    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                      EMPOWERING EMPLOYEE OWNED BUSINESSES
                       AND COOPERATIVES THROUGH ACCESS TO
                       CAPITAL

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

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD
                               SEPTEMBER 30, 2021

                                   __________

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 117-034
                 Available via the GPO Website: www.govinfo.gov

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    45-635                      WASHINGTON : 2021

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

                       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. Nydia Velazquez.............................................     1
    Hon. Blaine Luetkemeyer..........................................     3

                                   WITNESSES

    Mr. R.L. Condra, Senior Vice President, National Cooperative
      Bank, Arlington, VA............................................     5
    Ms. Tatia Cooper, President, Home Care Associates, Philadelphia,
      PA.............................................................     7
    Mr. Gary Shorman, Chairman and Chief Development Officer, Eagle
      Communications, Hays, KS.......................................     9
    Ms. Alice Frazier, President and Chief Executive Officer, Bank of
      Charles Town, Charles Town, WV, testifying on behalf of the
      Independent Community Bankers of America.......................    11

                                    APPENDIX

    Prepared Statements:
        Mr. R.L. Condra, Senior Vice President, National Cooperative
          Bank, Arlington, VA........................................    37
        Ms. Tatia Cooper, President, Home Care Associates,
          Philadelphia, PA...........................................    40
        Mr. Gary Shorman, Chairman and Chief Development Officer,
          Eagle Communications, Hays, KS.............................    45
        Ms. Alice Frazier, President and Chief Executive Officer,
          Bank of Charles Town, Charles Town, WV, testifying on
          behalf of the Independent Community Bankers of America.....    53
    Questions for the Record:
        None.
    Answers for the Record:
        None.
    Additional Material for the Record:
        Capital Impact...............................................    60
        Credit Union National Association (CUNA).....................    63
        Letter in support of SBA direct lending......................    64
        NCBA CLUSA...................................................    68
        Opinion - American Banker....................................    71

         EMPOWERING EMPLOYEE OWNED BUSINESSES AND COOPERATIVES THROUGH
                               ACCESS TO CAPITAL

                                  ----------

                          THURSDAY, SEPTEMBER 30, 2021

                      House of Representatives,
                   Committee on Small Business,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 9:59 a.m., in Room
    2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
    [chairwoman of the Committee] presiding.
        Present: Representatives Velazquez, Davids, Phillips,
    Bourdeaux, Carter, Chu, Evans, Delgado, Houlahan, Mr. Kim,
    Craig, Luetkemeyer, Williams, Hagedorn, Stauber, Meuser,
    Tenney, Garbarino, Ms. Young Kim, Van Duyne, Donalds, and
    Salazar.
        Chairwoman VELAZQUEZ. Good morning. I call this hearing to
    order.
        Without objection, the Chair is authorized to declare a
    recess at any time.
        I would like to begin by noting some important
    requirements. 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 the 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 background noise.
        If you have to 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 and staff physically present in the
    committee room today, in accordance with the attending
    physician's most recent guidance, all Members and staff who
    attend this hybrid hearing in person will be required to wear
    masks in the hearing room. Furthermore, all Members and staff
    who have not been fully vaccinated must also maintain 6-foot
    social distancing from others. With that said, Members will be
    allowed to briefly remove their masks if they have been
    recognized to speak.
        The COVID crisis dealt a severe blow to American workers.
    In 2020, the pandemic raised unemployment rates, halted wage
    growth, and lowered employee satisfaction with their jobs. This
    shock occurred as the labor force was already contending with
    rising income and wealth inequality and growing uncertainty
    surrounding retirement security.
        The Small Business Committee serves as the voice of small
    firms in Washington. This includes the employees that help
    power these businesses, as well as entrepreneurs that start
    them.
        One such proven solution to alleviating the problems facing
    these workers is through the employee-owned business model,
    which takes various forms, but has a united principle that the
    interest of the employees and owners are aligned.
        Today, I would like to focus on two of the most prominent
    types of employee-owned businesses: the Employee Stock
    Ownership Plan, also known as ESOP, and cooperatives. ESOPs and
    cooperatives create a link between the fortune of employees and
    the performance of the companies they work for. As revenues and
    profits rise, employs are compensated, helping to create a
    culture of ownership in the enterprise. This model helps to
    raise wages, promote job preservation, and increase worker
    benefits.
        Employee-owned entities are also more resilient than their
    peers in the face of crisis. For example, a study by the
    Employee Ownership Foundation found that during the COVID
    crisis, ESOP firms retained more jobs, maintained standard
    hours and salaries, and provided protective measures at higher
    rates than typical firms.
        Given the long list of benefits associated with employee-
    owned businesses, Congress must explore ways to facilitate and
    encourage the formation of these enterprises. Though employee-
    owned companies have become more prominent over the years, they
    continue to face unique obstacles. For example, co-ops have an
    especially hard time accessing capital through the SBA 7(a)
    loan program. They are locked out of the 7(a) due to their
    requirement of a personal guarantee from anyone who owns 20
    percent or greater share of a business.
        Congress took steps to address this issue by passing
    legislation I sponsored in 2018. The main street Employee
    Ownership Act sought to lower barriers to accessing capital and
    allow more employee-owned firms to participate in SBA programs.
    Unfortunately, the SBA failed to follow congressional intent
    and declined to propose alternatives for co-ops to secure a
    loan without a personal guarantee.
        That is why as part of our Committee's title of the Build
    Back Better Act, we provided $500 million in funding for a
    cooperative lending pilot within 7(a) without the requirement
    of a personal or entity guarantee.
        Today, I look forward to examining the potential impact of
    the cooperative lending pilot program and exploring other ways
    that Congress can help employee-owned businesses.
        I look forward to hearing from our witnesses today about
    the benefits of employee ownership, the challenges these firms
    face, and what this committee can do to help.
        I now would like to yield to Ranking Member Mr. Luetkemeyer
    for his opening statement.
        Mr. LUETKEMEYER. Thank you, Madam Chair.
        I would like to begin by addressing what is happening a few
    floors below us at the House Financial Services Committee this
    very morning. Financial Services Committee will be hearing
    from, of all people, Treasury Secretary Janet Yellen.
        Although I am glad that Secretary Yellen has finally found
    her way to one of our House committees, I must address yet
    again that it has now been over 150 days since the Secretary
    has defied her legal duty to testify before our committee, the
    Small Business Committee, on COVID-19 relief for small
    businesses. Simply put, Secretary Yellen continues to break the
    law, and my colleagues on the other side refuse to hold her
    accountable.
        The Paycheck Protection Program was created with two
    agencies spearheading the efforts: Department of Treasury and
    the Small Business Administration. With nearly $800 billion in
    assistance flowing through the program, it was one of the most
    important small business relief programs to assist and save the
    nation's smallest companies and their most important asset,
    their employees, in history.
        It is clear that while Secretary Yellen flouts her
    statutory responsibility to the program, she is also ignoring
    American small businesses. This blatant disregard for main
    street USA appears to be a pattern within the Biden
    administration. Take, for example, the Biden tax hikes that are
    currently making their way through Congress, without Republican
    input. Increases to the corporate tax rate, increases to the
    individual rates, and the increases to the capital gains rate
    will all crush our country's small businesses.
        While small businesses continue to recover from COVID-19,
    they are being impacted by supply chain issues, skyrocketing
    inflation, and a major labor shortage. And this
    administration's response to all these issues is to increase
    taxes. All the while, the Treasury Secretary continues to turn
    her back on our nation's smallest firms, which is her statutory
    duty, by the way.
        Madam Chair, last week, I sent you a letter requesting that
    we subpoena her to testify. I look forward to working with you
    on next steps in order to conduct a hearing with the Treasury
    Secretary and the SBA Administrator as soon as possible.
        Now, today's hearing and topic are important. Employee-
    owned businesses are a viable option for many small businesses,
    especially with owners aging and planning next steps. However,
    I think it is necessary to also discuss some of the recent
    policy proposals put forth by my colleagues and how these
    proposals will impact small businesses' access to capital.
        Early in the month, this Committee met to examine the small
    business provisions within the Democrats' partisan, reckless,
    socialist spending spree. Not surprisingly, we saw numerous
    provisions that disregard responsible lending standards. Chief
    among these changes were language to create a direct lending
    option at SBA. This path that the Democrats are taking toward a
    one-lender model is extremely concerning.
        A few weeks prior to the creation of this direct lending
    tool, the Biden administration's SBA threatened lenders with
    audits if they didn't join with the newly created Direct
    Forgiveness Portal. These are dangerous trends for many
    reasons.
        Existing public-private lending guarantee partnership
    harnesses the efficiencies of competition to deliver assistance
    to small businesses. As we all know, the federal government
    doesn't face competition. Importantly, private sector lenders
    also bring their own fraud protection oversight to the table.
    In fact, we have a case study right before us that examines
    SBA's direct lending model.
        The Economic Injury Disaster Loan program, which was
    activated at the onset of the pandemic, has underperformed
    compared to the private lender-driven PPP program. EIDL
    continues to be slow and cumbersome, and the SBA's lack of
    response and communication on loan questions has been
    frustrating and unacceptable.
        When it comes to fraud, report after report from the SBA's
    Inspector General and others have highlighted that the program
    is layered with massive amounts of potential fraudulent loan
    activity. And, unfortunately, the fraud numbers continue to
    rise.
        It is important to note that we know all these problems are
    associated with direct lending. Yet my colleagues are
    continuing down this path. We also know the pitfalls of waiving
    the personal guarantee on loans moving forward. And this
    absolutely blows my mind. SBA in its own words said of the
    personal guarantee, this requirement is to ensure that SB
    adequately mitigates the risk to the loan program and
    ultimately to the taxpayer. And yet they won't do away with it.
        My Republican colleagues and I will not sit quietly and
    allow more taxpayer dollars to be exposed to fraud, waste, and
    abuse through the SBA's programs. Underwriting standards should
    not and cannot be reduced. These are vital topics that this
    Committee should examine thoroughly. I look forward to
    exploring many of these topics today with our witnesses.
        I came across a discussion yesterday with somebody and I
    made the comment that entrepreneurship is strong but next
    economy is on the way. Ladies and gentlemen, if we want to grow
    this economy, we have to protect the small businesses, the
    entrepreneurs of this country, to be able to grow our next
    economy.
        Madam Chair, thank you for the hearing. And I yield back.
        Chairwoman VELAZQUEZ. Thank you, Mr. Luetkemeyer. The
    gentleman yields back.
        I would like to take a moment to explain how this 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 finished.
        With that, I would like to introduce our witnesses.
        Our first witness is Mr. R.L. Condra. Mr. Condra is the
    Senior Vice President of government relations for the National
    Cooperative Bank, a national financial institution dedicated to
    providing banking solutions for cooperatives and their Members.
    He also serves on the board of CooperationWorks!, a national
    network of organizations focused on co-op development.
        Prior to joining the private sector, Mr. Condra worked as a
    Senate professional staffer.
        Thank you for joining us today, Mr. Condra.
        Our second witness is Ms. Tatia Cooper, President of Home
    Care Associates of Pennsylvania, a worker-owned cooperative
    based in Philadelphia providing in-home respite and senior
    care. Home Care Associates got started in 1992, in partnership
    with another home care co-op based in the Bronx, New York, a
    testament to the power of co-ops helping each other start up
    and expand.
        Welcome, and thank you for joining us today, Ms. Cooper.
        Our third witness is Mr. Gary Shorman, the Chairman and
    Chief Development Officer of Eagle Communications, a 100
    percent employee-owned ESOP, based in Hays, Kansas. Eagle
    Communications started the self-conversion process in 1998 and
    became majority owned by its employees in 2002. They have been
    100 percent employee-owned since 2012.
        Thank you for joining us today, Mr. Shorman.
        The Ranking Member, Mr. Luetkemeyer, will now introduce our
    final witness.
        Mr. LUETKEMEYER. Thank you, Madam Chair.
        Ms. Frazier is the president and chief executive officer of
    the Bank of Charles Town in Charles Town, West Virginia, and a
    leading official with the Independent Community Bankers of
    America, ICBA.
        Community banks have played a significant role in assisting
    and rescuing small businesses during the COVID-19 pandemic.
    Beyond this emergency period, community banks, which are known
    for their focus on relationship banking, serve our nation's
    small businesses consistently day in and day out. Across our
    vast country, community banks provide access to capital
    financial assistance to entrepreneurs and small businesses as
    they strive to offer the best products and services to their
    customers. Their dedication to customer service and serving our
    communities honestly and responsibility cannot be matched.
        Ms. Frazier, welcome. Welcome back to the Committee. We
    thank you for joining us again to represent the nation's
    smallest banks. We are also grateful for you attending in
    person. Thank you very much.
        And, with that, Madam Chair, I yield back.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Thank you witnesses for being here today.
        Mr. Condra, you are recognized for 5 minutes.

