[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE ROLE OF COMMUNITY
DEVELOPMENT FINANCIAL INSTITUTIONS AND
MINORITY DEPOSITORY INSTITUTIONS IN
SMALL BUSINESS LENDING
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HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 18, 2021
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 117-013
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
44-565 WASHINGTON : 2021
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
JARED GOLDEN, Maine
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
MARIE NEWMAN, Illinois
CAROLYN BOURDEAUX, Georgia
TROY CARTER, Louisiana
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANDY KIM, New Jersey
ANGIE CRAIG, Minnesota
BLAINE LUETKEMEYER, Missouri, Ranking Member
ROGER WILLIAMS, Texas
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
CLAUDIA TENNEY, New York
ANDREW GARBARINO, New York
YOUNG KIM, California
BETH VAN DUYNE, Texas
BYRON DONALDS, Florida
MARIA SALAZAR, Florida
SCOTT FITZGERALD, Wisconsin
Melissa Jung, Majority Staff Director
Ellen Harrington, Majority Deputy Staff Director
David Planning, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sharice Davids.............................................. 1
Hon. Dan Meuser.................................................. 3
WITNESSES
Ms. Aissatou Barry-Fall, President & CEO, Lower East Side
People's Federal Credit Union, New York, NY.................... 5
Mr. Everett Sands, Founder & CEO, Lendistry, Brea, CA............ 7
Mr. Robert James II, President, Carver Development CDE, Chairman,
National Bankers Association, Savannah, GA..................... 9
Mr. Walter L. Davis, Founder, Peachtree Providence Partners
Holding Company, Charlotte, NC................................. 10
APPENDIX
Prepared Statements:
Ms. Aissatou Barry-Fall, President & CEO, Lower East Side
People's Federal Credit Union, New York, NY................ 26
Mr. Everett Sands, Founder & CEO, Lendistry, Brea, CA........ 32
Mr. Robert James II, President, Carver Development CDE,
Chairman, National Bankers Association, Savannah, GA....... 41
Mr. Walter L. Davis, Founder, Peachtree Providence Partners
Holding Company, Charlotte, NC............................. 49
Question and Answer for the Record:
Question from Hon. Luetkemeyer to Mr. Robert James II and
Answer from Mr. Robert James II............................ 53
Additional Material for the Record:
Credit Union National Association - CUNA..................... 54
National Association of Federally-Insured Credit Unions -
NAFCU...................................................... 56
EXAMINING THE ROLE OF COMMUNITY
DEVELOPMENT FINANCIAL INSTITUTIONS AND MINORITY DEPOSITORY INSTITUTIONS
IN SMALL BUSINESS LENDING
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TUESDAY, MAY 18, 2021
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax, and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building and via Zoom, Hon.
Sharice Davids [chairwoman of the Subcommittee] presiding.
Present: Representatives Davids, Newman, Chu, Evans, Mr.
Kim, Bourdeaux, Meuser, Van Duyne, and Donalds.
Also Present: Representative Luetkemeyer.
Chairwoman DAVIDS. Good morning, everyone. I call this
hearing to order.
Without objection, the Chair is authorized to declare a
recess at any time.
Let me begin by saying that standing House and Committee
rules and practice will continue to apply during hybrid
proceedings. All Members are reminded that they are expected to
adhere to these standing rules including decorum.
House regulations require Members to be visible through a
video connection throughout the proceeding, so please keep your
cameras on. Also, please remember to remain muted until you are
recognized to minimize the background noise. If you participate
in another proceeding, please exit this one and log back in
later.
In the event a Member encounters technical issues that
prevent them from being recognized for their questioning, I
will move to the next available Member of the same party and I
will recognize that Member at the next appropriate time slot
provided they have returned to the proceeding.
For those Members physically present in the Committee room
today, we will continue to wear masks and socially distance
while the Chairwoman and Ranking Member work with the office of
the attending physician on updated guidelines and procedures.
Members and staff are expected to wear masks while in the
hearing. With that said, Members will be allowed to briefly
remove their masks when recognized by the Chair for statement
and questions. I know we all look forward to returning to
normal but appreciate everyone's patience while we prioritize
the health and safety of our staff and each other.
Access to capital is the lifeblood of American small
business. When small firms obtain adequate funding, they can
grow their business, create jobs, and bolster the overall
economy. Unfortunately, accessing capital is the single
greatest challenge facing most entrepreneurs. This is
especially true for the underserved groups like women,
minorities, and folk who do not have the same opportunities to
access funding as their peers.
Businesses owned by women and people of color who obtain
loans often receive less money and pay higher interest rates.
Fortunately, there are institutions working to close this
lending gap. Community development financial institutions
(CDFI) and minority depository institutions (MDI) operate to
get money to entrepreneurs traditionally ignored by big banks.
CDFIs provide a range of financial products and services on a
fair and transparent basis in economically distressed markets
such as mortgage financing, flexible underwriting, and loans
and investments to small businesses in low-income areas.
MDIs are depository institutions where 51 percent or more
of the stock is owned by minority individuals, including Black
Americans, Asian Americans, Hispanic Americans, and Native
Americans. As of December 31, 2020, there are 142 MDIs ensured
by the FDIC. MDIs better serve borrowers who live in low and
moderate income or LMI census tracts.
Over the past year, we have seen a wealth of evidence
showcasing the power of these institutions in reaching
undeserved groups. The pandemic highlighted and exacerbated the
deep inequalities present in the small business sector. In
2020, Black, Latino, and Asian Americans experienced drops in
business ownership rates much higher than their White peers.
These same groups also had less access to federal relief
programs, like the Paycheck Protection Program (PPP) due to
their lack of an account with a big bank.
Recognizing this inequality in capital access, I and other
Members of this Committee worked to empower CDFIs and MDIs to
get emergency relief to these communities. We passed set-asides
and multiple bills to appropriate funds so that community
lending institutions, including CDFIs, could participate in the
PPP on an equal footing with other lenders. We crafted these
set-asides to maximize PPP lending in traditionally underserved
business communities and we found that they were effective.
During the COVID-19 pandemic, small businesses reported the
greatest levels of satisfaction with CDFIs and small banks.
SBA's data also shows that CDFIs were best able to reach
underserved small businesses. CDFIs were the only type of
lender that performed above program average when it came to the
percentage of loans less than $150,000. The percentage of loans
made in low or moderate income areas and the percent of loans
made in rural areas. The pandemic taught us a critical lesson
in the power of community financial institutions, to reach
communities that other lenders neglect.
Moving forward, we must examine the SBA's programs that
empower CDFIs and MDIs to find ways to improve them. For
example, efforts like the Community Advantage Loan Program, the
504 or CDC Loan Guaranty Program, the Microloan Program has
also proven effective in helping CDFIs and MDIs get capital to
underserved communities.
Today, I would like us to look at what programmatic changes
can be made and what legislation we can pass to help improve
the ability of these mission-based lenders to reach their
target markets. As this Congress and the administration work
toward achieving an equitable recovery for everyone, we must
fully harness CDFIs and MDIs to reach this goal.
I will now yield to the Ranking Member for his opening
statement.
Mr. MEUSER. Well, I thank you, Madam Chair. Good morning to
all. And I thank you for holding this important hearing to
explore the topic of access to capital for small businesses and
how community financial development institutions and minority
depository institutions assist the nation's underserved small
businesses. Access to capital is a true driver of whether a
small business startup or entrepreneur can sustain business
operations. The ability to obtain capital can be the difference
between expanding and ceasing operations.
Unfortunately, when restrictions and shutdown measures were
mandated on small businesses by state and local governments to
prevent the COVID-19 from spreading, traditional financing
options quickly became even more limited. Instantly, small
businesses were faced with very devastating challenges. As a
response, Congress created numerous relief programs focused on
providing capital to small businesses and their employees.
To create efficiencies and develop capital in a swift
manner, the Paycheck Protection Program replicated the strong
private lender model used within the SBA's 7(a) Loan Program.
