[Senate Hearing 117-733]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 117-733

 IMPROVING ACCESS TO CAPITAL IN UNDERSERVED COMMUNITIES: THE COMMUNITY 
        ADVANTAGE PROGRAM, MICROLOANS, AND OTHER SBA INITIATIVES

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP

                                 OF THE

                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           DECEMBER 14, 2022
                               __________


      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship






                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
               





        Available via the World Wide Web: http://www.govinfo.gov



                               ______
                                 

                 U.S. GOVERNMENT PUBLISHING OFFICE

50-575                    WASHINGTON : 2023









            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                    ONE HUNDRED SEVENTEENTH CONGRESS

                              ----------                              

                 BENJAMIN L. CARDIN, Maryland, Chairman
                  RAND PAUL, Kentucky, Ranking Member

MARIA CANTWELL, Washington           MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire        JAMES E. RISCH, Idaho
EDWARD J. MARKEY, Massachusetts      TIM SCOTT, South Carolina
CORY A. BOOKER, New Jersey           JONI ERNST, Iowa
CHRISTOPHER A. COONS, Delaware       JAMES M. INHOFE, Oklahoma
MAZIE HIRONO, Hawaii                 TODD YOUNG, Indiana
TAMMY DUCKWORTH, Illinois            JOHN KENNEDY, Louisiana
JACKY ROSEN, Nevada                  JOSH HAWLEY, Missouri
JOHN HICKENLOOPER, Colorado          ROGER MARSHALL, Kansas
                 Sean Moore, Democratic Staff Director
              William Henderson, Republican Staff Director








                            C O N T E N T S

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                                                                   Page

                      WITNESS PREPARED STATEMENTS
                                Panel 1

Mr. Jon Gaines, Vice President, Business Services & Finance, 
  Wisconsin Women's Business Initiative Corporation, Milwaukee, 
  WI.............................................................     6
Mr. Nick Schwellenbach, Senior Investigator, Project on 
  Government Oversight, Washington, DC...........................    23
Mr. Robert Villarreal, Chief External Affairs Officer, Momentus 
  Capital-CDC Small Business Finance, Chula Vista, CA............    32
Ms. Annemarie Murphy, Executive Vice President, President of SBA 
  Lending, First Bank of the Lake, Greenville, SC................    49

                        QUESTIONS FOR THE RECORD

Mr. Jon Gaines
    Responses to questions submitted by Senators Cantwell and 
      Rosen......................................................    75
Mr. Nick Schwellenbach
    Responses to questions submitted by Senators Cantwell and 
      Inhofe.....................................................    87
Mr. Robert Villarreal
    Responses to questions submitted by Senators Cantwell and 
      Rosen......................................................    90
Ms. Annemarie Murphy
    Responses to questions submitted by Senators Cantwell and 
      Inhofe.....................................................    96

                  ADDITIONAL STATEMENTS FOR THE RECORD

Senator Hickenlooper
    Statement dated December 14, 2022............................   102
National Association of Development Companies
    Statement dated December 14, 2022............................   104
National Association of Development Companies
    Letter dated December 12, 2022...............................   110
Mission Lenders Working Group
    Statement dated December 14, 2022............................   115









 
 IMPROVING ACCESS TO CAPITAL IN UNDERSERVED COMMUNITIES: THE COMMUNITY 
        ADVANTAGE PROGRAM, MICROLOANS, AND OTHER SBA INITIATIVES

                              ----------                              


                      WEDNESDAY, DECEMBER 14, 2022

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:28 p.m., in 
Room 428A, Russell Senate Office Building, Hon. Ben Cardin, 
Chairman of the Committee, presiding.
    Present: Senators Cardin, Booker, Hirono, Rosen, Ernst, 
Young, Hawley, and Marshall.

              OPENING STATEMENT OF CHAIRMAN CARDIN

    Chairman Cardin. The Small Business Committee will come to 
order.
    I just wanted to acknowledge first this will be our last 
hearing of the 117th Congress, and I just really want to take 
this opportunity to thank the dedicated staff, both the 
Majority and the Republican staff, on this Committee for the 
work that they have done. This Committee, particularly during 
COVID-19 but as a legacy of COVID-19, handled a lot of 
responsibilities. Its portfolio increased dramatically, and it 
has one of the smallest staffs of any of the standing 
committees in the United States Senate. And I just really want 
to thank them for their dedication and work and the cooperation 
that we have received from the Majority and Minority staffs 
working together to get many major bills to the finish line.
    I am reminded that the SBIR/STTR programs were not an easy 
assignment. We have half a dozen bills that have made their way 
through our Committee and are going to make their way to the 
President for signature. This has been a very productive 
Congress for the Small Business and Entrepreneurship Committee, 
and I just really want to thank my members as well as our 
dedicated staff.
    We are continuing today with a very distinguished panel of 
witnesses, and I am really pleased that Senator Marshall is 
stepping in to be the Ranking Member for today's hearing. He 
has been a loyal member of this Committee, very actively 
engaged during the 117th Congress. So, Senator Marshall, 
wonderful to have you here today.
    Today, the Senate Small Business and Entrepreneurship 
Committee will consider a hearing on ``Improving Access to 
Capital in Underserved Communities.'' Access to capital is the 
lifeblood of any business but is especially critical to small 
businesses. For too long, underserved and underbanked 
businesses have not had equal access to these resources. It is 
an enduring problem.
    While large banks approve 60 percent of the loans sought by 
White small business owners, minority small businesses have a 
lower rate of approval. Banks approved just 50 percent of loans 
sought by the Hispanic small business owners and 29 percent of 
those sought by Black owners. Inequities like these were made 
worse during the pandemic, making it significantly more 
difficult for minority businesses to absorb financial shocks.
    According to a study by the Federal Reserve Bank of New 
York, about 58 percent of Black-owned businesses were at risk 
of financial distress prior to the pandemic as compared to 27 
percent of White-owned businesses. This is why leveling the 
playing field and improving access to capital for underserved 
communities is a top priority and why I am constantly looking 
for ways to improve the Small Business Administration's lending 
program.
    As many of you know, the 7(a) loan guarantee program is 
SBA's flagship lending program. Last year, SBA approved over 
47,000 7(a) loans totaling over $25 billion. This is an 
enormous amount of capital going to so many borrowers who would 
otherwise be unable to access capital elsewhere.
    However, of those 7(a) loans, only 4 percent went to Black 
business owners and 15 percent to women business owners. Though 
this is better than it has been in past years, we must do, and 
should do, much better. That is why I am a proud supporter of 
the Community Advantage program.
    Community Advantage was created in 2011 to address the 
credit gap in underserved markets. The program allows mission 
oriented, nonprofit lenders to make 7(a) loans up to $350,000 
focusing on economic development for underbanked small business 
owners. Compared to the regular 7(a), Black business owners 
received 20 percent of the Community Advantage loans and women 
owned businesses, 32 percent.
    Although a smaller, more targeted program, the Community 
Advantage program clearly does an excellent job of addressing 
the credit gap and is a key tool to our mission to improve 
access to capital for underserved small business owners and 
entrepreneurs.
    I have introduced legislation to make the Community 
Advantage program permanent. This will provide stability to 
enable more lenders to enter the program and ultimately reach 
more entrepreneurs and small businesses in their communities. I 
am hopeful that it will become a permanent SBA program in the 
next Congress.
    The Microloan program is another SBA initiative that 
reaches various demographic groups that would otherwise not be 
served by the private sector or even by the SBA's own 7(a) 
program, playing an important role in providing credit to the 
smallest, underbanked small business owners and entrepreneurs.
    In fiscal year 2022, 45 percent of all Microloans went to 
women-owned businesses, 14 percent to Hispanic-owned 
businesses, and 35 percent to Black-owned businesses. Microloan 
borrowers generally have the most difficult time accessing 
capital elsewhere. Less than one-third report that they would 
have been able to find acceptable financing from other sources.
    These lending programs are critical in addressing the 
existing credit gap for minority and women small business 
owners in particular. I look forward to hearing from our 
witnesses about how we can improve these programs and adopt 
innovative solutions to provide access to capital to those 
currently left out of the system.
    This hearing will also explore two recent rule changes 
proposed by the SBA. According to the SBA, the purpose of these 
two changes is to bring more lenders into the market, creating 
more opportunities for small-dollar loans and reaching more 
underserved communities. It is clear that lenders must do more 
to reach the underserved small businesses. We saw too often 
with the PPP that these small businesses did not have the same 
financial connections and resources as larger ones did, and 
they were excluded from the critical relief or had to wait a 
longer time in order to get their help.
    It is important that we recognize these inequities in our 
capital access programs and in the small business ecosystem 
more broadly and, even more importantly, that we work to 
address them. I support the SBA's efforts in their work to 
level the playing field for small business owners and 
entrepreneurs.
    I understand that there are many concerns about these 
proposed changes, and while I fully support the objectives and 
the goals in mind, I share some of these concerns. We need to 
ensure that we address these inequities and better serve small 
business owners without undermining important guardrails. 
Guardrails are essential. They protect borrowers, the lenders, 
and the integrity of the programs.
    We also need to think through these proposed changes and 
ensure that they will actually increase small-dollar loans and 
address the credit gap without unintended consequences or harm 
to small business owners we aim to help. The public comment 
period on the proposed changes is now open, and I encourage 
everyone with questions or concerns to make their voices heard.
    I wholeheartedly agree with the SBA that we must do better 
in reaching our underserved entrepreneurs. However, I also feel 
strongly that we must go about this in a transparent and 
informed way, and I welcome discussion about the impact of 
these changes. I look forward to working with the SBA, the 
lenders, underserved entrepreneurs, and the small business 
community, and other stakeholders on this issue.
    I want to thank our witnesses for being here today, and I 
look forward to their testimony. But first, if I might, I am 
going to yield to the Ranking Republican Member, Senator 
Marshall.

