[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
SBA MANAGEMENT REVIEW: OFFICE OF CAPITAL ACCESS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MAY 18, 2022
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 117-056
Available via the GPO Website: www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
47-535 WASHINGTON : 2022
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. Nydia Velazquez............................................. 1
Hon. Blaine Luetkemeyer.......................................... 2
WITNESS
Mr. Patrick Kelley, Associate Administrator, Office of Capital
Access, United States Small Business Administration,
Washington, DC................................................. 4
APPENDIX
Prepared Statement:
Mr. Patrick Kelley, Associate Administrator, Office of
Capital Access, United States Small Business
Administration, Washington, DC............................. 34
Questions and Answers for the Record:
Questions from Hon. Houlahan to Mr. Patrick Kelley and
Answers from Mr. Patrick Kelley............................ 40
Questions from Hon. Luetkemeyer to Mr. Patrick Kelley and
Answers from Mr. Patrick Kelley............................ 41
Questions from Hon. Tenney to Mr. Patrick Kelley and Answers
from Mr. Patrick Kelley.................................... 48
Questions from Hon. Donalds to Mr. Patrick Kelley and Answers
from Mr. Patrick Kelley.................................... 49
Additional Material for the Record:
None.
SBA MANAGEMENT REVIEW: OFFICE OF CAPITAL ACCESS
----------
WEDNESDAY, MAY 18, 2022
House of Representatives,
Committee on Small Business,
Washington, DC.
The committee met, pursuant to call, at 10:02 a.m., in Room
2360, Rayburn House Office Building, Hon. Nydia Velazquez
[Chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Golden, Davids,
Phillips, Chu, Evans, Houlahan, Andy Kim, Craig, Luetkemeyer,
Williams, Stauber, Meuser, Tenney, Garbarino, Young Kim, Van
Duyne, Donalds, and Fitzgerald.
Chairwoman VELAZQUEZ. Good morning. I call this hearing to
order.
Without objection, the Chair is authorized to declare a
recess at any time.
I would like to begin by noting some important
requirements. Standing House and Committee rules 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 Members to be visible through a
video connection throughout the proceeding, so please keep your
cameras on. Also, remember to remain muted until you are
recognized to minimize background noise.
In the event a Member encounters technical issues that
prevent them from being recognized for their questioning, I
will move to the next available Member of the same party and I
will recognize that Member at the next appropriate time slot
provided they have returned to the proceeding.
Our nation's 30 million small businesses come in all shapes
and sizes across various industries. Regardless of the product
they sell or the number of employees on their payroll, the
ability to access capital is crucial to their success.
Unfortunately, our committee frequently hears from
entrepreneurs about the struggle to obtain an affordable loan
on reasonable, nonpredatory terms.
The data supports these anecdotes. The Federal Reserve
published its 2022 Small Business Credit Survey that found that
almost 60 percent of small employer firms reported not having
their capital needs met.
To fill this gap, the Small Business Administration offers
a range of lending programs to serve businesses that cannot
obtain credit elsewhere.
These initiatives are administered by the Office of Capital
Access, also known as OCA.
OCA carries a loan portfolio of over $1 trillion and
oversees traditional SBA initiatives and pandemic relief
programs. Their work is fundamental to the SBA's mission of
helping Americans start, build, and grow small businesses.
Today, I would like to hear from our witness about what is
working well at the office and the challenges they face. This
is especially important in the wake of an unprecedented
increase in demand for SBA's traditional lending offerings.
For example, in FY2022, the 504 loan program experienced
record-high demand and reached the authorized lending limit of
$7.5 billion, causing the program to pause lending in early
September.
This increased demand has persisted in FY2022, and the
program was on pace to be forced to shut down in July before a
funding level adjustment was enacted. We are grateful for the
bipartisan and bicameral cooperation between our Committee and
the Appropriations Committee to secure that funding adjustment
and keep the 504 program open for lending this fiscal year.
However, we must continue finding ways that the agency and
Congress can ensure that SBA programs are equipped to keep pace
with demand from small businesses.
I would also like to discuss the steps OCA is taking to
help create a more equitable small business economy.
SBA data shows that the number of 7(a) loans of $150,000 or
less declined by almost 52 percent since FY2016, and that loans
of $50,000 or less fell nearly 58 percent during the same
period.
Administrator Guzman stressed the importance of small-
dollar loans when she testified before the Committee last
month, so I would like to hear more about OCA's work to ensure
that all small firms have access to the capital they need to
thrive.
With the recent news of the COVID EIDL program closure,
this is a very timely hearing for us to discuss the OCA
administration of pandemic relief initiatives. On Thursday, May
5th SBA announced that it would no longer accept applications
for loan modifications, reconsiderations, and appeals due the
exhaustion of program funding. Today, I hope we can provide
answers to the many Members and businesses calling us who are
awaiting application decisions.
Small employers are leading the way in our pandemic
recovery. Since 2021, entrepreneurs have started a record
number of small businesses, and small firms have created jobs
at a historic pace.
However, their continued success is contingent on their
ability to access capital. I look forward to discussing the
Office of Capital Access and what Congress can do to help the
office better serve American small businesses.
I would now like to yield to the Ranking Member, Mr.
Luetkemeyer, for his opening statement.
Mr. LUETKEMEYER. Thank you, Madam Chair, and thank you for
holding this hearing today with Mr. Kelley.
Prior to the COVID-19, the nation's small businesses and
our economy in general were operating at full speed. The low
tax environment enabled by the 2017 Tax Cuts and Jobs Act and
the smart regulatory environment, we were allowing small
businesses to grow, compete, and create jobs across America.
Unfortunately, the capacity restrictions and shutdown measures
of COVID-19 forced small businesses to think and operate
differently.
With limited foot traffic and minimal dollars coming
through their doors, small businesses were left without any
options. They turned to the federal government and the
country's COVID-19 relief measures, in particular, the Paycheck
Protection Program. Overnight, millions of small businesses
became aware of the resources and tools available to them at
the Small Business Administration. Additionally, thousands of
lenders raced to assist them.
When I am home, I sit and I talk to small businesses and I
often hear that the PPP saved their businesses. While the
nation continues to recover, our work is not over. Agencies and
program offices that ran and played a significant role with
these relief measures must continue to talk and work with
Members of Congress. That is why I am glad to have Mr. Kelley
before us this morning.
In addition to helping administer the PPP, the Office of
Capital Access has also in the Biden administration taken the
reigns of the fraud-plagued Economic Injury Disaster Loan
program, also known as EIDL. And the office was involved with
the unconstitutional and underfunded Restaurant Realization
Fund where Congress prioritized some restaurant owners over
others. To say the least, we have a lot of questions for this
office on how they performed over the last 2 years.
For example, the Biden administration continues to defer
EIDL payments for small business owners. These loans, which
have a maturity of 30 years, now have a deferment payment of
over 30 months. That means the American public, Congress, and
law enforcement won't know how the program has performed, now
will they see the true extent of fraud until payments are
required. The SBA's Inspector General has already flagged this
program for potentially $80 to $90 billion in fraudulent loan
activity. And yet, this office, the administrator, and the
Biden administration continues to defer payments.
I would like to remind everyone, the EIDL program was a
direct loan and grant program where the SBA qualified small
businesses and disbursed funds directly. The SBA Inspector
General has documented that an anti-theft was rampant in this
program. In fact, follow-up answers to this Committee by the
administrator indicate that the number of flagged applications
for anti-theft has swelled to over 1 million. This means that
criminals go through the SBA's open door and entered the
program illegally.
Additionally, and just yesterday, the SBA Inspector General
found its independent auditor's report that the SBA Direct
Disaster Loan Program continues to be overwhelmed with issues.
The report indicates that the program had gross improper
payments and an unknown payments rate exceeding 10 percent,
which is higher than the statutory amount.
Beyond these very large concerns, this office also
administers all of the SBA's government guaranteed lending
programs. These programs, which are delivered to small
businesses through efficient and responsible public-private
partnerships with lenders, assist small businesses when
traditional and conventional capital is not available.
Who is accessing these programs? Who is lending within
these programs? How is SBA overseeing these lenders? These are
major questions that need to be addressed. With all the new
interest and focus on SBA, this office's list of statutory
required duties is long. We have a lot of work that is mandated
in law. New and extraneous projects must not divert attention
away from what they must accomplish.
COVID programs must be concluded effectively, efficiently,
and responsibly. Traditional programs need to be calibrated and
staffed appropriately. Unfettered policymaking and decision
making will not stand.
However, I am glad the SBA will be at least here today to
testify because I cannot say the same about Secretary Yellen.
Even though she is charged with onboarding new PPP lenders and
despite being statutorily required to testify, she continues to
ignore this Committee and America's small business.
As I said earlier, our work is not done. With soaring
inflation, the economic environment for small business is not
great. However, despite these challenges, small business owners
have the resiliency to drive our nation forward.
With that, Madam Chair, I look forward to today's
conversation and the many conversations before us regarding
SBA's Office of Capital Access. And I yield back.
Chairwoman VELAZQUEZ. Thank you, Mr. Luetkemeyer. The
gentleman yields back.
With that, I will now introduce our sole witness today, Mr.
Patrick Kelley. Mr. Kelley is currently serving as the
Associate Administrator of the Small Business Administration
Office of Capital Access. This is Mr. Kelley's second tour of
duty at SBA. He previously served as Deputy Chief of Staff,
Deputy Associate Administrator, and Senior Advisor at SBA
during the Obama administration. Prior to his current service
at SBA, he was an executive with an active lender in the 7(a)
program. His blend of public and private sector experience has
been invaluable as he lead the SBA efforts with the third round
of PPP funding and now in the critical forgiveness stage. Mr.
Kelley is a graduate of Colgate University and Boston College
Law School.
Welcome, Mr. Kelley. You are now recognized for 5 minutes.
STATEMENT OF PATRICK KELLEY, ASSOCIATE ADMINISTRATOR, OFFICE OF
CAPITAL ACCESS, UNITED STATES SMALL BUSINESS ADMINISTRATION
Mr. KELLEY. Thank you. Good morning to the Committee. Good
morning, Chairwoman Velazquez, Ranking Member Luetkemeyer. On
behalf of our Administrator, Isabella Guzman, it is my pleasure
to be here.
As the Chairwoman noted in my bio, my name is Patrick
Kelley. I am the associate administrator for the Office of
Capital Access. Since last March 2021, so just over a year, I
have had the opportunity to serve alongside some of the
greatest civil servants that this country has put forward.