    STATEMENTS OF MR. R.L. CONDRA, SENIOR VICE PRESIDENT, NATIONAL
     COOPERATIVE BANK, ARLINGTON, VA; MS. TATIA COOPER, PRESIDENT,
       HOME CARE ASSOCIATES, PHILADELPHIA, PA; MR. GARY SHORMAN,
     CHAIRMAN AND CHIEF DEVELOPMENT OFFICER, EAGLE COMMUNICATIONS,
    HAYS, KS; AND MS. ALICE FRAZIER, PRESIDENT AND CHIEF EXECUTIVE
    OFFICER, BANK OF CHARLES TOWN, CHARLES TOWN, WV, TESTIFYING ON
         BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

                        STATEMENT OF R.L. CONDRA

        Mr. CONDRA. Good morning, Chairwoman Velazquez, Ranking
    Member Luetkemeyer, and Members of the Committee.
        I had the honor of testifying on this issue last year. I
    would like to thank the Committee's continuing interest
    regarding the Small Business Administration's inability to
    provide cooperative businesses access to its lending programs.
    I would also like to thank the Committee for its vision to
    create a cooperative pilot program that will provide much
    needed capital and build institutional knowledge of this
    business model within the agency.
        Is there anything more gratifying than becoming a small
    business owner? During the pandemic, haven't we learn how
    essential grocery stores are to our communities? Unfortunately,
    the SBA, the federal agency that oversees small business
    assistance and growth, continues to block cooperative
    businesses and their tens of thousands of jobs from being
    created.
        To be clear, cooperative businesses should have the same
    opportunities, service, and financial products as other SBA
    borrowers.
        There are over 65,000 cooperatives in the U.S., and the top
    100 generated $226 billion in annual revenue in 2020. Some
    notable cooperatives include REI, Ace Hardware, Ocean Spray,
    Land O'Lakes, and Congressional Federal Credit Union. In the
    last decade, the number of worker cooperatives have doubled and
    have become a preferred business option for young people,
    women, minorities.
        According to the 2019 Worker Cooperative Economic Census,
    50 percent of owners of worker co-ops are Latino and African
    American, and women make up 60 percent of the workforce.
    Additionally, over 160 food cooperatives have opened during
    this time, creating over 4,200 jobs. Last year, startup food
    cooperatives have opened in Colorado, Nebraska, Virginia, Ohio,
    Pennsylvania, and New York. All this progress has occurred
    without the SBA's assistance.
        The SBA has amended its outdated eligibility regulations to
    include cooperatives, but continues to block these businesses
    from accessing its programs with its own federal version of a
    catch-22. Now technically eligible, co-op businesses must meet
    the agency's personal guarantee requirement, which states that
    any owner of 20 percent of the business must sign a personal
    guarantee for a loan.
        Due to its unique business structure, a co-op is just not
    able to meet the check-the-box personal guarantee requirement
    the SBA requires. For example, if a custodial worker
    cooperative in New York City is owned equally by 10 women,
    which owner of one-tenth of the business signs the personal
    guarantee? If a food cooperative has 5,000 Member owners, which
    customer signs over their house to cover the other 4,999
    customers?
        A cooperative borrower does have skin in the game. They
    raise money through Member shares and Member loans that should
    secure financial and equity obligations that lenders require.
        In 2018, Congress attempted to level the playing field for
    cooperatives by passing the main street Employee Ownership Act,
    championed by Chairwoman Velazquez and Senator Gillibrand. We
    were greatly disappointed to learn the SBA did not provide
    practical alternatives for loans, as required by law.
    Essentially, the SBA ignored congressional direction and the
    needs of business owners and consumers.
        My employer, the National Cooperative Bank, has provided
    loans of more than $2 billion to cooperatives and independent
    retailers, including over $77 million to food cooperatives. Per
    our loan policies, we do not require a personal guarantee for
    consumer and worker cooperative loans.
        Along with the private sector, there is federal precedent
    for not requiring personal guarantees to cooperatives. The
    Department of Agriculture does not require personal guarantees
    for loans to cooperatives, but most startups are in urban
    areas. Ironically, even SBA does not require personal
    guarantees for loans to Employee Stock Ownership Plans, known
    as ESOPs, that have a similar structure as worker cooperatives.
        So why is there a need for a cooperative pilot program? The
    sector caught a break when Congress removed the personal
    guarantee requirement in the CARES Act for all EIDL and PPP
    business loans, thus giving cooperatives access to federal
    funding during the pandemic. Although, this Committee had to
    include specific billing which for cooperative businesses to
    become eligible for the COVID relief programs.
        Using the SBA reported numbers, the National Cooperative
    Business Association estimates that over 2,500 cooperatives
    received COVID-relief loans totaling $1.2 billion in funding
    that saved over 93,000 jobs.
        Chairwoman Velazquez, let me personally thank you and the
    Committee for helping these businesses and workers during one
    of the most difficult times of our country. Please be aware
    that the same co-op businesses that received COVID relief
    funding are still not able to access the SBA's existing loan
    programs.
        Now, especially in Black and Brown communities,
    entrepreneurs are turning to the cooperative model as an
    opportunity to own a business or meet the grocery needs in
    their neighborhoods, many of which are food deserts. In 2015,
    Pastor Reginald Flynn of Flint, Michigan, wanted to start a
    food cooperative due to the grocery chain closures in his
    community. Pastor Flynn was unable to obtain financial support
    from the SBA. Six years later, he has raised $7.6 million and
    now has over 900 Member owners. With the help of a $1.25
    million grant from the State of Michigan, the food cooperative
    has finally started to break ground. This is a success----
        Yes, ma'am.
        Chairwoman VELAZQUEZ. Yes. Time expired.
        Mr. CONDRA. Thank you.
        Chairwoman VELAZQUEZ. You could--during the question and
    answer period, you could expand----
        Mr. CONDRA. Thank you.
        Chairwoman VELAZQUEZ.--on the issue that you feel that you
    haven't been able to discuss.
        Ms. Cooper, you are now recognized for 5 minutes.

                       STATEMENT OF TATIA COOPER

        Ms. COOPER. Good morning, Chairman Velazquez, Ranking
    Member Luetkemeyer, and Members of the Committee. Thank you for
    the opportunity to speak today and share Home Care Associates'
    story, and discuss the need to address access to capital
    challenges for cooperative businesses.
        Home Care Associates of Philadelphia is a small business
    that is owned, controlled, and governed by its employees. HCA
    is the only--HCA is, you know, Home Care Associates, and I will
    refer to it as HCA throughout.
        HCA is the only healthcare cooperative in the State of
    Pennsylvania, and it is one of 500 cooperatives in the United
    States. Lack of access to capital, including Small Business
    Administration loan guarantees, is the central reason as to why
    so few of these businesses exist.
        HCA currently employs 124 full-time employees and 12 part-
    time employees. Although these past few years have been
    extremely difficult, we are looking forward to celebrating our
    30th year in business in 2022.
        Around 1990, founders of a larger co-op, as Chairwoman
    Velazquez pointed out, founders of a larger cooperative in the
    Bronx, New York, set out to find money to replicate the model
    elsewhere in the United States. At the time, Philadelphia made
    sense because of its large population of elderly and disabled
    citizens in need of quality care and because of the number of
    individuals living in poverty in need of a quality job.
        HCA's mission is to provide high-quality home care services
    to those who are elderly, chronically ill, or living with
    disabilities, and to provide quality jobs where workers embrace
    opportunities to learn and grow as Members of the healthcare
    team. They contribute greatly to the participatory culture and
    earn competitive wages and benefits, while building a
    profitable worker-owned company.
        The challenge to raise cash to start our business was
    enormous. Like many other cooperatives, cooperative small
    businesses, HCA was not eligible to receive startup support
    from the U.S. Small Business Administration. Fortunately, and
    thanks to others who believed in our model and mission,
    including charitable trust foundations and founders of the
    Paraprofessional Healthcare Institute, HCA was able to secure
    the capital it needed to open its doors in 1992. However, I
    must mention that HCA was very fortunate in that there were
    other attempts to start other co-ops in cities that were not
    successful in raising capital.
        At our 1-year anniversary, HCA established two different
    classes of stock: Class A shares were held by our investors,
    and class B shares were held by our workers. Worker owners
    would buy shares of the company for $500. Most of our owners do
    not have $500 of disposable income, so HCA lends the workers
    the $500, but they share no interest. The shares are then paid
    back with $35 deposit and a payroll deduction of $3 per week.
        Upon making the deposit, each worker has one vote, can
    campaign for a seat on our board of directors, and is eligible
    to receive a financial share when the company is profitable. We
    are proud to share that all class A shares were donated back to
    the workers, making HCA now 100 percent worker owned.
        Raising startup capital, though, was just the first of many
    challenges we faced. Eighty percent of the consumers that HCA
    serves are nursing home or Medicaid eligible, and most of HCA
    workers continue to be eligible for Medicaid.
        Unlike many noncooperative businesses in the industry, HCA
    provides extensive training on both technical and soft skills
    we believe necessary to provide quality care. HCA relies on
    reimbursement from Medicaid to cover costs associated with
    training and employment.
        In our efforts to provide a quality job, HCA remains
    committed to applying 70 percent of its revenue to worker
    salaries and benefits. Although we remain true to this goal,
    many of our workers and families continue to live below federal
    poverty levels. Low reimbursements contributing to low wages
    translates to caregivers who are eligible for Medicaid. This
    reality is not unique to Home Care Associates--home care
    cooperative. PHI reports that one in every six home care
    workers in the United States lives in poverty.
        Since the onset of the global COVID-19 pandemic, our
    resources are quickly depleting. The expense of additional PPE
    to protect our workers to remain compliant fell squarely on the
    business. Fortunately, HCA did qualify for the first round of
    the Paycheck Protection Program to support sustaining jobs and
    salaries, but did not qualify for round two because we could
    not include increased operational expenses that contributed to
    our increased losses.
        Although we have a strict PPE policy, many of our workers
    missed work, left work due to lack of access to childcare, or
    because they or someone in their family became sick with COVID-
    19.
        The strain on our bottom line continues to be felt and we
    continue to struggle now to hire new workers as overtime has
    increased and the expense related to that increases.
        Currently, HCA is struggling to find alternative sources of
    capital to support our efforts to sustain our business. Since
    early 2020, we have seen a decrease in employees willing to
    purchase shares to become worker owners. We are struggling to
    find ways to pay a living wage without sacrificing training and
    benefits, and we lack the financial support needed to widen our
    scope of services.
        Like many in our industry, supply cannot meet the demand
    for service.
        Chairwoman VELAZQUEZ. Ms. Cooper?
        Ms. COOPER. If we are to increase volume so that we may
    remain self-sufficient and continue to provide quality care, we
    must secure the capital needed to expand our scope of service,
    pay a living wage, provide training, and increase----
        Chairwoman VELAZQUEZ. Ms. Cooper, time has expired. During
    the question and answer period you will have time to revisit
    any issue you that you haven't discussed. Thank you so much.
        And now, Mr. Shorman, you are recognized for 5 minutes.