Private sector lenders responded quickly and assisted small
businesses through the emergency period and a total of over
5,000 private sector lenders participated in the PPP.
To reach underserved businesses in urban and rural areas,
including minority-owned businesses, CDFIs and MDIs were
welcomed into the program as well. Beyond acting as important
lenders and intermediaries, CDFIs and MDIs were categorized as
community financial lenders and were on the frontlines
assisting small businesses throughout the pandemic. From when
the program opened in April 2020 through the conclusion of the
first round in August 2020, over 114,000 PPP loans were made by
308 CDFIs for a total of $7.5 billion. Quite a bit. Likewise,
approximately 175 MDIs played an important role in PPP during
the same time period by making 123,000 PPP loans for $10
billion.
Fast-forward to today, and CDFIs and MDIs are still
actively participating in the PPP program. Aside from providing
critical access to capital, CDFIs and MDIs were answering
questions, providing technical assistance, and responding to
the needs of the nation's smallest firms and organizations and
they were quite active in Pennsylvania, which was very
appreciated. I would also like to thank all the lenders that
participated in PPP, including the nation's CDFIs and MDIs for
assisting small businesses through these somewhat dark days.
But more work needs to be done. It is important for
Congress to examine the role these lenders had over the last
year. Moreover, Members of Congress must also examine the
relief options used during COVID-19 to measure programs'
efficiencies and overall effectiveness. Hearings like this one
will help guide us as we explore numerous capital access
issues, including the most efficient ways to deliver credit to
small businesses. We learned a lot during this emergency
period. We should use this information to continue to refine
and sharpen all of the existing traditional tools available
within the federal government.
I would like to thank all the witnesses for joining us
today. I look forward to the conversation.
Madam Chair, thank you for calling his hearing and I yield
back.
Chairwoman DAVIDS. Thank you. The gentleman yields back.
I would like to take a moment to explain how the hearing
will proceed. Each witness will have 5 minutes to provide a
statement and each Committee Member will have 5 minutes for
questions. Please ensure that your microphone is on when you
begin speaking and that you return to mute when you are
finished.
With that, I would like to introduce all of our witnesses.
Our first witness is Ms. Aissatou Barry-Fall, the President
and CEO of the Lower East Side People's Federal Credit Union. A
leader in the community development credit union movement and
one of the earliest institutions to obtain CDFI certification
from the Treasury. Since its founding, they have provided vital
financial services and community development investments in
low-income, immigrant, and underserved communities in New York
City. Ms. Barry-Fall began her career as a teller almost 30
years ago. Welcome, Ms. Barry-Fall.
Our second witness is Mr. Everett Sands. Mr. Sands is the
Founder and CEO of Lendistry, a minority-led and technology-
enabled small business lender with CDFI certification and one
of the largest lenders in SBA's Community Advantage Program.
Lendistry is also a Member of the Responsible Business Lending
Coalition, a leading advocacy group for transparency and
fairness in the lending process. He has over 20 years in
national community banking and began his career working at two
MDIs. Welcome, Mr. Sands.
Our third witness is Mr. Robert James II. Mr. James is the
President of Carver Development CDE, an affiliate of Carver
State Bank in Savannah, Georgia, one of the oldest Black-owned
banks in the United States. He is also the Chairman of the
National Bankers Association, the leading trade organization
for the country's minority depository institutions. An attorney
by trade, he has spearheaded numerous initiatives to bring
private and public investments to underserved communities.
Welcome, Mr. James.
I would now like to yield to our Ranking Member, Mr.
Meuser, to introduce our final witness.
Mr. MEUSER. Thank you, Madam Chair.
Our next witness, Walter Davis. Mr. Davis is the Founding
Member of Peachtree Providence Partners Holding Company with
locations in Charlotte, North Carolina and Atlanta, Georgia.
Peachtree Providence Partners was formed in 2014 and
specializes in advisory and consulting services, as well as
financial solutions. Prior to forming Peachtree Providence
Partners, Mr. Davis was Vice Chairman, Chief Executive Officer,
and Founder of CertusBank, and before that he was managing
partner of Integrated Capital Strategies. Mr. Davis has also
held executive level roles with Wachovia Corporation which is
now Wells Fargo and Bank of America. Along with numerous board,
trustee, and academic positions, Mr. Davis is an advisor on
opportunity zones and was Chair of Vice President Pence's
Economic Inclusion Task Force. Mr. Davis has a degree from the
University of South Carolina and the University of North
Carolina Chapel Hill. Mr. Davis, I would like to welcome you to
the Subcommittee today and I am looking forward, we all are, to
your thoughts and ideas.
Thank you to all of the witnesses for joining us, and I
yield back.
Chairwoman DAVIDS. Thank you for doing that introduction.
Ms. Barry-Fall, you are now recognized for 5 minutes.
I believe you might be muted still.
STATEMENTS OF AISSATOU BARRY-FALL, PRESIDENT & CEO, LOWER EAST
SIDE PEOPLE'S FEDERAL CREDIT UNION; EVERETT SANDS, FOUNDER &
CEO, LENDISTRY; ROBERT JAMES II, PRESIDENT, CARVER DEVELOPMENT
CDE, CHAIRMAN, NATIONAL BANKERS ASSOCIATION; WALTER L. DAVIS,
FOUNDER, PEACHTREE PROVIDENCE PARTNERS HOLDING COMPANY
STATEMENT OF AISSATOU BARRY-FALL
Ms. BARRY-FALL. Can you hear me now?
Chairwoman DAVIDS. There we go.
Ms. BARRY-FALL. Thank you.
Chairwoman Davids, Ranking Member Meuser, and Members of
the Subcommittee, thank you for inviting me to testify at
today's hearing.
I am the CEO of the Lower East Side People's Federal Credit
Union, a not-for-profit community development financial
institution and minority designated credit union located in New
York City. We are also a proud Member of Inclusiv, a national
network of nearly 400 community development financial
institution and minority-designated credit union located in New
York City. We are also a proud Member of Inclusiv, a national
network of nearly 400 community development credit unions.
Together they serve 14 million predominantly low-income and
minority communities and manage $190 billion in community-
controlled assets.
During the pandemic, while working to help our Members
access stimulus payments, deal with financial insecurity and
access emergency loans, community development credit unions
also mobilized to become a critical conduit to getting the
Paycheck Protection Program out to minority small and micro
businesses.
Our credit union was established in 1986 as a response to
the closure of the last bank branch serving the Lower East Side
of Manhattan. Thirty-five years later, we continue to play the
same critical role as the only regulated CDFI in our community.
We now manage around $90 million in assets and 9,000 people
through three community institutions.
Our loan portfolio has more than $22 million in mortgages,
over $20 million in loans to low-income housing cooperatives,
and $16 million in Paycheck Protection Program loans.
Like other community development credit unions, we are the
financial first responders. We are there when disasters strike.
We were first to open in the aftermath of 9/11. Last year, we
did it again. In a time of crisis, we inevitably see increased
demand on our services.
Our experience with PPP was in itself a journey. We could
not participate in the first round as the money ran out even
before we could get on the SBA platform. In the second round,
we faced some significant logistic challenges but our team
quickly gained the expertise needed to ramp up our lending. We
now have a strong pipeline that we hope to continue processing
as long as the $9 billion set-aside is still available.
Most of our business borrowers are micro and very small
entrepreneurs. They come to us frustrated by their negative
experiences with other financial institutions.
Our average PPP loan is around $30,000. Our median loan is
$21,000. The largest loan we made was $750,000 and the smallest
was for only $220. Yes, $220.
Our role is to serve those that other lenders do not. They
are the minority businesses that would have been left behind
were it not for the work of the CDFIs and MDIs.
Our numbers are consistent with what Inclusiv has been
tracking from its network. In 2020, community development
credit unions originated $1.8 billion in PPP loans. This number
is likely to be bigger this year. In fact, community based
lenders collectively have deployed more than $22 billion in PPP
loans so far. To finish strong, we ask SBA to share daily
updates with community lenders on how much funding is
available.