             OPENING STATEMENT OF SENATOR MARSHALL

    Senator Marshall. Well, thank you, Mr. Chairman, and let me 
also add my thanks to Ranking Member Paul for giving me the 
honor of sitting in this chair. And let me add my thanks, along 
with yours, to the Committee staff as we close out the Congress 
for all their hard work and let me add also my thanks to the 
witnesses for coming today, taking time out of your day to get 
here and share your wisdom.
    It is an honor to serve as Ranking Member for today's 
important hearing as we examine how the Small Business 
Administration can best serve small businesses' capital needs, 
especially for borrowers in underserved communities.
    Access to capital is always a top issue facing Kansas small 
business owners and businesses throughout the country. After 
hosting several roundtable discussions with minority-owned 
Kansas businesses, it is clear that our entrepreneurs have 
solid business ideas and plans to grow but often lack the 
resources or connections they need to get a business off the 
ground.
    I frequently hear concerns that the SBA's lending programs 
are cumbersome for our community lenders and are filled with 
bureaucratic red tape for the borrowers, who often give up very 
early in the process. Due to the high-risk status of any new 
venture and this lengthy application, many banks have decided 
to stay on the sidelines. Indeed, entrepreneurs need 
streamlined access to capital so they can focus more on their 
businesses and not paperwork.
    But some things must be working as SBA approved a 
blockbuster number of loans in fiscal years 2021 and 2022. 
According to SBA's data, in fiscal year 2021, the 7(a) loan 
program administered more than 50,000 loans for more than $36 
billion of which 30 percent of the dollars went to minority 
owned small businesses. In total, these 2021 numbers represent 
an increase of $13 billion from 2019 in approved 7(a) loans. 
These numbers are promising for the lending programs, but more 
can be done, and I am committed to finding solutions with my 
colleagues so we can provide more opportunities to 
entrepreneurs across the nation. This is exactly what will turn 
our economy around and provide more high-paying jobs for all 
Americans.
    However, when changing these programs, we cannot forget to 
maintain strong due diligence standards while still maintaining 
simplicity. As these programs are government-backed loans, it 
is essential that prudent lending standards are in place to 
ensure taxpayers are not footing the bill on risky loans. The 
7(a) loan program has generally operated at zero subsidy, 
meaning the program administers fees to offset any loan losses.
    Recently, the SBA announced two proposed rules that would 
alter the underwriting and standard practices in the 7(a) and 
504 programs. One rule would also lift a 40-year moratorium on 
how many non-Federally regulated lenders the SBA can oversee. 
While I hope this allows more access to capital, it is 
concerning to me that the current administration is changing 
significant lending policies without input from Congress. It is 
also concerning that the SBA may not be able to adequately 
provide oversight and examinations of these new SBA lenders 
through the SBA's Office of Credit Risk Management under these 
new rules.
    Many have seen these rule changes as an opportunity to 
allow fintech lenders into SBA's traditional lending programs. 
While it is encouraging to see the SBA is attempting to take 
steps to diversify its lending pool, it is troubling they are 
coupling it with loosening program standards.
    Fintechs had the opportunity to participate in the Paycheck 
Protection Program, but recent reports have shown fintech is 
responsible for a disproportionate amount of PPP fraud compared 
to more traditional, local lenders like community banks and 
credit unions. Many of the fintechs in PPP had not been subject 
to the Bank Secrecy Act and Know Your Customer compliance 
requirements, which led to fraudulent PPP applications being 
processed. These are major concerns that, while automation may 
streamline certain processes, critical vetting and eligibility 
checks will be left behind and replaced by a high-volume 
business model with the addition of fintechs in lending 
programs.
    SBA loan procedures can often be improved, but it is the 
key technical assistance to borrowers that differentiates SBA 
lending and ensures that the borrower is not in a predatory 
loan that they will have difficulty paying back. In light of 
the findings on fintech fraud in PPP, Congress needs to first 
examine letting fintechs into new Federal lending programs 
before the SBA implements these very significant changes. 
Thankfully, we will have the opportunity to start the 
conversations today.
    I am looking forward to hearing from our witnesses today, 
who are experts on the fraud and wrongdoing in PPP loans as 
well as SBA mission lenders who can speak in detail about how 
they help underserved communities and the impacts these new 
policy changes will have on program risk.
    Again, I believe we can do both. Making the process simpler 
and streamlined will bring in more lenders. Yet, we must 
maintain the integrity of the programs.
    Thank you. I yield back.
    Chairman Cardin. Thank you, Senator Marshall. I certainly 
agree with your comments, though. We have to make sure we have 
accountability, and we have to expand the opportunities to make 
it easier for small businesses to access the SBA programs. So, 
thank you very much for your comments.
    We now look forward to hearing from our distinguished 
panel. Let me introduce you, and then we will go from my left 
to right.
    First, Jon Gaines is the Vice President of Business 
Services and Finance at Wisconsin Women's Business Initiative 
Corporation. That organization has become a highly successful 
Microloan and Community Advantage lender. They do great work in 
this area, and I look forward to hearing from Mr. Gaines about 
his organization's experience with these programs and 
discussing what we can do to make them better.
    We will next hear from Nick Schwellenbach, a senior 
investigator at the Project on Government Oversight. He joined 
POGO in February of 2017 and was previous a communications 
director at the U.S. Office of Special Counsel, the main 
Federal agency in charge of protecting whistleblowers.
    Next we have Robert Villarreal, Chief External Affairs 
Officer at CDC Small Business Finance. Under his leadership, 
the organization has become the nation's largest Community 
Advantage lender. CDC Business Finance also lends in my home 
State of Maryland. I always mention that. They do excellent 
work in supporting smaller lenders, and I look forward to 
hearing your testimony.
    And then lastly, we will hear from a person I had the 
privilege of hearing from earlier last week, Annemarie Murphy, 
who is President of the SBA Lending for First Bank of the Lake, 
where she directs all facets of government-guaranteed lending. 
As part of her current role, Ms. Murphy successfully launched a 
Veterans Initiative Team to target lending activities to our 
nation's veterans and tripled the volume and space within the 
first year. Quite a record.
    We will start with Mr. Gaines.