                       STATEMENT OF GARY SHORMAN

        Mr. SHORMAN. Thank you, Chairwoman Velazquez, Ranking
    Member Luetkemeyer, and Members of the Committee. Wish I could
    be there in person.
        I am Gary Shorman, Chairman of the Eagle Communications. We
    are a 100 percent employee-owned company doing business in
    Kansas, Nebraska, and Missouri, where we own and operate 31
    local radio stations in local and small communities. In
    addition, Eagle has created digital and online learning
    divisions where we assist our local businesses.
        I am also here representing The ESOP Association, a
    nationwide nonprofit representing over 3,000 ESOP companies and
    professionals.
        I would like to state something right up front. ESOPs and
    employee ownership is not an experiment. They are proven, they
    are successful, and they are here to stay. It is time for the
    various agencies of the U.S. Government, including the Small
    Business Administration, to recognize this, and to treat ESOPs
    and employee-owned businesses as the successful, mature
    businesses that they are.
        According to the most recent figures submitted to the U.S.
    Department of Labor, approximately 8.6 percent of the entire
    U.S. workforce has some ownership in an ESOP. That is more than
    14 million American households.
        In just a 10-year period of time, from 2008 to 2018, the
    Department of Labor reports that more than $1 trillion in
    retirement benefits have been paid to ESOP beneficiaries. Let
    me stay that again. More than $1 trillion.
        In my written testimony, I have listed research showing the
    power of ESOPs, not only during the Great Recession, but also
    during the pandemic. ESOPs rebound much faster following
    economic downturns, and our company is a great example of that.
        Despite of all the strengths, there remain far too many
    unnecessary obstacles for ESOP formation. To begin addressing
    those obstacles, Congress passed the main street Employee
    Ownership Act. I would like to speak to the two main goals of
    that legislation: access to capital through the Small Business
    Administration's 7(a) lending program and a desperate need for
    awareness initiatives.
        During the pandemic, more than 70 percent of all ESOPs were
    successfully awarded Paycheck Protection Program loans through
    the SBA. That PPP program was administered through the SBA's
    7(a) loan program and utilized the delegated lending authority
    program such that local SBA lenders could approve these time-
    sensitive loans.
        However, in the first few days of the program, there was
    some initial confusion because despite the clear intent of
    Congress and the main street Act, the SBA does not allow loans
    to ESOP companies to be approved through delegated lending
    authority, instead requiring ESOP loans to be approved by staff
    in Washington. Fortunately, clarification was quickly given and
    ESOP PPP loans were allowed to be evaluated and granted by a
    local lender, just like every other PPP loan, as Congress
    intended.
        We were one of those PPP beneficiaries. And it was a local
    familiarity that our lender had with our business that made it
    a streamlined and efficient process. Yet even though our local
    lender clear knows and understands our business and has
    evaluated and given us a PPP loan, if we were to apply for an
    SBA loan today, they could not approve it and would be required
    to forward our loan application to Washington where it might
    languish for weeks or even months.
        To address these issues, the SBA must streamline lending
    for ESOPs. It is as intended by the main street Employee
    Ownership Act. We ask that the SBA be unambiguously directed to
    include ESOP loans in the preferred lending program. The
    experience of PPP program clearly demonstrates that local SBA
    approved lenders are fully capable of evaluating responsibly
    and lending to companies like ours.
        In addition to lending, the programs--the main street Act
    also sought to significantly increase awareness within the
    privately held business community about ESOPs. Within the Act,
    the SBA was tasked with promoting awareness of ESOPs and
    employee ownership. Business owners must know the ESOP option
    exists and must be able to attain useful unbiased information.
    And to that end, be directed to have a centralized and specific
    office, such as the Office of Small Business Development
    Centers, with active public education and information effort
    about ESOPs. Further, we ask that the SBA undertake specific
    ESOP relegated educational training for regional SBA staff. We
    have been recently encouraged by public statements and support
    for employee ownership as articulated by SBA Administrator
    Guzman.
        As you know, one of the biggest economic challenges ahead
    is the looming retirement of baby boomers, who own nearly 2.5
    million businesses. It is known as the ``Silver Tsunami,'' and
    this will be the largest transfer of business ownership over
    the shortest period of time in our nation's history. Many of
    those businesses have no succession plan. So time is of the
    awareness to raise all of the important issues regarding ESOPs
    for business owners.
        And, finally, while I recognize this is outside the
    jurisdiction of this Committee, I would be remiss if I did not
    speak about what many of us in the ESOP community view as the
    biggest obstacle to the formation and expansion of ESOPs: it is
    the chilling effect of the U.S. Department of Labor. And I
    would recognize and would like to have a question on that later
    today.
        I appreciate the time you have given me today to share any
    testimony, and look forward to your questions.
        Ms. HOULAHAN. [Presiding.] Thank you, Mr. Shorman.
        Ms. Frazier, you are now recognized for 5 minutes.