Moving forward, I would ask you to take advantage of this
moment to create a strong framework to serve minority
businesses. CDFI credit unions are a key to help these
businesses, not just survive but to grow and thrive.
I propose the following:
Open the SBA Community Advantage Program to CDFI credit
unions.
Improve the traditional 7(a) SBA program. The loan
guarantee process is cumbersome to borrowers and challenging
for community lenders.
SBA should streamline approval for loans under $150,000.
Provide resources to support technical assistance and
training to ensure entrepreneurs can really succeed. We spend a
significant portion of our time helping borrowers navigate the
lending process.
Keep capital flowing. We are encouraged by the inclusion of
$12 billion for the CDFIs and MDIs in the COVID relief bill and
we plan to access all those opportunities. We applied for a $3
million grant under the CDFI Fund Rapid Response Program. This
capital infusion will enable us to continue mobilizing funds to
fill our lending.
We urge the CDFI Fund to move forward with that review
process quickly and to prioritize on-the-ground CDFIs that are
working directly with consumers, homeowners, and businesses.
We intend to apply for secondary capital through the U.S.
Treasury's Emergency Capital Investment Program (ECIP). We
encourage Treasury to make this program as flexible as possible
and to ensure that the information requested in those
applications is in line with the NCUA review. We also urge NCUA
to make their reviews consistent and expeditious.
I thank you again for this opportunity and look forward to
answering your questions.
Chairwoman DAVIDS. Thank you, Ms. Barry-Fall.
Mr. Sands, you are now recognized for 5 minutes.
STATEMENT OF EVERETT SANDS
Mr. SANDS. Thank you. Good morning, Chair Davids, Ranking
Member Meuser, Ranking Member Williams. Thank you calling a
hearing on The Role of CDFIs and MDIs in Small Business Lending
and for inviting me to testify.
My name is Everett K. Sands, and I have more than 20 years
of experience in lending at MDIs, national banks, and at the
only fintech CDFI, Lendistry.
For the past 5 years, as founder and CEO of Lendistry, my
focus has been on responsible lending to underserved small
businesses, and particularly those owned by minorities, women,
veterans, and people in rural areas.
Lendistry is also a Community Development Entity (CDE), and
a Member of the Federal Home Loan Bank of San Francisco, and a
SBA lender.
Lendistry ranks second nationwide in SBA Community
Advantage lending, which ranges from $50,000 and $250,000, and
more than 60 percent of Lendistry's total outstanding principal
loan balance is with minority and women-owned borrowers, and 70
percent to underserved small businesses.
Lendistry's intentional focus on these businesses and our
ability to efficiently process high volumes of applications,
have enabled us to make an impact during this period of urgent
need. Over the past 13 months, Lendistry has been the primary
point of contact in connecting more than a quarter of a million
affected small businesses with $3.2 billion in loans and grants
and we aspire to grow to at least $5 billion by year end.
In addition to providing PPP loans nationwide, including at
least one county represented by every Member of this
Subcommittee, Lendistry has served as the administrator for
COVID relief grant programs offered by the states of California
and Pennsylvania, and we have provided businesses in every
county of those states with critically needed equity capital.
My message today is that the single most effective way for
Congress and the Federal Reserve to substantially expand
capital access to small and underserved businesses is to focus
on making significantly more capital available to CDFIs and
MDIs.
One unmistakable lesson of the determined economic relief
efforts led by Congress over the past year in response to COVID
is that small and underserved businesses are far and away more
successful in accessing capital from CDFIs and MDIs than from
other sources.
Furthermore, as a signatory to the Small Business
Borrower's Bill of Rights, we at Lendistry see that the lesson
also contain a market-oriented solution to the predatory
lending problem, with the potential for greater supply of
responsibly-priced capital channeled through CDFIs and MDIs.
Yet, paradoxically, CDFIs and MDIs face more barriers to
gaining an adequate supply of capital to deploy than other
federally-regulated and federally-certified financial
institutions.
In short, CDFIs and MDIs are essential, yet underutilized,
pieces of the small business funding infrastructure.
The stakes in addressing this paradox are enormous.
Disparity in access to capital on responsible terms is a
critical hurdle for small businesses, both in powering the
nation's economic and jobs recovery and in narrowing the racial
wealth gap.
The capital access landscape many small businesses must
traverse as they grow resembles the desert where the lifeblood
of responsibly-priced capital is scarce. Worse, it is a desert
that is made almost impossibly steep by the prevalence of
predatory lenders that have filled a void left by two decades
of bank consolidation. After a year of COVID relief, there is
clear and compelling evidence that measures making capital
available to CDFIs and MDIs will transform this steep desert
that small businesses must cross on their path to growth and
into a more fertile and flatter playing field.
Congress and the Federal Reserve already have put in place
key building blocks for addressing the problem of CDFIs and
MDIs lacking the capital necessary to be significantly more
impactful for small businesses. The work to do is relatively
straightforward.
Let me summarize three categories of recommendations which
I have described in greater detail in my written testimony.
First, leverage several key building blocks that already
have been established by Congress and the Federal Reserve by
establishing mechanisms that are exactly analogous to ones that
have already proven to be effective in opening the flow of
capital to CDFIs and MDIs. My recommendations in this regard
are making greater use of the Paycheck Protection Program
liquidity facilities in all SBA programs; expanding SBA
community advantage in three dimensions--length, loan amount
and geographic reach; and making greater use of the Federal
Home Loan Bank and programs that guarantee loans, such as the
recently renewed State Small Business Credit Initiative.
The second category of recommended actions is optimizing
the complementary nature of traditional banks, on one hand, and
CDFIs and MDIs, on the other, for the benefit of small
businesses. My recommendations in this regard focus on
enhancing the incentives for traditional banks to partner with
CDFIs and MDIs.
And the third area of recommendation is to create an office
within SBA dedicated to supporting the efforts of CDFIs and
MDIs as small business lenders.
Thank you again to the Subcommittee and the staff for the
opportunity to provide my perspectives and recommendations. I
look forward to engaging you further in response to your
questions.
Chairwoman DAVIDS. Thank you, Mr. Sands.
Mr. James, you are now recognized for 5 minutes.
STATEMENT OF ROBERT JAMES II
Mr. JAMES. Thank you, Chairwoman Davids, Ranking Member
Meuser, Chairwoman Velazquez and Members of the Subcommittee.
Good morning and thank you for this opportunity to testify on
the role of CDFIs and MDIs in small business lending. It gives
me great hope that one of this Subcommittee's first hearings of
the 117th Congress is aimed at shining a light on this critical
issue.
My name is Robert James II, and I am president of Carver
Development CDE, an affiliate of Carter State Bank in Savannah,
Georgia. I am also Chairman of the National Bankers Association
(NBA). The NBA is the leading trade association for the
country's Minority Depository Institutions. Our mission is to
advocate for the nation's MDIs on all legislative and
regulatory matters concerning and affecting our Members, as
well as the communities we serve.
Many of our Member institutions are also CDFIs, and many
are banks of choice for consumers and businesses who are
underserved by traditional banks. NBA Members are on the
frontlines, reducing the economic hardship in minority
communities, which historically are the most vulnerable during
any slowdown and have been hit hardest by this pandemic.
The House Small Business Committee and Chairwoman Velazquez
have been instrumental in the inclusion of several provisions
in multiple relief packages adopted during the course of the
pandemic that ensure that MDIs and the small businesses and
individuals that we serve are not forgotten during this
national emergency.
The creation of the Emergency Capital Investment Program
and the $3 billion plus up of the CDFI Fund will allow
institutions like those within the NBA to make more credit
available to individuals and small businesses in LMI
communities. The NBA applauds the Congress for the adopting
these two important capital measures and we look forward to
working with you on other measures that will help the
communities we serve.