STATEMENT OF JON GAINES, VICE PRESIDENT, BUSINESS SERVICES AND 
  FINANCE, WISCONSIN WOMEN'S BUSINESS INITIATIVE CORPORATION, 
                      MILWAUKEE, WISCONSIN

    Mr. Gaines. Well, good afternoon, Chairman Cardin, Ranking 
Member Paul, Dr. Marshall. My name is Jon Gaines, and I am the 
VP of Finance for Wisconsin Women's Business Initiative 
Corporation. We call it, internally, WWBIC.
    Thank you for the opportunity to testify today as an 
intermediary lender of the SBA loan program and on its success 
of microlenders like our organization in delivering financial 
services to underserved small businesses. I am pleased to 
testify on behalf of WWBIC and the Friends of the SBA Microloan 
Program, an association of Microloan intermediaries that 
advocate basically for the program.
    A brief bit about WWBIC. We are a leading, innovative, 
statewide economic development corporation birthed out of the 
Women's Economic Empowerment Movement and began operations in 
1987, providing business development services to start-ups, 
micro enterprises, and small businesses, with a primary focus 
on women, minorities, people of low wealth and incomes, and 
most recently, veterans and military-connected families. We 
open doors of opportunity by providing direct lending and 
access to fair and responsible capital, quality and responsible 
lending, and one-to-one technical business assistance and 
coaching to increase financial wellness.
    In 2005, WWBIC entered the SBA Microloan program, and I 
will talk a little bit more about that later, but we are 
certainly excited about the success so far of the SBA Microloan 
program and certainly what it has done in terms of working with 
folks within our State as well in terms of fostering economic 
growth.
    WWBIC has about 65 employees. We have five regions across 
the State of Wisconsin, and we are really excited about the 
work that we do, in quality small business lending and 
financial training.
    A little bit about the SBA program. It is the largest 
Federal program exclusively targeted to support the credit 
needs of very, very small businesses and self-proprietorships. 
Through a network of community banks, and nonprofit 
intermediaries, the SBA program provides small-dollar loans and 
technical assistance to small businesses that cannot--I repeat, 
cannot secure credit from conventional lenders or other SBA 
based programs related to loan guarantees, of which most of 
those borrowers are, again, ladies, low-wealth individuals, 
veterans, and minority entrepreneurs.
    Those entrepreneurs--the intermediaries ourselves, we then 
leverage those funds with state, local, and other private 
dollars to basically provide Microloans and business 
development services and resources to small businesses. You may 
know, Microloan proceeds may only be used for working capital 
and the acquisition of materials, supplies, furniture, 
fixtures, equipment, those types of things.
    Intermediary lenders participating in the SBA Microloan 
program receive two streams of funding from the SBA: a direct 
loan to the intermediary lender that is used to capitalize a 
revolving loan fund and grant funds to help support the costs 
of providing technical assistance to business borrowers.
    As we said before, SBA Microloan intermediaries serve the 
smallest of the smallest businesses that are out there. The 
program allows intermediaries to make loans up to $50,000. 
However, the average SBA Microloan is about a little over 
$14,400 as of fiscal year 2020. Currently, there are about 150 
active Microloan intermediaries serving 49 states, the District 
of Columbia, and Puerto Rico as well.
    WWBIC's SBA Microloan program effects began, again as I 
noted, in 2005. Since we have been a part of the SBA Microloan 
program, we have deployed a little over 940 loans totaling 
$20.6 million, with an average loan size in that Microloan pool 
of about $22,000. So, again, very small dollars there.
    The small business borrowers of our program provide 
tangible benefits in the communities that we serve. Our logo at 
WWBIC--I will say more our mantra--``one team, one mission, one 
WWBIC,'' our service approach, is we really work to listen, 
serve, and nurture novice small business owners who are my 
neighbors and also live in communities we call home.
    I could talk about more statistics, but I would rather talk 
about a couple stories if I can. I want to share a brief story 
about Heather Varney. Heather Varney owns a company called 
Aeroforce Logistics. It is a start-up veteran- and women-owned 
business located in Milwaukee.
    Heather learned to be a resourceful problem-solver and a 
good communicator at an early age. While in the Marine Corps, 
she experienced a bad accident and was forced to change jobs 
due to the injury and began focusing on sourcing aviation 
parts. She became the parts-finder, if you will, for the Marine 
Corps and ultimately continues adding growth by serving U.S. 
Government entities and large corporations, actually, that 
needed additional aerospace materials and aerospace equipment 
while really working on her focus to make sure she ensured 
working around the small business contracting and utilization 
goals she had in place.
    How did WWBIC help? We helped directly with her first loan 
ever, an SBA Microloan for $50,000, which covered a portion of 
her start-up costs. Her business grew very, very rapidly, and 
within six months she repaid that loan and graduated to, as we 
call it, moving to a commercial lender, which we definitely 
work to extend those parts for businesses as well.
    Heather shared briefly about WWBIC. This is a quick quote: 
``They helped us when traditional banking could not, and they 
are also very well known in the community and also help with 
making connections, which again are important facets of the 
Microloan program.''
    My second example I would like to talk briefly about, 
Lakesha Davis. Lakesha Davis is the owner of Lovingkindness 
AFH, LLC, which again is a minority- and women-owned business 
in Racine, Wisconsin. Lakesha fled a domestic violence 
situation and also homelessness as well and wanted to help 
other folks facing similar circumstances.
    WWBIC got directly involved. We lent her less than $50,000 
in capital to start her business and provided substantial pre-
loan technical assistance, for example, helping her create her 
business plan, pitching her business idea with other 
individuals, working to build her confidence, working 
specifically to help her learn and really use QuickBooks in her 
business, and certainly last, but not least, finding mentors 
and connecting with other resources, which we all know are 
important with any business.
    Currently, Lakesha plans to scale her business to own 25 
percent of the houses in the area where she actually has her 
current business and then ultimately, once that process 
happens, expand to other states as well.
    Lakesha shared a lot: ``When I started my first business 
with WWBIC, I was a big pile of mush, and that was okay. My 
head was full of uncertainty, but as I followed the step-by-
step instructions you guys shared with me, things began to get 
a lot more clear. Not only did I learn how business works, but 
I also learned self-confidence, how to believe in myself, and 
also how to get others on board with my ideas. WWBIC truly 
helped me turn my business dream into the reality.''
    So, as we say, the Microloan program does help with putting 
businesses to work.
    And finishing here, there continues to be a great demand 
for Microloans and raising the cap on intermediary loans, which 
will allow high-performing intermediaries to secure additional 
resources to assist small businesses in their communities. 
Waiving requirements for technical assistance matching will 
make more intermediary resources available to businesses. 
Current law limits to 50 percent the use of TA, technical 
assistance, grants for pre-loan technical assistance and the 
use of consultants. We urge the Committee to consider extending 
or making these provisions permanent.
    We also strongly support, again, eliminating the 50 percent 
limit----
    Chairman Cardin. If you could summarize the rest of your 
statement, we appreciate it.
    Mr. Gaines. I will. In other words, thank you again for 
your time today and listening to our story. And again, it is 
important. TA is important; the Microloan program is important 
to the success of businesses in our community but also across 
the nation as well. Thank you.
    [The prepared statement of Mr. Gaines follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Cardin. Mr. Gaines, thank you for your testimony.
    Mr. Schwellenbach.

