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


                    AN EMPIRICAL REVIEW OF THE PAYCHECK 
                              PROTECTION PROGRAM

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

                                HEARING

                               BEFORE THE

       SUBCOMMITTEE ON OVERSIGHT, INVESTIGATIONS, AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                              HEARING HELD
                             MARCH 16, 2022

                               ----------                              

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 

            Small Business Committee Document Number 117-050
             Available via the GPO Website: www.govinfo.gov
             
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
47-102                      WASHINGTON : 2022                     
          
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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
                        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. Dean Phillips...............................................     1
Hon. Beth Van Duyne..............................................     3

                               WITNESSES

Mr. William Shear, Director, Financial Markets and Community 
  Investment, United States Government Accountability Office, 
  Washington, DC.................................................     4
Dr. Robert W. Fairlie, Professor of Economics, University of 
  California, Santa Cruz, Santa Cruz, CA.........................    19
Dr. Manju Puri, J.B. Fuqua Professor of Finance, Duke University 
  Fuqua School of Business, Durham, NC...........................    21
Dr. Iryna Demko, Research Associate at the Center for Economic 
  Development, Maxine Goodman Levin College of Urban Affairs, 
  Cleveland State University, Cleveland, OH......................    23
Mr. Robert Barnes, President and Chief Executive Officer, 
  PriorityOne Bank, North Magee, MS, testifying on behalf of the 
  Independent Community Bankers of America.......................    24

                                APPENDIX

Prepared Statements:
    Mr. William Shear, Director, Financial Markets and Community 
      Investment, United States Government Accountability Office, 
      Washington, DC.............................................    32
    Dr. Robert W. Fairlie, Professor of Economics, University of 
      California, Santa Cruz, Santa Cruz, CA.....................    54
    Dr. Manju Puri, J.B. Fuqua Professor of Finance, Duke 
      University Fuqua School of Business, Durham, NC............   165
    Dr. Iryna Demko, Research Associate at the Center for 
      Economic Development, Maxine Goodman Levin College of Urban 
      Affairs, Cleveland State University, Cleveland, OH.........   245
    Mr. Robert Barnes, President and Chief Executive Officer, 
      PriorityOne Bank, North Magee, MS, testifying on behalf of 
      the Independent Community Bankers of America...............   358
Questions and Answers for the Record:
    Question from Hon. Mfume to Mr. Shear and Response from Mr. 
      Shear......................................................   365
    Question from Hon. Houlahan to Dr. Demko and Response from 
      Dr. Demko..................................................   368
    Question from Hon. Houlahan to Mr. Barnes and Response from 
      Mr. Barnes.................................................   370
Additional Material for the Record:
    CUNA - Credit Union National Association.....................   371
    NAFCU - National Association of Federally-Insured Credit 
      Unions.....................................................   373
    UNITE HERE Local 11..........................................   375
    Center for Responsible Lending...............................   385
    Gusto........................................................   400

 
         AN EMPIRICAL REVIEW OF THE PAYCHECK PROTECTION PROGRAM

                              ----------                              


                       WEDNESDAY, MARCH 16, 2022

              House of Representatives,    
               Committee on Small Business,
                         Subcommittee on Oversight,
                           Investigations, and Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building, and via Zoom, Hon. 
Dean Phillips [chairman of the Subcommittee] presiding.
    Present: Representatives Phillips, Velazquez, Davids, 
Mfume, Houlahan, Craig, Van Duyne, Luetkemeyer, Meuser, and 
Donalds.
    Chairman PHILLIPS. Good morning, everybody. I am going to 
call the meeting to order. And without objection, the Chair is 
authorized to declare a recess at any time. And I would like to 
begin by noting some important requirements for everybody. 
Standing House and Committee rules will continue to apply 
during hybrid proceedings. All Members are reminded that they 
are expected to adhere to these rules, including decorum. House 
regulations require that Members 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.
    In the event that 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 that 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, masks are now optional and no 
longer required. With that, I will make an opening statement.
    First, I would be remiss if we didn't recognize the speech 
that many of us just saw in the visitor center by President 
Zelenskyy. We are here to talk about small businesses in the 
United States today. And as we do so, I just ask that we all 
keep in our heads and our hearts the Ukrainians who are losing 
not just their businesses and livelihoods, but, indeed, their 
lives. And we stand united as a committee, as a Congress, and 
as a country to stand tall in the face of tyranny.
    But to the issues at hand. Nearly 2 years ago, the rapid 
spread of COVID-19 was wreaking havoc on small businesses 
across our country. As people stayed home to slow the spread of 
the virus, business for many small firms essentially grounded 
to a halt. It was a time of tremendous uncertainty. Small 
businesses of all shapes and sizes began to wonder how long 
could we continue to pay our rent, our employees, and make our 
other expenses met.
    Congress recognized the pandemic's threat to small 
businesses and the overall economy and moved very quickly and 
in a bipartisan fashion to pass emergency legislation. In late 
March of 2020, Congress passed the CARES Act on a near 
unanimous basis. The bill provided over $376 billion in relief 
for struggling small businesses. Most of this money was 
allocated to the newly created Paycheck Protection Program, 
commonly known as PPP.
    Under PPP, banks and other private lenders made fully 
guaranteed and forgivable SBA loans to small businesses 
impacted by COVID. These loans were intended to allow small 
firms to continue to pay their employees and to cover other 
expenses. Since it launched in April of 2020, PPP has delivered 
almost $800 billion in emergency loans, making it one of the 
most extensive relief programs in American history.
    The Small Business Administration administered more aid 
during the COVID crisis than it did for all other disasters 
combined in its 67-year history.
    Given the massive scale of PPP and other relief programs, 
and the speed with which it needed to be stood up, it was 
inevitable that problems would arise. For example, in the early 
days of PPP, it became clear that funds were not reaching the 
most vulnerable small businesses. Instead, larger companies 
with preexisting relationships with large banks were 
prioritized in many cases in the smallest businesses' expense.
    The initial rollout of PPP also shut out many businesses 
owned by women and minorities. This Committee worked diligently 
to address these inequities in the program throughout the 
pandemic. We fought for set-asides for underserved small 
business and worked to empower the community lenders that 
served them. The PPP and Health Care Enhancement Act created 
set-asides of PPP funds so that entities like CDFIs, CDCs, and 
SBA Microloan Intermediaries could fairly compete with big 
banks in the program.
    We also passed my bill, in conjunction with Chip Roy, the 
PPP Flexibility Act, which made PPP loan forgiveness more 
accessible for firms who needed to spend a greater share of 
their loan proceeds on non-payroll costs.
    And we also passed the Economic Aid Act, which delivered 
more relief to the hardest hit small businesses through Second 
Draw loans. These changes proved to be effective in making the 
program more accessible for small businesses. In later rounds 
of PPP, the average loan size reached approximately $44,000, a 
marked improvement over the $199,951 average loan size during 
the initial round.
    Many researchers have analyzed the effectiveness of PPP in 
saving jobs and reaching small businesses throughout the 
country. We have a few of those experts with us today. I look 
forward to hearing more about their research and discussing the 
insights they have gained into the overall efficacy of PPP and 
the program updates that Congress has instituted. By looking 
closely at these findings, we can better prepare ourselves for 
future crises and help SBA's non-pandemic loan programs reach 
more underserved businesses more effectively and more 
efficiently.
    With that, I would like to yield to the Ranking Member, Ms. 
Van Duyne, for her opening statement.
    Ms. VAN DUYNE. Thank you very much, Mr. Chairman, for 
holding this critically important hearing and your continued 
partnership on providing proper oversight. In order to respond 
to the crushing State and local shutdown orders, the federal 
government stepped in with multiple relief programs. The 
Paycheck Protection Program was front and center during this 
emergency period ensuring relief was focused on retaining 
employees while requiring that dollars flow to American small 
businesses through the private sector lenders. As we approach 
the second anniversary of PPE's opening, Members of this 
Subcommittee and the full Committee are busy examining how this 
almost $800 billion program performed. And this hearing is a 
continuation of that discussion.
    As of March 6, 2020, 86 percent of all PPP recipients have 
requested loan forgiveness. In response, the SBA has made 
forgiveness payments of approximately $700 billion. These are 
extraordinary dollar amounts and show the program is winding 
down but the work is not yet finished. The SBA cannot wipe its 
hands of this program and must stay engaged with this Committee 
as we continue our oversight responsibilities.
    This sentiment also needs to be emphasized to the 
Department of the Treasury who played a significant role in PPP 
by onboarding numerous new lenders. And as many new Committee 
Members have pointed out, Treasury Secretary Yellen is required 
by law to testify before the full Committee on the 
implementation of the COVID-19 programs, specifically the PPP. 
Unfortunately, 325 days past the date, the challenges small 
businesses face still haven't risen to the level of importance 
for the Secretary to appear. This cannot stand.
    In the State of the Union, the President stated that we are 
going after the criminals who stole billions in relief money 
meant for small businesses and millions of Americans. How can 
we believe that statement if appearing before our Committee is 
too difficult a step to take? Nevertheless, my colleagues are 
eager to go after wrongdoers and make necessary changes. And I 
hope the Treasury Secretary will testify on this matter soon.
    This Committee has a host of issues left to examine 
regarding PPP, including fraudulent behavior. Numerous articles 
and audits have highlighted trends connecting fraud to certain 
FinTech lenders. And it is crucial we understand these lenders' 
roll within the programs, and how they interacted with small 
businesses, determined eligibility, and if they adequately 
protected American taxpayer dollars.
    Fraud is unacceptable and we must address illegal behavior 
and ensure we recover improper dollars efficiently. 
Additionally, we need to learn more about how the SBA conducted 
PPP loan reviews. For example, if ineligible businesses entered 
the PPP, I am left to wonder how they were treated under the 
loan forgiveness process. We must find answers to these 
essential questions.
    Moreover, any PPP conversations should include the lenders 
on the ground delivering this program. And that is why I am 
looking forward to today's discussion with not only the 
Government Accountability Office, which has provided extensive 
oversight throughout, but also with a community bank lender who 
is on the frontline keeping businesses in his community alive. 
In Text 24, our private lenders helped disburse over 40,000 
loans worth well over $4 billion. In the numerous roundtables 
that I have held with small business owners from around north 
Texas, besides a tough labor market and skyrocketing energy 
prices, a common theme is how PPP was a lifesaver during the 
pandemic. And while American small businesses had been ready to 
grow their business without government handouts, our work in 
Congress is to ensure every last relief dollar was 
appropriately spent and that must continue.
    And with that, Mr. Chairman, I look forward to our 
continued work on this matter, and I want to thank you for 
holding this hearing. I yield back.
    Chairman PHILLIPS. Thank you, Ms. Van Duyne. The 
gentlewoman yields back. With that, I would like to introduce 
our only witness on today's first--our best and only witness 
today on our first panel, Mr. William Shear, the Director of 
Financial Markets and Community Investment for the U.S. 
Government Accountability Office. A frequent panelist 
representing GAO before us, he leads GAO's work in community 
and economic development, small business, and SBA's COVID-19 
response programs. Mr. Shear joined GAO more than 20 years ago 
and is a dedicated public servant. He has a master's degree in 
public policy and a PhD in economics, both from the University 
of Chicago. He also served as an adjunct faculty member in the 
graduate program in city and regional planning at the 
University of Pennsylvania. We welcome you back, Mr. Shear, and 
afford you now 5 minutes for your opening statement.

