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


                  EMPOWERING EMPLOYEE OWNED BUSINESSES 
                   AND COOPERATIVES THROUGH ACCESS TO 
                   CAPITAL

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 30, 2021

                               __________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
                               

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

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