[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
EMPOWERING EMPLOYEE OWNED BUSINESSES
AND COOPERATIVES THROUGH ACCESS TO
CAPITAL
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 30, 2021
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[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
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
JARED GOLDEN, Maine
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
MARIE NEWMAN, Illinois
CAROLYN BOURDEAUX, Georgia
TROY CARTER, Louisiana
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANDY KIM, New Jersey
ANGIE CRAIG, Minnesota
BLAINE LUETKEMEYER, Missouri, Ranking Member
ROGER WILLIAMS, Texas
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
CLAUDIA TENNEY, New York
ANDREW GARBARINO, New York
YOUNG KIM, California
BETH VAN DUYNE, Texas
BYRON DONALDS, Florida
MARIA SALAZAR, Florida
SCOTT FITZGERALD, Wisconsin
Melissa Jung, Majority Staff Director
Ellen Harrington, Majority Deputy Staff Director
David Planning, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. 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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