  STATEMENT OF WILLIAM SHEAR, DIRECTOR, FINANCIAL MARKETS AND 
  COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. SHEAR. Thank you. Chairman Phillips, Ranking Member Van 
Duyne, and Members of the Subcommittee, I am pleased to be here 
this morning to discuss our work on SBA's Paycheck Projection 
Program, or PPP for short. While my statements before this 
Committee on SBA's emergency loan programs in April 2021, and 
previously in October 2020, focused on program administration, 
controls, and oversight, and fraud risk management, my 
statement today is about how PPP changes SBA and Congress made 
affected the characteristics of participating lenders and 
program recipients. For this work, we relied on SBA loan level 
PPP data, as well as county level business statistics and 
American community survey data from the U.S. Census Bureau.
    We analyzed PPP loans over three application periods, April 
3 through 16, 2020, April 27 through August 8, 2020, and 
January 11 through May 31, 2021, which we refer to as Phases I, 
II, and III, respectively. Over this period, Congress provided 
commitment authority of about $814 billion. In summary, early 
lending during Phase I favored larger and rural businesses. 
Specifically, 42 percent of these early loans went to larger 
businesses, which we defined as those with 10 to 499 employees. 
Larger businesses were more likely to have a preexisting 
lending relationship with a bank. Businesses in rural areas 
also received a high share of these early loans relative to 
their representation among all small businesses.
    Traditionally underserved businesses, in particular, 
businesses owned by self-employed individuals, members of 
minority groups, women, and veterans faced challenges obtaining 
loans, prompting Congress and SBA to make a series of changes 
shortly after the program launched. For example, SBA admitted 
about 600 new lenders, including non-banks, developed guidance 
helping self-employed individuals participate in the program, 
targeted funding to minority-owned businesses in part through 
community development financial institutions. Through the 
Paycheck Protection Program and Health Care Enhancement Act 
passed in April 2020, and the Consolidated Appropriations Act 
passed in December of 2020, Congress established additional 
set-asides for businesses that applied through CDFIs and other 
specialized lenders.
    Lending to traditionally underserved businesses increased 
noticeably after these changes were implemented. By the time 
PPP closed in June 2021, lending in traditionally underserved 
counties was proportional to their representation in the 
overall small business community. While lending to businesses 
with fewer than 10 employees remained disproportionately low, 
it increased significantly over the course of the program.
    Chairman Phillips and Ranking Member Van Duyne, I would be 
happy to respond to any questions you or the panel would like 
to ask.
    Chairman PHILLIPS. Thank you, Mr. Shear. I will begin by 
recognizing myself for 5 minutes.
    The GAO found that banks made more than 93 percent of the 
loans during Phase I, which I recall was the first 2 weeks of 
the program. Did GAO determine how much of that 93 percent went 
to existing clients versus new clients of those banks?
    Mr. SHEAR. We refer to research by others as far as the 
tendency----
    Chairman PHILLIPS. Mm-hmm.
    Mr. SHEAR.--to serve existing clients, but we don't have 
information that--to answer that question as far as how much of 
it went to existing versus new clients.
    Chairman PHILLIPS. Okay. As you are well aware, we made 
several changes to the program midway. Some of them included 
CDFI set-aside, the 14-day exclusivity period for 
microbusinesses, and beginning in 2021, the loan calculation 
rule changes for Schedule C filers and others. Of those 
changes, and perhaps others, which of those were most effective 
in helping improve access, especially for underserved 
businesses, in your estimation, of the modifications that we 
made?
    Mr. SHEAR. The modifications that I tend to focus on the 
most are the inclusion of CDFIs and actions taken to help 
smaller banks participate. Those are the two that stand out for 
me. So, I don't want to take anything away from the other 
inclusion that occurred over the period. But that is what 
stands out the most to me.
    Chairman PHILLIPS. I appreciate it. You know, we know PPP 
was designed to expediently distribute funds with oversight and 
fraud protection occurring during the forgiveness phase. In 
your view, did Congress find the appropriate balance between 
expediency and fraud prevention? And what aspects of PPE are 
worth further research in that respect?
    Mr. SHEAR. Our concern from the beginning of the program 
was the lack, we called it limited controls. So, I will use the 
words controls and oversight kind of interchangeably----
    Chairman PHILLIPS. Okay.
    Mr. SHEAR.--and the lack of, really, what we call sound 
fraud risk management. So, that has been a concern from the 
beginning. As I have said before this Committee before, that we 
put the emergency loan programs on GAO's high-risk list because 
of our concerns of the lack of oversight, the lack of controls 
in place, the lack of sound fraud risk management, and also, 
findings from financial statement audits, and just high rates, 
the inability to estimate improper payments. So, these are all 
concerns of us. So, it is one that is our focus has been on 
SBA's administration of the program. So, those are the things 
that stand out the most for us in terms of we think the 
oversight of the program has improved over the period from the 
initial period. But we still have concerns with the oversight 
element of it. We are still concerned about the lack of 
comprehensive fraud risk management.
    Chairman PHILLIPS. Are there any specific recommendations 
you might share with us in the Committee relative to some of 
that oversight and fraud prevention that we could still yet at 
least call to their attention, or perhaps equally importantly, 
prepare for in the future?
    Mr. SHEAR. The most progress that has been made, we made a 
recommendation in our first GAO-wide report in June of 2020, to 
really put controls in place, to really have oversight to 
protect the integrity of the program. So, it is dealing, you 
know, kind of broadly with how do you monitor borrowers to make 
sure they are eligible, that they are the intended 
beneficiaries, and things of that nature.
    On that, there is a master review plan that has gone 
through different iterations. It was recently updated, but it 
has largely been intact for the last, I would say, 12 to 14 
months. That is one where there has been some progress made in 
terms of using largely consultants----
    Chairman PHILLIPS. Yeah.
    Mr. SHEAR.--in terms of automated reviews, manual reviews, 
to oversee it. So, it is like there has been improvement in 
that area. We are still looking for some greater movement on 
that. And the one area that we still are involved in discussion 
with SBA about is the lack of looking at what is called the 
self-certification for economic necessity. So, we have that.
    On fraud risk management, we are very concerned about it 
because we made two recommendations in 2021, having to do with 
fraud risk management to really to do an assessment of fraud 
risk to follow GAO's best practices for fraud risk management, 
which include naming a lead entity to do that and of specifying 
what is called a fraud risk tolerance. So, we have been 
looking. We have been calling for that and to have an action 
plan to deal with the fraud issues. It was just in the last few 
weeks, basically, that SBA has stood up a lead entity to lead 
fraud risk management.
    Chairman PHILLIPS. In the last few weeks, okay.
    Mr. SHEAR. Yeah, just in the last----
    Chairman PHILLIPS. My time----
    Mr. SHEAR.--few weeks.
    Chairman PHILLIPS.--is, unfortunately----
    Mr. SHEAR. I am sorry.
    Chairman PHILLIPS.--my time is well expired.
    Mr. SHEAR. I am sorry for the long answer.
    Chairman PHILLIPS. But it was important to get that answer. 
So, thank you.
    Mr. SHEAR. But this is a continuing concern of ours.
    Chairman PHILLIPS. Okay. Thank you, sir. With that, I yield 
to our Ranking Member, Ms. Van Duyne, for 5 minutes.
    Ms. VAN DUYNE. I appreciate that. And I actually want to 
continue exactly what you were talking about. So, I feel like 
you felt you had to truncate that answer. I am really concerned 
about the lack of fraud risk management what you are talking 
about with the inability to be able to find some of these 
fraudulent payments. Can you give us a little bit more detail? 
I mean, when we say the lead entity, who is that? Are you 
somewhat confident that they are going to be able to actually 
do the job of providing that oversight?
    Mr. SHEAR. We are at least glad that they named an entity, 
basically.
    Ms. VAN DUYNE. So, who is the entity?
    Mr. SHEAR. It is like a fraud risk council within SBA.
    Ms. VAN DUYNE. Okay.
    Mr. SHEAR. Okay. So, they established a council. So, there 
is a lead entity with the responsibility and the authority. So, 
there is an entity that is on paper that kind of corresponds to 
what we would call a lead entity in charge. They are supposed--
--
    Ms. VAN DUYNE. Up until that point, was there a concern 
that there was just no accountability within the organization?
    Mr. SHEAR. It was like, certainly, there have been 
extensive looks at fraud, especially by the IG, by the PRAC, 
and others. There has been a look at it, but the concern is the 
lack of a dedicated entity, and the idea that fraud risk 
management involves a very comprehensive and strategic 
approach. And what didn't happen at the beginning of the 
program and really hasn't happen yet is to really come up with 
an action plan.
    So, the way I would characterize it through the oversight 
function, it isn't like SBA's going, you know, is running blind 
that they don't know, you know, what some of the, you know, as 
far as what some of the problems are with borrowers that might 
not be eligible. So, they are not flying blind. But what we are 
looking for is a more comprehensive approach, a more strategic 
approach, a more informed approach to really to figure out the 
patterns of fraud risk--of fraud that is going on and to manage 
that risk. We recognize in an emergency that there--it is 
logical to allow some tolerance for fraud in the program. There 
can be--it recognizes that our fraud risk framework that in 
response to an emergency----
    Ms. VAN DUYNE. But you are going to have to ask the 
question like, I mean, how much fraud is acceptable? I mean, I 
think----
    Mr. SHEAR. We don't----
    Ms. VAN DUYNE.--from our position----
    Mr. SHEAR.--have a measure. Neither does----
    Ms. VAN DUYNE.--we would say none.
    Mr. SHEAR.--neither does SBA. But I know the tendency is to 
say no fraud is acceptable. And I can say that as a principle, 
we don't want fraud in any program. But there is the notion 
that if fraud risk exists, it is just like it might be that 
strategically that there might be a reason to tolerate, you 
know, more exposure to potential fraud----
    Ms. VAN DUYNE. Well, part of that solution seems----
    Mr. SHEAR.--in a program than in a regular program----
    Ms. VAN DUYNE. Yeah.
    Mr. SHEAR.--considering the emergency situation. It is 
similar to the situation----
    Ms. VAN DUYNE. No, and I am sorry.
    Mr. SHEAR. Yeah.
    Ms. VAN DUYNE.--but I have very limited time.
    Mr. SHEAR. I am sorry.
    Ms. VAN DUYNE. I have got like a bunch of questions that I 
want to ask.
    Mr. SHEAR. Okay. Thanks.
    Ms. VAN DUYNE. And I appreciate you going on that. But 