 STATEMENT OF NICK SCHWELLENBACH, SENIOR INVESTIGATOR, PROJECT 
           ON GOVERNMENT OVERSIGHT, WASHINGTON, D.C.

    Mr. Schwellenbach. Chairman Cardin, Ranking Member 
Marshall, and other Senators on the Committee, Senator Ernst, 
thank you for inviting me today to discuss the role of 
financial technology companies, also known as fintech 
companies, and fraud in the Paycheck Protection Program during 
today's hearing on underserved communities and their access to 
capital.
    At the Project on Government Oversight, or POGO, I have 
investigated fraud and potential fraud in the PPP for over two 
years, but before I say more, research has shown fintech 
lenders and associated companies did much to help underserved 
communities access PPP loans. According to one paper, fintech 
lenders made a larger share of their loans to Black-owned 
businesses compared to traditional lenders.
    POGO does not currently have a position on proposed rules 
from the SBA, one of which would give fintech lenders 
opportunities to participate in agency lending programs beyond 
the PPP. But as a general proposition, it may benefit 
historically disadvantaged and underbanked communities if 
nontraditional lenders, such as fintechs, can participate.
    But at the same time, fintech companies did not always 
facilitate lending to those the PPP was intended to serve. Many 
set on defrauding the program successfully used fintechs to 
divert money. The SBA must have sufficient safeguards to ensure 
fintechs and other lenders do not enable high rates of fraud. 
Fraud can reduce the amount of funding available for legitimate 
businesses seeking access to capital.
    All that said, fraud concerns should not stop the 
government from trying to access the very real equity issues 
that impede underserved communities' access to capital.
    Now let me talk more about the fraud work that I and others 
have done looking at fintechs. In October, 2020, POGO 
highlighted that a disproportionate number of PPP loans that 
the Justice Department had alleged were fraudulent were 
processed by fintech lenders. Specifically, we identified 97 
PPP loans that were allegedly fraudulently obtained up until 
that point in time--this is late 2020--and many cases have been 
brought since then.
    About half of those approved loans involved seven fintech 
companies and banks working closely with fintechs. Those seven 
processed disproportionately fewer PPP loans even though their 
loans were disproportionately among those that the DOJ was 
alleging were fraudulent.
    POGO's work was also informed by a whistleblower inside a 
fintech lending company, who I cannot divulge their identity, 
who told us that her company did not have ``much incentive to 
do oversight'' because the funds were coming from the 
government, the rules governing the PPP were lax, and each loan 
processed benefitted lenders who collected a fee. In short, 
they did not have any skin in the game. It was not their money, 
it was the government's, and there were a lot of financial 
incentives to process many loans quickly.
    In addition to POGO's work, University of Texas researchers 
earlier this year found that PPP loans processed by fintech 
lenders were much more likely to be accompanied by suspicious 
indicators than loans processed by traditional banks and credit 
unions. There are some notable exceptions, though. The UT 
researchers found that PPP loans processed by some fintech 
lenders actually had particularly low rates of potential fraud.
    So this points to varying underwriting practices by 
fintechs and other lenders participating in the PPP. Some 
fintechs appear to have engaged in rigorous underwriting 
practices, resulting in lower potential fraud rates, while 
others did not.
    Why the wide variance? That is because of the lax rules 
governing the program, such as relying on loan applicants' self 
certification and a lot of confusion about what the program's 
requirements entailed, including compliance with the Bank 
Secretary Act and Know Your Customer requirements.
    Given that some fintechs are not associated with high rates 
of fraud, it does not appear that there is an inherent flaw 
within fintechs as a group, but it appears that the government 
did not do enough to ensure that all nontraditional lenders and 
all lenders participating in the PPP had sufficient anti-fraud 
controls either in house or through their service providers.
    Earlier this month, the House Select Subcommittee on the 
Coronavirus Crisis issued a report that I urge the Committee to 
review that examined fintechs and their role in fraud in the 
PPP.
    If the PPP goes forward with its proposal, it has an 
opportunity to learn lessons from 2020. Unlike those chaotic 
days, the government can take deliberate steps now to get this 
right or get a better balance before the next big disaster 
strikes. The SBA should be commended for seeking ways to expand 
access to capital, but the Committee should also exercise its 
oversight to ensure that there are not high rates of fraud.
    I have included more details and considerations in my 
written testimony, and I am happy to take any questions you 
have.
    [The prepared statement of Mr. Schwellenbach follows:]

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    Chairman Cardin. Thank you very much for your testimony.
    Mr. Villarreal.