                       STATEMENT OF ALICE FRAZIER

        Ms. FRAZIER. Good morning, Chairwoman Velazquez, Ranking
    Member Luetkemeyer, and Members of the Committee. I am Alice P.
    Frazier, president and CEO of Bank of Charles Town, a community
    bank serving markets in West Virginia, Maryland, and Virginia.
    Today, I testify on behalf of the Independent Community Bankers
    of America, where I am Chair of the Policy Development
    Committee and a Member of the Board of Directors. And I thank
    you for the opportunity to testify.
        Employee-owned and cooperative firms are important
    ownership models that deserve our support as lenders, business
    advisers, and policymakers. My bank currently lends to two co-
    op borrowers. Access to capital is critical to the success of
    small businesses of all ownership types. And in this regard, I
    will discuss the importance of preserving community bank SBA
    lending, which comes at zero cost to the taxpayer.
        An experiment in SBA direct lending in which the agency has
    a poor track record would jeopardize access to the capital for
    small businesses. Community banks provide practical, real world
    business counseling, and networking opportunities, particularly
    for startups, in a way that can never be matched by SBA. We
    must not be sidelined in the critical task of creating access
    to capital. We are committed to working with this Committee and
    the SBA to ensure the 7(a) program is reaching the smallest
    borrowers.
        Community banks account for 66 percent of 7(a) loans over
    the past 10 years. And my bank has been a SBA lender for over
    40 years. The median loan size in our SBA portfolio is just
    under $100,000. We recently hired three highly experienced SBA
    lenders to place more of an emphasis on this product. The
    community bank-small business partnership goes well beyond a
    loan.
        My bank is currently work with an African-American
    entrepreneur who has corporate experience but no experience in
    setting up a company. He lacks contacts with accountants and
    lawyers and other professionals that specialize in startups.
    And, unfortunately, as he has told me, African-American
    entrepreneurs are often disadvantaged in this sense. Mentorship
    is especially needed in minority business communities.
        As we talked about his business plan, he asked for these
    connections, and we were happy to provide. We spent time
    walking him through different types of loans, eventually
    settling on a 7(a) line of credit, which we expect to grow
    quickly as his business ramps up.
        The loan is really just one feature of a much broader
    partnership. Our experience in working with other small
    businesses gives us a unique ability to provide insights and
    counseling. I provide other examples of our small business
    relationships in my written statement.
        Informed guidance, education, and borrower confidence
    building is our core value preposition. We stand by our
    partners and continue to provide guidance as the business grows
    and new opportunities arise or as they encounter setbacks and
    challenges.
        I do not believe that the SBA direct lending could offer
    any remote substitute for a long-term relationship with a
    community bank. Employee ownership and cooperative ownership
    are models that make sense for many firms. Community banks
    support these firms, bringing the same commitment that they
    bring to any small business relationship. And I discuss my
    cooperative lending in my written statement.
        We are willing to discuss alternative solutions to better
    accommodate co-ops and employee-owned firms. However, we
    caution against a broad waiver of guarantee requirement on all
    7(a) loans.
        SBA lending is not--direct lending is not the answer to
    capital access for small businesses of any ownership model.
    This experiment has been tried and failed, resulting in subsidy
    rates of 10 to 15 times higher than in loan guarantee programs,
    as noted in a recent Congressional Research Service report.
    What is more, as a locally based lender, we are able to root
    out fraud to which direct lending would surely be vulnerable.
        I urge this Committee to reconsider the direct lending
    provisions included in the Build Back Better Act.
        I thank you again for this opportunity to offer my
    perspective, and I am happy to answer any questions you may
    have.
        Ms. HOULAHAN. Thank you, Ms. Frazier.
        And thank you to all of our witnesses for being here today.
        I will begin by recognizing myself for 5 minutes.
        In June of this year, I formed the Stakeholder Capitalism
    Caucus with Representative Dean Phillips, who also sits here
    with me on the House Small Business Committee and who also
    shares an entrepreneurial background. We created the
    Stakeholder Capitalism Caucus in the wake of COVID-19's
    pandemic to engage Congress and business leaders on ways to
    reimagine the role of corporations to equitably benefit
    stakeholders and to lead to a more sustainable and prosperous
    economy.
        With their unique business structures, ESOPs and
    cooperatives have demonstrated that employee-owned business
    models can produce higher wages and can promote job
    preservation for their workers during periods of economic
    distress, as well as invest more in their local communities
    than conventionally owned businesses can. While conventionally
    owned businesses may have outside stakeholders, the
    stakeholders of employee-owned businesses are, in fact, the
    workers themselves.
        I would like to know if any of the panelists can address
    the ways in which your business models lend themselves to more
    equitable and sustainable conditions for your workers, as well
    as invest in your respective local communities in line with the
    ideal of stakeholder capitalism. And if it is okay, I would
    like to start with Mr. Shorman on that.
        Mr. SHORMAN. I like that question. And, frankly, good to
    see you again.
        When you take a look at what we do in our local
    communities, how important it is to have that connectivity in
    local communities, that is what we do with our radio stations,
    that is what we do with our businesses, is help them grow. And
    so when you ask that of being able to talk about that, over the
    last pandemic, that one that comes to mind, our ESOP, we did
    not layoff anyone, we did not furlough anyone. We kept everyone
    engaged. ESOP fought the same battles with everyone in dealing
    with the pandemic and being able to keep people at work and
    move them to the right place.
        But the employee-ownership model adds a powerful advantage
    to local community business because it keeps things local. It
    keeps that business local. It keeps those who are the employee
    owners right in the middle of working to grow and working
    together to win for that company. And we have seen that in
    results of--not only of working our way out of the pandemic,
    but working during the pandemic of not having to do any layoffs
    or furloughs.
        Thank you for that question.
        Ms. HOULAHAN. You are welcome.
        Ms. Cooper, would you have anything to contribute as well
    to that question? And hello to Philly.
        Ms. COOPER. Hello. You know, I want to make sure I
    understood. It was a two-part question, correct, in that you
    asked about the contributions to the community, but also how we
    have kind of hung in there? Is that correct?
        Ms. HOULAHAN. No. I am largely asking kind of what are the
    benefits, do you perceive, of co-ops and ESOPs to making sure
    that you are not only helping your shareholders, and in many
    cases co-ops and ESOPs the shareholders are the people, but
    also the community at large, potentially the environment,
    investors, all those kinds of things as well.
        Ms. COOPER. Well, for us, I mean, clearly, we are a home
    care business, so we are serving residents of the Philadelphia
    area every day by providing direct care.
        The one thing I wanted to say, which answers the question
    as we were wrapping up, is that, during this pandemic, with all
    of the challenges that we face in this industry, the advantage
    that we have as a cooperative is that, you know, our worker
    owners are not only committed to quality, but they are
    committed to their consumers. They are here because they want
    to be.
        We know that worker owners stay longer, they work harder,
    they are far more committed to their consumers, decreasing the
    revolving door of direct care workers going in and out,
    ensuring that their consumers are safe, and making sure that
    they understand that they are representing the company, that
    they are going to benefit from both financially and in terms of
    having say in the direction of the company.
        So we feel, as a cooperative, that that is our advantage in
    this industry, that because our workers are owners, they are
    more likely to stay, more likely to deliver quality care, more
    likely to contribute positively to the community by way of
    reducing hospital readmittances, accidents, incidents, and
    preventing illnesses.
        Ms. HOULAHAN. Thank you, Ms. Cooper.
        And, lastly, for Mr. Shorman again, what can we be doing
    more to promote businesses to transition to employee ownership?
    Many of you talked about the Silver Tsunami. Many people are
    trying to figure out what their transition, you know, exit
    strategies look like in this economy, because people are aging
    out of it, amongst other reasons. What can we be doing to
    improve the ideals of ESOPs and co-ops in the common
    vernacular?
        Mr. SHORMAN. Well, this Committee is doing great work. We
    see that every day because we are on the streets working with--
    --
        Ms. HOULAHAN. I am afraid that I need to stop you, sir,
    because I ran out of time, and I need to go ahead and yield. My
    time has now expired.
        The Ranking Member, Mr. Luetkemeyer, is now recognized for
    5 minutes.
        Mr. LUETKEMEYER. Thank you, Madam Chair.
        Ms. Frazier, thank you for joining us again today. And I
    want to start with you. Appreciate your testimony today. Like
    you, I am very concerned about the recent trends in SBA toward
    direct lending. You know, we are currently witnessing the
    devastation of direct lending through SBA's Economic Injury
    Disaster Loan program. And according to SBA's own inspector
    general, the program has a potential fraud rate of nearly 30
    percent. Unbelievable.
        And you rightly point out in your testimony, both in your
    written and verbal testimony, about the Congressional Research
    Service report that indicated that SBA, in the late nineties,
    stopped issuing direct business loans because the subsidy rate
    was 10 to 15 times higher than the subsidy rate for its loan
    guarantee program, which means that it was losing 10 to 15
    times more money in direct lending than it was the loan
    guarantee program, which means it has no idea what it is doing
    when it comes to direct lending.
        Your comment in there talks about--you are pointing to an
    example of where the bank actually caught somebody with an EIDL
    loan, a fraud attempt and caught them. So I would just
    appreciate you expanding on that a little bit more. This is a
    really, really big concern to me whenever we see that they are
    trying to actually propose more direct lending programs and
    empower the SBA even more whenever they can't handle what they
    have got right now.
        Ms. FRAZIER. Thank you for that question. I am happy to
    expand on that.
        I might begin with as a new banker, anyone that joins, the
    first thing they train you in preventing a bank robbery is look
    someone in the eye. And so there is a big value to that when
    you are getting ready to lend someone money. And if you are
    applying for a loan through a portal or through an opportunity
    where you really don't have to look anyone in the eye, the
    fraud is opportunity.
        So to be able to visit a bank--or visit a business and talk
    and speak with the owners of the business, understand their
    dream and what they are doing, and really be able to evaluate
    how effective they are, helps evaluate the opportunity for the
    loan to be used well, successful, and in play.
        So I think recently what we did experience, we had read
    about the fraud alert the SBA had issued on their website
    related to EIDL loans where they had distributed the money, and
    typically a borrower would come in and ask for all of the money
    in cash. We shared that with our branch managers. And one of
    them happened to have an instance where someone had come in and
    opened an account about 60 days prior, and had not really had
    any transactions in the account, very little for which would
    have been deemed a business account by far; had gotten two EIDL
    loan deposits 2 days apart and within 4 days came in wanting to
    take out what was equal to $20,000 out of the bank in cash.
        Now, of course, we had shared that information. Our branch
    manager rightly so had reached out to operations. Ultimately,
    we returned that money because it was deemed not appropriate at
    that time. So the fraud is there, and so I liken it back to
    being able to look at folks.
        Mr. LUETKEMEYER. As we have gone through this problem, the
    inspector general has pointed it out--the SBA's own inspector
    general has pointed it out, and indicates to us that he is
    trying to put in place some changes to the program to make it
    work better. SBA acknowledges that they are trying to put some
    things in place. But in the next breath, inspector general sits
    there and says, well, yeah, they are in--the changes are in
    place, but the employees don't follow the procedures. The
    employees don't follow the recommended changes. And as a
    result, the same things happen.
        Have you experienced that, that they ignore the processes?
    Maybe you are not even going to be aware of the changes SBA has
    to go through to make this work, but just a comment from you.
        Ms. FRAZIER. You know, I am not sure I could really speak
    effectively directly on that because I am not aware of the
    changes or how they operate internally.
        Mr. LUETKEMEYER. That is interesting. And, to me, the
    template for how this can actually work is the PPP program
    standpoint to the banks who have a know-your-customer law in
    place; and, actually, as you said, have to look the customer in
    the eye, make sure that those folks are who they say they are,
    and that they are a real business, a real person; their address
    and phone numbers, their signatures and Social Security number,
    all that matches up. Where when you do this virtually, there is
    a lot of this that doesn't take place.
        So, to me, I would like for you to just elaborate just a
    little bit in my last 20 seconds here.
        Ms. FRAZIER. You know, even through the PPP process or loan
    requests we received through our online portal, we would take
    the time to either visit their place of business, make sure we
    reached out and contacted them; had ways to validate it beyond
    just a complete virtual experience. And I think that puts us at
    a lot of risk if everything is virtual.
        Mr. LUETKEMEYER. I appreciate your comments this morning.
    And I think that we actually have a template in place which
    shows how we can fix the problems at SBA. We just have to make
    sure we do it right.
        Thank you very much for your testimony.
        Ms. HOULAHAN. The gentleman's time has expired. And the
    gentleman yields back.
        The gentleman, Representative Dean Phillips, Chairman of
    the Subcommittee on Oversight, Investigations, and Regulations,
    is now recognized for 5 minutes.
        Mr. PHILLIPS. Thank you, Madam Chair. And greetings to our
    witnesses and colleagues.
        My great-grandfather Jay Phillips started as a newspaper
    boy in Manitowoc, Wisconsin, in 1912, and created a business
    that became very successful over many years. He used to tell me
    that owners act differently than employees. They reuse paper
    clips and they turn off the lights when they leave the office.
    And he believed that business was a means to an end, and the
    end wasn't accumulating as much capital and wealth as possible,