looking at the potential for fraud, have you conducted any 
analysis on potential fraud between banks and non-bank lenders 
when it comes to the program? And has your research found out 
when it comes to oversight controls in place at the SBA, have 
you been able to root out that fraud? So, is there a difference 
between banks and non-banks, and where did SBA play a role in 
that?
    Mr. SHEAR. We recognize that there are certain concerns 
that have been raised about FinTech lenders.
    Ms. VAN DUYNE. Correct.
    Mr. SHEAR. Our forensic auditors have ongoing work that 
still is looking into the issue as far as it is largely focused 
on SBA's practices, but it also considers the different types 
of lenders. So, we have ongoing work on that. One of the things 
I would like to emphasize is that it will probably be years 
until we know how much fraud has occurred in this program. And 
so, what we point to an awful lot are from real time auditing 
by the IG community and others----
    Ms. VAN DUYNE. Mm-hmm.
    Mr. SHEAR.--is that what we look for is how much potential 
fraud is out there. We observe a high-level----
    Ms. VAN DUYNE. Do we have a number for that?
    Mr. SHEAR. There are different numbers that have been used 
that we have cited from the IG and others as far as how much--
--
    Ms. VAN DUYNE. What potential fraud would you estimate is 
out there right now for this program?
    Mr. SHEAR. I would have to go back and----
    Ms. VAN DUYNE. Can you give me a range?
    Mr. SHEAR. I can't answer it for the record, no. No, 
because this is one maybe a year ago when I was really 
discussing fraud risk, I would be better prepared. I----
    Ms. VAN DUYNE. But you are saying those numbers are public? 
Your organization----
    Mr. SHEAR. Yeah.
    Ms. VAN DUYNE.--SBA has made it public?
    Mr. SHEAR. We have reported multiple times. We refer to the 
IG report----
    Ms. VAN DUYNE. But you don't know what the latest numbers 
are at all?
    Mr. SHEAR. No. I don't have the latest numbers in front of 
me. I could go ahead----
    Ms. VAN DUYNE. Do you know what the difference between what 
is acceptable? What you are claiming would be acceptable 
compared to what we are looking at right now?
    Mr. SHEAR. We have no standard for acceptable. But what we 
are saying that for SBA managing fraud risk it is reasonable to 
think about how much risk are we willing to take.
    Ms. VAN DUYNE. I am just wondering what the delta is.
    Mr. SHEAR. Yeah.
    Ms. VAN DUYNE. But I am out of time.
    Mr. SHEAR. Yeah, okay.
    Ms. VAN DUYNE. Thank you, sir.
    Chairman PHILLIPS. The gentlelady's time has expired. 
Perhaps we can come to a second round too. With that, I am 
pleased to recognize the Chairwoman of the Small Business 
Committee, the gentlelady from New York, Ms. Velazquez, for 5 
minutes.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. Thank you, Mr. 
Shear, for being here today. I am happy to see GAO validates my 
initial assertion that more sophisticated firms that had better 
access and those without preexisting relationships couldn't get 
loans approved no matter how hard. First, they were not able to 
even have contact with those banks. And then if they did, those 
loans were not approved. So, your report suggests that program 
changes made by Congress and SBA helped to increase access for 
the intended businesses and counties. So, my question to you 
is, would empowering CDFIs and MDIs and getting them more 
involved with SBA lending help address gaps in the business 
lending market identified during PPP?
    Mr. SHEAR. You are asking a really good question. And it is 
very clear, as you said, that the changes made by the Congress 
and the SBA have led to greater access for especially 
underserved borrowers. So, it is greatly improved in this 
program. And I want to go back to what I said about maybe some 
tolerance for fraud, as far as, as a strategy is that the 
considerations involved in an emergency loan program and 
knowing how devastating the pandemic, the effects have been on 
small businesses, especially the most vulnerable and the 
smallest small businesses that might not have access to 
capital. It is a different consideration when you start 
bringing in more lenders and targeting assistance. I think it 
is a more complicated story if you are talking about let's just 
say during normal times, let's just say the 7A program as far 
as there are certain questions like we have followed the Office 
of Credit Risk Management very closely over the years. There 
are certain other considerations that come into effect.
    Ms. VELAZQUEZ. And I know that----
    Mr. SHEAR. Yeah.
    Ms. VELAZQUEZ.--our first consideration must be to be safe 
stewards of taxpayers' money, right? The fact is we haven't 
seen fraud committed by CDFIs and MDIs. So, that could be 
another report or investigation that could be. But the report 
mentioned potential fraud in the COVID relief programs. And 
while FinTech lenders were essential in helping small 
businesses access PPP loans, research has shown FinTech 
originated PPP loans are more likely to be associated with 
fraud. To balance the interests of safeguarding taxpayers' 
dollars while improving the reach of SBA lending programs, how 
cautiously should we proceed with non-bank lenders accessing 
SBA guaranteed lending?
    Mr. SHEAR. My answer for an emergency program like PPP is 
that you especially have the underserved businesses that were 
really adversely affected and particularly businesses owned by 
members of minority groups.
    Ms. VELAZQUEZ. Mm-hmm.
    Mr. SHEAR. And there might be--it might make more sense 
that the FinTech lenders have algorithms that are, you know, 
considered color blind, things of that nature. They have served 
that segment of the market more heavily than some of the other 
lenders have. So, the consideration of pandemic, I think, is 
different.
    I will just state the consideration I think if you are 
talking about the 7A program and during normal times, is to 
focus on the Office of Credit Risk Management. And we have seen 
improvements in that program over the years. We have certainly 
evaluated it many times from its creation. And there have been 
improvements in their program. I think the focus should be on 
the ability of that office to oversee the new lenders.
    Ms. VELAZQUEZ. Okay. Thank you. Many view the PPE as a 
stress test of the small business lending market. And GAO's 
research and testimony from other panelists show where the gaps 
in the program are--were. Do you agree that PPP was a stress 
test of the small business lending market and that we should be 
learning lessons based on where the gaps are shown to be?
    Mr. SHEAR. There are certainly lessons learned. One is that 
our next enclosure on PPP in our April report will get into 
lessons learned for let's just say future emergencies.
    Ms. VELAZQUEZ. All right.
    Mr. SHEAR. But there is also certain--it casts a light on 
who is served by whom in a more general way. So, I think it is 
something we should all be mindful of.
    Ms. VELAZQUEZ. Thank you. I yield back, Mr. Chairman.
    Chairman PHILLIPS. The gentlelady yields back. And I am 
pleased to recognize the Ranking Member of the Small Business 
Committee, the gentleman from Missouri, Mr. Luetkemeyer, for 5 
minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. And I want to 
follow-up on your opening remarks with regards to the powerful 
speech and video that we saw this morning from President 
Zelenskyy. I agree that it is a very unnerving situation. This 
is not a video game that is going on. This is a real-life 
situation with people living and dying and being hurt because 
of war. I mean, you take it very seriously, and I hope the 
administration does just that. That was a sincere request this 
morning and I hope they take it sincerely and act on it 
accordingly.
    With that, thank you for bringing this topic to us this 
morning. Mr. Shear, welcome again. I always enjoy your 
discussions with us. A lot of the things I was going to talk 
about have been discussed already. But I want to talk about a 
little bit with regards to the IG report that talked about some 
of the controls that they were requesting to be put in place. 
And as I was talking with them and actually off the record and 
on the record here in Committee a couple of times, they were--I 
asked them, you know, well, you have identified fraud. You 
identified problems within the SBA's administration of these 
programs. Which by the way it is a Treasury program. SBA is 
administering it. Let's get that straight. Make sure we 
understand that. And throughout the discussion, I kept asking 
the question, so, you are giving them processes, and protocols, 
and new procedures, are the leaders of the SBA, are they 
implementing those? And the answer was, yes. And so, I said, 
well, what is the problem, then? And they said, oh, the staff 
is not implementing it. The staff is not living up to the--and 
operating within those procedures. Did you find that same thing 
that staff didn't seem to be willing to comply with the 
processes and procedures that were put in place?
    Mr. SHEAR. We haven't seen evidence of that. But we 
haven't, you know, focused that closely as far as the processes 
followed by the employees. But what we have focused on have 
been the different, you know, automated checks, manual checks, 
and the like. And so, that is what we----
    Mr. LUETKEMEYER. Well----
    Mr. SHEAR.--focused on.
    Mr. LUETKEMEYER.--you sort of alluded to something a minute 
ago with respect to the reaction of SBA to your suggestions 
saying that they, in essence, and I don't want to put words in 
your mouth here, but basically you said they didn't take some 
of your suggestions seriously. They didn't act on them. They 
didn't put everything in place that you suggested. You know, it 
taking a long time for them to actually implement some of these 
things. So, do you think they take your recommendations and the 
IG seriously? Because it has taken until now and you just said 
a minute ago that just 2 weeks ago they started to implement 
some of these things. I mean, it looks to me like we are really 
not taking anything seriously from the folks who could actually 
be helping them clean up their mess.
    Mr. SHEAR. The things that stand out for us and it becomes 
part of discussions that I and my colleagues have had with SBA 
and that the Comptroller General has had with the 
administrator, which is the designation of the high-risk 
designation. And we are concerned that it has taken so long to 
set up an entity to manage fraud risk. It is very late in the 
game to be doing that. And so, that stands out. And there is 
also concerns that has come out of the financial statement 
audits from the last 2 years that there are concerns about the 
accounting and the internal controls pointed out by that. And 
those really stand out for us as something that we wish that 
action would have been taken more quickly in both areas.
    Mr. LUETKEMEYER. Well, your statement there, sir, I thank 
you for it, is that it has taken 2 years to get something done. 
I mean, it would appear to me, I mean, if I am managing the 
agency, you know, it may take, you know, 6 months to a year to 
get some new changes in place, get people used to the new 
processes, but 2 years? It looks to me like they are just 
saying no thank you. We are going to work on this in our own 
time. Either that or they are so overwhelmed with the process 
and all of the work they are having to do that they can't get 
to it. Is that a possibility?
    Mr. SHEAR. You bring up a very real possibility. And one of 
the things that I would point out is that you do have this 
master review plan in place as far as oversight. But it is a 
little bit more of a reactive policy. They learn from what they 