STATEMENT OF ROBERT VILLARREAL, CHIEF EXTERNAL AFFAIRS OFFICER, 
  MOMENTUS CAPITAL--CDC SMALL BUSINESS FINANCE, CHULA VISTA, 
                           CALIFORNIA

    Mr. Villarreal. Thank you, Chairman Cardin, Ranking Member 
Paul, Senator Marshall, Senator Ernst. I am honored to testify 
before you today on behalf of Momentus Capital--CDC Small 
Business Finance as well as the Mission Lenders Working Group. 
I want to thank the Committee for convening this hearing and 
for the opportunity to discuss how we can work together to 
ensure underestimated communities can access the capital and 
support they need to thrive.
    CDC Small Business Finance is part of the Momentus Capital 
Family of organizations, a mission-driven financial services 
firm which provides a continuum of social knowledge and 
financial capital. We are proud of our track record and in 44 
years have delivered over $22 billion in capital under 
commercial real estate and small business lending, supporting 
240,000 jobs.
    I am here also representing, as I mentioned, the Mission 
Lenders Working Group, which advocates and provides a voice for 
SBA Community Advantage lenders, a program I am here to talk 
about today. The SBA Community Advantage Pilot Program, or CA, 
as we call it, was launched in February of 2011, and for the 
first time SBA's flagship 7(a) program expanded the points of 
access that small business owners had for getting loans from 
mission-focused financial institutions with experience lending 
in economically underestimated markets.
    Now there are a number of requirements Community Advantage 
lenders must follow, and in the 11-year history of the program 
there has been a number of changes. Most recently, the SBA 
worked with the mission lenders in revising the Community 
Advantage Participant Guide, our standard operating procedure--
our SOP--which included increasing the maximum loan amount from 
$250,000 to $350,000 and streamlining lending requirements. We 
thank and applaud SBA, particularly the current leadership, for 
making these improvements to the program, and they have made a 
difference.
    Now overall, in the 11-year history of the program, since 
2011, there has been a billion dollars of lending under 
Community Advantage, helping 7,000 small businesses. Our 
organization, CDC Small Business Finance, has done 1,200 of 
those loans for $178 million and, yes, Senator, about a dozen 
for about $1.2 million in the great state of Maryland.
    More important, one of the successes of Community Advantage 
has been its reach into the Black and Latino small business 
community. As the Senator mentioned, in 2022, 20 percent of 
Community Advantage loans went to Black entrepreneurs as 
opposed to about 4 to 7 percent on the traditional 7(a), and 
for Latino entrepreneurs it was 16 percent under Community 
Advantage versus 10 percent under the regular 7(a) lending.
    For start-ups, Community Advantage lends almost three times 
more than the traditional 7(a), and that is the engine of the 
American economy. So we are really financing those new small 
businesses and those start-ups under Community Advantage.
    That is why I am happy and I am here to thank Chairman 
Cardin for the introduction of the Community Advantage Loan 
Program Permanency Act of 2022. This legislation not only seeks 
to codify and strengthen the Community Advantage loan program; 
it also recognizes the need to institutionalize mission lending 
as part of SBA's overall mission to aid, counsel, assist, and 
protect the interest of America's small business concerns.
    While the bill creates permanency for the Community 
Advantage program, it also expands the program to cover both 
economically and socially disadvantaged small businesses. As I 
mentioned before, the great work we have done in reaching Black 
and Latino small businesses, that was not even a target market. 
Senator Cardin's bill makes that a target market, and we think 
that and other key provisions will really allow Community 
Advantage lenders to drive deep into communities that are 
underserved and underestimated.
    Senator Cardin, Congresswoman Chu, who have been a strong 
advocate of Community Advantage, both understand that Community 
Advantage is a critical SBA program enabling small-dollar 
lending that is intentionally targeted to small businesses in 
underserved communities, and we thank them for their leadership 
and encourage members of this Committee to support the bill.
    In my last minute, I do want to make at least one comment 
on the SBA's proposed rule on small business lending companies. 
As mentioned, this rule is going to lift, or proposes to lift, 
the 40-year moratorium and add more than the 14 current small 
business lending companies, or SBLCs, and the SBA is doing this 
per the proposed rule to drive deeper and to reach capital 
market gaps. We applaud them for that. We want more capital to 
small businesses in underserved communities and rural 
communities.
    They plan to do this by introducing two new types of SBLCs, 
or at least one new type, and then opening it up. One is a 
mission SBLC, and that will allow a Community Advantage lender, 
like ourselves, to now become an SBLC. They also propose to 
allow, at the start, three new for-profit SBLCs.
    Now in the proposal, they are stating that the mission 
SBLCs will have a lot of requirements to make sure we reach 
underserved communities. Remember, these are organizations that 
already have been doing this for decades and for years.
    On the other hand, for the new for-profit SBLCs, there are 
no--I think the mention was guardrails. There are no guardrails 
for these new SBLCs. So we urge the SBA to really take a look 
at this, and if they really want to reach the underserved and 
to make this work, there needs to be some stronger guidelines 
ensuring that these new SBLCs reach the underserved communities 
that are identified.
    Thank you very much, and I am happy to answer any 
questions.
    [The prepared statement of Mr. Villarreal follows:]

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    Chairman Cardin. Well, thank you for your testimony, 
particularly the nice things you said about my bill. I 
appreciate that very much.
    Ms. Murphy.

   STATEMENT OF ANNEMARIE MURPHY, EXECUTIVE VICE PRESIDENT, 
 PRESIDENT OF SBA LENDING, FIRST BANK OF THE LAKE, GREENVILLE, 
                         SOUTH CAROLINA