    rather sharing as much as possible.
        And in 1941, he created the Phillips bonus and profit
    sharing plan, a copy of which I have here in my hand. And he
    wrote in it: Unfortunately, the great majority of the people in
    this country never achieve the degree of financial independence
    which permits them to live out their lives without help from
    others. I believed, and still do, that the time to help people
    solve this problem is during the prime of their life and not
    when they become objects of charity.
        When he introduced this plan in 1941, the top 1 percent of
    Americans controlled about 30 percent of wealth in America.
    Eighty years later, that number is 40 percent and growing.
        I think we can all agree, Democrats and Republicans, that
    ownership is the best example, broad ownership in capitalism.
    We do not need a revolution in capitalism, rather evolution.
    And in my estimation, that is employee stock ownership
    programs.
        So my question, starting with you, Ms. Cooper, is, you
    know, why are there not more ESOPs in America? And what can we
    here in Congress do to incentivize and encourage and promote
    and, hopefully, see national benefits from employees owning
    more businesses in America?
        Ms. COOPER. I don't know if I can answer why there aren't
    more in the country. But I can tell you that, you know, in
    Philadelphia, in Pennsylvania, we work to--the same way
    Cooperative Home Care Associates supported us in replicating
    that model, we are supporting others in replicating the model,
    and trying to in healthcare, you know, really make the
    connection between ownership and quality of care. We know that
    in this country we are having an issue with delivering care.
        You know, we talk about the Silver Tsunami and the number
    of people that, you know, are still living independently but
    may need some assistance and are beginning to need some
    assistance, and how there aren't just enough people out there.
    One of the things that we worry about the most in this industry
    is fraud and abuse and neglect.
        Well, we know that when someone is an owner, they take a
    lot of pride in the level of care that they are delivering. And
    they take the work, you know, very seriously. They understand
    how important it is to make sure quality is delivered and to
    protect those from fraud, neglect, and abuse. And this is
    something that all of our workers have in common and they buy
    into. And I think it is necessary in order to create
    opportunities for quality care, continuity of care, and to
    protect our seniors, and people living with disabilities.
        In healthcare, to me, it makes sense that a cooperative or
    a worker-owned model contributes to solving the problem in
    numerous ways, not just in, you know, the delivery of quality
    care and the--what ownership means as they are delivering
    quality care, but also in the ability to participate in a
    culture where you then contribute to the direction of the
    company and can talk about what it means to have a quality job
    and how those two are connected.
        So for us it is about not only----
        Mr. PHILLIPS. Ms. Cooper, in the spirit of allowing a
    couple of others to speak too, if I might just move to Mr.
    Condra for comments on what we might do here in Congress to
    promote employee ownership across the nation.
        Mr. CONDRA. Thank you. The number one issue is access to
    capital. If you go to a conference, if you talk to cooperative
    developers, it is need to access to capital.
        The USDA has the business and industry program that does
    not require this personal guarantee blockage for cooperatives.
    If they were able to make loans to businesses outside of rural
    areas and urban areas, we wouldn't be here today. But,
    unfortunately, they can only make loans to rural areas, and the
    SBA continues to block access to capital to cooperatives. And
    the fact is, for banks to do startups, we need credit
    enhancements. We need the 7(a) guarantee type of guarantee to
    continue to grow these businesses.
        Mr. PHILLIPS. I appreciate it. I just have 10 seconds left.
    Just to inspire my colleagues on both sides of the aisle, to
    pursue what should be very unifying, which is to expand
    ownership in the United States as we try to inspire compassion
    to capitalism.
        With that, Madam Chair, I yield back.
        Ms. HOULAHAN. Thank you. The gentleman yields back.
        The gentleman, Representative Roger Williams, the Vice
    Ranking Member of the Committee, is now recognized for 5
    minutes.
        Mr. WILLIAMS. Thank you, Madam Chair. And I want to thank
    all the witnesses for joining us today.
        And in full disclosure, I am a small business owner myself
    for 51 years, and I haven't had a day in my life in 51 years I
    haven't owed a community bank money. And they are very
    important to me. And I want to also say to the bankers,
    congratulations on the way you handled the PPP. It was well
    done.
        In the last year and a half, we have observed how community
    financial institutions are better equipped to handle small
    business lending than the federal government. In the early days
    of the pandemic, the private sector was deputized to help
    deliver business serving loans quickly to American small
    businesses through the Paycheck Protection Program. They were a
    leading force, and successfully executed one of the most
    successful emergency lending programs in country's history. And
    on the contrary, the SBA's rollout of the Shuttered Venues
    Operation Grant program, or SVOG, took over 7 months before
    they delivered their first dollars, and was inefficient and
    lacked transparency.
        So, nonetheless, Democrats are still proposing a direct
    lending option under the SBA's 7(a) loan program that will cut
    off the private sector financial institution's role. And they
    are the ones who give service. And to meet the immediate needs
    of our community small businesses, we need to get the private
    sector more involved, not less.
        So, Ms. Frazier, can you speak more on how cutting the
    private sector's lending role from the 7(a) loan program, like
    Democrats have proposed, would have affected community banks
    and small businesses alike?
        Ms. FRAZIER. Thank you for that question. You know,
    business lending is just not as simple as it is with consumer
    lending. There is a lot of nuances to business lending that you
    have to take in consideration. It is, what is the business
    model? How is the financial reporting? What is the leader like?
    Are they going to be successful? Do they have a plan that can
    work, a location, et cetera? All of these things play in the
    factor of making a decision on a loan, not just completing an
    application and submitting financial information. And,
    oftentimes, the financial information, you need to talk with
    the business owner to understand what is there.
        So without that sort of relationship building and
    understanding that goes on in a community bank with the small
    businesses, I am concerned that the direct lending would really
    not be as effective as it could be for that. And with the story
    that I shared, oftentimes the small businesses, the
    entrepreneurs, they don't understand the different types of
    loans that they can use to help their business grow or the
    purpose of them. And direct lending might limit that
    opportunity or probably will limit that opportunity overall.
        Mr. WILLIAMS. A relationship with your banker is much
    better than a relationship with the government.
        Ms. FRAZIER. Most would say yes.
        Mr. WILLIAMS. Community banks are an integral part of main
    street America. They provide access to capital, financial
    services--as I said, they have me for 51 years--with
    personalized relationships to the small business they serve.
    The government must not impose excessive regulations on banks
    that will make them less competitive and less struggling to
    compete with larger financial institutions.
        Small businesses depend on community banks for their
    knowledge around the needs of local communities, and this
    direct relationship better positions community and regional
    banks to assist small business an reinvest local dollars back
    into the communities they are a part of to create more jobs.
        So, Ms. Frazier, how are small businesses affected when a
    local community banks closes? And how can Congress ensure that
    community financial institutions can remain competitive against
    their larger, multinational counterparts?
        Ms. FRAZIER. Thank you for recognizing how communities are
    affected when community banks are closed or are faced with
    challenges that prevent them from staying independent and
    involved in the community. Oftentimes, what exits first is the
    community dollars that are vested in the local nonprofits, the
    different civic organizations, et cetera, that really need the
    involvement of the community banks overall.
        But then talk about the small businesses, those
    relationships that we build, we invest in, we help. The
    businesses network with each other because we know we have the
    conversations with each, and we know what someone is looking
    for and who can help solve that problem for them.
        So I believe what you can do is continue to keep us
    involved in programs like the SBA, collaborate with us so that
    we can make those guidelines easier for people to access the
    capital that is needed to continue to grow.
        Mr. WILLIAMS. Community banks now know firsthand the
    importance of main street America having access to capital. So
    I have got a little time here. Let me just go right to the
    question, Ms. Frazier. Small businesses continue recovering
    from the COVID-19 pandemic. Can you tell me, and quickly, in
    your opinion, what the impact of higher taxes and new costly
    compliance regulations would be on both small business and the
    banks?
        Ms. FRAZIER. Right now, what we see is our small businesses
    continue to struggle to find employees, to be able to make
    additional revenues and profits. So if we added additional
    taxes, I think it would be very harmful.
        Mr. WILLIAMS. Cutting taxes is always good.
        Ms. FRAZIER. For business, yes.
        Mr. WILLIAMS. Thank you for your testimony.
        Ms. HOULAHAN. The gentleman's time has expired.
        The gentlewoman, Representative Sharice Davids, Chairwoman
    of the Subcommittee on Economic Growth, and Tax, and Capital
    Access, is now recognized for 5 minutes.
        Ms. DAVIDS. Thank you, Chairwoman. And thanks to our
    witnesses for joining us here today. I am really glad that we
    are getting the chance to hold this hearing.
        You know, employee-owned businesses certainly have an
    impressive track record of higher employee retention, pay, and
    have definitely proven to be more resilient during economic
    downturns. So, you know, I think that this conversation is
    important.
        You know, as these companies still might struggle with
    access to capital, even with the SBA programs, I think it is
    important for us to constantly evaluate how we can be helpful.
    You know, and that is why I supported--I have supported
    legislation like the promotion and expansion of private
    employee ownership. We have to do a better job with our
    marketing here--Promotion and Expansion of Private Employee
    Ownership Act.
        You know, I think bills like this, you know, we are talking
    about expanding tax incentives, federal assistance for ESOPs to
    encourage small businesses to use this business model.
        And, you know, I was also glad that we got the chance to
    put out from this Committee our portion of the Build Back
    Better Act, which would include $500 million for a pilot
    program for cooperatives and ESOPs to receive SBA loans without
    a personal or entity guarantee.
        And, you know, I am proud to support this kind of
    legislation, because this is the stuff that benefits stability
    for companies and provides their employees and customers--
    employee owners and customers during critical times. You know,
    we are in some, like, very uncertain economic times.
        And, with that, I definitely want to make sure that I talk
    to Mr. Shorman, a fellow Kansan here. Thanks for joining us. I
    was hoping to hear you talk a little bit about employee-owned
    businesses, specifically, you know, how ESOPs and such have
    been more resilient during the economic downturn. And then, you
    know, maybe how the resiliency maybe correlates with higher
    retirement savings and that sort of thing.
        Mr. SHORMAN. Well, first off, I look forward to meeting you
    in person, Representative Davids, sometime when we are in
    Kansas City to be able to meet up and do that.
        But our company, we started in 1998 with our ESOP, and you
    have seen the growth of wealth for our employee owners. We had
    that with a recent transaction. We saw that, how that paid off
    for employee owners as they built the company, and that is the
    story.
        And I grew up on a family farm, and you worked together to
    build something so at the end of the day, everybody has, I
    guess, a part of the pie and the ability to really focus on
    what they want to do. We have seen that in our business.
        As far as being able to figure out how to make it easy for
    companies to do ESOPs, that is a challenge, because you can set
    up a 401(k), and you have clear rules for making that happen,
    but an ESOP is more complicated than that. And what this
    Committee is doing to kind of simplify that, looking for ways
    to find easier access, looking to your community bank to make
    that happen, and secondly, being able to get clear regulatory
    guidance, and that is one of the biggest challenges. The DOL
    has perpetuated an absence of formal regulatory guidance. And
    so being able to have clear guidance would allow companies to
    jump in and be able to share that model.
        Because in local communities, owners, and we see them every
    day, owners that are running these smaller businesses don't
    have a big team of executives that can go to D.C. and do that,
    but they do have a team of people who can work with the local
    bank to grow that business. And being able to keep that
    business local versus selling to another big corporation or
    something like that is so very important, especially in Kansas.
    And we have so many of those local business owners that want to
    transition to something else. We would just like it to be an
    ESOP.
        Ms. DAVIDS. Yeah. I appreciate that. And, definitely, I
    will continue to figure out ways to be supportive from the
    Small Business Committee, and would be open to further
    conversations about how we might work with the Department of
    Labor, you know, to clarify some regulatory--the guidelines.
        Mr. SHORMAN. We would appreciate that. Thank you.
        Ms. DAVIDS. I appreciate all of you taking the time to join
    us, and I yield back.
        Chairwoman VELAZQUEZ. [Presiding.] The gentlelady yields
    back.
        Now we recognize the gentleman from Minnesota, Mr.
    Hagedorn, Ranking Member of the Subcommittee on Underserved,
    Agricultural, and Rural Business Development, for 5 minutes.
        Mr. HAGEDORN. Thank you, Madam Chair. Thank you. I
    appreciate the opportunity. It is nice of you to hold this
    hearing.
        And I am somebody who has been a pretty strong supporter of
    employee-owned businesses and co-ops. Visited many across our
    district, talked to a lot of employees who seem to appreciate
    the opportunity to kind of build their own future, you know,
    grow their own retirement, have some control of it, feel like
    they are part of it. And it is amazing, the millions and
    millions of Americans who are in the workforce that are
    participating. So it is, I think, a big success and something
    we should continue to see what we can do to foster and
    certainly not put any impediments in there.
        I would ask Mr. Shorman; you seem to be a strong advocate.
    Perhaps you could just let everyone know a little bit more
    about why it is such an opportunity for not just business
    owners to convert this way but for the employees.