see from, you know, from the focus of that master review plan 
and we are really looking for something more strategic to 
address these issues.
    Mr. LUETKEMEYER. Well, I hope instead of learning----
    Mr. SHEAR. And that has----
    Mr. LUETKEMEYER.--from what they----
    Mr. SHEAR. That has----
    Mr. LUETKEMEYER. Okay.
    Mr. SHEAR. That has taken a long time.
    Mr. LUETKEMEYER. Instead of learning from what they see, I 
hope they listen to what you say.
    Mr. SHEAR. Okay.
    Mr. LUETKEMEYER. Because it would certainly be helpful to 
them. I have just got a couple seconds left and I just wanted 
to make one more comment with regards to FinTechs. I agree with 
Chairman Velazquez that this is a concern. It appears that that 
is where most of the fraud was in the PPP program. Idle 
programs are whole another animal. But it does appear that from 
the statistics we saw, that the FinTech folks were actually not 
very good at protecting the integrity of the program. Would you 
agree with that statement?
    Mr. SHEAR. I don't think there is enough information 
available to draw that conclusion. So, maybe we are just----
    Mr. LUETKEMEYER. You don't have----
    Mr. SHEAR.--we are cautious.
    Mr. LUETKEMEYER. You don't have any idea that the losses 
were so significant compared to the banks and credit unions in 
this instance because they have a know your customer rule in 
place that the FinTechs don't? That it didn't protect the 
ability of the banks and those folks to do their job right 
versus the FinTechs?
    Mr. SHEAR. Let me just make the observation at a very 
simple level. We looked at lending over three periods of time 
and there were certainly evidence of significant potential 
fraud in the program in all three phases, and----
    Mr. LUETKEMEYER. But you haven't quantified it yet.
    Mr. SHEAR. We haven't quantified it and, again, I will go 
back to the statement----
    Chairman PHILLIPS. The gentleman's time----
    Mr. LUETKEMEYER. Are you----
    Chairman PHILLIPS.--has expired.
    Mr. LUETKEMEYER. Are you keeping----
    Mr. SHEAR. We don't know----
    Chairman PHILLIPS. Mr. Shear, we have to wrap this up.
    Mr. SHEAR.--how much fraud. We don't know how much--we will 
not know for a while how much fraud has occurred in the 
program.
    Mr. LUETKEMEYER. I think it is very important that we 
quantify that. And I thank you for your testimony and I thank 
the Chairman for his indulgence. Thank you.
    Chairman PHILLIPS. The gentleman's time has expired. Now, I 
am pleased to recognize the Vice Chair of the Committee and the 
Chairman of the Subcommittee on Contracting and Infrastructure, 
the gentleman from Maryland, Mr. Mfume, for 5 minutes.
    Mr. MFUME. Thank you very much, Mr. Chairman. I want to 
thank you and the Ranking Member for convening what I consider 
to be a crucial hearing. Mr. Shear, thank you for being with us 
this morning. As we all know, if I can deliberately be 
redundant, the Paycheck Protection Program supported small 
businesses across our nation during the pandemic by allocating, 
as we know, $800 billion to cover payroll and operational 
costs. And it was such an incredible program that it lifted 
businesses that were in the most need and kept them afloat. So, 
you can understand why there is so much concern here about 
fraud and fraud assessment and how do we not do the same thing 
again.
    I believe, however, that to truly invest in a program like 
this, we have to be compliant to our oversight and our 
fiduciary responsibilities as a committee, and not only applaud 
the success, but to also point out failures where we see them. 
And the driving force behind the program was paychecks for 
employees. It was very simple. Yes, we care about every aspect 
of business and operations, but the program was designed to 
protect employees. So, as you might imagine, some of us have 
been hearing stories that just go against the grain.
    Mr. Shear, there is a hotel in my district, the 
Merriweather Lakeshore Hotel that received a PPP loan for 
almost $1.1 million on April 10 of 2020. On April 15, 5 days 
later, the Merriweather Lakeshore Hotel fired 100 of its 
employees and then closed to the public. According to PPP 
regulations, the hotel, correct me if I am wrong, was required 
to spend 60 percent of its loan on payroll costs. Yet it 
remained closed from that point during the entire period after 
that. And then based on information provided to me, the hotel 
refused later, a year later, to hire 98 of the 100 people that 
it had let go who had been out of work for all of that time. 
So, I am just trying to get some sense about this notion of 
give you money, take money. Give you money under one claim, and 
then under that same claim, in this case, 100 people are let go 
a few days later.
    So, could you tell me whether your research as shown 
whether this industry, the hotel industry, or other industries 
that have received cumulatively billions of dollars through 
this program, have also failed to return workers back to jobs 
after receiving the money to protect the paychecks of those 
workers.
    Mr. SHEAR. Our work hasn't drilled down into the very 
important issue that you raise. What our work has identified is 
the idea that this is a program out of the starting gate that 
relied heavily on borrower self-certifications. So, I can't 
speak to the hotel, even though I will mention I live in your 
district in Baltimore. But I know what hotel you are talking 
about.
    Mr. MFUME. God bless you. You are a great American.
    Mr. SHEAR. Okay. Thank you. But I will say that I can't 
comment on the one hotel or any specific industry. But we are 
concerned how much the program has relied on self-
certifications and this is why we have followed so closely the 
oversight that has been put in place to examine whether 
borrowers are complying with the requirements of the program 
and whether the borrowers are, in fact, eligible for the 
program. So that is where our focus has been.
    Mr. MFUME. Well, I hope now that you have this example 
based on the information that has been provided to me, that 
someone at GAO will look into this. I know you are not the 
Inspector General, but all of us are going to get instances 
where we have these strange, strange kind of situations where 
people receive money, they fire people, and then they close 
down, and then the loan is ultimately forgiven, as this one was 
a year later. I would appreciate it if you could look into that 
and if you could let myself and, of course, the Committee know 
of your response.
    Mr. SHEAR. Okay. I would be glad like as far as questions 
you want to put in our questions for the record. We normally 
don't comment on one entity, but we will see what we can do in 
response to your question. So, I thank you.
    Mr. MFUME. Thank you. And I hope you will take it as a 
constituent request. Back to you.
    Mr. SHEAR. Okay.
    Mr. MFUME. Thank you, Mr. Chair.
    Chairman PHILLIPS. The gentleman yields back. And now I 
recognize the Ranking Member of the Subcommittee on Economic 
Growth, Tax, and Capital Access, the gentleman from 
Pennsylvania, Mr. Meuser, for 5 minutes.
    Mr. MEUSER. Thank you, Mr. Chairman. Thanks to the Ranking 
Member. Thank you, Mr. Shear. Before I get started, I just want 
to go on record quoting our Chairwoman Velazquez last year when 
she stated how unfortunately Treasury Secretary Yellen has 
declined to appear before us in complete disregard for the law, 
which requires her to do so. That was last May that that 
comment was stated and Secretary Yellen has still failed to 
appear. Ranking Member Leutkemeyer has mentioned it many times 
in most meetings. It is just quite irresponsible and it runs 
counter to the law. So, it is kind of hard for us to, you know, 
you know, explain that, and it is not our job to explain it. I 
think maybe the Secretary could explain it when and if she 
appears here.
    But moving along. So, PPP did a tremendous amount of good. 
There is no question. It was a lifeline to thousands of 
businesses throughout my district and elsewhere. The Treasury 
Department at the time was very accessible. We were on the 
phone with then Secretary Mnuchin often, you know, getting it 
going. Many of us spent countless hours, 12, 13, 14 hours a day 
probably in the first 2 weeks of its inception dealing with 
banks, dealing with businesses, and helping it through.
    So, but the bad news is the level of fraud. Now, the PPP, 
the numbers that I have and I don't know, Mr. Shear, you can--
it is about $4 to $5 billion that is estimated, in fraud in the 
PPP out of--what was the total, $840 billion? Something of that 
nature. So, you know, $4 billion is a lot of money to say the 
least. But the problem lies in the EIDL. And the EIDL has, I 
believe the total EIDL was in the neighborhood of $260 billion 
and yet, nearly $80 billion in fraud. Now, we all know that the 
PPP was done in cooperation with the SBA and local banks, 
primarily local community banks. The EIDL done straight through 
SBA. So, clearly, the know the customer, right, KTC, is quite 
imperative for a program to have any integrity, right? I mean, 
that is almost like the simplest of answers, simplest of 
solutions. So, I am certainly hoping the GAO and moving forward 
the SBA that we recognize this and do what we can do to, you 
know, that we do things in such partnership with the KTC ideas 
being followed.
    So, I will just ask you this. As you are working on 
integrity and quality and such, are you, from the GAO 
standpoint, is the SBA implementing for loans and forgiveness 
programs right now more on the quality end of things, such as 
in systems? Or are they hiring people? What, Mr. Shear, is 
being done to fortify the process as well as bring a higher 
level of scrutiny to the integrity of the overall system, as 
well as assure our forgiveness program is being done in a 
manner that those who deserve forgiveness are receiving? What 
are we investing in? What are we--how are we improving?
    Mr. SHEAR. Yes. I will refer to we have reported, you know, 
on these GAO-wide reports, we have had quite a few and a lot of 
enclosures on the PPP program. We had a standalone report last 
summer, in addition to the one I am testifying on today, having 
to do with controls. And so, the--what I will point to for PPP, 
in particular, is we--oh, we also had a standalone report on 
SBA's use of supplemental appropriations to help support the 
emergency loan programs. So, we know that there is heavy 
reliance on contractors as part of the oversight. So, we know 
that Guidehouse is very much front and center in terms of, 
among other things, automated controls. We know that Deloitte 
is very heavily involved. We know Goldschmidt is very heavily 
involved. And it is a mix of the automated reviews, the manual 
reviews, and the overall checks for kind of like the quality of 
that system.
    So, that is what we observe as where there has been a 
oversight structure that has been in place for some period of 
time.
    Mr. MEUSER. I know that. Do you agree that the system with 
the PPP in cooperation with community banks proved far more 
effective and efficient than a straight EIDL loan through the 
SBA?
    Mr. SHEAR. With EIDL----
    Chairman PHILLIPS. A quick answer, sir. Our time has 
expired.
    Mr. SHEAR. Yeah, with EIDL, it is--there is another set of 
circumstances and there is another set of contractors that are 
involved with it. But I will go back to just my observation 
that we don't really know, we won't know for a long time how 
much fraud has occurred in both programs. And I would want to 
point to the oversight structure----
    Chairman PHILLIPS. Okay. Thank you. Thank you, Mr. Shear.
    Mr. SHEAR. I would want to point to the oversight structure 