For the last 24 months, civil servants in the Office of
Capital Access and cross-office of Disaster Assistance have put
forward over a trillion dollars of lending that as was noted by
the Ranking Member's remarks, is greatly appreciated all over
the country by small businesses. They are dedicated,
outstanding, and it is my privilege to work with them.
Over the last 12-plus months, our office has been
responsible for the PPP program round three which originated
another $6.1 million roughly PPP loans in phase three. The
COVID EIDL program we took over in July and that has led to an
additional 300,000 more or less, loans made in 2021 until
today. Each of those programs is hundreds of billions of
dollars.
In addition, as was noted, I had the pleasure of
administering the Restaurant Revitalization Program on behalf
of Administrator Guzman were we put out $28.6 billion to
101,000 restaurant-related entities more or less in 45 days
from the bill's passing. That particular program was an
opportunity to work with grant recipients who are near and dear
to all of us. You cannot tell the story of your life without a
restaurant or related entity, and certainly, that is true for
me.
With respect to the core programs, as Chairwoman Velazquez
noted, the lending in our core programs in fiscal year 2021
continued at a pace. In addition to the 504 numbers that were
cited, the 7(a) program also distributed $35 billion to roughly
50,000 small businesses. So those particular programs will
continue to be of use as we move forward for small businesses,
most especially to attack the problems that Chairwoman
Velazquez spoke about earlier with respect to accessing small
dollar loans which continues to be a persistent challenge. And
we have recently begun to address that by building off of one
of I think the bipartisan successes of the PPP program. As you
all know, in round three, community financial institutions were
given an exclusivity period at the outset of that program in
order to onboard those parts of the community that felt they
were underbanked in rounds one and two. That led to 600
community financial institutions making roughly $30 billion of
additional PPP loans more or less over that phase three.
As was mentioned, we have 5,000 lenders who participated in
the PPP program. They span financial technology companies,
which historically are not eligible to lend in the program.
Community financial institutions which historically have been
limited to the Community Advantage Program, and obviously,
banks and credit unions. In a typical 7(a) year, about 1,900
banks make at least one loan, and over a 5-year period it is
roughly 4,000.
So one of the tasks that Administrator Guzman has put our
office on is ensuring that we build off of the momentum of
participation by simplifying the products on behalf of our
lending intermediaries so that they might leverage digital
tools and take advantage of the secondary market tool which is
an excellent resource for SBA 7(a) lenders.
And finally, the 504 program continues to be an outstanding
resource. Certainly, as we contemplate a rising interest rate
environment, a 25-year-fixed rate note is an incredibly
powerful tool. The other great part of that particular program
is owner-occupied real estate, so it enables a small business
owner to build value in terms of an asset and allows for a
third-party lender to participate in the deal.
With that, I will yield back the time.
Chairwoman VELAZQUEZ. Thank you, Mr. Kelley. I will
recognize myself for 5 minutes.
Mr. Kelley, earlier this month, we learned COVID EIDL funds
had run out, and I am concerned that the agency did not have a
more detailed plan to notify constituents about the changes in
the program.
Mr. Kelley, could you please let the Committee know where
the breakdown occurred and what do we say to our constituents
who have been dealing with this confusion?
Mr. KELLEY. Sure. Thank you, Chairwoman.
First off, it is important to note that there were about
61,000 workable files at the close of business on May 6th and
all of those workable files across appeals, reconsiderations,
and loan modification requests that are eligible for funding
did, in fact, get approved for funding and have funds
obligated. And that is as of Monday, May 16th. There is a
population, for example, within the reconsideration which was
roughly about 9,000 applications for which folks will not be
approved, were not approved, and that is the result of issues
related to credit criteria, tax information, various issues.
But I do want this Committee to know and for the small
businesses to know that we did honor all of the applications
that were in before the funding expired and came in at the tail
on May 5th and 6th.
Second, it is important to understand what this population
is. The program has been in wind down since December 31st of
2021 when applications for new borrowers were no longer allowed
past that date. So, for example, the 5.4 million startups,
businesses that came online in 2021 would not be able to access
this particular product. But the 3.6 million borrowers that
were made in 2020 are seeking loan modifications or
reconsiderations.
It is also important to note that the program does not
allow a loan increase past 24 months for the original note. As
this Committee knows, 3.6 million loans were originated in
roughly 120 days in the spring of 2020 and so that 24-month
period is tolling. And so we have exhausted the funding as
Chairwoman Velazquez said, and it is also timely because the
loan increases were going to toll for 93 percent.
Chairwoman VELAZQUEZ. Okay. We need a commitment from you
to work with all the Members, and not only the Members of this
Committee but across the board, to provide transparency and
finality to this process. I will ask you to communicate that to
the loan officers and district offices so that they are aware
that that is a commitment that you make to this Committee.
I understand that SBA plans to transfer all disaster
lending to OCA soon. We have seen the Office of Disaster
Assistance do good work in response to major disasters,
especially in Puerto Rico after Hurricane Maria where ODA
provided over $2.2 billion in disaster loans. Can you guarantee
this transfer will not compromise the ability of SBA to respond
to natural disasters?
Mr. KELLEY. Yes. And it is important to note that the
Office of Capital Access will solely be responsible for the
lending but the Office of Disaster Assistance will continue and
be involved in preparedness which is obviously an important
first step in any disaster.
Chairwoman VELAZQUEZ. Thank you. Congress waived the
personal guaranty requirement in the CARES Act to ensure coops
and ESOPs could access PPP and EIDL funds. For 7(a) loans, SBA
continues to require an unlimited personal or entity guarantee
which virtually no co-op can provide based on their business
structure. Given the precedent set with PPP to not require a
personal guaranty for loans to ESOPs and co-ops, why does SBA
continue requiring a personal or entity guaranty for 7(a) loans
to co-ops and ESOPs?
Mr. KELLEY. So, as Administrator Guzman has reflected in
her public comments and maybe even before the Committee, this
is an important opportunity to ensure that employees get
ownership in the small businesses, and obviously, to deal with
succession planning which I know from my lending experience is
acute for the Baby Boomer generation in particular. This is an
important tool and we are working, for example, with the USDA
which also supports, as you know, loans to small businesses,
specifically for coops. And with that guidance, we are working
on addressing issues together with the lender.
Chairwoman VELAZQUEZ. Thank you. My time has expired.
Now I recognize the Ranking Member, Mr. Luetkemeyer, for 5
minutes.
Mr. LUETKEMEYER. Thank you, Madam Chair. Welcome, Mr.
Kelley.
In your opening statement, you briefly discussed the SBA's
Direct Forgiveness portal. On the morning of August 30, 2021,
an email signed by you was sent to PPP lenders. You state, and
I quote, ``Going forward the SBA will be conducting independent
outreach and audits on lenders who have not actively
communicated to borrowers on the availability of forgiveness.
This outreach will be primarily focused on those lenders who
are not participating in direct forgiveness. To avoid these
lender audits, we would encourage you to opt in to Direct
Forgiveness and maintain an active and aggressive outbound
campaign to your PPP borrowers.''
Why do you think it is necessary, Mr. Kelley, to threaten
the lenders like that?
Mr. KELLEY. I do not believe that I was threatening. What
we were responding to was banks communicating directly to the
Office of Capital Access personnel that they were withholding
starting forgiveness process in order to smooth out earnings
across 2021 and 2021. So at the time of that note, what we were
trying to help was the small businesses that were also
notifying the office that they did not have access to a portal
in order to seek forgiveness. The note, I will grant you, if I
could rewrite it, I would, but the sentiment was that we have
tools that we made available for over 1,500 lenders that have
serviced 2.5 million PPP loans.
Mr. LUETKEMEYER. Well, thank you for that but the tone was
such that it looks like to me like you were trying to
intimidate the lenders there into doing something which begs
the question, why do you think it is your job to manage the
loan portfolio for the lenders? Do you not think they know
their lenders better than you do such that if they felt that
this person was eligible for forgiveness that they would
probably have contacted them? If it was somebody they did not
feel was worthy of forgiveness they probably would not contact
them? I mean, I believe that they are the lender, you are the
guarantor in the PPP program, why would you want to get in the
middle of that relationship?
Mr. KELLEY. We wanted to get into the middle of that
relationship because there were direct reports from small
businesses that banks were not making forgiveness available for
their borrowers. And so what is important----
Mr. LUETKEMEYER. Do you not think it would be better then
to send out a reminder to the banks or update them on the fact
that, hey, you realize that the forgiveness process has
started. You need to be contacting these folks. We think it
would be a good idea to go through your portfolio and take a
look at it instead of trying to threaten them like that. That
is not what SBA should be in the business of. Not managing
their portfolio for them, that is up to the lender. That is not
in your job description in this PPP program.
Mr. KELLEY. So I agree that we should let the lenders
execute forgiveness if they, in fact, are doing that, and we
support that. To your point, we do extensive outreach with
respect to forgiveness immediately when I joined the agency
beginning in March of 2021.
Mr. LUETKEMEYER. Okay. Next question. According to SBA's
Inspector General, to date, how much potential fraud was
identified within the EIDL program?
Mr. KELLEY. So, I do not believe that the Office of the
Inspector General has stated an estimate of exact fraud. What
they have done is a series of reports that reflect estimates of
improper, ineligible loans. For example, the largest bucket,
which reflects the number that you are quoting is the fact that
in 2020----
Mr. LUETKEMEYER. I have not quoted a number yet, Mr.
Kelley. I was waiting for you to do that. The number in the
report is $84 billion that they anticipate could be
fraudulently accessed funds.
So, how much was identified in the PPP program?
Mr. KELLEY. So, again, there has not been a definitive
number released by any of the auditors. What is true about both
of the programs is that there were choices made in 2020 in both
programs which created the opportunity for an increased
likelihood of fraud. So, for example, in PPP, specifically, one
of the audit findings referenced 50,000 duplicate loans. That
was the direct result of the decision by the Secretary of the
Treasury at the time to make the loan accounting system----
Mr. LUETKEMEYER. I understand the problem. In the report
they are talking about roughly 5 percent of the loans to be
fraudulently accessed.
In your opinion, when you look at 20 percent versus 5
percent roughly, did the private sector do a better job of
getting these loans out and preventing fraud?
Mr. KELLEY. Well, they are two different programs. So, for
example----
Mr. LUETKEMEYER. Why are they different then? In what
respect do you feel they are different, that they were able to,
one not prevent fraud and the other one, at a minimal rate,
versus the other one with a 20 percent rate?