        Mr. SHORMAN. If you look at it--and thank you. You look at
    it from an employee standpoint. You can work for a company your
    entire career, and at the end of your career maybe have some
    sort of 401(k) or maybe a government retirement. You work for
    an employee-owned company, and we have seen that happen where
    the employees have worked for a company 20 years, and they end
    up retiring, but they have a nest egg that they are able to do
    things that they want to do. You can't do that in a regular
    company. But as an employee owner, you participate day in, day
    out in the growth and success of the company, and we see that
    in the success, and that also means that success stays in the
    local community.
        And our company is based locally. We have to have strong
    local businesses. So to see them being able to transition into
    an ESOP and take their company, keep it local and share that
    ownership, that is a powerful way to do business, especially in
    small markets, small communities across our country.
        Mr. HAGEDORN. It is just an excellent option. Obviously,
    nobody has to do it. People buy into it, and the employees,
    like I said, that I have spoken with have been very, very
    pleased.
        So I think this Committee is very, very fortunate to have
    somebody like our Ranking Member, Mr. Luetkemeyer, who has a
    background in community banking, and he brings up some very
    good points. I mean, if we are--if the SBA wants to take some
    of these things over and expand their portfolio, boy, there has
    been some problems there, a lot of waste, fraud and abuse, as
    he said. We don't need any more of that, and we need a little
    bit more customer service.
        I think Congressman Williams hit it right. Who is going to
    be there for the customer more than the community bank or the
    people in the community, invested in the community, who already
    have them as customers, or a big government bureaucracy or a
    big corporate bureaucracy? I am one Republican certainly never
    stands up and advocates for the big banks. I think the
    community banks have been hit hard.
        What do you think? Don't you think you are in a much better
    position to deliver those services maybe than others and do it
    in a way that is going to protect the taxpayers?
        Ms. FRAZIER. Thank you. I completely agree with what you
    say. We live in the communities we serve. We see our business
    leaders at church. We see them in the grocery stores. We see
    them out shopping, at the soccer games, et cetera, so we are
    involved in the community with them side by side. It is just
    not a faceless application. It is just not a faceless business.
    We know when their businesses are thriving and we know when
    they are struggling, and we do what we can to help. So I think
    community banks are the partners and really what help make
    communities thrive.
        Mr. HAGEDORN. Thank you. Now, the majority wants to take a
    bunch of money that is created by capitalism--and I would say
    capitalism is always compassionate, because without producing
    wealth, you have no wealth in order to help people. So--and
    they want take a bunch of money and say, look, we are going to
    help you here. What they fail to talk about is how the other
    part of their bill is going to raise taxes and how their other
    agenda is going to increase regulations and how part of both
    agendas, both in this bill and across the board, is going to
    drive up the cost of energy needlessly and make it less
    reliable.
        And, lastly, who knows about trade? We haven't seen much
    from the administration on that. And then fiscal policy, we see
    what is going on with inflation. It is just going to be spurred
    more.
        You know, those things, those good government or bad
    government policies are way more important than government
    handing out money in order to have capital in this case. You
    can destroy businesses. You can give them all the money in the
    world, but if you are going to have policies that will destroy
    them, what difference does it make?
        And I think a lot of businesses across our country need to
    reflect on this, and a lot of employees, that we are in a
    crossroads. And a lot of these policies that are coming out of
    Washington on the other side stand to destroy them and put them
    out of business forever, businesses that have been around for
    generations.
        So while I appreciate the need for capital, and we will do
    what we can in order to help people, I do not appreciate the
    philosophy and the policies of the Democrat Party overall on
    this bill.
        Thank you.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Now I recognize myself for 5 minutes.
        Mr. Condra, the USDA Business and Industry Loan Program
    does not require a personal guarantee from cooperatives.
    Instead, USDA requires co-op Members to sign a covenant to
    withhold profit distribution until the agency loan is paid in
    full. Could this work for the SBA loans to co-ops in place of a
    personal guarantee?
        Mr. CONDRA. This could--this could work. This could work.
    And, also, if we sat in a room, we could think of all kinds of
    alternative ideas that the main street Act encourages SBA to
    do.
        Chairwoman VELAZQUEZ. Thank you.
        Ms. Frazier, the number of 7(a) loans made under $150,000
    decreased by 44 percent over the past decade. The decline is
    even more troubling for 7(a) loans below $50,000, which
    decreased by 59 percent over the last 5 years. The average 7(a)
    loan size has also more than doubled in that time. In fiscal
    year 2012, it was just over $340,000. As of September 2017, the
    average loan size this fiscal year is over $687,000.
        Many people will say smaller loans, those under $150,000,
    are not profitable, so traditional lenders are not making those
    loans. So what do you say to small businesses who are seeking
    loans of under $150,000? What do you say to them?
        Ms. FRAZIER. Thank you. And there is no way we can refute
    the numbers. I can only share with you my experience working
    with our customers. Oftentimes what we see is the expenses of
    starting a business are higher today than they were maybe 2, 3,
    4 years ago. And so the loans that we have done to help
    startups, either a tenant up fit--and in my testimony I talk
    about a baseball coaching facility where we helped them up fit
    a tenant facility, and it is really nothing more than a
    warehouse, and they have got some nets, but the cost of doing
    so is expensive.
        Chairwoman VELAZQUEZ. Yes. Ms. Frazier, you know, one of
    our commitments is to make sure that small businesses have
    access to affordable capital. When you look at the overall
    portfolio of loans that have been made, the numbers speak for
    themselves. We need to look at alternative options of
    affordable loans, and this is one of them. It has worked for
    the USDA. I do not understand why it cannot work here.
        Mr. Condra, the small business title of the Build Back
    Better Act, which was approved by this Committee in early
    September, provided $500 million for a cooperative lending
    pilot that would waive SBA personal or entity guarantee for co-
    ops. Will this new pilot program improve co-ops' access to 7(a)
    loans?
        Mr. CONDRA. And what a great compromise with this
    Committee, with Congress, and the SBA and the private sector.
    As you know, we continue to discuss and work with SBA on these
    issues, but they just will not budge on the requirements, even
    though we have provided examples after examples of why it is
    not working.
        An example, like in my testimony, the pastor raised $7
    million. Apparently, that is not enough money to secure an SBA
    loan that they still require him to, I guess, use his used car
    as collateral over $7 million. So it will completely open up
    the gates for this industry, for the food/grocery industry, and
    the worker co-op industry.
        Chairwoman VELAZQUEZ. Thank you.
        Mr. Shorman, the main street Employee Ownership Act allows
    7(a) preferred lenders to process ESOP loans under their
    delegated authority to streamline the process for small firms.
    Unfortunately, SBA's rule implementing the law says that those
    loans cannot be processed under delegated authority.
        How did the ESOP community respond to SBA's position which
    contradicts the clear language of the statute?
        Mr. SHORMAN. Well, I think this Committee has it right. I
    mean, trying to get--the direct contact with local community
    bankers is not a shortcut, but it is a way to get something
    done that is not happening today. So the Committee is right on
    target with what they are doing. And I think more of what we
    are talking about today is just saying, hey, this is what has
    to be done. ESOPs should be eligible for SBA loans through the
    local lending authority.
        Chairwoman VELAZQUEZ. Thank you. My time has expired.
        Now we recognize the gentleman from Minnesota, Mr. Stauber,
    for 5 minutes.
        Mr. STAUBER. Thank you, Madam Chair.
        And I just have a few comments. You know, an employee stock
    ownership plan, an ESOP, is a wonderful employment structure
    for a small business. ESOPs allow their workers the ability to
    obtain ownership in the company where they are employed, really
    complementing the way small businesses normally operate. With
    over 6,500 ESOP companies nationwide, I am proud to say that
    over 250 of them are in my great State of Minnesota.
        With that being said, I am worried about ESOPs and how they
    might fare under this administration's tax plan, specifically
    under the proposed capital gains tax increase. When ESOPs
    distribute actual shares of company stock rather than pay out
    the value of the shares in cash, the employee pays income tax
    at ordinary tax rates on the value of company contributions to
    the plan, plus capital gains tax on appreciation and share
    value when they choose to sell their shares.
        We can sit here and talk all day about the access to
    capital, but it seems to me that none of it will make a
    difference if, on the back end, individual employees are stuck
    paying higher taxes.
        A capital gains tax increase severely diminishes the
    incentives that normally draw individuals into ESOPs. When they
    look at getting into or potentially getting into an ESOP and
    they find that they are going to be paying more taxes, that is
    a disincentive. We have to encourage entrepreneurship and
    encourage people to invest in their companies and become part
    of the ESOPs.
        Despite this administration's claims, this current
    reconciliation bill will cost something. It will cost the
    livelihood of small business owners. It will hurt the middle
    class with tax hikes and increase the taxes on middle-income
    ESOP participants. We can do better by allowing our small
    businesses and those participating in ESOPs to keep more of
    their hard-earned money.
        And, Madam Chair, I yield back.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Now we recognize the gentleman from Pennsylvania, Mr.
    Evans, for 5 minutes.
        Mr. EVANS. Thank you, Madam Chair.
        Madam Chair, first, I would like to welcome Ms. Cooper. And
    I am very happy to have the president of a woman-owned work
    cooperative located in my district on this panel. But I am also
    proud of this Committee and the Chairwoman's work to mark up
    and pass out of Committee $25 billion to help entrepreneurs in
    the Building Back Better. This includes $500 million for a
    pilot program for workers and consumer cooperatives. This will
    provide loan guarantees to eligible small business
    cooperatives, including short- and long-term working capital.
        Ms. Cooper, how would this pilot program help Homewood Care
    and its workers?
        Ms. COOPER. Currently, you know, we were able, as I
    mentioned, to get the money we needed for startup, but
    currently, we are really struggling to expand our services. And
    in this current environment with, you know, the pandemic and us
    not being eligible for the second--not having been eligible for
    the second round of PPP, a loan from the Small Business
    Administration would help us to expand our services, keep our
    employees employed, but also survive some of the changes that
    are going on in this particular industry.
        So, you know, right now, we are clawing to, you know, stay
    alive in this industry. We know that there are changes that we
    need to make in order to remain competitive. So, yeah, it would
    help us to continue to stay in business. It would help us to
    secure our future, to increase volume, to sustain jobs.
        Mr. EVANS. One last question, Ms. Cooper, I want to ask.
    What is your secret of bringing this together? I know it is
    difficult. It has been very a very difficult time, but I am
    interested in the personal aspect of seeking and pulling things
    together, you know, you driving to do this.
        Ms. COOPER. You know, my--I will try not to be--I am a
    talker; I will try not to be too long-winded. But my thesis
    statement in college was the working poor. And I am very much
    committed to people who go to work every day, who work hard to
    care for others, who fill a gap that is desperately needed to
    fill, who are still struggling to make ends meet.
        So for us, that is what drives me, my commitment to them.
    And I know, you know, how important the work is that they are
    doing but also the pride that they have in being owners.
        The secret is that, that the worker ownership model creates
    a culture in which people are proud to be here, proud to do the
    work that they do. We are fully transparent as it comes to
    financials and every other aspect of the business. The board is
    primarily direct care workers. So, you know, the secret really
    is the culture. The secret is the cooperative. The secret is
    the fact that when we send someone to someone's home, they can
    say, I am the owner of the company and I am going to make sure
    that you get the quality care that you deserve.
        Mr. EVANS. Thank you, Ms. Cooper.
        And I yield back, Madam Chair. Thank you for the
    opportunity. Thank you.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Now we recognize the gentleman from Pennsylvania, Mr.
    Meuser, for 5 minutes, Ranking Member of the Subcommittee on
    Economic Growth, Tax, and Capital Access.
        Mr. MEUSER. Thank you, Madam Chair. Thank you very much. I
    appreciate it.
        It is an interesting hearing. We certainly all want
    responsible, reasonable risk, that is, access to capital
    available to new entrepreneurs, current businesses, those
    businesses that are simply trying to grow and expand. And you
    know what? Especially in some areas where we need it most. I
    have many very stressed cities in my district that I would love
    to see them have better access to capital, of course, more
    efficient and accessible.
        Now, the cooperative formula that exists with the community
    banks and the SBA can definitely be improved, but as we saw
    with the PPP versus the EIDL, they were quite different, right,
    in the outcomes. One had--one was effective. One was
    unbelievably useful. One--you can't even go anywhere in a
    chamber meeting without those saying, hey, thank you for that
    PPP; it was everything to us.
        And then the EIDL, which was strictly run by the SBA--and I
    appreciate the SBA. They were very helpful to us during the
    crisis and all, but it was--it is high levels of fraud, right.
    So that is a clear sign that that is not likely the best
    formula. The cooperative between the community banks and the
    SBA shows to be a better formula.
        Now, it can be improved, right? I mean, you know, the whole
    PG requirement, the personal guarantee being mandatory as
    opposed to maybe only being needed when assets and collateral
    don't stack up for the loan to be made; be definitely made more
    efficient, as Ms. Frazier and I were speaking about earlier.
    But without the cooperative effort, we can see there is real
    serious fraud, okay. And this isn't just fraud from some large
    stockholders. This is the taxpayers. And it is our
    responsibility to make sure that doesn't happen. And some of