for both.
    Chairman PHILLIPS. All right. Thank you. The gentleman's 
time has expired. I am going to give an award to the first 
among us who stays within his or her 5 minutes, myself 
included. With that, I am pleased to recognize the Chairwoman 
of the Subcommittee on Economic Growth, Tax, and Capital 
Access, the gentlelady from Kansas, Ms. Davids, for 5 minutes.
    Ms. DAVIDS. Thank you, Chairman and to the Ranking Member 
for holding this hearing today. You know, the Paycheck 
Protection Program was absolutely an essential lifeline to 
small businesses across the country during the height of the 
pandemic. And small businesses in the Kansas 3rd received over 
2,000 PPP loans totaling somewhere around $820 million. And 
that critical funding really helped small firms in the 3rd 
District that I represent maintain their rent and payroll while 
they learned how to operate and adjust to extraordinary 
challenges that the pandemic presented. Unfortunately, we did 
see that, you know, larger banks overlooked the smallest 
businesses, those owned by minority or veteran and women-owned 
businesses while they were originating the PPP loans.
    And, you know, in fact, in your testimony, or maybe in 
response to one of the questions, you mentioned, Mr. Shear, 
that the community-based lenders like CDFIs were instrumental 
and that that was a key piece of the modifications that we 
made. I am curious, Mr. Shear, what factors, from your point of 
view, led community-based lenders to being so much better at 
reaching those businesses?
    Mr. SHEAR. Thank you for the question. I think that you 
look at the missions of entities such as the CDFIs and you can 
see that they have a focus on what is often called the 
underserved community of small businesses. So, I would point to 
that. As far as the smaller community banks, you know, I would 
say that especially when you look at rural areas, I think that 
the smaller community banks really played a role. So, here I am 
not talking about specialized lenders, per se, but I think that 
a lot of it is that what is the--what is kind of like the 
mission of----
    Ms. DAVIDS. Mm-hmm.
    Mr. SHEAR.--the various entities. With banks, you have a 
little bit more. And I am not saying this to criticize banks, 
but you have a situation where serving your customers it is a 
huge incentive to serve your customers. And that sometimes can 
lead to serving customers that are your existing customers that 
and aren't as focused on those customers, those small 
businesses that might be underserved.
    Ms. DAVIDS. So, are we seeing, now that, you know, the PPP 
is closed to new applicants, but we are seeing applications 
coming in for the forgiveness portion of these programs, of 
this new program, and I am curious if you are seeing, again, a 
similar kind of gap as it relates to the traditionally 
underserved or disadvantaged business entities.
    Mr. SHEAR. We did some analysis around just like we did for 
in, you know, that is in my statement today, for loans that 
were made, looked at the forgiveness process. And what the 
biggest thing that has come out of that is the very large 
percentage of forgiveness applications that have been approved. 
And so, nothing--we didn't report on it. We don't plan to 
report on it, but I will just state that nothing really stood 
out in terms of whether the forgiveness process itself and to 
say was in some way could be called detrimental to any 
particular group.
    Ms. DAVIDS. Okay. Well, I appreciate your taking the time 
to testify before our Committee today. And, Mr. Chair, I yield 
back.
    Chairman PHILLIPS. The gentlelady yields back. And now, I 
recognize the gentleman from Florida, Mr. Donalds, for 5 
minutes.
    Mr. DONALDS. Thank you, Mr. Chairman. Mr. Shear, according 
to the PRAC Small Business Administration Paycheck Protection 
Program Phase III Fraud Controls Report in January of 2021, the 
SBA OIG reported that nearly 55,000 PPP loans worth about $7 
billion went to potentially ineligible businesses or fraudulent 
recipients. The report goes on to say that 100 percent of the 
case--in 100 percent of the cases the PRAC reviewed included 
one or more false statements on the PPP loan application that 
would have made the applicant ineligible. The PRAC has said 
that the SBA could have used IRS data to determine improper 
payments prior to disbursement. That opportunity to conduct 
pre-disbursement checks is no longer available. Have you 
considered the use of available commercial data like business 
information such as payroll, utility, or rent information to 
conduct reviews or audits of PPP loans?
    Mr. SHEAR. Our forensic auditors who really take the lead 
and have worked with us very closely on the fraud issues 
certainly use what we often call data analytics in the use of 
different datasets, including it might be from the Postal 
Service, the Do Not Pay list out of Treasury, and various other 
types of databases that are available to examine those issues. 
And certainly, the PRAC and the SBA IG have been very involved 
in those types of examinations. At GAO, it is really our 
forensic audits group that we work with closely have taken a 
close look and continue to take a close look at certain 
patterns that are present that might suggest fraud or 
certainly, where the flag goes up that there could be potential 
fraud.
    Mr. DONALDS. Okay. All right. So, looking forward, would 
you recommend that any future relief programs similar to PPP or 
other pandemic programs leverage available third-party data for 
verification purposes to prevent fraud, abuse, mismanagement, 
and also to reduce the need of costly after-the-fact 
remediation or enforcement?
    Mr. SHEAR. Absolutely.
    Mr. DONALDS. Mm-hmm.
    Mr. SHEAR. The whole role of data analytics of examining 
and coming up with a structure and in this case, it would have 
been great to come up with a comprehensive approach using 
different data sources to ensure the integrity of the program, 
but really to ensure that the fraudsters don't get it. The 
shift now has been more toward because of the passage of time, 
is, you know, when I was before this Committee last year, our 
emphasis was on preventative controls, and that is exactly what 
you are talking about. Preventative controls are great. Now, we 
are in a situation, meaning the IG community, SBA, and others 
where you are trying to chase down fraudsters. And that is a 
much more costly kind of approach to the fraud issue than 
putting in preventative controls to begin with.
    Mr. DONALDS. Thank you, Mr. Chair. One final statement just 
more for, you know, our colleagues here on the Committee. When 
it comes to, in my view, when it comes to the role of CDFIs 
versus traditional commercial banks versus community banks, one 
of the things we have to always remember is that CDFIs have a 
specific mission that has been granted, frankly, by us. 
Commercial banks and even credit unions that used to have a 
specific mission, they have obviously had mission creep in 
their original mission. But the community banking industry and 
the national commercial banking industry and even the super 
regionals, one of the issues that they do face is the 
regulatory burden that has been unleased on their industry by 
us here in Congress.
    And so, if they have to deal with significantly higher 
regulatory burdens, specifically in the community banking 
space, which is why the community banking space has decreased 
substantially over the last decade in the United States, that 
is the reason why so many of our smaller businesses struggle 
with access to capital. And that is why you have new industries 
like FinTech who are coming up to fill that space. That is in 
direct response to the regulatory environment that has been 
unleashed in banking since the passage of Dodd-Frank back in 
2009.
    So, I think it is important for the Members as we look at 
what has happened during the pandemic and access to capital 
issues, that we understand it is the regulatory environment 
that has fed industries like FinTech and these other 
opportunities to flourish. I yield back, under time, by the 
way, Mr. Chairman.
    Chairman PHILLIPS. Duly recognized, Mr. Donalds, as Mr. 
Mfume also, and also Ms. Davids gets an award. Seeing no other 
questions, Mr. Shear, we want to thank you for your time and 
your dedication to this very important work. So, we now excuse 
you and we will just take a few moments to set up our next 
panel. Thank you.
    Mr. SHEAR. Okay. Thank you very much.
    Chairman PHILLIPS. All right. We want to welcome our 
witnesses on our second panel today. I will take a minute to 
introduce each of you before your testimony.
    Our first witness on panel two, Dr. Robert Fairlie, 
Professor of Economics at the University of California, Santa 
Cruz. Professor Fairlie has testified before Congress numerous 
times on policy issues related to small businesses and we are 
thrilled to have him before us again today. Professor Fairlie's 
most recent work focuses on third and final round of PPP, which 
ran during the first half of 2021 and successfully targeted 
program funds to underserved businesses. We look forward to 
hearing about this important research and the implications it 
has on SBA's non Covid business loan programs.
    We welcome you, Professor Fairlie.
    Our second witness is Dr. Manju Puri. Professor Puri is the 
J.B.--oh, I never know how to say--Fuqua--sorry--Fuqua 
Professor of Finance at Duke University's Fuqua School of 
Business in Durham, North Carolina. She and her co-authors' 
research looks specifically at the intermediary supply effects 
of using banks as the primary delivery mechanism for PPP loans 
and how it contributed to the prioritization of big businesses 
early in the program. Professor Puri has also served as a 
senior advisor for the FDIC center for financial research.
    We welcome you, Professor Puri.
    Our third witness is Dr. Iryna Demko. Dr. Demko is a 
research associate at the Center for Economic Development at 
the Maxine Goodman Levine College of Urban Affairs at Cleveland 
State University where she specializes in economic impact 
studies. In addition to reviewing PPP loan data, Dr. Demko and 
her research team also conducted a series of interviews with 
PPP borrowers of all sizes in Northeast Ohio. We look forward 
to hearing how the PPP loan data you observed tracks with the 
anecdotal evidence that you received.
    We welcome you, Dr. Demko.
    And now I would like to yield to the Ranking Member, Ms. 
Van Duyne, to introduce our final witness.
    Ms. VAN DUYNE. Thank you, Mr. Chairman.
    Our next witness is Robert Barnes. Mr. Barnes is the 
president and chief executive officer of PriorityOne Bank in 
Magee, Mississippi. PriorityOne Bank is a community bank with 
over a dozen locations throughout Mississippi and Mr. Barnes is 
testifying on behalf of the Independent Community Bankers of 
America, also known as ICBA.
    Mr. Barnes has a long history of serving Mississippi 
businesses and communities as he started at the bank nearly 40 
years ago. During this time he has held numerous positions and 
has had leadership roles. He is currently on the board of the 
Mississippi Bankers Association and is the Chairman of ICBA's 
legislative issues committee. Additionally, he holds membership 
on numerous economic, health, and education boards.
    Mr. Barnes also served on the governor's pandemic economic 
response team, known as Restart Mississippi.
    Mr. Barnes, welcome to the Committee. Your experience and 
background as a community banker will be invaluable as we have 
this conversation today.
    I yield back.
    Chairman PHILLIPS. Thank you, Ms. Van Duyne.
    Professor Fairlie, you are now recognized for 5 minutes for 
you opening statement.