It is important to note that 70 percent of minorities do
not have a bank branch in their neighborhood and 94 percent of
Black small businesses are the sole proprietors that are
typically underbanked or unbanked.
Given the challenges faced by these small businesses,
especially minority-owned small businesses, it is imperative to
assess which type of banks are best positioned to provide
access to capital for these communities. National banks may not
be fastest in reaching this constituency but were principally
minority communities that have accounted for 50 percent or more
of the debts from this pandemic.
Traditionally, CDFIs and MDIs are critical economic
development engines in minority and low-income communities,
particularly due to our trusted relationships. Unfortunately,
our relatively small scale and underrepresentation in the
implementation of many of the relief efforts show that more
intentional inclusion is required in program design. We saw
this play out during each round of the PPP. Congress devised
the program as a mechanism to aid small businesses suddenly
found themselves forced to close during stay-at-home orders, a
set of conditions that have favored larger businesses,
including delaying the application of sole proprietorships, and
program rules not allowing enough time for our MDIs and CDFIs
to work with very small, under-resourced, minority-owned
businesses has limited their access.
In light of the nature of this hearing, the NBA is pleased
to recommend several potential policy options for
consideration, including the establishment of an MDI office at
the SBA which will focus on integrating our institutions as the
outreach servicing minority small businesses across the
country.
A critical component for this office would be a mandate for
the SBA to preserve and promote minority depository
institutions by: (1) preserving the number of MDIs; (2)
providing technical assistance to ensure maximum efficiency in
program implementation; and (3) promoting and encouraging the
creation of new MDI partnerships.
It is very similar to requirements that make regulatory
agencies currently comply and we believe that these
requirements of the office ensure that MDI partners are able to
effectively engage with the SBA.
Several other options are outlined in my written testimony
including passage of the Ensuring Diversity Community Banking
Act, Consumer Credit Enhancements, and Small Business Faith-
Based and Nonprofit Institution Credit Enhancement.
In conclusion, the MDA applauds the Subcommittee for
holding this important hearing and supports the Full
Committee's ongoing efforts to ensure equity for all American
small businesses. While we commend Congress on its leadership
to date, much work needs to be done. We continue to support the
MDI sector as we respond to the credit needs of small
businesses that our Members [inaudible]. In this regard, the
NBA and its Member institutions look forward to working closely
with the Committee and the Subcommittee to find workable
solutions that ensure minority small businesses ultimately have
every opportunity to thrive.
Thank you again for the opportunity to testify. I will be
pleased to answer any questions.
Chairwoman DAVIDS. Thank you, Mr. James.
Mr. Davis, you are now recognized for 5 minutes.
STATEMENT OF WALTER L. DAVIS
Mr. DAVIS. Thank you, Chairwoman Davids, Ranking Member
Meuser, and Members of the Economic Growth, Tax, and Capital
Access Subcommittee. It is a pleasure to be with you today.
I come before you today with extensive senior executive
leadership experience with some of the nation's largest
financial institutions, as well as an entrepreneur.
Specifically, I previously co-founded and served as the
chief executive officer of the African American founded and
managed, CertusBank. Having reached the level of more than $2
billion in assets, CertusBank operated as the largest bank in
the U.S. founded and managed by African Americans.
Prior to my work at CertusBank, I served as an executive
vice president at Wachovia Corporation, which is now Wells
Fargo Bank. While there, I managed a $70 billion retail credit
and small business portfolio.
It is in this context that I would like to share some
thoughts on the state of CDFIs and MDIs, as well as suggest
some policies to improve the flow of capital into small
businesses.
It is important to note that when we are speaking of CDFIs
and MDIs, which include Black banks, in the broader context,
what we are speaking of is our national access to capital and
financing infrastructure for minority businesses and
entrepreneurs. Quite often, these enterprises are doing and
seeking to do business in the places that pose the greatest
challenges and risks in the marketplace. These markets are
often at the bottom of the economic ladder and separated
significantly from the mainstream economy. These are the areas
that are generally referred to as distressed or underserved
markets and communities. These areas are reflected in what we
now designate as opportunity zones, which by the way I had the
privilege to work closely with Senator Scott and his staff on
the opportunity zone legislation.
These communities do not have the same support or capital
access system as mainstream communities. We admonish them to
take advantage of what is the core of America, our unparalleled
capitalist free enterprise system. But what happens when the
federal government does not ensure that the free enterprise
system is there for them like it is the mainstream marketplace?
What happens is this: The disproportionate economic devastation
that we see in communities persists. And these conditions are
the bedrock of much of the social dysfunction and yes, racial
unrest that we are experiencing today.
No business can grow without access to capital. The role of
the government in my view is to make certain that the proper
infrastructure is there to ensure equitable access to capital.
During the pandemic, The Federal Reserve and Treasury did a
laudable job working in tandem to make certain large financial
institutions were able to meet the needs of their large and
mid-sized clients through mechanisms such as the Commercial
Paper Funding Facility, the main street Lending Program, and
the Primary Dealer Credit Facility, among others. In this same
period, we saw the SBA administer the Payment Protection
Program and Economic Injury Disaster Relief Loan facilities but
without the same efficiency. We witnessed once again that Black
and Brown businesses were shut out of the all-important flow of
capital during these programs' initial stages.
Adjustments were made and the calvary was called in to help
get PPP loans to those most in need. In this instance, the
calvary consisted of CDFIs and MDIs. CDFIs and MDIs handled the
bulk of Black and Brown small business relief efforts.
I would like to say that I am not against the market and
policy support for our large American businesses. We truly need
that. I am saying that as a federal government, we must be as
dedicated to providing for the needs of minority businesses in
distressed communities.
Now, for a moment, let's talk about Black banks and their
role in supporting underserved communities. One hundred years
ago in 1921, 120 Black-owned banks were in existence across the
U.S. Twenty years ago, that number had been reduced to 40, and
today only 19 Black-owned banks remain in operation. One might
think consolidation and moves to achieve economies of scale
drove this shrinkage. However, there is only one of these
institutions that has $1 billion in assets.
In an economy where there are multiple trillion-dollar
banks, this is inexcusable. We expect Black-owned Banks to
serve the ``least of these.'' We need these institutions to be
strong; however, we need to take a close look at some type of
infrastructure, investment, and regulatory relief.
As it relates to solutions, we have talked about the
Emergency Capital Investment Program. I believe this is a great
program. However, right now currently the SBA will not allow
banks to invest capital received from ECIP into SBICs (Small
Business Investment Corporations). According to the SBA there
are over 300 SBIC licenses and less than five in the hands of
Black-owned fund managers.
Given the dire need of capital in the underserved market
and particularly, Black communities, a provision should be made
to allow CDFIs and MDIs to invest in ECIPs without restriction.
Also, Congress should consider allowing CDFIs and MDIs to take
in equity capital from opportunity zone investors and in turn
lend it out to entrepreneurs will allow for more capital flow
into minority and business communities.
I can speak more during Q&A about other thoughts but I
thank you for your time and appreciate you allowing me to
address you this morning.
Chairwoman DAVIDS. Thank you, Mr. Davis.
And thank you to everybody who has testified so far this
morning. We appreciate everything you have shared with us.
I am going to start by recognizing myself for 5 minutes.
Mr. James, in the last few months, we have seen a concerted
effort from the White House and the SBA to reach the smallest
of small businesses through the Paycheck Protection Program. As
they were largely shut out of the program early on, how would
you evaluate SBA's outreach to the lending community and the
emphasis on targeting the hardest to reach at this point?
Mr. JAMES. Thank you for the question, Chairwoman.
As you know, the role out of the program was a bit rocky.
In the first round of the program, the SBA was very much
focused on speed to market and getting capital in the hands of
small businesses. Unfortunately, there was not really a lot of
intentionality in the design of the program and so it was very
difficult for particularly small institutions to access and
deliver resources to the communities that we serve.