Mr. KELLEY. Well, first off, I do not agree that the IG or
any of the auditors has identified the percentages that you are
speaking to----
Mr. LUETKEMEYER. Well, Mr. Kelley, with all due respect,
all you do is you take the amount of money that has gone out
the door, you take the amount of money that they think has been
fraudulently accessed, and you divide that out and you come up
with a percentage. One is roughly 20 percent on EIDL loans,
roughly 5 percent on PPP. So my question is, if the direct
lending of SBA is resulting in a 20 percent rate versus the
private sector is only 5 percent, we have got a problem.
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. And all I want you to do is acknowledge
the fact that that is the case. And you have two separate
entities here who are direct lending and there is a big
difference in the results.
Mr. KELLEY. Yeah.
Mr. LUETKEMEYER. That has to be acknowledged. You cannot
deny the facts. It is in the reports.
Mr. KELLEY. Sure. What I can acknowledge is that in the PPP
program, for example, the top 25 depository institutions in the
United States originated 96 percent of their PPP loans to
existing customers. Those existing customers had already, as
you know, gone through KYC and were on the books either as
depositor or loan borrowers. For community banks that number is
83 percent. The Disaster Loan program is a credit, not
available elsewhere, last resort program. As you know, and the
Committee reflected in the Economic Aid Act the fact that----
Mr. LUETKEMEYER. So the point though, Mr.----
Mr. KELLEY.--there was a need for folks that had not
received funding.
Mr. LUETKEMEYER. With all due respect, Mr. Kelley, the
point--I reclaim my time. The point is that there are things in
place that help minimize fraud in one situation that are not
there in the other that we need to take a look at.
I thank you. I yield back.
Chairwoman VELAZQUEZ. Time has expired.
Now we recognize the gentleman from Pennsylvania, Mr.
Evans, for 5 minutes.
You are muted, Mr. Evans.
Mr. EVANS. I am muted.
Some of my constituent business owners have been working
with the SBA on EIDL reconsideration for a year or more.
Several of them have been in the process for so long due to
reasons beyond their control such as tax documents expired
between SBA loans have been delayed in submitting the document
to the IRS. Can you explain the timeline going forward for
these cases and those that are either submitted or approved
status?
Mr. KELLEY. Yes. So, as I mentioned earlier in the
testimony, there were roughly 61,000 outstanding workable or
eligible files which meant that they were either seeking an
appeal of a previous decline, a reconsideration of a previous
decline, or a loan modification which is an increase to their
existing loan. One of the persistent challenges in this
particular program is the disconnect between the choice that
was made in 2020 regarding not validating tax income for 3.6
million borrowers versus the desire in the Economic Aid Act for
2021 to require, again, as is the case historically for natural
disaster lending at SBA to verify tax income.
It is important to remember that the tax information that
we are seeking for these borrowers is their 2019 filing. It is
now May 2022. For the reconsideration requests, in almost all
cases the original denial is due to a discrepancy that has been
reviewed by a loan officer with respect to an amended tax
return. The amendment is seeking a higher increase amount than
the borrower is eligible for and not surprisingly, the borrower
is not happy with the outcome, which as I know from ending is
an unfortunate byproduct of making loans.
The thing that is important about 2022, as I mentioned
earlier, is that the opportunity for seeking loan modifications
begins to toll because the original notes for 93 percent of the
loans were originated in 2020 and the 24-month window will
toll.
Mr. EVANS. Has money been set aside for applications that
have been approved but not received funding?
Mr. KELLEY. Yes. So there are approved and obligated
borrowers who have not executed closing at their own
discretion. And they will continue to have the opportunity to
close the loan or not close the loan, in which case we will
cancel it. But in all cases, we began communicating to the
outstanding applicants for loan modifications,
reconsiderations, and appeals beginning in February, and
notified them directly through email directly to their account
and spoke directly through call center and loan officer
response to the actual borrowers' request.
Mr. EVANS. Will those in submitted status be able to
receive funds?
Mr. KELLEY. So it depends on what you mean in terms of
submitted, Congressman Evans. So I apologize. Are you referring
to new applications or loan----
Mr. EVANS. Those submitting a status. Those submitting a
status. Will they be able to receive funding?
Mr. KELLEY. So, yes. So, all of the submitted eligible
reconsideration, appeal, and loan modification requests that
were received on or before May 6th, totaling roughly 61,000
requests will have been processed, and those that are eligible
for funding in the case of a loan modification increase, which
is roughly 40,000 in that bucket, have received notification.
And those funds will be obligated for them to close today or at
a later date at their discretion.
Mr. EVANS. I thank you, and I yield back, Madam Chair.
Thank you very much.
Chairwoman VELAZQUEZ. The gentleman yields now.
I now recognize the gentleman from Texas, Vice Ranking
Member Mr. Williams, for 5 minutes.
Mr. WILLIAMS. Thank you, Madam Chairwoman, and Ranking
Member Luetkemeyer.
Mr. Kelley, I have three questions. I have got a bunch of
questions. But I would appreciate you keeping your answers to a
quick yes or no on these first three questions.
Do you believe the SBA, regardless of who is in the White
House, should fight for lower taxes, less regulations, and
advocate for Main Street America?
Mr. KELLEY. I absolutely believe that the SBA should fight
for small businesses.
Mr. WILLIAMS. Regardless of who is in the White House?
Mr. KELLEY. Correct.
Mr. WILLIAMS. Do small business owners prefer capitalism
over socialism?
Mr. KELLEY. I cannot speak for small business owners.
Mr. WILLIAMS. Do you think that capitalism built the
country, not socialism that we see today in the Biden
administration? Do you think that when you go out and see small
business owners like myself that they say we would much rather
have capitalism than socialism? I mean, are you a capital?
Mr. KELLEY. Am I capitalist? Yes.
Mr. WILLIAMS. Okay. But do you think Main Street America
wants that over socialism?
Mr. KELLEY. I cannot speak for all of Main Street America.
Mr. WILLIAMS. Okay, well, you work for the SBA, but okay,
that is fine.
The other question would be, have you ever owned a
business? Because we were talking about your private sector
experience. The Chairman was talking about that. Have you ever
owned a business and started it with your capital and met a
weekly payroll?
Mr. KELLEY. No, I have not.
Mr. WILLIAMS. But you still feel like you see the issues
that face small business even though you have not had that
experience?
Mr. KELLEY. For 6 years between the Obama administration
and the Biden-Harris administration I built a lending practice
for asset-based lending and business acquisition loans and made
a half a billion dollars of loans available for small
businesses. Yes, I feel pretty fluent in the issues related to
small business.
Mr. WILLIAMS. But it is also different when you have your
own capital behind it. And we have some people in this
administration who have never owned a business either. That is
a problem we have.
So as a small business owner myself, I still own a business
in Texas, I have about 300 employees that work for me for over
50 years. I can tell you that President Biden's SBA is out of
touch with Main Street America. Inflation continues to
skyrocket as Americans struggle with the rising cost of gas and
groceries and you see that even from your perch how inflation
is choking small business, not to mention that America's labor
force participation rate is close to a 45-year high leaving
small businesses understaffed and on the verge of shutting
down.
Meanwhile, through all this, the administration's fiscal
2023 budget requests millions of dollars under the SBA's
lending program to go towards climate initiatives. We have got
businesses out there begging to be able to participate, stay
open, and you are out there talking about climate initiatives.
It is shocking to me that the SBA would request more taxpayer
dollars for climate change in lieu of directing money to
provide businesses with access to capital. And I can tell you
that I know businesses in my district in Texas, they are
concerned about their ability to compete in the future and are
looking to SBA to be a nonpartisan resource that has their best
interest in mind and they are not worried about climate change.
So Mr. Kelley, as you talk with small business owners like
me, what is the bigger concern today, climate change or
inflation?
Mr. KELLEY. Well, specifically for the Natural Disaster
Loan Program which we have talked about here, the fact of the
matter is that the number and the impact of natural disasters
has been on the rise. And so what the budget refers to is the
fact that we are going to continue to need to make both
consumer loans for property damage deltas that are not made up
by their private insurance to put homeowners back in their
homes, as well as small businesses for working capital once
they have been leveled by a tornado, an earthquake----
Mr. WILLIAMS. Of course, this is before they have been
leveled by a tornado or earthquake. They just want some help.
Mr. KELLEY. Yes.
Mr. WILLIAMS. And you are out there absorbing a budget full
of climate change which people are not interested in right now
that takes cashflow away from those businesses.
Mr. KELLEY. So for the businesses that are wrecked by the
natural disaster, that is an opportunity for them to get back
on their feet. And our core programs, for example, during the
Obama era, we leveraged the 7(a) program to do a dealer floor
plan financing report. So you own an auto dealership. We stood
in when the dealers were being closed and shuttered when there
was the potential of the auto manufacturers going down and
provided 7(a) capital. That was done through community banks to
support auto dealers to make sure that they could get access to
floor plan financing.
So you are right; we have two programs. One that is an uber
credit not available elsewhere, which is to say when a business
owner is at the worst moment in their life, we stand in to help
them.
Mr. WILLIAMS. Okay.
Mr. KELLEY. And for the core main street businesses, we
provide working capital, owner-occupied real estate and
business acquisition----
Mr. WILLIAMS. Do not forget small businesses that need
operating capital before the big storm as you refer it.
Mr. KELLEY. Absolutely.
Mr. WILLIAMS. That is ready capital they can employ people
with and create more jobs.
Chairwoman VELAZQUEZ. Time has expired.
Mr. WILLIAMS. As opposed to something down the future.
Thank you. I yield my time back.
Chairwoman VELAZQUEZ. The lady from Kansas, Ms. Davids, is
recognized for 5 minutes.
Ms. DAVIDS. Thank you, Chairwoman. I am glad we are having
this hearing today. As the Chair on the Subcommittee on
Economic Growth, Tax, and Capital Access, I am really glad that
we are taking time to work with the Office of Capital Access.
This hearing comes, of course, at a critical time. Just
recently, the SBA announced that the COVID EIDL funds have been
exhausted leaving a lot of business owners, particularly in the
Kansas 3rd frustrated and disappointed. I know my office has
been working with a lot of small businesses that have had
trouble getting their EIDL applications processed in a timely
manner. Whether that is because of the IRS or SBA processing
delays, eligible small business owners have been extremely
frustrated to discover that after months of paperwork and back
and forth with government agencies that there is not funding
available for them and that is, of course, not through any
fault of their own.