   STATEMENTS OF ROBERT W. FAIRLIE, PROFESSOR OF ECONOMICS, 
  UNIVERSITY OF CALIFORNIA, SANTA CRUZ; DR. MANJU PURI, J.B. 
  FUQUA PROFESSOR OF FINANCE, DUKE UNIVERSITY FUQUA SCHOOL OF 
  BUSINESS; IRYNA DEMKO, RESEARCH ASSOCIATE AT THE CENTER FOR 
  ECONOMIC DEVELOPMENT, MAXINE GOODMAN LEVIN COLLEGE OF URBAN 
 AFFAIRS, CLEVELAND STATE UNIVERSITY; ROBERT BARNES, PRESIDENT 
         AND CHIEF EXECUTIVE OFFICER, PRIORITYONE BANK

                 STATEMENT OF ROBERT W. FAIRLIE

    Mr. FAIRLIE. I thank you. Thank you, Chairman Phillips, 
Ranking Member Van Duyne, and Members of the committee. It is 
an honor to testify before you on the Paycheck Protection 
Program.
    I am a professor of economics at the University of 
California, Santa Cruz, and I have studied entrepreneurship, 
racial inequality, and small business policy for over 25 years. 
I have been asked to discuss the findings from my research on 
small businesses in the pandemic and the allocation of PPP 
funds to communities of color.
    The economic impacts of the pandemic have been especially 
severe for small businesses, workers in minority communities. 
In my research early in the pandemic, I found that the number 
of active business owners in the U.S. plummeted by 22 percent 
from February 2020 to April of 2020. African American 
businesses were hit the hardest, experiencing a 41 percent drop 
in business activity. LatinX business owner activity fell by 32 
percent, and the Asian business owner activity dropped by 26 
percent. Job losses were all much higher for workers of color. 
Black unemployment hit a peak of 17 percent and LatinX 
unemployment hit a peak of 18 percent.
    Anticipating these potential losses, one of the stated 
goals of the CARES Act was to prioritize serving underserved 
markets and businesses owned by socially and economically 
disadvantaged individuals. In the beginning of the pandemic, 
however, minority businesses and communities were generally 
delayed in obtaining financial assistance through the PPP. 
Research of mine and others found that the first round of the 
PPP went disproportionately less to minority communities. In 
the second round of PPP funding Fintech lenders were more 
involved in making loans and disbursement to minority 
businesses and communities improved.
    A few months after the program ended in the summer of 2020 
Covid cases began to rise rapidly and social distancing 
restrictions returned. Given these concerns, the PPP restarted 
in January 2021 with a strong emphasis on helping eligible 
borrowers in underserved and disadvantaged communities. A head-
start for applications through CDFIs, a 2 week exclusion period 
for applications from very small businesses were introduced. 
Access to loans was emphasized for sole proprietors and 
independent contractors that didn't have employees.
    From January to February--or, sorry, from January to May 
2021 6.7 million loans totaling $278 billion were provided. But 
did these funds in the rebooted program get disbursed to 
minority communities as intended or did the program struggle 
with equitable loan disbursement.
    So what we did is we analyzed the 12 million loans proved 
through all 3 rounds of the PPP. We basically had five main 
findings. First, we find evidence of the strong positive 
relationship between PPP loans and the minority share of the 
population in the third round. We analyzed this relationship 
using several different measures and found consistent evidence 
that minority communities received loans.
    Second, in contrast to this finding, we found a negative 
relationship for the first round in 2020 and a less positive 
relationship for the second round in 2020.
    Third, we found a stronger positive relationship between 
minority share for loans in first draw of loans than second 
draw of loans in 2021. This is important because it might 
capture persistence in racial inequities from the first round, 
because a small business can only obtain a second draw loan if 
that business indeed received a first loan draw in the earlier 
round in 2020.
    Fourth, we found that PPP loans also went to self-employed 
business owners without employees in minority communities.
    Fifth, many more banks and financial institutions were 
involved in the third round, including Fintechs and CDFIs, 
which helped spread funds to small businesses in underserved 
markets.
    To conclude then, the rebooted program in 2021 appears to 
have been disbursed to communities of color as intended. 
Although it is too early to tell what the long-term effects are 
from the third round of funds for small businesses in the 
country, there is no doubt that access to capital poses one of 
the most important barriers for small businesses. This is 
especially true for small business owners of color. Half of 
black families in the U.S. have less than $14,000 in total 
wealth, half of LatinX families have less than $32,000 in total 
wealth, whereas the median level of wealth among white families 
is $187,000.
    Black owned businesses also start with substantially less 
capital than white owned businesses and these disparities 
continue over time.
    I believe that two things could help us move forward. 
First, we need to continue to provide access to capital for 
struggling businesses. One method to do this is to increase the 
range of financial institutions both geographically and by 
type. Increasing involvement of a wider range of financial 
institutions appears to have helped improve access to loans to 
communities of color.
    Second, we need more awareness and action on increasing the 
diversity of suppliers and producers. Consumers often value 
knowing where their purchases of goods and services help 
disadvantaged businesses and workers, but consumers and firms 
need information to make these choices.
    Additionally, governments and businesses can increase 
diversity in their suppliers, all of which will help provide a 
steadier stream of revenues to disadvantaged and small 
businesses. This in turn will help with the access to capital 
issues.
    Thank you for the opportunity to present the findings from 
my research on this topic. I look forward to hearing your 
comments and questions.
    Chairman PHILLIPS. Thank you, Professor Fairlie.
    And now I recognize Professor Puri for 5 minutes for your 
opening statement.

                    STATEMENT OF MANJU PURI

    Ms. PURI. Subcommittee Chair Phillips, Ranking Member Van 
Duyne, and Members of the Subcommittee, thank you for inviting 
me to testify in front of you today.
    I am Manju Puri, the J.B. Fuqua Professor at the Fuqua 
School of Business, Duke University. I have over 25 years of 
research experience examining financial institutions and bank 
relationships. I will be drawing on my research today on PPP.
    When Covid hit, small businesses were particularly 
vulnerable. Small businesses typically have cash on hand that 
only lasts for a month without revenue and in fact less than a 
quarter of them can survive even two months without revenue. 
They are the engine of growth, accounting for 61 million jobs, 
so clearly it is important to support them and to so quickly.
    So the question is, what lessons do we learn about the 
speedy delivery of financial support in times of crisis from 
PPP? Let us start with banks as the delivery channel in PPP. 
Now, banks seem like a natural and obvious way to distribute 
funds. They have large networks, they are all over the country, 
they are in every nook and corner. Most small businesses have 
accounts with banks. But does using banks as the delivery 
channel shape the supply of PPP? It is important to look at the 
funding prioritization of banks.
    When PPP was originally announced there was a scramble for 
funding. There were lines outside the doors of banks. The 
entire initial allocation of $349 billion was exhausted in a 
few days, by April 17, 2020. And then after a pause of ten 
days, it started again on April 27 with the second allocation 
of $320 billion.
    So looking at who gets PPP early, before April 20, 2020, 
gives us a rare and clean window as to the prioritization 
allocation priorities of banks across clients. In particular, 
we distinguished between large and small banks, how they treat 
large and small firms, whether they treat them differently, and 
what is the role of bank relationships.
    Now, arguably, big and small banks have different business 
models, right. The value added by big banks is access to one 
stop shopping, networks, et cetera, which are perhaps more 
relevant for large firms. On the other hand, small banks 
specialize in relationship-oriented lending, as suggested by 
the 2018 FDIC small business lending survey.
    I would like to briefly give you the following findings 
based on three data sets and a very large new data set on UCC 
filings of bank relationships.
    One, small banks deliver PPP funding more promptly. Two, if 
you are a firm with a bank relationship, you get PPP early. 
Now, this is especially true if you have a relationship with a 
small bank. Three, all banks in general prioritize large firms, 
however, the crowding out effect of small banks is fully 
eliminated and even reversed when firms have relationships with 
small banks. This suggests that the small firm-small bank 
relationship is special and it should be leveraged in future 
and other funding initiatives.
    Now, a second set of lessons concerns funding hesitancy. 
PPP funding is remarkably cheap. When it was announced, firms 
that took PPP saw a stock price reaction positive 1 percent, 
yet several firms returned PPP and when they returned it they 
again saw a positive stock price reaction, actually of 3 
percent--three times. Why so? Our research suggests that the 
market values the fact that these firms returned PPP, that is 
frees from the uncertainty of the threat of a government 
investigation, especially when there is uncertainty about the 
scope and the timing.
    So let me close by summarizing the key takeaway. The main 
point is intermediaries matter when you are delivering 
government funding. In PPP funding is delivered sooner by small 
banks and when there are banking relationships, especially with 
small firms. The crowding out of small firms is less when small 
firms have small bank relationships.
    A second lesson is that just as there are clear norms and 
ex ante eligibility of PPP, there should also be clear guidance 
on ex post investigation to help remove funding hesitancy.
    But perhaps the most important lessons is about 
intermediaries. In designing financing programs for small 
firms, policy makers should recognize and leverage the 
specialness of small bank-small firm relationships.
    Thank you and I would be happy to field any questions.
    Chairman PHILLIPS. Thank you, Dr. Puri.
    And now I recognize Dr. Demko for 5 minutes for your 
opening statement.

