capturing from their customers.
    Senator Cardin. I would just request if you would make 
available to the Committee the dollar amount under the fee 
program, under the veterans Express loan, how much that fees 
are being waived, the dollar amount in the last couple fiscal 
years, and then if we had fee waiver on the small loans, how 
much revenue is involved in the fee waivers? If you would just 
give us those two numbers, I would appreciate it.
    Mr. Manger. Sure. I will get that back to you, Senator. 
Absolutely.
    Chairman Rubio. I also had one more, since you are already 
sitting there, and we will get some of this for the record as 
well. But I know that, I guess, in September of last year, 
there was published a notice in the Register making some 
changes to the agency's Community Advantage program. Among the 
changes were a moratorium on new lenders entering the program.
    Kind of what was the intent of this change, and how have we 
assessed? Has that change been made, and is it now effective? 
How do we assess the program under that new parameter?
    Mr. Manger. I appreciate that question, Senator. Yes.
    So when I came in, the Community Advantage program, I was 
introduced to it as a pilot program. I was watching it. It is 
performing very well in getting loans made, but we wanted to 
look more deeply into how the actual loans were performing.
    So we had, in collaboration with our Office of Credit Risk 
Management, Dun & Bradstreet do a review of the performance of 
the program, and it showed that there were some problems, 
especially on some of the larger loans. Loans that had a low 
credit score, we were allowing lenders, the CA lenders, to make 
loans on a delegated basis with a credit score below 140.
    The problem with that was we noticed that the loans that 
were being made below 140 credit score had a default rate of 
over 10 percent. That caused us concern. This is a subset of 
the 7(a) program. We thought that was too high.
    What was amazing was the minute the credit score went above 
140, the default rate dropped to just over 4 percent. So what 
we did in this notice that you are citing from last fall, in 
September, was we said, ``Look, from now on, the delegated 
loans may only be made with a credit score above 140, where 
there is less risk. If the loan is going to be made below 140, 
we will still allow that, but it needs to go into one of the 
SBA centers to be really underwritten and looked at so that we 
do not have the threat of, again, over 10 percent default 
rate.'' So that was one of the changes we made.
    We also made some other changes that we think were very 
helpful to small businesses. We restricted some of the fees 
that they could be charged because we saw that there were some 
very high fees being charged to the small business to get one 
of these rather small loans.
    We also expanded the areas in which they could be made. For 
example, Senator Hawley was talking about rural loans. We 
included rural as another category of where we would encourage 
these loans to be made.
    And, finally, again, as I said earlier, we wanted to look 
at the program and really study it, just the way you would 
almost do a science experiment, and you need a static group so 
that you can study exactly how it performs.
    So we said, ``Look, right now, we are going to ask for a 
moratorium to be put in place so we can study this group, how 
it performs, and then make any adjustments necessary to make 
sure that this program is on a firm foundation and that it can 
go forward and become a permanent program in the SBA's array of 
programs.''
    Chairman Rubio. So it is the intent--you just said it could 
be a permanent program. Is permanency a goal?
    Mr. Manger. It is a goal of the agency, absolutely, and we 
want to be able to study it and make sure that it is as strong 
as possible so that it can be a permanent program. Yes.
    Chairman Rubio. And the moratorium was designed to free 
sort of the status quo so you could study and learn from it?
    Mr. Manger. Absolutely. So that we would have a controlled 
group participating in the program so that we could observe how 
the program performs.
    Over the years, since it was introduced in 2011-2012, there 
have been many, many new entrants into the program. That skews 
our ability to really study the program.
    Chairman Rubio. Right.
    Mr. Manger. If you have a static group in the program, as I 
said, like a science experiment, you can really study and see 
how the program is performing with the lenders.
    Chairman Rubio. So, to paraphrase it, you froze it in place 
so you could study it, learn what works and what does not, 
create those conditions, I imagine at some point lift that 
moratorium, open it up for new lenders under those new 
conditions, and have the confidence to come back and ask us to 
make it permanent?
    Mr. Manger. Absolutely. Thank you for the question, 
Senator.
    Senator Cardin. I would just observe that at least from a 
lot of the stakeholder groups that I have heard from in regards 
to the changes you made in the Community Advantage program, 
there did not appear to be consultation with the stakeholder 
community. I think they were kind of surprised to see the rules 
that come out.
    Your rationalization is something that I think is helpful 
to have discussions with stakeholders before you make that type 
of a major change.
    Mr. Manger. I appreciate that, Senator. Thank you.
    Chairman Rubio. All right. Well, thank you.
    We have been joined by our Chairman Emeritus, but he is 
going to submit a question for the record.
    Anything on foreign policy you want to ask the SBA? 
Nothing? All right.
    [Laughter.]
    How many offices do you have in Afghanistan?
    Senator Risch. We covered that at lunch, did not we?
    [Laughter.]
    Chairman Rubio. Thank you so much. I appreciate you being 
here. Thank you.
    Do you have anything else?
    Senator Cardin. No.
    Chairman Rubio. All right. We are going to welcome our 
second panel. We want to thank you for being here.
    Mr. Manger. Senator Risch, I am sorry I did not get any 
questions from you.
    Senator Risch. Well, I got a tough one, but we are going to 
do it for the record.
    Chairman Rubio. I will start introducing our second panel 
as they position, and I want to start out by saying to the 
second panel, we are going to try to--I am going to limit my 
questions, obviously, so that other members have time to fully 
ask theirs as they come and go.
    We have a series of votes, potentially beginning at around 
approximately 4:30 or so, which means about 4:45 is the limit 
for those of us who have to get over there and do it. So that 
should give us enough time to kind of get through this, but 
your input is very important. And we are glad that you are all 
here.
    Our panel today, Julie Huston is the president and CEO of--
immito. Is that right? Did I say it----
    Ms. Huston. immito.
    Chairman Rubio. All right. You are going to tell us how to 
pronounce it.
    Out of Denver, Colorado. They phonetically spelled it for 
me here, but I guess I just botched it. Out of Denver, 
Colorado, she has worked for over 30 years in the small 
business lending sector, participated in three successful 
nonbank startups and one division turnaround, and spent 19 
years in executive leadership roles where she has worked to 
build programs, development products, and improve delivery 
systems for small business lending.
    Patricia Kibbe is president and CEO of Evergreen Business 
Capital based in Seattle, Washington, and I know Senator 
Cantwell was here earlier. If she is able to return--I know she 
had some other commitments on committees as well, but she 
wanted to have a few moments to also introduce. We will make 
that happen if she is able to return. Based in Seattle, 
Washington, but also serves Washington, Idaho, and Alaska, and 
has served in that role since 2013. And, in 2015, Ms. Kibbe 
helped set up Evergreen Business Capital Community Finance.
    Robert Villarreal is the executive vice president of CDC 
Small Business Finance in San Diego, California. As executive 
VP, he is responsible for grand and capital development, 
strategic partnerships, and government relations.
    And Connie Evans is the president and CEO of the 
Association for Enterprise Opportunity based here in 
Washington, D.C. Ms. Evans has worked on microlending policy 
since 1986, when she was the founding president of the Women's 
Self-Employment Project.
    So we want to thank all four of you for being here today. I 
know each of you have an opening statement you would like to 
give.
    So why do not I start with you, Ms. Huston, so you can tell 
me how to accurately pronounce that and then move from there.
    Senator Risch. Mr. Chairman, for the record, Julie does a 
fact-finding trip to Idaho every year, so we are always glad to 
have her.

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

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

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

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