I know Mr. Evans and a couple of other people have touched
on this. I want to make sure that I have a clear understanding
of the process going forward. When you were responding to Mr.
Evans's question, I believe that you said that even in
instances of applications being--I guess I will give a hypo. If
a business applied and was inappropriately flagged for fraud
and then ultimately their application is determined to be
eligible, there are funds available for those applicants; is
that correct?
Mr. KELLEY. There can be funds made available. There are
not currently any funds available for that. What is important
to note is that in your hypothetical, that particular borrower
had been seeking that particular reconsideration and had over
14 months to seek the loan increase. So what I can say is that
for 98 percent of the applicants, we respond to those requests
in less than 30 days, and the funding for the loan modification
increases, the average size of which is about $100,000 to
$200,000 takes place in less than 3 weeks. And for the $2
million loans, it takes about 5 weeks to process. So as of May
6th, the total inventory of those challenges, and I want to say
to everyone on the Committee and you, Representative, if there
are any individual issues that you want me to chase down, I am
happy to do that. But in terms of the workable inventory, we
did go through all of those and made sure that those folks were
funded.
Ms. DAVIDS. Okay. And is that regardless of whether we are
talking about IRS delays or folks being inappropriately flagged
for fraud? Going forward, I just want to make sure that
everyone has been--because we will definitely follow up with
any constituents from the Kansas 3rd who have seen these delays
who have been extremely frustrated with the back and forth or
lack thereof. I just want to make sure that what you are saying
is that your understanding is that you have essentially
exhausted all of the applications whether somebody was
inappropriately flagged for fraud or went through the delays
with the IRS that all of those applications have been processed
and anybody who has been approved has already received their
funding?
Mr. KELLEY. Yes. And what I am also saying is that when
Members send us constituent challenges it falls into two
buckets. Either they did not file in 2019 and they are seeking
an increase for more than a year because in 2020 they were able
to get the advance as well as the loan up to $150,000 without
needing to validate taxes, which of course is the subject of
all of the audit reports. For the 2021 population, the 300,000
have had the year to seek new applications. New applications
ended on 12-31. And for the second predominant reason is
amended returns where the increase request that the borrower is
seeking is higher than the previously stated taxes. And so in
those instances there is interrogation on the part of the loan
officer and the team leads as there should be to determine
that.
With respect to fraud per se eligibility, those issues are
dealt with pretty rapidly with respect to, you know, as soon as
the flag fires and it is an automated flag. So it is most
likely that the constituent's issue is related to taxes.
Ms. DAVIDS. Okay. All right. Well, thank you. And we will
follow up.
Thank you, Chairwoman. I yield back.
Chairwoman VELAZQUEZ. The gentlelady yields back.
Now we recognize the gentleman from Pennsylvania, Mr.
Meuser, Ranking Member of the Subcommittee on Economic Growth,
Tax, and Capital Access.
Mr. MEUSER. Thank you very much, Madam Chair. And I thank
the Ranking Member, Mr. Kelley. Good to be with you.
So do you think that the expertise and direct community
ties for private lenders working with the SBA for the 7(a) loan
program is a successful initiative, a successful partnership?
Mr. KELLEY. For $370,000 loans, which is the average loan
size for owner-occupied real estate and business acquisitions,
which is three-quarters of the loans originated each year, yes,
absolutely. The 10-year amortization for business acquisitions,
there is not a better product.
Mr. MEUSER. But you actually think SBA is better off doing
many of those loans on its own?
Mr. KELLEY. I think that we need to exhaust all
distribution channels across the full spectrum of borrower
need.
Mr. MEUSER. The EIDL loan had such fraud and PPP had such
minimal fraud. You are a private sector guy. Why in the world
would you want the SBA that is understaffed. People throughout
Pennsylvania anyway are working real hard, doing a decent job
with what they have available to them, they do not have the
tools to do it a high level of excellence, and you are saying
that you want to take on the direct lending? That sounds crazy
to me.
Mr. KELLEY. Well, I would point you to the State of North
Dakota, which has had a public bank for over 102 years. The
Kansas City Fed recognizes that it has the highest consumer and
business borrower deposit density amongst----
Mr. MEUSER. I completely disagree. Completely disagree.
That does not make any sense. Look at the EIDL funding and the
PPP.
Mr. KELLEY. There is a public bank----
Mr. MEUSER. I will reclaim my time. Also, the idea that you
are spending millions of dollars as Mr. Williams just brought
up for climate change? Well, have you walked through a few
small businesses lately?
Mr. KELLEY. Yes.
Mr. MEUSER. All right. They have got a lot of issues taking
place.
Mr. KELLEY. Yes.
Mr. MEUSER. Okay? And access to capital is a real important
one. And you are focused on the wrong things. I mean, why would
you be focused on voter registration? Why did you put your hand
up first when President Biden said, hey, let's turn federal
agencies into voter registration arenas. Why would you say,
hey, we have got nothing else to do. We will do some voter
registration for you. Does that make sense to you?
Mr. KELLEY. Allowing people to vote, yes.
Mr. MEUSER. That is not the function of the SBA. Okay?
Yeah, it is nice if you hand out ice cream, too, but that is
not what your role is. It is absolutely remarkable and it does
not make any sense that you would not bring some focus to this
important authority that you have and advocacy. But you do not
see it that way.
Mr. KELLEY. I definitely bring a focus every day to the
access to capital issues. So right now working on the full
spectrum of----
Mr. MEUSER. And I can see why you are not in the private
sector.
Let me ask you this.
Mr. KELLEY. I spent the bulk of my career in the private
sector, Congressman.
Mr. MEUSER. You know, well, then why would you be expanding
your duties while the main function is running so poorly? Okay?
EIDL loans have run out; right? You are aware of that, the
funding for EIDL loans?
Mr. KELLEY. Yes.
Mr. MEUSER. I have got a lot of businesses that were
counting on those loans. If we did not have billions, $80
billion in likely fraud, those loans would not have run out. If
they were done in partnership with community banks knowing the
customer, that would not have happened. Because look at the
PPP. So I have small businesses in need of capital, and
instead, we sent it to fraudsters, okay, because you took it on
yourself and you want to expand that. Okay? Can you understand
where I am coming from that I have some difficult in that as
this Committee has oversight of your work?
So on to the EIDL funding. Do you have any plans for--what
is the plan for bringing some additional funding for the EIDL
lenders, for the EIDL loans?
Mr. KELLEY. So we will work with this Committee
appropriators and the Office of Management and Budget to
properly fund the program. With respect to the EIDL program in
particular, there is no doubt that there is going to be
continued demand for a 3.75 percent fixed rate loan with a 30-
year amortization period, but there are other options in the
marketplace as you and other Members have referenced that those
borrowers are going to be able to access. And one of the key
tools for that will be the 7(a) product for which thousands of
lenders----
Mr. MEUSER. Wrong answer. I am just looking for when it is
going to be funded so these small businesses can get the loans
that they have been counting on.
Just real quick. The 504 Express Pilot program that was
supposed to be done December `22, I know you guys are busy, but
when will that be implemented? When will that finally be
created and done?
Mr. KELLEY. Shortly. So the regs will be promulgated in
short order.
Mr. MEUSER. I yield back, Madam Chair.
Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
We recognize the gentlelady from Pennsylvania, Ms.
Houlahan, for 5 minutes.
Ms. HOULAHAN. Thank you, Madam Chair. Just making sure that
you can hear me okay?
Chairwoman VELAZQUEZ. Yes, we can.
Ms. HOULAHAN. Terrific.
And thank you, Mr. Kelley, so much for your testimony.
The SBA, my questions have to do with some inadvertent
consequences, unexpected, unintended consequences. The SBA
estimates that over 300,000 PPP borrowers have in good faith
made miscalculations. That miscalculations have been made
either by the borrowers themselves or by the lending
organizations. On average, they have ended up with excess loan
amounts in errors of around $12,403, which of course poses an
unexpected and potentially crippling debt for many of our
borrowers despite in many cases the loans being used and spent
on what would be considered forgivable uses. So in other words,
the SBA's current process had a simple technological inputter
error occurred could impact or would impact some of our
borrowers for years to come because of that mistake. We really
need, I believe, to deliver on our promises to those borrowers
that these loans can be turned into grants if funds were spent
on forgivable loans or for forgivable reasons.
So my question to you, sir, is will the SBA commit to
making good on that promise and to helping these borrowers to
get full forgiveness?
Mr. KELLEY. Yes. We will commit to working with you and
your staff and the Committee to trying to figure out the right
path forward for those particular forgiveness borrowers.
Ms. HOULAHAN. Excellent. I very much look forward to
working with you and my staff working with you as well.
Real quick. Do you think that there is a legislative issue
here or is there something else that we can understand going on
here?
Mr. KELLEY. I would defer to take this offline because
while I am a lawyer, I am not a particularly good one and I do
not want to speak out of turn on the authorizing statute.
Ms. HOULAHAN. Okay. I look forward to that conversation.
My second question is somewhat related. As the PPP program
was also rolled out, the program rule changes were actually
quite rapidly changed in some cases because of just the crisis
that we were in and making sure that we were being as expedient
as possible. The elimination of the agency's grace periods
contributed to additional errors such as improper documentation
that was submitted by both borrowers and lenders again. So my
question again is does the SBA have any plans to be able to
retroactively review those kinds of cases where the program
rules changes may have also contributed to good faith errors?
Mr. KELLEY. Yes. So, it is important to note that there
have been 10.1 million out of the 11.4 million loans forgiven.
Roughly 65,000 have been purchased and there are about 4,000
current appeals. The appeals process is for those denials, full
denials that you are referencing. And in the case of partial
denials, we do have a reconsideration process that we make
available for those borrowers.
Ms. HOULAHAN. And is there, again, anything that I can be
helpful or this Committee can be helpful in doing to help make
sure that we, again, in the case of people who are just
operating in good faith with the rules, very flexible and very
dynamically changing understandably, is there anything that we
can be doing to be helpful there?
Mr. KELLEY. Yeah. I think you have highlighted some areas.
I am happy to work with the Committee and any Members on the
areas regarding errors and the calculation of the payroll
amount. We do see that in terms of overages as you referenced
and one of the challenges that creates for the borrower. So
absolutely, I am happy to work and try to solve this and get to
the bottom. And I think we should all feel good, and I give the
Committee and obviously your colleagues in the Senate a lot of
credit because we kept the faith with borrowers and lenders.