                    STATEMENT OF IRYNA DEMKO

    Ms. DEMKO. Thank you for the invitation to testify at the 
hearing titled ``An Empirical Review of the Paycheck Protection 
Program''. It is an honor for me to present before you and 
answer questions.
    I am a research associate at the Center for Economic 
Development in the Maxine Goodman Levine College of Urban 
Affairs at Cleveland State University. I am also from Ukraine 
and my family is in Ukraine right now.
    I have focused my research on the access of minority, 
Hispanic, and female owned businesses to PPP loans. In 2020, 
these businesses received smaller PPP loans than their business 
counterparts of the same size. For example, Hispanic owned 
business with less than four employees received 5 percent 
smaller loans compared to non-Hispanic owned business of the 
same size, or $828 less.
    Minority owned businesses received 11 percent less per 
employee than white owned business, or $1,000 less.
    Larger companies displayed increased discrepancies in loan 
amounts. On average, female owned businesses with less than 
four employees received 17 percent smaller loans than male 
owned businesses of the same size. And female owned businesses 
with 20 to 500 employees received 22 percent smaller loans than 
male owned businesses of the same size.
    I conducted over 20 interviews with a variety of PPP loan 
recipients. The sample consisted of businesses in Northeast 
Ohio where nearly 40 percent of previously employed residents 
filed for unemployment as the pandemic started. I interviewed 
small businesses that received PPP loans from about $20,000 to 
over $2 million. The sample included female owned, male owned, 
minority owned, and white owned businesses. Every respondent 
expressed appreciation for the assistance provided by the 
government in the form of PPP loans. And the majority stated 
that the loan helped them retain employees. In general, 
businesses that received smaller loan amounts reported more 
difficulty with the loan application process, filing multiple 
loan applications with multiple banks and pursuing more unique 
funding sources, such as Fintechs. Respondents cited the reason 
for this difficulty stemming from the size of their business.
    For example, a business owner complained, I couldn't get 
anyone's attention or response because I am a small business.
    Some respondents stated that lenders could have been 
incentivized to work with businesses of diverse ownership and 
size.
    Beyond the difficulty in finding a lender, many recipients 
of smaller PPP loans expressed frustration over loan amount 
limits and permitted uses. Many interview respondents didn't 
realize that rent, mortgage, and utility payments could be 
included in the requested PPP amount. As a result, they missed 
out on the opportunity to receive higher loan amounts.
    Most businesses do not have experience in doing their 
financial. They had a steep learning curve to understand how to 
apply for the learn. For us it was all foreign language, said 
one PPP recipient. This highlights the importance of 
communication strategies and free technical assistance to 
guarantee the success of a public policy.
    From a policy perspective, if the goal is to target ethnic 
disparities and support inclusion in federal aid for 
entrepreneurs, then the program cannot be one size fits all. In 
2021 SBA set aside a 2 week exclusive application period for 
smaller businesses with fewer than 20 employees. While a few 
small businesses interviewed in Northeast Ohio did mention that 
exclusive application period was a valuable change, others felt 
that it was not long enough.
    Interview findings didn't confirm biases by lenders or the 
SBA against minority or female owned applicants. Businesses 
that received unequal treatment from PPP lenders not based on 
the demographic of their ownership, but when their business was 
smaller. These findings have important implications because 
previous literature found that minority owned firms are 
substantially smaller than white owned firms.
    Research compared in male and female business owners also 
found women operating smaller business in terms of annual 
turnover and employment size. As such female and minority owned 
businesses tend to fall under business the case of businesses 
that may have applied for smaller PPP loans.
    I am looking forward to your questions. Thank you.
    Chairman PHILLIPS. Thank you, doctor. And just to say once 
again, all of us, this country, this Committee, this Congress, 
have you and your family in our hearts and all of Ukraine. And 
we know how difficult it is to be with us today and we are 
grateful that you are here.
    Thank you.
    Ms. DEMKO. Thank you.
    Chairman PHILLIPS. And with that, I now recognize Mr. 
Barnes for 5 minutes for your opening statement.