In addition, in the second round of the PPP program, the
issues were a little bit better. It was a little smoother. We
were able to access certain set-aside funding for small
businesses in the communities we served. But there were issues
in terms of the rules of the program, in terms of calculations,
particularly for small sole proprietors and the way that they
were required to calculate their eligibility. Then, in the
third round of the program when it rolled out, we received very
little notice. The program rolled out in early January. We
received very little notice at our institutions about the
change of technology platforms and the way that the program
would be administered. And so that presented some challenges
because many of our institutions had worked out their own
process during the first two rounds and then they had to change
processes with very, very little notice. Then, we had another
situation where the new administration came in and made a very
welcomed change to the calculation rules to allow more sole
proprietors to access capital based on their gross income and
not their net but that then caused it to slow down again due to
the rule changes, changes in application forms which again
impacted the ability to serve those small business customers
effectively and efficiently.
So in future programs like this, Chairwoman Davids, I would
just recommend that we design them on the frontend with a
little bit more intentionality about how to make the capital
available to the smallest and hardest to serve businesses and
our institutions, as well as I am sure the other Members of the
panel today would be happy to provide this Committee and the
Congress in the future with very specific suggestions like the
creation of an MDI office at the SBA which would really improve
our ability to again make program designs very efficient going
forward.
Chairwoman DAVIDS. Thank you.
Mr. Davis, and this question can be for anyone else on the
panel who also wants to share. I am curious after your
testimony, we know that access to capital is a challenge for
clients of CDFIs and MDIs, but also for the institutions
themselves. And earlier this year, Treasury announced the
launch of the Emergency Capital Investment Program (ECIP) to
provide emergency capital to CDFIs and MDIs.
I guess I am curious about your ideas about how we ensure
that Treasury maximizes those benefits of this particular
program and then also, if you have anything additional about
the infrastructure needed to support MDIs and that sort of
thing.
Mr. DAVIS. Certainly. Thank you for the question,
Chairwoman.
The ECIP program I think is a really good idea. It is a
novel idea. Two percent cost of capital being driven down to 50
basis points. And sometimes starting at 2-1/2 percent for
subordinated debt I think is great. The issues that you have to
think about is that this is for the best of institutions, the
most well run. There are a lot of weaker institutions that
serve these communities that need help as well. Tier one
capital, as we know, is the lifeblood of any financial
institution, especially a depository institution. And so if we
think about a business model where these folks are set up to
serve the poorest of communities, the profitability model is
going to be a little bit different. And so I think that we can
enhance this program by taking a look at what are those efforts
that we can make for those weaker MDIs that are out there? How
can we support them in a different way? I think that is going
to be critical from my perspective.
Chairwoman DAVIDS. Thank you. And I realize that my time
has now expired.
I am going to now recognize the Ranking Member, Mr. Meuser
from Pennsylvania.
Mr. MEUSER. Thank you, Chairwoman.
Chairwoman DAVIDS. For 5 minutes.
Mr. MEUSER. So this is a very important subject and really
quite intriguing.
Mr. Davis, I would just like to start with you. How do you
feel the undeserved small businesses were served by the PPP and
the EIDL programs via the CDFIs and the MDIs? I mean, in
general or specifically, how do you feel the programs went?
Mr. DAVIS. Thank you, Ranking Member Meuser.
So, in general, I think the program went fine. As it
relates to the EIDL program, the SBA administered those loans
directly, and as we know, the SBA is not set up generally to
make loans directly. So I would sort of think about something a
little bit different in working through the intermediaries such
as the MDIs and CDFIs as it relates to that.
Paycheck Protection Program, I think that worked generally
well. A lot of feedback that I received from MDIs was two
things. One was their lack of infrastructure to be able to
handle the number of requests they had because they were the
ones really serving those that had been left out and those most
in need.
Number two, they talked about the amount that they were
paid for these loans, and so I think that is something that we
should look at. But in general, it was fine. As I stated in my
comments, the SBA had to readjust, as did everyone else because
the businesses that were most vulnerable were the ones that
were being left out initially.
Mr. MEUSER. All right. Thanks.
So as the country opens up and the stores open up, how do
you view the state of solvency of underserved small businesses
and their continued access to capital?
Mr. DAVIS. So I think that one of the things I would look
at is the main street Lending Program that the Federal Reserve
implemented. I actually like the structure of that program. You
know, 5-year loan, 5 percent is held by the institution and
there are no payments the first year. Interest only the second
year. And then amortized. And so something more downstream for
smaller business in order to have the same effect so that it is
sustainable over time. I know we talk about the PPP program but
generally, that is a one time injection into these businesses.
What we need is a sustainable capital infrastructure. The
private markets are the most efficient markets. And so
government's role in making sure that we establish those
markets as a backstop so that these institutions can make more
loans and have more flexibility in my opinion is what we need
to take a look at.
Mr. MEUSER. Okay. I am very interested in revitalization in
suburban, rural, as well as urban areas. So you brought up the
idea of equity capital investments and the CDFIs within
opportunity zones and creating opportunity funds. I do not know
how much we can cover that right now but would you like to
elaborate for 30 seconds on your point there?
Mr. DAVIS. Sure. As it stands today, MDIs and CDFIs are not
considered qualified opportunity businesses. The opportunity to
have investors invest in a fund and that fund in turn invest in
these MDIs, especially, is a good opportunity to inject capital
into these institutions so that they can further lend out in
these communities. Right now, that does not exist as a
provision. And so in my opinion, that is something that you
should take a closer look at.
Mr. MEUSER. Okay, great.
And I want to ask your thoughts on this. The Restaurant
Revitalization Fund is depleted. It was $30 billion, I believe,
and they have got nearly $70 billion. How is that affecting
your communities, and do you have restaurants coming to you
through the CDFIs and the MDIs in a panic? How are the
restaurants faring and how are the CDFIs serving them?
Mr. DAVIS. The restaurants have been in a tough situation.
Obviously, when we shut the country down to some extent, these
businesses where we have a lot of service individuals were some
of the most vulnerable. And so when you think about those
businesses, a lot of them went away and will not come back. One
of the things that we really need to contemplate is being able
to take a little more risk in the startups that we are going to
see. We have to have more businesses willing to start up as we
come out of this economic morass that we have been in. And so
the restaurant business is one that I think is important and we
are going to have to take a closer look at so I like the idea
of the fund. Let's take care of those businesses from a smart
perspective.
Mr. MEUSER. Sure. Thank you.
And Madam Chair, I know I am past my time. I would like to
follow up with our witnesses on these very important issues so
I would just like to perhaps do that with you, Madam Chair. But
I yield back. Thank you.
Chairwoman DAVIDS. Thank you. The gentleman yields back.
The Chair would now recognize Rep. Evans for 5 minutes.
Mr. EVANS. Thank you, Madam Chair.
Madam Chair, I would like to question Mr. Sands. Mr. Sands,
tell me about your partnership with the PACBFI Network and your
work with California. Do you think the PACBFI network is a
structure that be beneficial to other states? Mr. Sands?
Mr. SANDS. Thank you, Representative Evans.
I do. And just for background, Lendistry partnered with 17
CDFIs, bringing 18 CDFIs together, including MDIs. We took
roughly about 64,000 applications in a period of 20 days for
$1.1 billion in requests to service the state. As I believe you
know, but just in case, we were able to reach underserved small
businesses in rural areas, revitalization areas. We had a
significant amount of women-owned businesses and minority-owned
businesses. Lendistry was then able to repeat that same process
of roughly 60 institutions in California and take 334,000
applications in roughly 15 days. The collaborations that we are
now building with CDFIs, MDIs, and other mission-based
organizations shows that there is a huge opportunity to deploy
a significant amount of capital if given the opportunities with
CDFIs and MDIs. Thank you.
Mr. EVANS. Thank you.
Mr. Davis, do you foresee CDFI continuing to use fintechs
to assist them with their services? What are the benefits and
challenges? And how can you provide better support to CDFIs
that wish to use fintechs?
Mr. DAVIS. Thank you, Representative Evans for that
question.