These loans were supposed to be forgiven, and if the lender
made them, they would have the option to be forgiven. And by
and large that has been executed. But you point out an
important group that might be at the margins that we should
work on.
Ms. HOULAHAN. Thank you. I appreciate it. I have very
limited time left but I would love to take for the record a
question that is always pressing on me which is the
accessibility of capital to the women-owned small businesses.
The businesses that are women-owned have loan sizes that are 41
percent lower than those that are owned by men. Furthermore, on
average, the credit score for women-owned businesses tends to
be much lower, 14 points lower. I only have 16 seconds left and
so probably no opportunity for you to answer but would love for
you from the record to be able to talk to us about what we are
doing, what your office is doing to level that playing field
and what can Congress do to be supportive of those efforts.
And with that, Madam Chair, my time has run out and I yield
back.
Chairwoman VELAZQUEZ. The gentlelady yields back.
Now we recognize the gentleman from Florida, Mr. Donalds,
for 5 minutes.
Mr. DONALDS. Thank you, Madam Chair.
Mr. Kelley, thanks for coming in.
A real quick question. This is to piggyback off the final
question from Mr. Meuser dealing with the 504 Express program
and when essentially the regs were going to be written for this
program. You said shortly. What does that mean?
Mr. KELLEY. It means in the next 30 days or so in terms of
being published.
Mr. DONALDS. Okay. So in 30 days that should be out there
small businesses can take advantage of this?
Mr. KELLEY. Yes.
Mr. DONALDS. Okay. All right. I wanted to get some more
clarification because words have meaning here in our process.
Real quick question. So what is the impact in your view of
the rising interest rate environment on the 7(a) program, on
the 504 program? Obviously, the Fed is on the move. My view,
they are late to the game. They should have done this, should
have been doing this earlier considering the inflationary
environment. But what is your view of the impact of rising
interest rates on those programs?
Mr. KELLEY. Well, it makes the product that much more
valuable for the small business borrower that receives it. So,
for example, you referenced 504. That is a fixed rate tool. So
obviously, borrowing with money today and paying back later is
an advantage with a fixed rate note. And while the rate has
gone up 50 basis points in the last couple of weeks to a point
on the baseline rate, overall, the base rate is still low
historically. So the other advantage of these particular
products is that they allow for longer amortization periods
which lowers the monthly debt service associated with the debt
which means that there is less cash going to the debt. And for
companies that have to pivot, companies that are looking for
growth, owner-occupied, excuse me, business acquisition tool in
the 7(a) program for which 30 percent annually loan proceeds go
to is an excellent opportunity to buy a business with little to
no money down in the particular program.
Mr. DONALDS. Let me ask you this question because you
mentioned your private sector experience. I have to go into
another hearing. So real quick, just can you give me a quick 15
seconds on what your private sector experience was?
Mr. KELLEY. Sure. I worked for a community bank based on
Wilmington, North Carolina that makes loans nationwide to small
businesses for about 6 years. Prior to the Obama
administration, I worked for Schulte Roth and Zabel, which is a
law firm in New York City. Worked mostly on M&A as well as
structure finance. Prior to law school, I worked for a for-
profit educational company that helped children with ages 4 to
14 with enrichment and remediation. That was a retail store. I
ran a P&L for that. And then worked for Chubb Insurance
Company, as well as Merrill Lynch in the Muni-bond division in
the late `90s.
Mr. DONALDS. Okay. So let me ask you this question. So, we
have roughly 30 million small businesses in the United States.
Capital is basically required by everybody. What is the
capability of SBA through direct lending to actually take what
part of the market share do you anticipate SBA can actually
access?
Mr. KELLEY. So I would reference the previous
congresswoman's point about women-owned borrowers and earlier
references to startups.
Mr. DONALDS. Hold on, Mr. Kelley, I have got a minute 33.
If you guys are talking about doing direct lending, of all the
small businesses that exist that are looking for capital, what
percentage of overall small businesses--you guys have had to do
some analysis on this--just what is the percentage? Ten percent
of small businesses? Twenty-five percent? Thirty percent? What
do you think SBA's real capacity is and capability?
Mr. KELLEY. So, I do not know the total capacity. What I
can say based on market demand is that the hardest challenge,
and Chairwoman Velazquez referenced this in her opening
statement, there has been a dearth or decline in loans
particularly under $50,000.
Mr. DONALDS. You do know why that is; right? We have shut
down community banking in the United States through Dodd-Frank
regulation. In my congressional district we had 75 community
banks when I was in community banking. Seventy-five. Now we
have five. It is 10 years, 15 years. From 75 to five. That is
what Washington has done.
So my question is, and again, because now I am down to 25,
28. My question is very, very simple. If SBA was going to go
out and do direct lending, essentially create a federally
controlled bank, if you were going to out in the private
markets and make your own bank, you would have to have an
understanding of what percentage of the market you were going
to be able to anticipate counting on as customers. So what
percentage of the overall market does SBA have the capacity to
actually take on as direct lending customers?
Mr. KELLEY. I assume you are referencing to this
Committee's language that was put in the Build Back Better bill
with respect to direct lending. If that is the case, in
particular what that language called for, and I think it was
appropriate, was for funding loans under $150,000. And what the
language sought to do is to create parity between the SBA's
direct loan for which the agency has direct lending authority
today and has had it historically. To make small dollar loans
for which there is a gap and there is an efficiency challenge
recognized by all----
Mr. DONALDS. The only thing I would argue is----
Chairwoman VELAZQUEZ. Time has expired.
Mr. DONALDS.--I do not think the SBA really has a clue of
what its capacity really is.
Chairwoman VELAZQUEZ. Time has expired.
Mr. DONALDS. That is my point.
Chairwoman VELAZQUEZ. The gentleman from Minnesota, Mr.
Phillips, is recognized for 5 minutes.
Mr. PHILLIPS. Thank you, Madam Chair.
Let me first associate myself with the remarks of my
colleague from Florida relative to community banking. I agree.
I do not want to see more erosion. I want to see more
propagation. I have seen the great value they bring to our
communities and share your concerns.
Mr. Kelley, let me start with you and say thank you. There
is a lot you could be doing other than serving the public in
this capacity. The SBA in my estimation is a uniquely American
institution in supporting entrepreneurship and its ecosystem.
And I am grateful. We have an obligation to provide oversight
and accountability, and we all have concerns about fraud, about
some of the programs, but I want to thank you. A colleague who
was so critical of the SBA just moments ago, according to news
reports, secured a million dollar plus PPP loan. I want to say
thank you on behalf of his enterprise and the hundreds of
thousands that you helped save. And say thank you most
importantly on every one of those little enterprises' behalf.
With that said, there is a lot SBA could do better. It
could do better under Republican administrations and under
Democratic administrations I think we would all agree. But let
me start by just affording you a few moments and express to us
what do you think we could do better, the SBA, you, your
associates, relative to the provision of capital to small
enterprises?
Mr. KELLEY. Thank you. So, the single most important thing
that I think we can do better is build off of what worked
universally within the PPP program for our lending
intermediaries, which is to support a simplified product that
can leverage technology, that can lower the cost of new
customer acquisition, as well as the controllable non-interest
expense associated with making a loan, and to make available
the secondary market so that the guaranteed portion of that
loan can help banks lend beyond their lending limit for an
important customer or leverage the secondary market for
liquidity and quarterly earnings.
So to do that we need to also build off of the expansion of
distribution channels. So as I mentioned earlier, 600 community
financial institutions supported $30 billion more or less of
PPP loans. This is particularly important because the average
loan size across that $30 billion was roughly $40,000. That
particular amount is going to be absolutely critical when we
think about the 5.4 million new startups that happened in 2021.
For those new startups, if they go to the bank that I worked
for or any other bank, they will obviously be in their first
year or two of cashflow. Typically, community banks rely on the
trailing 36 months to validate income from tax returns. So, as
a result, there is a market externality related to startups and
it is one of the most challenging aspects for any lender,
whether you are a community financial institution or a large
top four depositor institution. So, I think the things that we
can do focus on making the rules simple. I commend the
Committee across multiple programs for simplifying, for
example, some of the eligibility criteria for those programs
with respect to affiliation, criminal background checks, those
things. I think we should build off of that.
With respect to the credit criteria for PPP, it was a
formula. And so it lent itself to speed, and as a result, we
saw huge participation within the first $385 billion from
community banks.
As I mentioned earlier, it is a fact that the State of
North Dakota has a public bank for the last 102 years. It lends
$22 billion currently of assets alongside its community banks.
And in PPP, the largest lender, community bank lender in the
State of North Dakota made 1,000 loans with the same amount of
branches as a top four depository institution, same state, but
they only made 100 loans. So community banks are thriving as
measured by the Kansas City Fed in terms of consumer deposits
and business deposits.
So I think that we should think about, and we mentioned it
earlier in the Committee, public-private partnership means both
halves of those equations. And the reason that community banks
are struggling and declining is because of the pressure that is
being put on them by the products offered by the top 25
depository institutions which has led to a decline in their
deposits and it has made it very difficult to compete in terms
of working capital options for small business borrowers that
have high average daily deposit account numbers.
So, the opportunity to do what the----
Mr. PHILLIPS. My time is expired.
Mr. KELLEY. I am sorry. I got passionate about that.
Mr. PHILLIPS. No, and I wanted to afford you time, and I
hope we can work together with you to help realize that vision.
With that I yield back. Thank you.
Chairwoman VELAZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Wisconsin, Mr.
Fitzgerald, for 5 minutes.
Mr. FITZGERALD. Thank you, Madam Chair.
Mr. Kelley, so on July 28, 2021, SBA made changes to the
PPP forgiveness by establishing the Direct Forgiveness Portal.
So there has been discussion already amongst Committee Members
on the difference between the PPP loans that obviously were
part of the files that were controlled and initiated by local
banks compared to the SBA direct loans. So, you know, there was
an experience there that I think there was a little bit of talk
about. And I get it. We are trying to get the money out the
door, get it out as quickly as possible, and there were a
couple of different avenues that that could happen under.
But the problem I think now is that there was very little
communication between the SBA and the banks and credit unions
on the forgiveness part of it. So because I am in the district
in the 5th congressional and I still hear about this now, that
this is an issue that was kind of hanging out there and had not
been dealt with directly. Do you guys still believe that what
was put in place and the due diligence or the underwriting
related to that is still relevant? Or should this be revisited
now and include the credit unions and the banks in this full
discussion about forgiveness?