                   STATEMENT OF ROBERT BARNES

    Mr. BARNES. Thank you, Chairman Phillips, Ranking Member 
Van Duyne, and Members of the Subcommittee.
    I am Robbie Barnes, president and CEO of PriorityOne Bank 
in Magee, Mississippi. I testify today on behalf of the 
Independent Community Bankers of America and want to thank you 
for this opportunity.
    PriorityOne Bank is a $900 million community bank with 230 
employees and 15 branches in 5 counties. Our markets are rural, 
suburban, and urban. We are also a community development 
financial institution, serving a predominantly low to moderate 
income market.
    The paycheck protection program was a natural fit for the 
business model of community banks. We are small business 
lending specialists with local knowledge and deep roots in the 
communities that we serve. My bank's PPP lending is typical of 
most community banks. We made a total of over 1,200 loans for 
roughly $40 million. Our average loan amount was $32,500 and 
our smallest loan was for only $350. PriorityOne Bank's long 
history as an SBA 7A lender helped us to navigate sometimes 
challenging SBA channels on behalf of our borrowers.
    My written statement includes stories that illustrate the 
impact of the PPP. One of those stories is of a minority owned 
nail salon in our community that received first and second 
round funding for a total of less than $12,000. Though this 
borrower did not initially qualify for a second-round loan, we 
analyzed her cash flows and determined that her 40 percent 
revenue drop was pandemic related, which qualified her for 
additional funding. That business survived the pandemic and was 
able to remain open. This is just one of any number of examples 
I could offer. All the community banks have similar stories and 
results.
    Community banks made nearly 60 percent of PPP loans, 
supported nearly 50 million jobs. What is more, community banks 
made nearly 72 percent of the PPP loans to minority owned small 
businesses and 81 percent of PPP loans to women small 
businesses.
    I am proud that my industry stepped up to support the 
survival of these diverse businesses at a time of crisis. The 
challenges of the program are well known to this Committee. The 
task far exceeded the scale and technological capacity of 
anything the SBA had previously undertaken. However, the agency 
was dedicated to making the program work and continued to adapt 
and improve.
    The forgiveness phase of the program brought a separate set 
of challenges, but our upfront process and strong relationship 
with most of our borrowers made forgiveness on the back end 
relatively straightforward. We did not make loans that we were 
not confident would qualify for forgiveness. Ninety percent of 
our PPP loans have been forgiven and we fully expect the 
remaining ones to be forgiven as well. We have experienced no 
cases of fraud or default.
    As you consider the lessons of the PPP in designing future 
SBA lending programs, I would emphasize the critical role 
played by community banks. SBA programs work best in 
partnership with experienced on the ground community bank 
lenders who are committed to the borrower's success. There is a 
strong network of community banks, CDFIs, and other lenders in 
every market in the country to meet demand for small business 
borrowers. The SBA on its own simply does not have the 
resources or the know how to effectively reach thousands of 
small business borrowers.
    What is more, community banks offer our borrowers a long-
term relationship that goes well beyond the initial loan. It 
includes practical real world business counseling, mentoring, 
and networking opportunities. This is our core value 
proposition and it is one that is especially important for 
startups. The SBA simply cannot replace this kind of 
relationship lending.
    Further, the involvement of banks is critical to reducing 
fraud. Community bankers know their customers, they know the 
difference between a legitimate business and a shell business 
set up to perpetrate a fraud because they meet with business 
owners, visit their businesses, and see their operations. With 
an on the ground presence, the SBA cannot assist borrowers 
first-hand. The distance from the borrower makes direct lending 
vulnerable to fraud.
    Community banks 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 7A program is reaching 
the smallest borrowers.
    Thank you again for convening today's hearing and for the 
opportunity to offer a community bank perspective on the 
paycheck protection program and other SBA programs.
    I'm happy to answer any questions you may have.
    Thank you.
    Chairman PHILLIPS. Thank you, Mr. Barnes. And to all of our 
witnesses, we appreciate all that you have shared with us and 
for being with us today.
    I am going to begin by recognizing myself for 5 minutes and 
direct my first question to you, Mr. Barnes.
    You just stated that PriorityOne Bank has experienced zero 
cases of fraud in over 1,200 loans to the PPP program. So 
assuming that would be true for most of the banks in PPP due to 
their preexisting relationships with most of their borrowers, 
shouldn't the government be focused more now on investigating 
non bank originated PPP loans where fraud is certainly more 
likely to have occurred in your estimation?
    Mr. BARNES. In my estimation I think that the community 
banks do have an advantage, if you will, because of our 
relationships with our customers and existing borrowers. 
However, we did serve customers--or I guess non-customers, 
those that applied for us that were not currently customers of 
our bank. But as alluded to earlier in this hearing, we have a 
know your customer policy we have to abide by. And we live and 
we work with and we see these businesses, you know, day in and 
day out. So it is very easy for us to determine legitimate 
businesses from those that may not be.
    I can't speak for those lenders who may have made loans in 
communities or markets outside of where they operate and how 
that might have affected fraud and--because as I said in my 
earlier opening remarks, we didn't experience any fraud. And I 
think that you can probably assume that most of the community 
banks also had the same experience.
    Chairman PHILLIPS. Thank you, sir.
    Dr. Demko, you repeatedly heard about the need for a 
centralized application portal to standardize the information 
that small firms had to submit that would help lenders from 
becoming overwhelmed with processing applications, especially 
for smaller loan amounts.
    As you know, the private sector has largely abandoned this 
segment of the market because the fixed lending costs often 
outweigh the potential returns for lenders.
    So do you believe that these findings support the creation 
of a targeted direct loan product from SBA to better reach 
those overlooked by the banks?
    Ms. DEMKO. I think that centralized application portal may 
help businesses with access to the loans. And it is not just 
that, it is also free technical assistance with the 
applications, because many of applicants didn't know what to do 
with the application. And I think that exclusive application 
period may help as well.
    Chairman PHILLIPS. Any other methods that you think can be 
considered to better reach smaller underserved firms?
    Ms. DEMKO. So when we look at the distribution of minority 
owned and female owned businesses, among 1 million minority 
owned businesses, 64 percent, they employ less than 4 
employees. And among 1.2 million of female owned businesses, 65 
percent employ 4 or less employees. So I think that exclusive--
if we want to reach small businesses, exclusive application 
periods may really help.
    Chairman PHILLIPS. Okay. I appreciate it.
    Dr. Puri, I know your findings stopped short of including 
CDFIs, but do you think that would be valuable to consider for 
other researchers? Especially given their greater likelihood of 
having had relationships beforehand?
    Ms. PURI. What our research suggests is that relationships 
are important, and not just any kind of relationships. It is 
small firm-small bank relationships. And I think any way that 
you leverage this can only be helpful, right. And so, so more 
broadly, whether it is community banks or other small banks or 
vehicles to do it, I think that would be helpful.
    Chairman PHILLIPS. Okay. I appreciate that.
    You know, I am going to yield the reset of my time and now 
recognize the Ranking Member of the Committee, Ms. Van Duyne, 
for 5 minutes.
    Ms. VAN DUYNE. Thank you very much, Mr. Chairman.
    Mr. Barnes, before we get into the PPP discussion, I just 
want to ask you about the economic reality that we have on the 
ground today. You have got small businesses, I am sure, coming 
to you. What are they telling you about what they are facing 
right now with inflation, rising gas prices, the labor market? 
Can you just help me explain what small businesses are coming 
to you with today?
    Mr. BARNES. Surely, Ms. Van Duyne.
    You know, businesses are still experiencing a lot of issues 
right now they are having to deal with--of course, inflation 
being one. One of the big issues that we are experiencing in 
the markets that we serve is the fact that--is getting 
employees back to work. You know, they are just--at this point 
in time they are still understaffed, still looking for 
qualified employees to come back in and help their business. 
Inflation has not helped at all, of course, and that puts a tax 
on the small businesses. It is not a governmental tax, but it 
is certainly a tax that they are still having to absorb.
    So there is still--small businesses are still struggling 
out there. And of course we are relationship lenders, as all 
community banks are. We work with our customers extremely 
closely, our borrowers. We communicate with them on a regular 
basis and we stay in close touch with them. And it is a 
difficult time. You know, Covid has knocked our businesses back 
down two or three times. When you think you get up, all of a 
sudden another wave comes and you are knocked back down.
    But hopefully we are toward the end of this and we will see 
some improvement as we move forward.
    Ms. VAN DUYNE. I appreciate that answer.
    And I agree with your statements on direct lending. From a 
fraud and efficiency perspective, private sector lenders have 
consistently out performed--I think you have heard that form 
all of our witnesses today--while also safeguarding taxpayer 
dollars. But from your perspective, what does history tell us 
about the government getting involved in direct lending? And at 
the end of the day, did the programs better assist small 
businesses as compared to the private sector driven 7A loan 
program?
    Mr. BARNES. You know, based on my experience, and I have 
been a lender for a number of years and have--been an SBA 
lender and done a number of 7A loans as well as 504 loans, and 
I think the partnership between banks and SBA is a good 
partnership. The government getting involved in direct lending 
I think has proven that it does not work. Borrowers in general 
don't have a high level of trust, to be honest with you, in 
dealing directly with a governmental entity. I don't think they 
are going to be able to reach those borrowers. It is a complex 
process to go through when you are dealing with SBA. It is just 
the facts of the matter. We as bankers understand that, we 
learned the process, we can navigate that and help our 
customers be able to obtain the funding that they need through 
that process. But from a direct lending standpoint, I am afraid 
you are going to alienate a lot of customers that may otherwise 
be able to be served through a banking relationship and a 
guaranteed loan process by going with the direct lending.
    Ms. VAN DUYNE. And thank you for that.
    You know, I also appreciate you talking about just kind of 
the excessive regulations that we see being faced by a lot of 
the small businesses today. You know, we are trying to get a 
bill passed that would actually address exactly that.
    So when it comes to access to capital, I believe there 
should be always--have a conversation on how these regulations 
are affecting small lenders. So, for example, we see that the 
CFPB is in the process of promulgating rules for Section 1071.
    can you share the community bank's perspective on this rule 
making?
    Mr. BARNES. Certainly, I will be more than happy to.
    Rule 1071, as you know, was mandated under the Dodd-Frank 
Act and is something CFB has no option but to implement. 
However, as currently presented and proposed, the rule goes 
beyond what is mandated in Dodd-Frank as far as collection of 
data. And basically what the rule is is a HMDA type rule for 
small business lending. But what is being required right now--
or presented or proposed by CFPB, goes beyond those 
requirements, is going to expose I think our borrowers to 
potential concerns about their right to financial privacy. It 
is going to put information out available to the public that is 
going to be information that could be detrimental to them from 
a competitive standpoint. And our borrowers are hugely 
concerned about that. We have been hearing from a number of 
them about this and we don't have a choice but to comply with 
it, obviously. But I think that it could force some of these 
borrowers to seek other options as opposed to the banking 
system because of the fact that they are concerned about the 
information that is going to be collected and their invasion of 
privacy.
    Ms. VAN DUYNE. I appreciate your testimony here today. I 
think it is something that we really need to look at and make 
sure that we are advising, because SBA's job is really to be 
able to support and advocate for small businesses. And if we 
are adding additional regulations and additional hurdles to 
being able to move on in your business, I think that is doing a 
detriment and the exact opposite of what we should be doing.
    So thank you very much for your testimony here today, and 
all the witnesses.
    And I yield back.
    Chairman PHILLIPS. Seeing no other Members asking 
questions, we are going to do one more quick round. I have one 
question for Dr. Fairlie.
    And, Doctor, I recognize--recall that you came here last 
year and provided testimony and I want to welcome you back to 
the Small Business Committee.
    Perhaps you could just take a moment and share how your 
current report builds off of last year's.
    Mr. FAIRLIE. Yes. So previously I reported on what was 
happening to small business owners. So some of the numbers that 
I briefly mentioned, you know, one of the most troubling was 
the 41 percent drop in black business owner activity.
    And so I have been studying the pandemic and studying small 
businesses over the pandemic. And that kind of evolved over 
time into really being interested in what was happening with 
the policy solution, so the PPP program. And so since then I 
have been studying what has happened over those three rounds.
    You know, seeing that kind of first round and studying it 
carefully and seeing that a lot of minority communities were 
not receiving those funds, and then going to the most recent 
study in the 2021 program and seeing that it made a big 
difference. There was a huge shift in terms of what we found in 
terms of that relationship with minority communities. So it was 
kind of a positive sign that the changes in the program really 
made so much of a difference.
    Chairman PHILLIPS. Thank you, sir.
    Mr. Barnes, your testimony mentions ICBA's support for 
SBA's 504 program, which, as you know, is experiencing 
significantly increased demand that caused a brief lending 
pause at the end of the last fiscal year.
    So how disruptive is it for a vital lending program like 
that to be under the annual threat of a shutdown due to 
increased demand?
    Mr. BARNES. In my experience, it is hugely disruptive. And 
I want to thank Congress for continuing that program and 
providing additional funding to allow it to continue. I have 
actually been in situations personally where I was the lender 
of a 504 loan and the funds ran out before the 504 loan was 
funded. And we had to wait--the customer had to wait on their 
business loan for almost 4 months before they could get any 
funding for it. You can imagine that 4 months, if they had been 
operational, they would have been employing people, obviously 
generating income, and paying taxes on that income. And it 
would have been a commerce for the communities it served. But 
it is hugely disruptive when you have got a deadline you are 
coming up against, you have got a finite amount of funds that 
you can draw from and there are more than enough of borrowers 
out there looking for those funds.
    So thank you again for the additional funding and 
additional time.
    Chairman PHILLIPS. Yeah, just to follow up on that, sir. 
Unlike the 7A program, 504 still lacks a provision that allows 
SBA to adjust the funding level without needing Congressional 
approval. So without such a provision the program is under 
constant threat of a shutdown if the pace of lending exceeds 
the expected levels.
    So, in your estimation, sir, should the 504 also have what 
we might call a shock absorbing mechanism, as 7A?
    Mr. BARNES. In my opinion I think that would be a great 
idea. Like I said, it would allow us to be able to serve 
borrowers when they need to be served and not have a disruption 
to their business model going forward.
    Chairman PHILLIPS. Thank you, sir.
    I am going to yield back the remainder of my time and 
recognize the Ranking Member, Ms. Van Duyne, for 5 minutes.
    Ms. VAN DUYNE. Thank you.
    I just have one quick question, Mr. Barnes. You stated that 
we did not make loans that we were not confident would qualify 
for forgiveness because we did not want to saddle anyone with 
unintended debt. And this struck me as significantly important 
in contrast with perhaps how some of the other non relationship 
lenders might have treated customers.
    So can you talk to the Committee a little bit more about 
this statement and how you operated under this program?
    Mr. BARNES. Certainly. I will be happy to.
    In every case when a borrower came to use for a PPP loan, 
we walked them through the process. We asked them for 
information to basically be convinced that they were eligible 
for the PPP loan and also that it would stand up through the 
forgiveness application. We many times worked with their 
accountant or financial advisor that they may have been working 
with through their business together, information. So we wanted 
to make absolutely sure that we didn't put a customer in a 
situation where we were trying to help and all of a sudden we 
have made it worse because they have now another loan that they 
have to pay, and they were already struggling to pay the 
initial loan that they have on their business.
    So I think it is just relationship banking. I mean that is 
what we do every day. We have a relationship with that 
customer, we work with them, we try to make sure that we 
improve their situation, we don't harm them by putting them in 
a worse situation. And our lenders are--you know, understand 
that, they are very good at that. We had lenders here that 
worked 24 hours a day, you know, 7 days a week trying to kind 
of build an airplane while we were in flight, to get this 
program up and going and started. And it was very, very 
frustrating, but I think in the end our main objective was to 
help as many customers and as many businesses in the 
communities that we served as we possibly could.
    Ms. VAN DUYNE. I think you just proved again that there is 
no--you know, there is no questioning that people on the ground 
who know their community, who are working in the community with 
actual real people completely outweigh the D.C. bureaucrats in 
being able to be efficient and effective and help in the 
community.
    So thank you very much for your testimony today.
    I yield back.
    Chairman PHILLIPS. The gentlelady yields back.
    And with that, I want to thank all of our witnesses again 
for joining us today. Your research analyzing PPP is a vital 
tool for all of us on this Committee as we work to make SBA 
programs reach the smallest of small businesses throughout the 
country. And it is heartening to see that the changes Congress 
did institute had a profound effect on entrepreneurs that were 
initially shut out of PPP.
    It is also vital that we take the lessons learned from the 
PPP program and apply them to current and future SBA programs.
    Making these programs more accessible and equitable will 
ensure that more entrepreneurs can pursue their dreams and that 
all small businesses have a chance not just to survive, but to 
thrive.
    I also want to note that the passage and implementation of 
PPP was an acknowledgment of Congress' responsibility to help 
small businesses during the COVID-19 pandemic. For the hardest 
hit small businesses and disproportionately impacted 
industries, including restaurants, live events, and fitness, 
the fight is still far from over. We have to once again 
acknowledge our responsibility to maintaining the strength of 
our small business ecosystem and I would argue pass additional 
targeted relief to ensure that our nation's most resilient 
small businesses do not close their doors after surviving 2 
years of this terrible pandemic.
    I urge the inclusion of such relief in any supplemental 
COVID-19 bill that comes before this Congress.
    With that, and without objection, Members have 5 
legislative days to submit statements and supporting materials 
for the record.
    And if there are no further business to come before the 
Committee, without objection, we are now adjourned.
    Thank you, everybody.
    [Whereupon, at 11:42 p.m., the subcommittee was adjourned.]
                           
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