    Ms. Murphy. Chairman Cardin, Ranking Member Marshall, and 
members of the Committee, my name is Annemarie Murphy, and I am 
President of SBA Lending for First Bank of the Lake, a small 
community bank.
    Lenders can, and need, to do more in reaching underserved 
markets, but let us look at some facts. Because of the 
program's statutory ``credit elsewhere'' mandate, every 7(a) 
loan serves a borrower that would otherwise be left behind by 
banks conventional lending policies. We are inherently a 
mission program.
    Let us look at stats from last year in 7(a). Roughly 50 
percent of all loans were $150,000 or smaller. More than two 
thirds of all loans were $350,000 or smaller. One-third of all 
loans were to minority borrowers, a number that has been 
steadily on the rise. Twenty-five percent of our borrowers did 
not identify their race or ethnicity, so the actual percentage 
of loans to minorities is likely higher than the statistics 
indicate.
    African Americans are the fastest growing demographic in 
the program, with nearly $1 billion in loans last year alone, 
with nearly a 60 percent increase since FY '17, and so far this 
year, loans to African Americans are up 52 percent in units and 
72 percent in dollars compared to last year.
    Hispanics totaled $1.5 billion, more than a 27 percent 
increase since FY '17, and so far this year, loans to Hispanics 
are up 91 percent in units and 98 percent in dollars compared 
to last year.
    Our loans in rural areas totaled roughly 20 percent of all 
loans.
    Into this success story, SBA is proposing to change the 
7(a) program with the stated intention to aid underserved 
markets. We agree with this intent. Increasing mission lending 
and welcoming more lenders into SBA is good. Our concerns have 
nothing to do with competition. Our concern is about the 
unintended consequences of harming underserved borrowers and 
damaging program integrity.
    SBA proposed two new regulations. The affiliation rule 
proposes to remove the specific, longstanding, prudent credit 
criteria, and the SBLC rule would invite an unlimited number of 
non-Federally regulated entities, including fintechs, into a 
program that would then be devoid of lender guardrails.
    Rather than test these new concepts in a gradual fashion or 
invite fintech to take part in 7(a) using current prudent 
lending standards, SBA has veered in the opposite direction, 
morphing the 7(a) program to fit the fintech business model. 
SBA did not include any specific mission requirements for these 
new lenders to make any loans to underserved markets even 
though that was the stated intent. SBA did not include any 
framework for these non-Federally regulated entities that would 
mirror Federal regulatory standards like anti-money laundering 
or Bank Secrecy Act to protect against fraud.
    SBA proposes the removal of well-established underwriting 
standards that protect taxpayers from excessive losses. Past 
experience indicates that without these underwriting standards 
losses would rise. As a result, Congress may have to increase 
fees on the very borrowers we are trying to help or provide 
appropriations to cover increased losses from risky 
underwriting.
    SBA says it will approve three new non-mission lenders 
right now, but the actual rule allows an unlimited number and 
unlimited loan volume. SBA says it has the capacity to monitor 
these additional entities, but lenders know SBA's oversight 
resources are already stretched too thin.
    And, SBA would permit political appointees to decide 
critical program requirements.
    Over the past seven months, Treasury, OCC, CFPB, the House 
Financial Services and Senate Banking Committees have all 
expressed serious concerns about fintech in financial 
activities without oversight. Most explosive is the Select 
Subcommittee on the Coronavirus Crisis report released this 
month, which revealed how fintechs' inexcusable misconduct 
resulted in tens of billions of dollars of fraudulent loans. 
SBA wants to duplicate the perceived successes of PPP and 7(a). 
These fraud results are the last thing we should recreate.
    Congress and this Administration have valid and substantive 
concerns with fintech. So why is SBA rushing to invite fintech 
into 7(a) without limitations of any kind while simultaneously 
eliminating many of the program's lending standards? If ever 
there was a need to press pause on an issue that raises more 
concerns than answers, it is now.
    Let us reach more borrowers by exploring innovative 
solutions, but SBA should not be making changes to the 
detriment of borrowers or the integrity of the 7(a) program, 
and they should not be ignoring valuable resources that already 
exist in Community Advantage. Congress should make it 
permanent, and SBA should be leaning into their existing 
mission lenders who have mission requirements and let the rule 
changes from May take effect that would further aid mission 
lending.
    Over the past two years, the 7(a) loan program delivered 
almost $62 billion to almost 100,000 borrowers, with over $19.3 
billion going directly to minority borrowers. Let us preserve 
that impact.
    Thank you, and I will take any questions.
    [The prepared statement of Ms. Murphy follows:]