Mr. KELLEY. So I guess could you help me? I am having a
hard time. So with respect to forgiveness, so as I mentioned
earlier, 10.1 million loans have been forgiven, 65,000 have
sought purchase. Currently, we have an inventory of manual
reviews of roughly 40,000, of which there are a total of 4,000
that exceed the 90-day window. Ninety percent of that number
stays in inventory for less than 15 days. Of the 4,000 over 90
days, all of them have hold code related to eligibility issues
that we are interrogating. So I am not aware of challenges with
respect to forgiveness.
Mr. FITZGERALD. They are basically making the case that the
fraud detection was not significant enough in relationship to
the SBA compared to what they were already doing. So right now
it has created kind of two different categories of PPP loans
that are out there, and I think there are a lot of credit
unions and banks that are saying we simply kind of do not know
where SBA is going with all this.
Mr. KELLEY. So I am happy to take offline to better
understand the issue. My experience with lenders, and we just
recently attended the National Association of Guaranteed
Lenders, and there were about 800 different community banks
represented. There was not a reflection that forgiveness was
having problems. With respect to direct forgiveness
specifically, we add new banks each week even to this day. We
are over 1,500 representing 2.5 million loans under $150,000
that we are processing. And on a daily basis the Direct
Forgiveness portal is responsible for roughly 55 percent of the
inbound intake. What remains outstanding of the 11.4 million
loans is roughly a million loans from the 2021 population for
which the 10 months from the end of the forgiveness period is
about to toll, and we saw an uptick last summer at this time
related to the 2020 population. But I am definitely happy to
hear and will talk to any lender that is having a challenge
specifically with forgiveness to assist.
Mr. FITZGERALD. Very good. I will follow up with you on
that.
Let me just shift gears real quick. So we just introduced
H.R. 7678, American Small Business Competition Act. It would
increase loan amounts under both 7(a) and the 504. I think this
is especially important as kind of the small business costs
continue to rise with the goods and services and what we are
seeing kind of with the economy right now. Have you guys looked
at the 5 million and whether or not that is a sufficient loan
max in this environment that we are operating in now as we
continue to try and get the economy in a better place than
where it is currently?
Mr. KELLEY. Yes, Congressman. I am aware of the bill and
the language. And there is a continuum or spectrum of small
business capital needs that spans from the tying loans that we
were referencing earlier where there is a gap and what the
language of your bill references which is, for example,
specific to supply chain financing today, small businesses that
are seeking to purchase in bulk are often facing a liquidity
challenge because they need to front the money to the
suppliers. And the increase in the amounts in order to be rank
ordered by that supplier is necessary. For the banks, that
proposition is not one that they are excited about because they
are lending money today in hopes of getting an invoice at a
later date. So I do think there are opportunities for us to
work together to support working capital. Largely, the 4,500
community banks focus on residential mortgage and commercial
mortgage loans and they have stepped out of the line of credit
or asset-based lending which is the type of lending that is
particularly needed when you are financing growth and supply.
Mr. FITZGERALD. Thank you. I yield back.
Chairwoman VELAZQUEZ. Thank you. The gentleman's time has
expired.
Now we recognize the gentleman from Maine, Mr. Golden, for
5 minutes.
Mr. GOLDEN. Thank you. I quickly want to revisit something
that was brought up earlier by one of my colleagues. I believe
there was an executive order having to do with agency-side,
department-wide working on issues of voter access. And so I
think some people were talking about SBA kind of throwing their
hand up and I just do not think that is quite the case. I think
it is important that people understand that you are
appropriately focused on your mission but you do have an
obligation to be responsive to executive orders. I am sure you
would agree. So totally fair for Congress to voice opinions
about perceived bad executive orders no doubt but I think that
should be appropriately targeted at the White House and maybe
as an associate administrator of your office you are just being
responsive in the way that you have to be. But somewhere in the
Cabinet there is someone I am sure who was pushing that EO but
it would not have been your office. So I just wanted to clarify
that for everyone out there. I agree with the sentiment of my
colleague though that your office should be focused on capital
access. I think you are doing a good job demonstrating your
grasp of the work that you do, so thanks for being with us here
today.
I want to talk very locally about a constituent that I have
back home but I think that their situation is very similar to
many others around the country. So my constituent was working
on an EIDL application. They had been working with my office
for months to get SBA to complete a review of their
application. And there were difficulties with midstream changes
to the applicant's personnel and then with delays at the IRS.
SBA's processes, however, also contributed to delays. So the
applicant reported to us several times that responsibility
within SBA for their materials changed frequently. And it was
evidenced by redundant requests for information that they were
asked to provide to a number of different SBA employees. And
these requests seemed to stem from confusion about the
applicant's organizational structure which they were able to
clear up with certain SBA contacts only to then have confusion
reappear when they encountered new contacts at SBA. This led to
extended periods in which there was little progress made in the
review.
As of yesterday, neither the applicant nor my office is
able to determine whether their application will meet the
criteria for SBA to complete its review as laid out in SBA's
May 13th FAQ. We were informed recently that its status in
SBA's system was I guess labeled as Not Interested, which is
apparently being used as a holding pattern for certain
applications. But it is unclear how this status maps to the
review stages laid out in the May 13th FAQ. So, while the
applicant has finally received an IRS transcript, it is not
clear whether there are remaining documentation gaps.
And given all this, including the fact that the application
was subject to processing delays by SBA and the IRS, it seems
unfair for them to miss the opportunity to at least have a full
review of their application. So I would like to work with you
and your staff to, first of all, determine whether this
application is in one of the stages that would make it eligible
for a completed review; and then second, if the application is
not on track to receive a full review, is there any way to get
this on track? Or are there other ways in which your office can
help them get access to the capital that they were looking at
and that they clearly need? And of course, in a way that will
work for them, similar to the EIDL program. It obviously had
some very good loan terms that they were interested in, but if
it is not this, are there other opportunities? And I will
follow up with your staff to make sure that you get more
details on the specifics here.
Could you just speak a little bit about the process for
constituents like this across the country? What kind of
flexibility is out there and how long is this going to take for
your office to figure out?
Mr. KELLEY. Well, specific to the example, yes, I am happy
to take that offline and get directly into that. Broadly
speaking, it is no doubt the case that the worst thing you can
do in a business experience or a customer service experience,
excuse me, is to set the wrong expectations on the outset of
the relationship. Unfortunately, when the COVID EIDL program
was rolled out in 2020, 3.6 million borrowers, 93 percent of
the total asset portfolio, were able to obtain $150,000 with
none of the credit criteria that is normally applied either
commercially or in this public program.
So when they came back in for loan modifications which this
administrator made available, the process was by definition
going to be more arduous because we were actually underwriting
the eligibility you referenced in your remarks as well as the
credit criteria. So, it is unfortunate for sure and we have
experienced it with those borrowers. So I am happy to work
offline to address the issue.
Chairwoman VELAZQUEZ. The gentleman's time has expired.
Now we recognize the gentleman from New York, Mr.
Garbarino, for 5 minutes.
Mr. GARBARINO. Thank you, Madam Chair. Mr. Kelley, thank
you very much for being here today.
I wanted to follow up a little bit, build off of actually
what the previous Member was asking.
So your office oversaw the COVID EIDL program; correct?
Mr. KELLEY. Yes.
Mr. GARBARINO. The application process?
Mr. KELLEY. Our office took over the program in July of
2021. Yes.
Mr. GARBARINO. And so if something moved from the pending
status to I think your office you used something internally,
obligated. That means if the loan was obligated that means it
was either going to be funded or was being funded. Who
determined, is that your staff or your office that determines
if something hit the obligated status?
Mr. KELLEY. Yes.
Mr. GARBARINO. so when you announced, or your office
announced, or SBA announced that the EIDL money was done, there
was no more, if something was not in obligated status at that
point, did that mean they could not get any money? There was no
more money available for them; right?
Mr. KELLEY. At that particular moment on May 5th, yes.
However, as I referenced earlier in my testimony, there were
around 61,000 workable files across people seeking appeals to a
previous decline, reconsiderations of a previous decline, and
then loan modification increases. And we were able to process
all of those that were eligible to be approved and be obligated
funds. And we have notified those customers directly from the
loan officer and then the folks that are obligated have the
right at their discretion to close the loan. And they will have
sufficient time, 180 days or more to execute that.
Mr. GARBARINO. So they might not have been obligated but
they were appealing it or there was reconsideration. Were there
any applications that were not being appealed or reconsidered
with their new applications that were not obligated that have
since become obligated? Like could anything happen through a
congressional inquiry or something that would have moved
something that was not obligated on that date to obligate it if
it was not a reconsideration?
Mr. KELLEY. Yes. So from the period of time from May 5th,
May 6th, up until May 16th, your office perhaps and certainly
others, have made us aware of folks who were in the statuses
that your question refers to. And we have dispositioned each of
those instances. And so that might lead to an approval in being
obligated. It also can lead to another decline for the reasons
that they were previously declined. For example,
reconsideration. It is important to note that reconsiderations
for the 24-month period, 8 out of 10 times that someone seeks a
reconsideration, they are declined. So it is also important to
note that because of the delta between what was required for
the 3.6 million loans originated in 2020 versus the roughly
300,000 plus originated in 2021 that required tax income
verification, that those folks from 2020 seeking a loan
increase were denied the increase they were seeking 50 percent
of the time. So it is absolutely the case that the experience
has been frustrating. But as I mentioned to the previous
Member's question, when you set a different set of program
expectations and 93 percent of the loans are originated under
different expectations, that is, of course, going to create
that scenario.
Mr. GARBARINO. Okay. So nothing can be reconsidered now. If
an application by May 5th, they were not obligated, everything
was pretty much denied; correct?
Mr. KELLEY. Yeah. I think----
Mr. GARBARINO. Well, and the reason I am asking is I have a
couple constituents that had applications in. They were not
obligated. They never had an original determination. They were
now denied because the funding was out but they were sent a
letter asking if they would like a reconsideration. So there is
no extra money for reconsideration of loans that were denied;
correct?
Mr. KELLEY. There can be money through cancelations but it
is more likely the case that the limiting factor for a
particular borrower seeking an increase at this late stage, and
keep in mind that increases have been available for 14 months.
Mr. GARBARINO. But if they were denied, and I am almost out
of time, but people are getting reconsideration requests but
the program is closed now.
Mr. KELLEY. Yes.
Mr. GARBARINO. So I think there is a disconnect there and
it is really confusing a lot of my constituents.
Mr. KELLEY. The challenge is going to be from the date that
they signed the note they cannot seek an increase beyond 24
months.