I am a big believer in financial institutions having robust
digital capabilities as it relates to the future. And so when
we think of a combination of CDFIs and fintechs, I think that
could be a fairly novel idea. I think that a lot of people are
going online now. Digital wallets. Digital is big. But I
believe we will not see people in our lifetime get away from
walking into bricks and mortar. That is just something that is
going to be there. And especially in the communities that are
the most vulnerable. If you pass by any bank branch in a
distressed community on Friday afternoon, or you pass by any
check cashing institution, you see lines. And so I think that
as we can make a combination with digital robust capabilities
of fintechs, along with CDFIs and MDIs, we can broader serve
the communities that we are after.
Mr. EVANS. Mr. Sands, do you think fintechs should have a
permanent place in SBA programs, especially to help targeted,
underserved small businesses? And if so, why?
Mr. SANDS. Representative Evans, they do have a permanent
place. That would be Lendistry. We are a fintech CDFI. We have
proven that scale is something that can be done, that we can
reach underserved small businesses. And I think that what
fintech has allowed is a couple of things. The first thing I
would mention is an unbiased approach to how we look at
lending. Technology does not look at who the applicant is. It
just takes them in and looks at their qualifications.
The second thing is it allows us to collaborate with those
who might not otherwise have the ability to provide technology.
I do agree with Mr. Davis, there will be people who will come
into a physical location but I believe it is also not a silver
bullet. We have to recognize that most people, even
underserved, even when they do not have broadband, do have a
cellphone.
The third thing I would mention is scalability, and the
ability to scale is really, really important. And that goes not
only just in volume, that goes in being accessible to small
businesses when small businesses are doing their personal
items. Banks are traditionally open from 9:00 to 5:00. Small
businesses are open from 5:00 to 9:00. And so we have to think
about these things, and we have to think about how to be more
accessible to these small businesses when they are available
and when they are doing their loan activities. Thank you.
Mr. EVANS. Thank you.
Mr. Davis, would you like to add any comment relating to
the question I just asked?
Mr. DAVIS. No, sir. Thank you, though.
Mr. EVANS. Thank you. And I yield back the balance of my
time, Madam Chair.
Chairwoman DAVIDS. Thank you. The gentleman yields back.
The Chair will now recognize Mr. Luetkemeyer, the Ranking
Member of the Full Committee. You are now recognized for 5
minutes.
Mr. LUETKEMEYER. Thank you, Madam Chair.
Great panel today. We have got a lot of great folks here
who have got a lot of personal knowledge of the industry and
how these programs all work.
Let me start with Mr. Davis. You made the comment a few
minutes ago and you have managed a small business portfolio at
Wells Fargo, that we need to do something different with
regards to delivery of these programs. And it would seem to me
that as successful as the PPP program was and as disastrous as
the EIDL program has been from the standpoint of fraud and
abuse and mismanagement, the template is there for us to look
at perhaps going to more direct lending from--take away the
authority of SBA and use this third party, whether it is the
banks, credit unions, or CDFIs, to be able to be the
intermediary, the place where these loans originate, where the
grants originate and have SBA become a grantor or a guarantor,
I should say on these programs.
Do you think that is a viable option all things considered
by the way that the lack of fraud and abuse in the PPP program
where the third-party bank was involved in making these loans
versus the EIDL program which it looks like here I have got a
number of $62.7 billion potentially in fraud and I know that
there was another $6.7 billion identity theft alone. Those are
unacceptable figures. We have to do something different. So is
this something you think would be workable?
Mr. DAVIS. As it relates to taking direct authority from
the SBA, I do think it is something that is workable. Again, I
go back to my thought that the markets are much more efficient
and the thought process around using intermediaries, trusted
intermediaries, when we give them the back-office support. A
lot of MDIs and CDFIs complained during this last crisis that
their technological backbone was not adequate to handle the
volume that they received. And I think there is something that
we can do to take a look at that. But I am a big believer in
the intermediary system. And so I would not argue with looking
at taking away the SBA's direct lending authority.
Mr. LUETKEMEYER. Mr. James, I serve on the Financial
Services Committee as well and the Ranking Member on the
Financial Institutions Subcommittee. I have seen you appear
before us a number of times. You are a very impressive
individual with your background and your knowledge. And I am
thankful you are on the Committee today because I think you
bring a lot of expertise to it.
So you heard my question to Mr. Davis. What would your
opinion be of that situation, trying to find a better way to
deliver the dollars to those folks who need it most, and it
seems to be you are taking it right to the community versus
having to go through some other government entity here to make
that happen. What would your opinion be to that?
Mr. JAMES. Thank you for the question, Ranking Member
Luetkemeyer. It is great to see you again. And thank you for
your work on Financial Services, which has been very beneficial
to our institutions.
Yes, sir. I believe that there is a real opportunity to
look at the infrastructure that we built here in the past year
and a half or so within CDFIs and MDIs. Leveraging additional
technology, creating processes within our institutions. Many
CDFIs did not have existing relationships with the SBA and now
they do. Many of our MDIs had allowed their relationships to go
dormant due to issues that they had had previously in many
previous years with having the SBA honor guarantees and some
other problems that occurred in previous generations. And so
now that those relationships have been renewed and reactivated
and we have created systems, I really do think that there is an
opportunity for Congress to look at providing additional back
office support to our institutions and really leveraging this
capability that we built again to respond to the pandemic and
potentially allow us to be the ones that are driving the
resources into the communities. The issue of avoiding fraud and
abuse is one that regulated institutions in particular have to
take very, very seriously. So we have to comply with the Bank
Secrecy Act and anti-money laundering requirements. We have to
know our customers. And so the regulated financial institutions
in particular are excellent at making sure that we identify who
we are dealing with, whether we are doing it in a digital
format or an in-person format. And so I do think that there is
a great deal of opportunity to be explored in increasing our
authority to deal with those customers that are closest to us,
where we have the relationships, and where we also have the
compliance infrastructure to make sure that the funds are going
to the places that we intend for them to go.
Mr. LUETKEMEYER. Thank you for that answer. That is exactly
what I was hoping you would say and I think you have
articulated it better than I can. And I probably will submit
for the record another question here with regards to the
troubled debt restructuring and forbearance I think has been
very, very helpful to all of the institutions--banks, credit
unions, CDFIs, all of those folks who are working with these
entities and hold loans that have been able to give the kind of
forbearance it takes to be able to ride out this situation we
are in. So I appreciate your being here today and I look
forward to sending that question and your response to it. thank
you, sir.
I yield back.
Mr. JAMES. Thank you.
Chairwoman DAVIDS. Thank you. The gentleman yields back.
The Chair will now recognize Rep. Bourdeaux for 5 minutes.
Ms. BOURDEAUX. Thanks so much. Thank you, Chairwoman Davids
and Ranking Member Meuser.
It is great to see Georgia so well represented on today's
panel with Mr. James from Savannah, as well as Mr. Davis, whose
work goes to support Georgia small businesses. As the only
Georgia Member on the Committee, thank you for your work to
support the small businesses in our state.
My first question is for my fellow Georgian, Mr. James, but
I welcome any input from some of the other witnesses if you
have thoughts or experiences to share.
Mr. James, as you know, the initial rounds of the Paycheck
Protection Program did not really reach many of the underserved
businesses who needed help the most. And thanks to the work of
Chairwoman Velazquez, many Members on this Committee, as well
as your organization, subsequent rounds have shown improvement.
But of course, now we have the next phase, which is PPP loan
forgiveness. And I am curious how you and your Members have
found access to PPP loan forgiveness and how is that process
working with minority-owned businesses? And is there more than
can be done to reengage minority-owned small businesses and
ensure they have the information necessary to apply for loan
forgiveness?
Mr. JAMES. Representative Bourdeaux, thank you so much for
the question. It is great to represent the State of Georgia
here today.