    the conversation going here, we are going to open ourselves up
    to that.
        Now, if you don't have a personal guarantee, or a PG, there
    is a likelihood, right, how the economy works, that the
    competitive interest rates may be higher, more collateral
    requirements, perhaps less loans, right. So there is some
    unintended consequences that come with that, but that can be
    reviewed and be worked out as happens. But why the leadership
    of the Biden administration for SBA seems to want to centralize
    the authority within the SBA is something, frankly, we should
    be very wary of.
        You know, just quickly on the ESOP idea, you know, I know
    many businesses that were ESOPs. Some did well; some did
    terrible. You know, it is a big payday for the owners, by the
    way. And then loans are made, and if that doesn't work out,
    there is a lot of false hope, and wishes and dreams can tumble
    down pretty fast. So every business has to do what is best for
    itself, what is in its interests. Many companies have options.
    Many companies have partial ESOPs. Many companies have stock
    ownership plans, right, and good retirement plans. So, now, why
    would those companies be--not receive the same level of SBA
    resources and plans that an ESOP would receive? So I have got a
    problem there.
        So, Ms. Frazier, let me ask you, then, related to the PPP.
    Do you believe that that went relatively efficient? And as
    well, if it weren't with your--some of the community banks'
    oversight and credit criteria, understanding and knowledge of
    many of the customers, of course, how much different would it
    have been than what we have seen occur?
        Ms. FRAZIER. Thank you for that question. Boy, that would--
    a lot of speculation that it would be largely very different,
    but I do believe the community banks were able to step up and
    really address the concerns of the small business borrowers and
    address their needs and work hand-in-hand with them to get to
    it.
        I suspect if that program to have been a direct type of
    program, it might not have been enacted as quickly and
    efficiently. The dollars may not have been able to be
    distributed to the small businesses as quickly and their being
    able to survive, because it took a lot of hands and a lot of
    dedication and commitment to make that work.
        Mr. MEUSER. I agree. We can't put billions of dollars of
    taxpayer money at risk.
        So I yield back, Madam Chair.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Now we recognize the gentleman from Louisiana, Mr. Carter,
    for 5 minutes.
        Mr. Carter, you are muted.
        Mr. CARTER. Thank you, Madam Chair. Greatly appreciate the
    opportunity.
        My question: Mr. Shorman, in my district, a large number of
    small business owners are first-generation business owners,
    women and/or Black. With the additional struggles facing these
    communities in accessing and maintaining capital, how do we
    make sure that we know about ESOPs and other opportunities that
    employee-owned business models have as an option?
        Mr. SHORMAN. I think one of the things we talked earlier is
    that is one of the directives in the Act is to be able to make
    sure education is out there. Everybody knows you can sell to an
    outsider, you can transfer to your family, or you can just go
    out of business. But being able to have that fourth option of
    transferring the business to your employees is so important to
    be able to tell that story. And if we can do that through the
    resources, whether it be through the SBA and training them to
    say, here is another option for you, that just makes so much
    sense.
        And too many times I talk to employers who are--in fact,
    one was in my office the other day looking to transition their
    company. The ESOP was something completely foreign to them. And
    so I tell the story about what is going on. We need to do that
    more and more. We need to put that story on steroids, because
    those 2.5 million tsunami out there who are transitioning their
    business need another option, and employee ownership is one of
    them.
        Mr. CARTER. So what more can be done to raise awareness
    about the benefits regarding ESOPs and other employee-owned
    business models? We know they are there; many people don't
    know. What can we be doing on our end specifically to educate
    minority and women-owned businesses, in your estimation?
        Mr. SHORMAN. Well, when somebody comes in, make sure the
    SBA understands the importance and the value of that as well,
    and that goes through training programs for SBA employees that
    are in the field. That goes to making sure that the ease and
    access to the system is there which you are working on to be
    able to find ways for employee-owned companies to access the
    SBA, and then that local community banker that is sitting over
    there. And I appreciate the comments earlier of how that local
    community banker is connected to the community.
        And while the person who is selling the business has a
    legacy there, that local community banker knows who is involved
    and who is a part of that company. That can't happen on a
    national level in Washington, D.C. It can happen if the SBA is
    required to allow and look at loans from employee-owned
    companies and helping them set that up as well.
        Mr. CARTER. Mr. Shorman, I understand that Eagle
    Communications began the ESOP conversion process in 1998. It
    became majority owned by employees in 2002, and 100 percent
    employees owned in 2012. In your experience to ESOP
    conversions, what is the biggest obstacle you have seen in your
    company's struggle to overcome and convert into an ESOP?
        Mr. SHORMAN. Well, the biggest struggle out there is making
    sure there is clarity of regulations. And the DOL has really
    been--has really not put out clear guidance for that. And so
    when we went through the process, we involved the best
    professionals so that we were doing it right to get the job
    done, but we are a bigger company. And at one point, we had 400
    employee owners. We now have just under 200.
        And when you take that, you have to have a clarity of
    regulations so that even the smallest companies understand what
    they need to do to set up an employee-owned company and make
    that happen, without worrying about regulatory issues that may
    come and haunt them later on. We need clarity through the DOL
    to make that happen.
        We need to have a good path for economic value to be able
    to get loans through the SBA, and then have that resource of
    tools so that there is educational tools, like The ESOP
    Association, to be able to help them get through the process
    and manage that and then have a successful ESOP, because that
    is the goal, to have successful companies that stay local and
    build their local communities.
        Mr. CARTER. And, finally, as my time winds down, if there
    were--if there was one thing that you could ask of this
    Committee that would aid other small businesses out there that
    have not--that either don't know about ESOPs, have not had the
    opportunity to utilize ESOPs, or what could we do as this
    committee to make your life and any other small business owners
    better or easier to access these resources?
        Mr. SHORMAN. Well, I think this Committee can, in very
    specific terms, say that ESOP loans are available through the
    SBA, because that would trigger a whole new effect. Right now,
    that is not an option. I had a PPP loan. It worked great, and
    our local banker did it. A local banker can do the same thing
    with other local businesses there to be able to take and make
    that money available so that an ESOP can be created. But
    somehow it gets lost in the translation from the Committee to
    the SBA. So say, this is what we want to have happen, and get
    it done.
        Mr. CARTER. Thank you. I yield back.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Now the gentlelady from New York, Ms. Tenney, is recognized
    for 5 minutes.
        Ms. TENNEY. Thank you, Chairman Velazquez and Ranking
    Member Luetkemeyer, and for holding this meeting. It is of
    great interest to me as a small business owner. Our company is
    celebrating our 75th year in business this year. But let's talk
    about a little bit of reality today.
        A lot of capital that is investment capital is highly
    concentrated by geography, tend to be centered around big
    business hubs, urban areas, like Boston, New York City, San
    Francisco, and leaves behind much of the country, including my
    fairly rural and suburban district. It also tends to flow
    disproportionately into high-tech industries and not into the
    manufacturing sector that are more capital intensive;
    obviously, great for creating jobs too because they are more
    labor intensive; a lot more diversity in providing labor across
    all sectors. And those tend to be really beneficial in my
    community where the industrial revolution was founded.
        But in the absence of these opportunities in these rural
    areas, and particularly in our area, as many of them have been
    forced to shut down partly due to lack of capital and also due
    to what has happened last year in upstate New York. My solution
    is to invite all of you to co-sponsor--and some of you have, I
    appreciate it--the American Innovation and Manufacturing Act.
    This bipartisan legislation will allow the federal government
    to work with the private sector to ensure these underserved
    areas, and especially manufacturers who create things, are not
    left behind by today's unequal landscape. Also, it does not--it
    does so with strong safeguards. We have put a lot of safeguards
    in place by protecting taxpayer funds. And I think with this
    type of innovation, we can bring back good, middle-class
    careers and by bring good-paying jobs across all sectors.
        And I wanted to point to one thing. I wanted to ask Ms.
    Frazier a question. When we get to this direct lending and
    creating, you know, we are all for ESOPs and, you know,
    employee-owned businesses, that is a great option, and to
    opening up the lending process. Something in Ms. Frazier's
    testimony really struck my eye. And while we try to give more
    direct lending authority to the SBA, she says in her testimony:
    While the SBA has the authority to make direct loans, the
    exception disaster loans and micro loan program intermediaries,
    it has not exercised this authority since 1998. The SBA
    indicated that it stopped issuing direct business loans
    primarily because the subsidy rate was 10 to 15 times higher
    than the subsidy rate for its loan guarantee programs.
        And I can tell you, as a small business owner, there is
    nothing worse than killing entrepreneurship, innovation, and
    growth in industry than providing government subsidies and
    picking winners and losers over other--in the marketplace. And
    I have been the victim of having competitors in the marketplace
    with government subsidies. And we have been lucky to survive in
    some cases, but many businesses cannot afford this unfair
    advantage.
        And so I wanted to direct my first question to Ms. Frazier,
    and I reference this as well, but let me--if you could just
    tell me a little bit about 7(a) loans and tell us a bit about
    your business plan and how to properly use a bank loan to fund
    their business. You also guide them through funding and
    options. Do you think that this partnership with a local bank
    or investment partner provides an irreplaceable value to a
    business and increases its potential for success? I know you
    are going to say yes, but I want to you to give me some more
    reasons why, because if it weren't for small community banks,
    we wouldn't even be in business today.
        And thank you for your great testimony. I think it is
    really important. And if you could address real quickly what
    the subsidy issue that I referenced in your testimony, that
    would be great and just clarify that.
        Ms. FRAZIER. Thank you. Maybe I can start a little bit with
    the stories about how we help people and how we engage with the
    borrowers--or the potential business borrowers. We spend time
    with them in really figuring out what do they need. Because
    oftentimes, as I mentioned, they think they need a term loan,
    something that is paid out over 5 years, but maybe they need
    short-term working capital, or maybe they need to buy equipment
    and they don't know how to pay for it, or they don't know how
    much they can afford to repay.
        So the time our bankers spend with those businesses really
    educating towards what the options are, and then in sharing
    with them how, maybe as they are starting out, they don't have
    the capital to really go a conventional route, and how we can
    use that with SBA to subsidize for them. And through PPP.
        And, actually, we have been in existence for 150 years, so
    serving the rural communities has been very important to us.
    What we found is, is there is a great need for the 7(a)
    programs out in the communities, and we felt it was our
    responsibility to dig in deeper and made those investments.
        If you think about the 10 to 15 times increase subsidy
    rate, I would suggest that----
        Chairwoman VELAZQUEZ. Time has expired.
        Ms. FRAZIER. Okay. Thank you.
        Ms. TENNEY. Thank you so much. Maybe we can revisit this.
    Thanks.
        Chairwoman VELAZQUEZ. Thank you.
        Now we recognize the gentlelady from California, Ms. Chu,
    for 5 minutes.
        Ms. CHU. Mr. Shorman, in addition----
        Chairwoman VELAZQUEZ. Ms. Chu, you are muted.
        Ms. CHU. Mr. Shorman?
        Mr. SHORMAN. Hi there.
        Ms. CHU. Hi. In addition to being a Member of the Small
    Business Committee, I sit on the House Ways and Means Committee
    which has jurisdiction over issues affecting ESOPs. I am
    particularly interested in the way the Tax Code discourages
    business owners from agreeing to ESOP conversions, and most
    importantly, how we can fix this.
        Currently, only C corporations can convert to an ESOP, but
    hardly any small businesses that organize as a corporation
    choose the C corp structure. Instead, most will elect to
    organize as an S corp because of the significant tax benefits
    for small businesses. Congress could choose to extend ESOP
    eligibility to S corporations in order to provide this option
    to more small businesses.
        Could you talk about the impact that could have on
    encouraging more ESOP conversions?
        Mr. SHORMAN. Well, it is going to open the door to a lot
    more ESOPs because, as you know, and you mentioned the 1042
    benefit allows reinvestments of funds received from the sale of
    an asset without triggering a taxable event at that time. And a
    large portion of small businesses are sub S. Congress has made
    C corps eligible for that 1042 benefit, and S corporations are
    ineligible. So Congress could greatly incentivize the formation
    of new ESOPs by extending that same 1042 benefits that are
    given to C corps to S corporations.
        And with many small businesses out there, and we talked
    about those 10--or 2.5 million baby boomers who have to decide
    what to do with their business. If they are an S corp, changing
    that and making it available for the 1042 benefit would greatly
    open the door to a lot more possibility for employee ownership.
        Ms. CHU. Thank you. And let me ask you about another issue
    that owners face when they convert their business to an ESOP,
    and that is that often they can't meet the requirement to
    reinvest their proceeds within 1 year of the transaction. That
    is because ESOP conversions often take place over the course of
    many years because owners are paid in seller notes. This has
    created a situation where owners either miss out on the tax
    deferral that Congress created to incentivize ESOP conversions
    or they purchase 1042 securities that ultimately lose money but
    have a very, very long maturity.
        So can you talk about how this 1-year window to reinvest
    proceeds impacts owners who decide to convert to an ESOP?
        Mr. SHORMAN. That happened in our case, because we formed
    our ESOP in 1998, but it was 2012 before we could purchase all
    of that. And so there is that timeframe that takes place when a