Mr. GARBARINO. Okay. Thank you.
Chairwoman VELAZQUEZ. The gentleman yields back.
Ms. Chu, the gentlelady from California is recognized for 5
minutes.
Ms. CHU. Yes, Associate Administrator Kelley, I am feeling
the distress that some small businesses are experiencing in
getting shut out of COVID EIDL funding due to agency errors or
delays outside of their control.
A couple of examples from my district. A small business
owner in my district applied for a COVID EIDL loan increase
well before the May 6th deadline but because the IRS did not
send the SBA the required tax transcripts in time, the
application was not considered complete and will be rejected.
Another small business owner in my district applied for a
loan increase more than 2 weeks before the deadline but
experienced a technical issue with the SBA's online portal.
They immediately notified SBA and called the agency every day
to see if the issue had been resolved but they still have not
heard back about the status of their application and are
concerned that they will not receive funding.
These are just two of the examples but I am sure that there
are thousands more small businesses in similar situations.
How is the SBA going to make all the small businesses like
this who had a lag in response from the IRS or who were not
able to submit their completed application due to your own
agency's errors? Is it possible to extend the deadline for
these particular businesses?
Mr. KELLEY. What I would recommend, so what I would say to
all the Committee Members, and I would recommend in this case
that we address each individual issue. What I have found since
July when I took over this program is that there is a lot of
detail with each individual inquiry.
With respect to taxes, I agree that we as a nation should
prioritize helping the IRS with the 4506T Modernization. There
is a bill that was passed for the IRS to make available through
API income verification that would not only help us administer
these programs but it would be a tremendous tool for the
commercial lenders and it would directly impact small business
borrowers because they would be able to get a faster quote at a
lower rate because of the verification of the income. One of
the lessons coming out of the Great Recession and the
Residential Mortgage Meltdown was stated income loans, or so-
called liar loans create challenges.
It is absolutely the case that borrowers who could get a
loan in 2020 with no income verification and are having issues
with their 2019 tax filing are frustrated. It is important to
note that the largest single request that we deal with from
Members or directly through our field offices relates to a
disagreement over amended tax filings. This is to say that
there was a reported income that justified a lower increase
request that the agency did approve and the borrower is seeking
reconsideration of that by amending their tax filing. And
coincidentally demonstrating that they are now eligible for an
increase over and above what they had previously filed. It is
important to understand that we are all dealing with a balance
of speed and certainty here with the speed to get the emergency
relief out and the certainty that we all want and this
Committee has prioritized in the Economic Aid Act with respect
to safety and soundness and mitigating fraud, waste, and abuse.
Ms. CHU. Well, what about the situation with the portal not
being functional? That is the SBA's error.
Mr. KELLEY. So by definition, there were 9,000
reconsideration requests that were pending on May 6th and there
were 4 million outstanding loans. So there are, in fact,
thousands literally of folks who are frustrated with the
process at any one time. But the scale and magnitude of the
volume that we are dealing with, which is to say we have been
approving roughly 40,000 to 50,000 loans a day since July on
the order of magnitude of a half a billion to a billion dollars
in some cases means that by definition there will be larger
numbers across the board. Our call center response time is less
than 42 seconds to pick up the phone. The longest wait time
recorded since September is 17 minutes. And the average
disposition time is 7 minutes. So, there is opportunity to
interact with a human and to dispose of these. And I am happy
to work with your Member and the individual borrower offline to
try to get to hopefully a positive outcome.
Chairwoman VELAZQUEZ. The gentlelady's time has expired.
Now we recognize the gentlelady from New York, Ms. Tenney,
for 5 minutes.
Ms. TENNEY. Thank you, Chairwoman Velazquez and, also,
Ranking Member Luetkemeyer, my Vice Ranking Member next to me,
Mr. Williams, another small business owner, and thank you, Mr.
Kelley, for being here today.
I know you are going to understand this completely because
you are a Colgate graduate. Over the past few decades, too many
of our communities have been left behind by manufacturers. Many
of the businesses moved to China. You know that as a person who
lived in Hamilton, New York, for a few years of your life. My
mom's hometown. This has been really exacerbated by the reality
that capital today is really hard to get, and we are relying on
SBA, many of our businesses. A lot of the money tends to be
focused on big city hubs, so Boston, New York, San Francisco.
And yet, it is disproportionately not going to areas like
Hamilton and rural Upstate New York that I represent that have
capital-intensive businesses in the manufacturing sector that
have long-term profit horizons but it takes a lot more capital
to get them up and running but they have longer term prospects.
And also, more job opportunities for people in these
communities, especially everyday Americans.
And I introduced a bill called the American Innovation and
Manufacturing Act, and that was to address this imbalance. I
think there is a place where small business could be really
helpful in this. It would provide flexible financing. We have
also great people in the audience here today who are working on
providing private lending options to our SBA, through SBA, and
also to our small business community.
But my first question to you is right now we have got this
situation where the PPP and the COVID programs are going to
take about a decade to close out, but the SBA and the
congressional Democrats are pushing to create new programs for
them to direct new lending. And I know you have been tackling
questions all morning on this. So even though that is
happening, with the SBA's current tissues managing the fraud
and difficult loan cases and the PPP and EIDL programs, number
one, why should we trust the agency to continue to take on new
types of programs that are more diverse and why do you not see
a need to move to the private sector using partners like
community banks and others to help our underserved in rural
communities? I know there is a lot there but if we could
address, we are creating all these new programs. Why are we not
going and using these private sector type lenders and
institutions who are really going to enhance the SBA's role and
take a lot of that away from sort of a larger bureaucracy that
you are describing today has been very difficult to manage?
Mr. KELLEY. So first I would say that you are absolutely
right that the choices made in 2020 with respect to the safety
and soundness measures for PPP and COVID EIDL created or
increased the likelihood of the challenges that are highlighted
in the audit reports that reflect that. What is also true is
you would be hard pressed prior to that to find an IG or GAO
audit report discussing either natural disaster lending or the
core 7(a), and 504 programs with respect to fraud, waste, and
abuse. So it is absolutely the case that these extraordinary
programs that met an extraordinary plague are outliers. So I
believe you should feel very confident in the agency's ability
to administer programs without fraud, waste, and abuse, because
we have demonstrated that for the bulk of the agency's history
with the exception being the choices made in 2020.
Secondly----
Ms. TENNEY. Okay, quickly, because I want to ask one more
question.
Mr. KELLEY. Sure. Secondly, with respect to your working
capital situation, I completely agree. The Chairwoman, in one
of the versions that this Committee voted out with respect to
direct venture, and one of the programs that is highlighted in
the president's budget goes directly to helping third-party
lenders, private lenders, provide working capital solutions
through certified development corporations for the type of
asset-based financing that you are looking for, specifically
for manufacturing. So I would love to work with your staff and
the Committee more on that.
Ms. TENNEY. Thank you. The last question I have is when the
Paycheck Protection Program was created by the CARES Act,
reauthorized in December of 2020, we applied affiliation rules
prohibiting SBA from issuing and forgiving PPP loans to
entities with more than 500 employees across their affiliates.
And it only excluded hotels and restaurants. However, we have
since learned with various witnesses before this Committee that
the SBA and your office have since forgiven illicit loans from
34 Planned Parenthood affiliates totaling over $65 million.
Considering Planned Parenthood has more than 16,000 employees,
well beyond the 500 employee threshold, what was the reasoning
behind illicitly forgiving these loans?
Chairwoman VELAZQUEZ. Time has expired.
Ms. TENNEY. I would be happy to take that offline or in
person if possible.
Chairwoman VELAZQUEZ. The gentlelady from California, Ms.
Kim, is recognized.
Ms. TENNEY. Can I get that question answered offline?
Ms. YOUNG KIM. Hello?
Chairwoman VELAZQUEZ. Yes, I can hear you. I can hear you.
Give me a second, please. Mr. Kelley, would you provide a
written response to the gentlelady's question from New York?
Mr. KELLEY. Sure.
Chairwoman VELAZQUEZ. The gentlelady from California is
recognized for 5 minutes.
Ms. YOUNG KIM. Thank you. Thank you very much, Chairwoman
and Ranking Member Luetkemeyer for holding this hearing. And I
want to thank our witness.
Mr. Kelley, I really want to thank you for being with us
today.
I echo many of the issues my colleagues have raised today,
and I am concerned that the administration is moving away from
SBA's core mission which is to help small businesses prosper
and protect their interests in order to preserve free,
competitive enterprise. But instead, the administration and SBA
should be focusing and using existing resources to operate more
efficiently and improve its responsiveness to small businesses
and entrepeneurs.
According to a recent report by the Office of Inspector
General found that for some loans totaling $66.4 billion, SBA
did not meet the 90-day statutory requirement to remit
forgiveness payments to lenders. Additionally, the report
states SBA did not meet the 90-day requirement for over 98
percent of loans over $2 million.
So Mr. Kelley, why is the SBA failing to meet the 90-day
statutory requirement?
Mr. KELLEY. It is not any longer. The report that you are
citing references the forgiveness applications over $2 million
that were outstanding as of March of 2021 when I took over the
office. At that time there was a population of about 60,000
loans that had not been processed in a timely manner. The
previous administration did not begin forgiveness review of
manual reviews until November of 2020 despite the forgiveness
portal opening August 10th of 2020. From March of 2021----
Ms. YOUNG KIM. Just talk to me about the plan that you are
working on and how would it help?
Mr. KELLEY. I am sorry; I did not----
Ms. YOUNG KIM. Or how is SBA meeting the 90-day requirement
right now?
Mr. KELLEY. We are meeting the 90-day requirement. In fact,
we are actually exceeding the 90-day requirement. Of the
current workable inventory with respect to manual reviews of
which there are roughly 40,000 at any one time, 90 plus percent
of those will be turned in less than 15 days. There is a
population of 4,000 that have exceeded 90 days due to hold
codes related to fraud, waste, and abuse that we are
interrogating which reflects that.
I would also be happy to talk to any of your constituent
lenders that participate in the PPP program that have any
outstanding issues with any loan greater than 90 days.
Ms. YOUNG KIM. Well, it seems that we have a clear case
study on the effectiveness and efficiency of the successful
public-private partnership versus direct lending. On one hand,
the EIDL program disbursed loans on an average of 49 days
during the early days of the pandemic, and they had almost $85
billion of potentially fraudulent activity. On the other hand,
the PPP as a public-private partnership took an average 7 days
to disburse loans and had approximately $4.6 billion in
potentially illegal behavior.