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    Chairman Cardin. Let me thank all four of our witnesses, 
very constructive testimony, appreciate that, on the existing 
programs as well as the two proposed rules by the SBA.
    And I appreciate the testimony in regards to the Community 
Advantage program. It clearly is reaching--doing a better job 
in reaching the underserved communities and with smaller small 
businesses.
    What is the advantage of it being made permanent? The 
Administration did expand its reach by action earlier this 
year. What additional advantage would there be if this is a 
permanent program, Mr. Villarreal?
    Mr. Villarreal. Thank you for the question, Senator. So the 
first and foremost thing is, while SBA did extend the program--
at that time, I think it was 28 months, so now it is less than 
2 years. And we have heard the words ``prudent lending'' go 
around a lot. And if you are a mission lender and see that a 
program has a sunset of now 22 months or 23 months, it does not 
make any sense to make that investment to become an SBA 
Community Advantage lender because it takes a lot of resources 
to do that and it takes time to ramp up. Even in the SBA's 
proposed rule change, they talked about the ramp-up period for 
SBLCs.
    So the most critical one is that it gives security to a 
lender in that it knows the program is going to be around, so 
that is the primary one. So then it can start to build a team 
around that and start to build a marketing strategy to get to 
those.
    I think the other one, particularly as it is proposed, 
Senator, is it allows a greater guarantee for loans under 150, 
to 90 percent, and then for loans from 150 to 350, of 80 
percent.
    And why is this important? A lot of the Community Advantage 
lenders are smaller lenders that can be capital restrained. So 
the ability to take that guarantee and sell it in the secondary 
market and recapitalize and get back--if you do a $100,000 loan 
and you get back $90,000, you can continue to recycle that 
money in your community, and these smaller Community Advantage 
lenders are not in that wheel of having to go and continuously 
fundraise and get more money.
    So those are two critical things that permanency will do, 
particularly the way it is written. It will allow Community 
Advantage lenders to not have to go out and fundraise as much 
and really make an impact in their community.
    Chairman Cardin. Several of you have mentioned the progress 
we have made in the 7(a) programs in reaching the traditionally 
underserved communities, and we have made progress. But one 
trend line appears to be just the opposite: that is, the size 
of the loans. Over the years, the average size of a 7(a) loan 
has grown in dollar amount, not gotten smaller.
    And, as we know, the smaller small businesses are the ones 
who are always more challenged to have the capacity to get a 
loan. What can we do to target the program more to the smaller 
small businesses in traditionally underserved communities? Mr. 
Gaines, do you have some thoughts on that?
    Mr. Gaines. Well, thank you again, Senator. Appreciate that 
question. I think there are certainly a few ideas we can 
certainly think about right off the bat there because again we 
are dealing with--I am going to say small ``micro businesses'' 
is probably the best term I would use.
    I would say right off the bat, in regards to making it 
easier, of course, we all know there is importance to have 
regulation. But the process that we go through in terms of 
really underwriting the loan, to really make it simpler from 
the standpoint of actually making it easier to underwrite the 
loan, makes it quicker for the borrower but also makes it 
quicker for the lender to basically do the work they need to do 
to get those funds out to the borrower.
    So I would say one thing right off the bat would be 
simpler. I do not want to say simpler regulation, but I want to 
say simpler documentation from that standpoint to make it 
easier to happen.
    What other things we could probably--or, other 
recommendations that could be out there to make it easier for 
smaller business loans? I think we need to continue to further 
the outreach that we do as well in regards to working with 
small businesses just so they know because we are sometimes 
challenged by language barriers. Speaking briefly, in terms of 
Wisconsin, you know, two-thirds of our business owners are 
ladies. We want to make sure that we are doing everything we 
can to really kind of bridge those cultural divides and really 
work hard to communicate with folks from a marketing 
perspective so it makes it easier for small businesses to 
understand who we are, what we do, and, just as importantly, 
work with us.
    Chairman Cardin. Thank you. Ms. Murphy, I want to give a 
shout-out to what you have been able to do in the veteran 
community. It shows that if you really want to make a 
difference, if you do the outreach, you can reach a community 
that has had a challenge in reaching services. So tell us your 
secret. How did you get those good results in the veteran 
community?
    Ms. Murphy. Thank you, Chairman Cardin. So what we did was 
recognize that many of our underserved borrowers want to work 
with somebody that they feel that they have a shared experience 
with, someone that they have something in common.
    And when we looked at it--I come from a longstanding 
military family tradition. I will give the shout-out to my 
daughter who is currently serving in Guam. What we realized was 
that when we started putting teams together of veterans and 
then started doing outreach to veteran organizations, having 
that common experience, all of a sudden our veterans were 
willing to check the box, to say, ``Yes, I am a veteran. Yes, 
here is my DD214. Yes, I now have the advantage of the no fee 
for my veteran loan'' because they felt comfortable with that 
person.
    So we have expanded that to now include veteran 
underwriters. We are looking at other operations positions at 
this point and training veterans who are now separating from 
service and training them up in SBA lending. And, we are 
looking to replicate this since we had that success this year. 
We launched this on January 1st of 2022. So we are not even a 
full year into it and tripled it. So now we are looking to 
replicate what we did and start doing that with other 
underserved markets.
    Chairman Cardin. Thank you.
    Mr. Schwellenbach, I just really want to compliment you on 
your testimony as to the way you framed it. I look forward to 
your specific recommendations in regards to modifications of 
the proposed rule to deal with the guardrails and concerns that 
you express. You seem very positive about SBA expanding 
competition but raise an issue we are all concerned about, and 
that is having adequate protection and accountability. So we 
look forward to your specific recommendations in that area.
    Mr. Schwellenbach. Right. So there is a bit of a gap here. 
And thank you for the question, Chairman Cardin. So many of the 
participants in the PPP were traditional depository 
institutions Federally regulated by the Treasury Department, 
OCC, and on and on, with ample experience complying with Bank 
Secrecy Act, Know Your Customer Act--Know Your Customer 
requirements.
    And the PPP was a big experiment in expanding participation 
to fintech lenders, and to their great credit, you know, they 
played a major role in helping a lot of underserved and 
minority-owned and other businesses that had trouble accessing 
capital get PPP loans. The big downside is a lot of these 
fintechs just kind of opened the floodgates to fraud.
    And many of these fintechs and their supporting companies, 
companies like Blue Acorn and Womply, they really had no 
experience or very little experience complying with the Bank 
Secrecy Act and Know Your Customer requirements prior to the 
PPP, and suddenly they are processing tens of billions of loan 
applications.
    And I will not go into great detail, but the House Select 
Subcommittee report is very disturbing. But, really, what it 
points to is that the SBA was not doing its own due diligence 
at the front end in allowing many of these companies to 
participate.
    So one thing I did lay out in my testimony is that we need 
to have sufficient criteria when evaluating companies that want 
to participate in these programs. Do they have a track record 
of complying with the Bank Secrecy Act or have they 
demonstrated that they can comply with the Bank Secrecy Act? 
And, does the SBA have the capacity to vet them at the front 
end and then continually monitor them over time to make sure it 
was not--they are not just passing the test at the front end 
and then throwing away all their anti-fraud resources to save a 
buck later on?
    And the Select Subcommittee's report goes into great detail 
about how some of these companies, when they started to flag a 
number of loans as suspicious and potentially fraudulent, cut 
back on their automated systems for processing loans. Some of 
them were throwing reviewers into processing loans without any 
training at all and looking for signs of potential fraud.
    So at the SBA side, you need to have sufficient criteria so 
that these companies that are not regulated by the Treasury 
Department or OCC or other Federal entities can meet the 
standards that traditional banks and credit unions have to meet 
when it comes to knowing your customer.
    The SBA itself flagged hundreds of thousands of loans as 
potentially fraudulent because it found signs that they were 
not active businesses before February 15th, 2020. If these 
lenders were doing their Know Your Customer requirements 
properly, they would know if these loan applicants existed, you 
know, before February 15th. It is a very basic thing.
    So you know, a lot of this is SBA making sure that the 
lenders who participate and their supporting companies--that is 
a really key part of this--comply with these standards and that 
the standards are high enough.
    Chairman Cardin. Thank you.
    Senator Marshall.
    Senator Marshall. Chairman, I will yield my time to Senator 
Ernst if that is okay with you.
    Senator Ernst. Okay. Great. Thank you, Chairman, and 
thanks, Ranking Member, very much.
    And, Mr. Schwellenbach--did I say it correctly?
    Mr. Schwellenbach. That is pretty good. Schwellenbach, yes.
    Senator Ernst. Schwellenbach. Thank you. I appreciate it.
    No, I do appreciate you talking about the role that fintech 
firms--financial technology firms--played in distributing funds 
to our small businesses during PPP. So many of us were involved 
with the Paycheck Protection Program during COVID-19. I think 
largely in part it was a great success for our small 
businesses, but of course, we did run into issues when it came 
to fraud. And so I am glad that you have had the opportunity to 
do investigative work in these areas.
    We did have unprecedented levels of fraud within the 
program, which I hate that we have to report that, but that is 
the way it is. And we need to make sure that there are 
appropriate guardrails. I think it was close to an estimated 
amount of a hundred billion dollars of fraud, and so that does 
have to be corrected.
    It is very important that we make sure our underserved 
communities have equal access to SBA lending programs, but as 
we are looking at this, we also have to make sure that our 
taxpayer dollars are being adequately protected from fraud and 