Yes. The forgiveness process is actually extremely
important to our institutions. Obviously, all of our
institutions, whether they be regulated or unregulated CDFIs
and MDIs, as well as the large institutions, we entered into
the PPP program as a bargain counting on 100 percent guarantee
from the SBA and easy to navigate forgiveness process. We are
grateful to the Committee for streamlining the forgiveness
process, particularly for those borrowers under $150,000. The
original application that came out before the Committee and
Congress took that action was going to be too onerous. It was
frankly more onerous than the original application itself and
it was going to be very discouraging to us helping our
customers receive that forgiveness.
One of the things that many of our institutions are doing
is actually engaging even additional support. I know that my
institution in Savannah, we have engaged a consultant
specifically to assist our customers with that forgiveness
process at no cost to them. Our median PPP borrower was about
$26,000. We extended over 200 percent of our bank's capital to
PPP because we saw the demand was really off the charts. And so
we also decided early on this year that we needed to engage
some additional assistance to make sure that our borrowers were
able to complete even the streamline process. And so we just
recently began a process of specific one-on-one outreach to our
customers to make sure that they know what they need and they
complete the process and get those loans forgiven so that they
are not dragging debt into their additional efforts to
recovery.
Ms. BOURDEAUX. Just to follow up on that. We did a quick
survey--this was earlier in the year--of some small businesses
in the district and just sort of found that minority-owned
businesses seemed less likely to be getting the loan
forgiveness and getting that process in place. Do you see any
disparity in that and do you have any insight on what might be
the causes of it?
Mr. JAMES. Well, you know, I think a lot of the disparity
is the same sort of kind of structural disparity that you may
have seen in the initial onset of the program. And so it is
really important for financial institutions, whether they be
MDIs, CDFIs, or large, traditional financial institutions to
again do that one-on-one work. Our smaller institutions, the
MDIs and the CDFIs, are the ones that are the closest to those
individuals, the closest to those customers. We have those
relationships and are taking the extra steps of providing
support to our customers. I can certainly see how disparities
are starting to pop up, and so I do believe that there is a
real need for SBA, as well as the originating lenders to roll
up their sleeves, particularly for smaller borrowers to ensure
that they are making the kind of outreach to ensure that those
folks do not have an obligation that they did not otherwise
intend.
Ms. BOURDEAUX. Okay. Thank you so much.
Do any of the other panelists have any comments on that
particular aspect of the PPP program?
Okay. If not, I think I am out of time. I yield back. Thank
you.
Chairwoman DAVIDS. Thank you. The gentlelady yields back.
And the Chair will now recognize Mr. Donalds of Florida for
5 minutes.
Mr. DONALDS. Thank you, Madam Chair.
To the panelists, thank you so much for your time and your
testimony. It has been very, very good, actually, so I really
appreciate your time and you being here.
Mr. Davis, you mentioned opportunity zones in your
testimony, a program in the Tax Cuts and Jobs Act of 2017 that
has faced a lot of scrutiny despite obvious gains, America's
most distressed communities have experienced. MDIs and CDFIs
are left out of this provision.
Mr. Davis, can you speak to how CDFIs and MDIs could
benefit small businesses if they were to be designed as
opportunity zones?
Mr. DAVIS. Thank you, Representative Donalds for that
question.
These institutions, as I said before, are a critical part
of the community. And as it relates to investment of equity
capital especially, they are highly important. If you think
about the designation of opportunity zones, (it was highly
politicized, so that aside) I think that it is a good program
that can continue to be tweaked around the edges because we now
do have those designations. And the idea in the spirit of the
legislation was to unleash as much capital as possible into
these communities without damaging the fabric or the
individuals in those communities. And so because these MDIs and
CDFIs have a real community component to them, they are much
more capable of investing it and loaning to the folks and the
businesses in these communities and others. And I think because
they are so close to the ground, it would be a great
opportunity to have them engaged and have the ability to be
able to accept qualified opportunity fund investments.
Mr. DONALDS. Thank you for that response. That is actually
quite helpful.
We often hear about how minority and rural microenterprise
owners were late to access PPP and EIDL at the beginning of the
pandemic. While I believe many other factors played into this,
I think the root of the problem is largely due to the lack of
financial institutions in these areas as a result of Dodd-
Frank. Regulations meant to punish big banks actually hurt
smaller institutions the most. From the second quarter of 2008
to the third quarter of 2020, CDFIs had a decline of over 47
percent and over a third of MDIs went under during that same
timespan. The widespread loss of these businesses present a
serious threat to the financial stability of consumers and
businesses located in areas almost exclusively served by
community banks and other minority depository institutions.
Mr. Davis, what steps do you think Congress could take to
kind of spur development in these institutions?
Mr. DAVIS. So Representative Donalds, you bring up an
interesting point. The cost of compliance, regulatory
compliance is very burdensome on financial institutions. And if
you think of these institutions that are the smallest and those
that are lending to the least of these, that regulatory burden
is something to consider. Scale is important in the financial
services business. When I mentioned that we went from 120 to 40
to today 19 Black-owned banks and only one of them has a
billion dollars in assets, that is inexcusable. So an
investment in those banks from an infrastructure standpoint.
But the regulatory piece has to be addressed as well. I have
got experience with a regulator who said if you are going to
build a $5 billion bank, you build a $5 billion infrastructure
even before you get there. And so I have seen how these
regulatory burdens can actually hurt institutions.
Do not get me wrong. We need strong institutions there and
we need regulations. But I think that there is some type of
opportunity for Congress to look at how these banks are
regulated as well as some type of backstop. And I am sure Mr.
James can probably speak to that more articulately than I can.
But that is my opinion, sir.
Mr. DONALDS. That is actually a great segue because I was
going to ask Mr. James for his opinion as well.
So Mr. James, if you could comment I would appreciate it.
Mr. JAMES. Thank you, Congressman.
Mr. Davis is correct. I think that we need to find the
right type and amount of regulation. None of our institutions
want there to be unsafe or unsound lending practices. We
certainly want to be very, very compliant with Know Your
Customer and the Bank Secrecy Act and AML, but there is
certainly an enormous burden. And that burden does not change
regardless of the size of your institutions. You still have to
comply with the same laws and regulations no matter the size of
your institution. Of course, small scale and minimal capital
will impact our ability to efficiently provide that type of
compliance which impacts our ability to provide service back to
the community. And so just having a right size type of
regulation based on our institution size and our reach into the
community would be welcomed. And so we welcome Congress and to
have the opportunity to work with you to try to find the right
size regulations for institutions that are serving the smallest
and most hard hit and vulnerable communities.
Mr. DONALDS. Thank you.
Madam Chair, I apologize for being slightly over my time
but I yield back.
Chairwoman DAVIDS. Thank you. The gentleman yields back.
The Chair will now recognize Ms. Chu for 5 minutes.
Ms. CHU. Thank you.
Mr. Sands, community financial institutions like CDFIs and
MDIs have been instrumental in delivering PPP assistance to
underserved communities throughout this pandemic and I am
particularly interested in your perspective as a CDFI and one
of the country's largest community advantage lenders. PPP
showed that the community advantage model can work at scale by
leveraging mission-based lenders to connect small businesses in
underserved markets to capital. One reason this model works is
because community advantage lenders, unlike traditional banks
and 7(a) lenders provide technical assistance to their clients.
This assistance not only helps them to secure that initial
community advantage loan but also prepares them for future
growth.
So could you discuss the role of technical assistance and
mission-oriented lending and how this strengthens the Community
Advantage Program?
Mr. SANDS. Absolutely. Thank you, Representative Chu. And I
am glad to see you representing California.
I would like to say that I think technical assistance, we
all know--all the lenders who are on the panel and in the room
and who have done the studies--we know that providing technical
assistance services has a direct correlation to having lower
default and loss rates inside of our institutions. Community
development financial institutions have been focused on
providing assistance and that assistance is helping these
borrowers to not only have access to community advantage and
PPP loans, but other loans historically, and they do much
better in terms of paperwork compliance and different things
like that as they are scaling their businesses. Thank you.