So Mr. Kelley, based on these numbers, in your opinion,
which model did a better job at disbursing loans in a timely
manner while protecting against fraud?
Mr. KELLEY. So I think both programs as measured by the
audit report deserve a lot of improvement based on choices that
were made in 2020. Each program is different. The objectives,
for example, within the PPP program were to originate a
forgivable note where the lender was held harmless, was not
required to verify the payroll amount. And as I mentioned
earlier, by and large lend the loan to an existing customer
versus an uber credit not available elsewhere disaster loan
which was a critical lifeline for the population that was
widely reported in 2020 as not being able to access PPP due to
being underbanked and underrepresented across the banking
footprint.
Second, with respect to the number that you all are
aggregating with respect to the IG reports for COVID EIDL, the
lion's share of the use case that makes up that number refers
to the sole proprietors, including employee numbers, on their
applications for the advance, which was distributed in 2020.
And not having a requisite EIN number.
The IG has classified that not technically as fraud per se
but as being ineligible. And their justification is the absence
of EIN, which is a requirement for a sole proprietor declaring
employees?
Chairwoman VELAZQUEZ. Time has expired.
The gentleman from Minnesota, Mr. Stauber, is recognized
for 5 minutes.
Mr. STAUBER. Thank you, Madam Chair. Thank you, Ranking
Member Luetkemeyer, for holding this meeting.
Associate Administrator Kelley, I appreciate you being here
today.
In your testimony, you mentioned that 5.4 million Americans
filed an application for a new business in 2021. You also state
that as the SBA transitions its focus from pandemic to its core
mission, the agency has never had more startups to support.
Would you say that adding $201 billion in additional
regulatory cost and over $130 million in new compliance hours
for small businesses as the Biden Administration has
ambivalently done or support actions for these 5.4 million new
startups?
Mr. KELLEY. I think the regulations that you are
referencing are appropriate for the industries that they are
overseeing. And we have seen time and time again that if we do
not have the proper rules of the road, it is the small
businesses that actually are disadvantaged because the major
corporations are able to use their vast resources to a
comparative advantage. So I agree with you that 5.4 million
small businesses absolutely need fairness across the board. And
obviously, Administrator Guzman is, you know, their voice.
Mr. STAUBER. So would you agree that $201 billion of
additional regulatory costs for small businesses is not wise?
Mr. KELLEY. I agree that you are citing an aggregation of
the PRA citations in the Notice and Comment Rulemaking for
which the public will have an opportunity to weigh in on those
rules. I am also in agreement that for specific industries we
need to have fair rules of the road so that there is a
competitive landscape for small businesses to compete.
Mr. STAUBER. You certainly want a competitive landscape in
adding--these are the Biden administration's own numbers--
adding $201 billion of additional regulatory costs is
unacceptable as we look at COVID through our rearview mirror.
From the budget proposal, it is clear that the SBA
administrator is looking to promote her own goals and
initiatives rather than deal with the follow-up pandemic. The
pandemic may be over but the responsibilities of this agency
certainly are not. EIDL loan payments are going to begin soon.
More fraud than we already know to exist is going to bubble up.
Innocent people are going to get hurt.
This leads me to my next question. How is this agency
managing its resources? Are you directing money away from
incomplete tasks for the administrator's wish list initiatives?
Because according to your budget justification, the SBA seems
to think it is more prudent to use taxpayer dollars to pay off
environmentalists but help small businesses that are facing
skyrocketing inflation, a labor shortage, and a continued
supply chain crisis.
Mr. KELLEY. I am sorry, I did not catch the end of your
question.
Mr. STAUBER. How is the agency managing its resources?
Administrator's wish list, it seems like the administrator is
putting a wish list forward. I want to know your budget
justification. The SBA seems to think it is more prudent to use
taxpayer dollars to pay off environmentalists and help small
businesses that are facing skyrocketing inflation, labor
shortages and a continuing supply chain crisis.
Mr. KELLEY. So, I am not aware of the budget paying off
environmentalists. What I am aware of is the increase in the
frequency and the aperture of natural disasters nationwide and
in the territories. And what is absolutely paramount, as you
heard me answer to that Chairwoman earlier and promise, we need
to make sure that there is never an instance where someone
cannot receive natural disaster lending either on the consumer
side to make up for a delta between their property insurance
and what the true physical damage is to their home, and for the
small business's working capital. We are focused on providing
lending and capital for growth. Growth is as important now as
ever and fixed rate products are obviously a unique opportunity
leveraging the 7(a) and the 504 program.
The last thing I will say is that I believe that this
country at this point is truly served by this administrator
give her experience, not just in the Biden administration but
being on the ground when the pandemic was unfolding in a
similar position for the State of California, which is the
sixth largest economy.
So I believe that she understands and has a full grasp of
the issues and concerns that you have highlighted.
Mr. STAUBER. I expect as the associate administrator you
would make those statements about our administrator.
Madam Chair, how much time do I have left?
Chairwoman VELAZQUEZ. Your time has expired, sir.
Mr. STAUBER. I apologize and I yield back, Madam Chair.
Chairwoman VELAZQUEZ. The gentleman yields back and now we
recognize the gentlelady from Texas, Ms. Van Duyne, for 5
minutes.
Ms. VAN DUYNE. Thank you, Madam Chair, and to the Ranking
Member for holding this hearing today. And thank you,
Administrator Kelley, for appearing before us.
This hearing comes at a precarious time for small
businesses. Over the past few years they have battled and
emerged from the pandemic that permanently forced many small
businesses to close their doors. Yet, at this moment, small
employers are the least optimistic about their future business
conditions than they have been in almost 50 years. And how can
you blame them? 8.3 percent annual inflation is ripping through
the economy without signs of stopping. Every business you talk
to cannot find people to hire, and supply chains are still in
turmoil. There is no doubt that this administration's fiscal
policies have played a hand in overstimulating the economy.
The San Francisco Fed found their fiscal support and
countered for over a third of the recent rise in inflation.
Fortunately, this Administration's response has been much of
the same rhetoric. The president tweeted that the key to
bringing inflation was ``making sure that the wealthiest
corporations pay their fair share.'' And yet, his new press
secretary could not even defend that statement.
In an environment that leaves business owners looking for
ways to cut costs, this president still has on his mind
increasing taxes. That will be devastating for small
businesses.
On this Committee, we have established that tax increases
would directly and indirectly impact small employers. But lucky
for us, the key to a thriving small business economy and a
lower inflation environment lies with less government
interference and spending.
And let's be clear. We are nowhere near finished with the
oversight of COVID relief. The Washington Post just put out a
story about close to $163 billion in unemployment fraud. And
combine that with the staggering amount of fraud in small
business programs, we are nearly a quarter of a trillion in
waste. Imagine what we could do with that money. Maybe we could
actually deal with the rapidly approaching expiration dates of
Medicare and Social Security Trust Funds.
The message to the American people should be clear. The
federal government will not spend any new money while we work
to get back the billions of dollars in improper payments.
Mr. Kelley, I have just a couple of questions. Is the SBA
and the Office of Capital Access expecting or planning for a
recession in the U.S. economy?
Mr. KELLEY. We are not expecting anything related to that.
What we are doing every single day is providing credit not
available elsewhere. So our----
Ms. VAN DUYNE. Okay. So you are taking no steps at all to
plan for a recession?
Mr. KELLEY. Our program with respect to its CORE products
is actually a product that will work very well for small
businesses and lenders regardless of the economic----
Ms. VAN DUYNE. Oh, that is wonderful, so but are you saying
that you are not taking any steps to prepare for a recession?
Mr. KELLEY. No, I am saying that we have loan products that
we administer----
Ms. VAN DUYNE. So you are taking steps to prepare for a
recession?
Mr. KELLEY. I think I have answered the question which is I
am saying----
Ms. VAN DUYNE. It is a yes or a not. Are you not or you
are?
Mr. KELLEY. We are administering a program that provides
loan products----
Ms. VAN DUYNE. So is it a yes or a no?
Mr. KELLEY. That we are providing loan products, it is a
yes.
Ms. VAN DUYNE. That you are preparing or not preparing for
a recession?
Mr. KELLEY. We are not currently preparing for a recession.
No.
Ms. VAN DUYNE. Okay. So would you agree that the overall
economic situation does impact lending cycles? And whether
small business owners may seek out SBA loans versus a private
lender?
Mr. KELLEY. I am sorry; could you repeat the question?
Ms. VAN DUYNE. Would you agree that the overall economic
situation impacts lending cycles?
Mr. KELLEY. Yes.
Ms. VAN DUYNE. And whether or not small business owners can
seek out SBA loans versus a private lender?
Mr. KELLEY. Yes. But what happens in a recessionary
environment is that the SBA loan products are actually in
greater demand. And so----
Ms. VAN DUYNE. Okay, so good to know. So as I am sure you
are aware, many financial institutions are starting to
anticipate and price in a higher risk of a recession. So I am
interested in why private lenders are adjusting to this economy
at a higher risk of a recession but the SBA is not thinking
about it.
Mr. KELLEY. It is not that we are not thinking about it.
Our core products depend on those lending intermediaries that
you just referenced. And the core product actually benefits
them in the counter cyclical environment. So what I am saying
to you is that the particular program that I administer has
loan products that are most useful in countercyclical
environments. So whether I am in a----
Ms. VAN DUYNE. Okay. I have got to yield back my time
because I have only got 17 more seconds.
As you talk with small business owners I am curious, what
is a bigger concern for them, climate change or inflation?
Mr. KELLEY. I think that anything that impacts their
business is a concern. And both of those----
Ms. VAN DUYNE. But you think they are more concerned with
climate change right now or inflation?
Mr. KELLEY. I think with respect to the references to
climate change within the specific budget it is in reference to
natural disasters that have eviscerated their small business.
So I believe----
Ms. VAN DUYNE. Okay. I yield back my time. Thank you very
much.
Chairwoman VELAZQUEZ. Time has expired.
Thank you, Mr. Kelley, for appearing before us today. The
work that you and your staff do is fundamental to the success
of our main street communities.
We are committed to working together to enhance OCA's
program, remove barriers to accessing capital, and support
entrepreneurs as they continue to lead our recovery.
Without objection, Members have 5 legislative days to
submit statements and supporting materials for the record. If
there is no further business to come before the Committee,
without objection, we are adjourned. Thank you.
[Whereupon, at 11:53 a.m., the committee was adjourned.]
A P P E N D I X
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