    seller will actually loan money to the employees to be able to
    buy out that business.
        So, really, what needs to happen, the law needs to be
    changed so that the taxable event takes place when the
    transaction is finished, when it is completed, including full
    repayment of the seller notes. Otherwise, it is a big penalty
    for that person who sells that first year who may not even have
    the proceeds from the sale because that is going to happen over
    a period of years later. So that is very important to take a
    look at and make happen.
        Ms. CHU. Okay. And then there is a third issue. ESOP
    conversions are disincentivized because owners are so limited
    in what products they can reinvest in while keeping their tax
    deferral incentive. And, in fact, that is a big reason why so
    many owners are pushed into buying 1042 securities, which are
    complicated, expensive, and could end up costing them more
    money over the long run. And many small business owners who
    might contemplate an ESOP conversion are considering their
    retirement, but they can't use the proceeds to invest in a low-
    cost stable investment like an index fund.
        So could you--can you explain how allowing owners to invest
    in mutual funds could make ESOP conversions more attractive?
        Mr. SHORMAN. Well, I am a business owner/operator and not
    necessarily a tax accountant. But, nonetheless, when you look
    at it, you know, when you take your 1042 money, you want to
    have choices to put it into. Right now, those choices are very
    specific. If you could extend that to be able to do things like
    mutual funds as a qualified investment, that opens the door for
    more people to be and feel good about making that transaction,
    making employee ownership a possibility. And, frankly, by doing
    that, it would just remove another impediment for more
    employee-owned businesses.
        Ms. CHU. Thank you. I yield back.
        Chairwoman VELAZQUEZ. The gentlelady yields back.
        Now we recognize the gentleman from New York, Mr.
    Garbarino, for 5 minutes.
        Mr. GARBARINO. Thank you, Chairwoman, and thank you to the
    Ranking Member, for putting this on. And thank you to our
    witnesses.
        I have a question first for Ms. Frazier. In your testimony,
    you state that waiving the personal guarantee would reduce
    access to capital for firms. Why do you believe this is the
    case?
        Ms. FRAZIER. Thank you for that question. I think we spoke
    about waiving the personal guarantee. Oftentimes that is the
    incentive to continue to ensure that payments are made, and the
    businesses run effectively to do that.
        As regards to co-ops, we understand that those are very
    nuanced, and so that needs to be looked at differently, and we
    would like to collaborate for that specifically. But other
    loans, we really caution against waiving the personal
    guarantees.
        Mr. GARBARINO. All right. Thank you very much.
        Mr. Shorman, in your testimony, you have discussed the
    lenders' delegated authority. You even state that loans could
    take weeks or months if they weren't processed with delegated
    authority.
        Why do you believe delegated authority is so important as
    opposed to loans being sent to the SBA?
        Mr. SHORMAN. Well, Hays, Kansas, is a long way from
    Washington, D.C., and we would have to walk around a lot of
    streets in D.C. for even people to know where Hays, Kansas, is.
    So for us to apply for a loan that gets processed in
    Washington, D.C., in one of the big, massive offices there, we
    know the difference. We have seen that happen time and time
    again with things that we work on.
        If I can walk across the street, have a good community
    banker that is interested in keeping us in business, keeping
    our community growing, and I can tell my story to that local
    banker, and they, in turn, are able--if they are able to
    process the PPP loan, as complicated and as quick as that all
    happened, they ought to be able to process an ESOP loan to be
    able to keep a company going or allow that transaction to
    happen within the ESOP community to grow ESOPs.
        And so having that delegated authority, being able to
    transfer for ESOPs just like other businesses, I can't believe
    our local banker--Ms. Frazier may say something different here,
    but I can't believe our local banker wants to make loans that
    aren't going to work, that aren't going to keep that company in
    business.
        So it would allow them and actually say, go do this versus
    saying maybe go do this--go do this and loan money to ESOPs. It
    can be a game changer for employee ownership for allowing those
    companies to have an option versus some of the others that
    aren't so good but having an option to keep that ownership
    local.
        Mr. GARBARINO. I appreciate that answer, Mr. Shorman.
        Ms. Frazier, did you want to respond to that, or did you
    have anything else you wanted to add to that--his statement or
    that question?
        Ms. FRAZIER. I think there is nothing a local community
    bank enjoys more than help a business remain successful and
    operating.
        Mr. GARBARINO. Oh, absolutely. We have a lot of community
    banks in New York, and I have worked with them in my previous--
    in my law practice, and they were very good at helping small
    businesses as well as homeowners and individuals. So I have
    nothing but respect for community banks.
        I don't have any further questions. I yield back,
    Chairwoman.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Now we recognize the gentlelady from California, Ranking
    Member on the Subcommittee on Innovation, Entrepreneurship, and
    Workforce Development, Ms. Young Kim, for 5 minutes.
        Ms. YOUNG KIM. Thank you, Chairwoman Velazquez. And I would
    like to thank the witnesses for being with us today.
        You know, earlier this month, I had the opportunity to
    visit HdL Companies that was located in my district, in
        Brea, California. HdL is a pioneer and leader of auditing
    operations and revenue solutions for public agencies, and it
    has around 150 employee owners. So I saw firsthand the value
    that ESOPs bring to our communities. And so I want to recognize
    how this ESOP structure serves as an important tool for
    businesses owners that are, you know, currently discussing and
    examining retirement. So in order to encourage this model to be
    adopted and encourage more employee ownership, as discussed
    already, I agree that we can offer more educational tools and
    clarity.
        But as we discuss access to capital, I would like to ask
    Ms. Frazier, can you elaborate on how the personal guarantee
    allows community banks to mitigate credit risks and increase
    capital for firms? And then, can you also discuss how the SBA
    can make it easier for community banks and other lending
    institutions to provide capital for ESOPs and other employee-
    owned businesses without waiving the personal guarantee?
        Ms. FRAZIER. Thank you. When you think about lending, there
    are oftentimes a lot of factors that go into it, not only
    what--on a business in particular, how the business is going to
    repay the debt, but what happens when the business has a
    stumble or things go awry for a period of time. And the banks,
    in a conventional way, and SBA in this way also, rely on the
    owner of the business to step in and make adjustments. And
    having that personal guarantee holds them to the line of that,
    and so it is very important.
        There is five Cs of credit, and one of those is character.
    And part of that, putting your name on the bottom line of a
    loan saying I will guarantee it is a sign of character.
        In speaking about--I think the more we could collaborate
    together and discuss, not only how can we look at the
    guidelines around the co-ops, but let's look at how we can also
    collaborate even more so to meet the needs of those small
    businesses and those small loans. Collaboration would be
    important.
        Ms. YOUNG KIM. Thank you for your response.
        You know, clearly--can you hear me?
        Chairwoman VELAZQUEZ. Yes.
        Ms. YOUNG KIM. So we had a lot of discussion today about
    clearly banks and credit unions and community banks are much
    better equipped to service their communities than someone from
    afar in Washington. And as you stated, Ms. Frazier, direct
    lending through the SBA is not the answer to expanding access
    to capital for small businesses or women and minority
    entrepreneurs. I agree. The federal government does not have a
    good track record of being responsive nor having good
    communications with our constituents.
        So can you elaborate on how community banks and lending
    institutions are better prepared to detect and prevent fraud
    than direct lending programs created by the government?
        Ms. FRAZIER. Thank you. First of all, we are in the
    community, so we know the businesses. We know the business
    owners. Oftentimes, when new businesses are getting started up
    and those that are seeking capital that might be eligible for
    an SBA loan, we can visit them. We see them. And as mentioned
    earlier, there is nothing like laying eyes on someone as you
    are evaluating their ability to repay and their willingness to
    repay a loan. So I believe that value that we bring to the
    table of being feet on the street in the community helps
    prevent fraud in those areas.
        Ms. YOUNG KIM. Thank you. You know, as a quick followup,
    can you talk about how--or what the tools, like the know your
    customer and the AML compliance, bring to the table in
    preventing and detecting fraud?
        Ms. FRAZIER. Certainly. The documentation that we research
    and we bring to the table as far as even following up and
    making sure that they have a certificate of good standing in
    the State, all of those tools are pieces to validate that these
    are a credible business and has been established appropriately.
        Ms. YOUNG KIM. Thank you very much. I really appreciate the
    interaction we had.
        And I yield back my time.
        Chairwoman VELAZQUEZ. The gentlelady yields back.
        Now we recognize the gentlelady from Texas, Ranking Member
    on the Subcommittee on Oversight, Investigations, and
    Regulations, Ms. Van Duyne, for 5 minutes.
        Ms. VAN DUYNE. Thank you very much, Chairwoman Velazquez.
        As this Committee has heard countless times, access to
    capital is essential for small businesses, but I can't help but
    think that a lot of the initiatives that are being put forward
    by the Democratic Congress are detrimental to the goals of our
    nation's small businesses. And this includes raising small
    business income taxes, capping the small business deduction,
    and raising capital gains and estate taxes. All of this comes
    while small businesses still can't fill their labor needs and
    our supply chains remain disrupted.
        As we proceed with this hearing, it is important to
    underscore that it is not happening in a vacuum. There are very
    real harms Texas small businesses will face should the
    reconciliation package that Democrats are attempting to jam
    through become law. According to the Texas Public Policy
    Foundation, Texas businesses will lose $663 billion in
    investments, corporate tax hikes will cut wage growth by over
    23 percent for employees, and international tax cuts will
    reduce full-time employment by 12,000 jobs. This is nothing of
    the $12,000 reduction in median family income or the exploding
    debt the average household will be expected to cover because of
    federal spending.
        And, finally, I want to reiterate how disappointing it is
    to watch Secretary Yellen skirt her legal obligations to come
    before this Committee while small businesses in our community
    continue to fight to keep their doors open. I will continue to
    ask, but I really hope to see her before this Committee very
    soon.
        I just have a couple of questions. Ms. Alice Frazier, thank
    you so much for being here today. I have significant concerns
    about how direct lending by the SBA. The SBA's latest effort,
    EIDL, had a large amount of potential fraud and the OIG
    reporting a possible fraud rate of up to 30 percent. Knowing
    this, can you tell us what the benefits are by including
    private lenders in small business loan process? And why do you
    think this administration is trying to cut private lenders out
    of the process?
        Ms. FRAZIER. Thank you for the question. I am going to
    start at the end. And I am not sure that I can answer why I
    think that they are trying to cut it out of the process, but I
    would say that having the private lenders, the community banks,
    banks involved, this is what we have done. We have been doing
    it for years and years. It is a good process that works today.
    We work effectively with the SBA. And to change that process
    today, I am not sure even the business owners or those that
    would utilize it would understand how it would work. And given
    their current experiences with the programs, such as the EIDL,
    I am not sure they would trust it as well.
        Ms. VAN DUYNE. Okay. Thank you. As you know, access to
    capital is crucial, but capital for business owners today isn't
    going as far as it used to. So prices for goods across the
    board are up. We have seen unprecedented number of cargo ships
    anchoring offshore at our ports and shuttering of supply
    chains. And this administration is planning to increase taxes
    on small businesses.
        So, in your view, how do these challenges affect small
    business?
        Ms. FRAZIER. Oh, they are affecting things greatly at this
    point in time. We have multiple committee-type meetings around
    in our different local areas where we bring small businesses
    together, and that takes up a good bit of the hour that we
    spend together. And I think to elaborate not only the
    challenges with labor but the challenges of the supply chain
    and the fears that they will have increased taxes has great
    concern for them.
        Ms. VAN DUYNE. So you have talked to a number of
    businesses, I am sure, over the last year. Do you have any
    specific examples of how people who are either not as
    successful as they could have been because of some of these
    policies or ways that they are not currently investing because
    of threats of these policies?
        Ms. FRAZIER. Oh, sure. I can tell you we have landscaping
    firms that are unable to hire enough people to do the jobs that
    they have actually been hired to do or contracted with. It
    might even be restaurants that have to close 2 days a week
    because they can't hire enough workers to remain open. The
    workers are overworked, or even in such that cost of the food
    has gone so great, they can't increase their prices enough.
        One company that hires a number of workers that work remote
    said that they hired 200 workers over a 9-month period of time
    to retain 50. And so I think the----
        Ms. VAN DUYNE. You said they hired 200 workers?
        Ms. FRAZIER. Two hundred to retain 50 in that time period,
    and it is just the transient nature. The way that labor is
    working today has affected their business greatly.
        Ms. VAN DUYNE. All right. I appreciate that very much.
        I yield back.
        Chairwoman VELAZQUEZ. The gentlelady yields back.
        Thank you again to our witnesses for joining us today. Your
    stories serve as a testament to the power of employee-owned
    businesses and all they offer the labor force.
        If we generally want to help the American people build back
    better, we must promote policies to empower American workers.
    Employee-owned businesses merge ownership and employees'
    interests, helping to create a symbiotic relationship where
    everyone thrives. As ESOPs and cooperatives become more
    prominent, the American workforce will benefit.
        I ask unanimous consent that Members have 5 legislative
    days to submit statements and supporting materials for the
    record.
        Without objection, so ordered.
        If there is no further business to come before the
    Committee, we are adjourned.
        [Whereupon, at 11:56 a.m., the committee was adjourned.]

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