Ms. CHU. Thank you for that.
Ms. Barry-Fall, PPP funding is exhausted for traditional
lenders and is nearly exhausted for community financial
institutions like CDFIs and that means time is almost out for
us to address racial disparities in the program. Earlier this
month the L.A. Times published an investigation finding that in
Los Angeles, businesses in majority White communities received
PPP loans at twice the rate of those in Latino neighborhoods,
1.5 times the rate of Black neighborhoods, and 1.2 times the
rate of Asian neighborhoods.
I sent a letter to SBA and Treasury asking for an official
analysis of racial disparities and a plan to address this
issue. Can you expand on any racial disparities and PPP uptick
that you have seen in your community and talk about ways that
SBA and Congress can leverage community financial institutions
moving forward to address these disparities?
Ms. BARRY-FALL. Can you hear me?
Ms. CHU. Yes.
Ms. BARRY-FALL. Yes. Thank you for your question,
Congresswoman.
One of the things that we have considered is who is getting
the PPP. As of now, we are just kind of processing all the PPP
applications that we are receiving. And we serve our majority
is like low-income communities. We are not like really kind of
going through the whole detail of the application and find out
like what is the percentage of it. But I am sure like because
we have been like serving mostly our Members, I am sure like we
have been targeting like our target market rate.
Ms. CHU. Thank you for that.
Mr. Sands, thank you for your recommendations for the
Community Advantage Program. It aligns with my legislation that
passed the House, unanimously passed this last December which
proposed to authorize the program for 5 years, increase the
maximum loan amount to $350,000, and expand targeting of
underserved businesses. And we have to make sure that as we
recover from COVID that there is long-term small business
recovery. As a major lender, can you discuss how giving the
program long-term statutory authorization will lift it out of
the short-term status and impact the program's effectiveness?
Mr. SANDS. Thank you again for the question.
I actually think it is quite surprising that anyone would
not have voted for the bill. Number one, it is the only program
in SBA's history, and possibly in any of administration's
history, that has double digit numbers in terms of lending to
Asians, African Americans, and Hispanic Latinos. That alone
shows that the program works and that alone shows that the
program should have possibly its own appropriation, possibly
higher loan guarantees, and other things to supercharge it. I
would also like to make a recommendation that we look at the
PPLF facility as possibly a funding source for Community
Advantage going forward. If the CDFIs and MDIs had that ability
and had that access to capital, I think you would see those
numbers be even more expanded and even more tremendous than
what they are today compared to the other programs. Thank you.
Ms. CHU. Thank you. I yield back.
Chairwoman DAVIDS. Thank you. The gentlelady yields back.
The Chair will now recognize Ms. Van Duyne for 5 minutes.
Ms. VAN DUYNE. Thank you very much, Chairwoman Davis and
Ranking Member Meuser for holding this hearing today.
During my tenure as mayor, the City of Irving witnessed
unprecedented economic growth and development. We added
thousands of new jobs and billions of dollars to our local
economy. With these improvements, we were able to bring in
jobs, build new places to live, and create more opportunities
for people to learn, thrive, and grow. I appreciate the
opportunity to hear from today's panel on how we can better
foster capital for our small businesses.
But I am also very deeply concerned about the current
economic environment that they face. They are falling by the
wayside as the Biden administration touts unemployment benefits
that contributed to one of the most disappointing jobs reports
that we have seen in history and continue to provide the
necessary and unnecessary stimulus that is leading to
skyrocketing inflation, protections, and all Americans.
We cannot talk honestly about wanting to provide
opportunities for small businesses in underserved communities
while Congress stands by and actively competes against them for
employees. The number of employees I have spoken with in my
district desperately seeking employees is staggering. Make no
mistake; the federal government is actually hurting the very
businesses in need of help.
I am looking forward to the work ahead on this Committee as
the economy reopens and we need to transition out of the
pandemic response. But this Committee also needs to hear
directly from administration officials who are in charge of
these programs. And I would like to reiterate my request to
bring Small Business Administration officials in front of this
Committee as soon as possible. Until that time, I look forward
to hearing our witnesses' thoughts on improving the flow of
capital to small businesses.
With that, I would like to ask Mr. Davis, while I was
working at HUD, I worked a lot with opportunity zones and I
think they are strong drivers of economic activity in
communities due to the incentives for private investment and
minimal red tape. In your testimony you mentioned allowing
CDFIs to receive equity investments as opportunity zone
businesses. Can you talk more about how this would work? And
are there any other improvements to opportunity zones that you
think should be made to help small businesses even further?
Mr. DAVIS. Thank you, Representative Van Duyne, for that
question.
Starting with the last first, I think that one of the
things we talk about in the bill of opportunity zones and
tweaking it is transparency. What we do not have today is a
measuring or reporting mechanism to know exactly who we are
helping and how we are helping them. And so I think that is
going to be an important issue going forward as we think about
tweaking this.
The other thing as this relates to getting capital flow
into these businesses, during my testimony I also talked about
the ECIP program at SBIC. A lot of people forget about SBICs as
part of the SBA. And these licenses are very valuable. Two to
one, three to one matches. And so again in my testimony I
stated out of over 300, only 5 are in the hands of Black-owned
founders. That means 1 percent of those dollars go to Black-
owned businesses; 1 percent go to Hispanic businesses as I am
told by the SBA.
We need every bit of capital flowing to these communities
that we can get because when they thrive, we thrive broadly.
And so as we think about improving the flow of capital, I think
that is one opportunity to really do it along with opportunity
zones as well.
I want to reiterate something Mr. Sands said though as it
relates to technical assistance. Whatever we do, Representative
Van Duyne, as we think about how we get more capital flowing,
and I have talked about startups before, this technical
assistance piece is going to be critical. And I think that, for
example, you can be the best chef in the world but meeting
payroll, growing a business, understanding staff are different
things. And so I think those are all elements that go into
this.
Ms. VAN DUYNE. Excellent.
Can you also identify any burdensome, like be specific
about burdensome regulations on lenders that make it difficult
for them to make loans in these underserved communities?
Mr. DAVIS. I would first off start with the overall cost of
compliance and regulation. The cost is the same, as Mr. James
said, it does not matter what size you are. You still have the
same costs. In these institutions, we need scale. And in order
to scale, there has to be invested equity capital. And so until
we look at a different way to reform the regulatory aspects of
how these institutions are regulated specifically, I think that
it is going to be interesting overall. So I would not look at
any one specific regulation. I would look at the cost and
burden of overall regulation because that is where it really
hurts these small institutions.
Ms. VAN DUYNE. Okay. Thank you.
I think I am over my time.
Chairwoman DAVIDS. The gentlelady yields back.
It looks like, okay, I thought maybe one more Member would
be joining us.
Well, first of all I would like to say thank you again to
all of our witnesses for joining us today. I also want to thank
you for your work on behalf of America's underserved small
businesses, particularly over this last year that we know has
been so difficult during the pandemic. I know I heard stories
from lots of employees at organizations like yours that went to
great lengths to help their clients access the relief that they
needed to stay in business and keep their doors open. So your
tireless efforts have made a difference in the lives of so many
entrepreneurs. And I know I, and so many others, appreciate you
all for that.
And then moving forward, we have to utilize and maximize
your work ethic and also the connection to underserved
communities to help ensure that we do not leave people behind
as our economy recovers.
To that end, I am committed to working with the SBA to help
its capital access program serve the underbanked and also to
monitor the engagement of the federal banking regulators with
CDFIs and MDIs as it relates to small business lending.
So today's hearing has given us a lot of ideas about ways
to empower CDFIs and MDIs, and I am looking forward to working
with the Members of this Committee to act on those
recommendations.
I would ask unanimous consent that Members have 5
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered.
And if there is no further business to come before the
Committee, we are adjourned. Thank you.
[Mr. Walter L. Davis did not submit his QFR's in a timely
manner.]
[Whereupon, at 11:21 a.m., the subcommittee was adjourned.]
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