waste caused by a lack of oversight. So I appreciate you 
outlining for Chairman Cardin some of those changes that you 
would like to see and certainly would love to work with you in 
the future just so that we can strengthen some of those anti-
fraud protections, so I just wanted to start off with that.
    But then, Ms. Murphy, I would like to go to questions with 
you, and I really appreciate you talking about our veterans 
community as well. There are a number of underserved 
communities, especially as we look at some of the SBA lending 
programs. I will start with a priority that I have been working 
on, and then we will move into more of the veterans and some of 
those underserved communities.
    But one of the longstanding priorities that I have had is 
to expand access to child care for small businesses, especially 
those that are in the rural and underserved areas that have 
little or no access to quality child care services. And because 
of the inability to access child care, it has created these 
economic barriers for so many people out there, these families 
that want to return to work, maybe do what they were doing pre-
pandemic, but some of their child care is gone.
    So earlier this year, I introduced the Childcare DESERTS 
Act, and that would allow for small businesses to use SBA loans 
to provide child care services to employees.
    And I am also a co-sponsor of the Small Business Child Care 
Investment Act, which would allow for nonprofit child care 
providers to access those SBA 7(a) loans, and I am glad you 
talked about those 7(a)s, really appreciate that.
    How could the SBA provide further assistance to eligible 
SBA lenders to help provide small businesses with access to 
quality child care in rural or those underserved communities?
    Ms. Murphy. Thank you, Senator Ernst. It is a great 
question. So the bill would actually need to pass in Congress 
because the way the SBA program is structured right now it is 
ineligible for nonprofits.
    Senator Ernst. No nonprofits, mm-hmm.
    Ms. Murphy. Mm-hmm. So we would need that to pass, but we 
would absolutely look forward to sitting down with you and 
putting something together and seeing what we can do because it 
is so important, especially for our working families, to have 
reasonable child care.
    Senator Ernst. Mm-hmm. And it is important because in many 
of our rural areas there are a lot of churches and other 
nonprofits that really want to expand availability of 
childcare, but they just lack that access to loans and other 
types of programs. So I would love to work with you on that.
    So I would like to dive in as well to assisting our 
veterans, of course. I have a daughter who is active duty, 
serving right now. I am a veteran. We have lots of veterans 
that live in our communities and are engaging in small business 
activities.
    What more can we do? I know checking the box is great, but 
what more can we do to get veterans engaged through SBA loan 
programs?
    Ms. Murphy. A lot of it is the continued outreach. SBA is 
doing that, and we have been working with many of the Veteran 
Business Outreach Centers to get in front of veterans and talk 
to them from a lender perspective of what exactly we need to 
put together and how we can best serve what they are looking to 
do as an entrepreneur.
    Senator Ernst. Very good. And my time is expired, so I will 
yield back, but thank you very much.
    Thank you, Ranking Member.
    Chairman Cardin. Thank you.
    Senator Hirono.
    Senator Hirono. Thank you, Mr. Chairman.
    My focus is on the smaller loan programs that target the 
minority-owned businesses; that would include women-owned 
businesses. And I met with--every time I go home, I meet with 
those businesses who benefitted from the PPP program, and one 
of the really interesting things is last time when I was 
talking with two women-owned businesses was that they both 
started their businesses during the pandemic. They decided that 
they would start their businesses. So it was a really 
interesting kind of timing that I had not heard, that people 
would actually start a business during the pandemic, when 
businesses were having such a hard time. So I think that they 
would definitely have benefitted from some of the smaller 
programs that we have.
    So for example, the Community Advantage loan program, about 
$104 billion was lent through that program nationwide, and we 
did not have any of that going to any businesses in Hawaii. 
However, the Microloan program, with $63 billion lent out, 
there was at least one entity, nonprofit entity, in Hawaii that 
lent something in the order of close to $500,000 in very small 
loans.
    The idea of increasing the money available for these kinds 
of really small loans, is that in the cards? I should ask you, 
Mr. Gaines.
    Mr. Gaines. Yeah, thank you, Senator. Definitely a good 
question there. I certainly think it is important to note that 
it is always a couple things. I call it trust and then also 
access to capital, and those are very, very critical when we 
are talking particularly small loans.
    I would say certainly the trust factor is so critical 
because, again, I am a person that has no idea. I have nowhere 
to turn. I do not know how to get started.
    How can we help them really kind of bridge that gap in 
terms of moving forward? So we have to continue to work on that 
piece, and I think we all, as microlenders, are really working 
hard to--how do we figure out a way to use trust to build those 
connections, to get folks much more involved and focused in 
regards to that.
    But certainly, I would go right back to, as you would say, 
Senator, I think it is important. We need to continue to 
increase the funding available, the capital available. It could 
be Microloan intermediaries but also other partners as well 
because, again, there is no way with 150 Microloan 
intermediaries we can loan all the funds that are needed out 
there in regards to the communities at large. So it is still 
critical.
    So I would say, yes, we need to increase capital, and we 
certainly need to use things like trust and other resources to 
build that out.
    Senator Hirono. So while there is approximately $100 
billion in fraud under the PPP program, do you know if there 
was this kind of a percentage, kind of fraud, in these smaller 
Microloan programs?
    Mr. Gaines. That is a good question. I do not know the 
answer to that, Senator.
    Senator Hirono. Anybody? Ms. Murphy.
    Ms. Murphy. I do not know the answer to the Microloan 
question. However, what I can say is that the guardrails we 
already have in the 7(a) loan program, they really prevent a 
lot of fraud. It is never going to be 100 percent perfect, and 
I cannot tell you what the percentage would be. But we verify 
the tax returns with the IRS that we receive from the borrower, 
and right there that stops quite a few people when they find 
out we are verifying with the IRS themselves.
    Senator Hirono. Are there those kinds of guardrails in the 
Microloan program and the Community Advantage loan program?
    Mr. Gaines. Yes, definitely. Certainly, Senator.
    Senator Hirono. Okay.
    Mr. Gaines. Yeah, there are definitely reviews of those.
    Senator Hirono. To me, as I focus on the targeted--these 
kinds of targeted loans, these programs can use a lot more 
funding if you already have these guardrails. So we are not 
going to see the kind of massive fraud that we saw in PPP.
    And it is astounding to me that the kind of fraud in PPP 
totals $100 billion when you have these other small programs 
that do not total much more than what was fraudulently acquired 
under PPP. So it seems to me that we can do more.
    Mr. Villarreal. So, Senator, if I can add, as both a 
microlender, like Jon--and he is also a Community Advantage 
lender, like ourselves--SBA is our regulator, and we have heard 
some negativity--a bit about SBA. But they are our regulator, 
and they are looking at the loans because a lot of them are 
going through the loan processing center. Not on the SBA 
Microloan, but for us, every year or every other year, SBA 
staff does come out and look at our portfolio. So there is some 
strong oversight.
    And in regards to the funding, we think that Senator 
Cardin's bill, as proposed, would really help. And we would 
really like to talk about this continuum of capital from SBA 
microlenders to Community Advantage lenders and then on to 
traditional financial lenders. So I think that is what this 
bill could do, and some of the reforms that Jon talked about 
and the permanency of Community Advantage, I think, would 
strengthen this ecosystem of support for small businesses.
    Senator Hirono. So I think that makes a lot of sense.
    And at the same time, if I can complete my thoughts here, 
regarding the Microloan program, I did have a nonprofit entity 
in Hawaii that found this program to be generally, while 
challenging, very useful. But the one concern they had was the 
complexity of the reporting requirements from SBA. So when you 
are dealing with these really small kinds of loans, we can 
probably make the reporting requirements and maybe other kinds 
of requirements, while still maintaining the guardrails, much 
more user-friendly.
    Thank you, Mr. Chairman. Thank you.
    Chairman Cardin. Senator Marshall.
    Senator Marshall. All right. Thank you, Mr. Chairman.
    Ms. Murphy, your business model was built upon trying to 
get to ``yes'' for your customers. People apply online. They 
come into your bank. You would like to help them--within, of 
course, the rules--get to ``yes.''
    What are some of the major reasons people are unsuccessful 
qualifying for this loan? Is it credit score, is it they do not 
have a financial statement or they kind of just drop out 
because they are overcome with the process?
    Ms. Murphy. That is a great question. So we generally do 
not have people dropping out because they are overwhelmed with 
the process. We do focus--as a government guaranteed lender, we 
do have dedicated resources for the borrower on our team.
    Where we find the turndowns is usually, you know, the lack 
of repayment ability. It comes back to, the core of what we 
have to do in SBA is the borrower has to be able to repay the 
loan. So when they send in their financials and the projections 
and they cannot repay the loan on their projections, or 
historically, then unfortunately we have to tell them right now 
``No. We need you to be able to repay this loan.''
    When a borrower cannot repay and then there is a default, 
effectively, they now have a debt collector of the U.S. 
Government until that is paid in full.
    When we look at these two proposed rules, the affiliation 
rule removing the guardrails around underwriting, around the 
repayment, the basic premise well-established of how we 
underwrite, there is a fear that that is where we would have 
increased program cost because of increased defaults, which 
hurts the borrower.
    Senator Marshall. Eventually, it would.
    One of the big advantages of a community bank or a credit 
union is really knowing your customer and being able to--you 
know, a reputation is still worth something, and you get this, 
are they hardworking, some of those things. And as you figure 
out their ability to repay that loan, certainly there are 
objective measurements.
    But if you are a fintech program, do you think that they 
will be able to assess the ability to repay the loan in the 
same fashion you will?
    Ms. Murphy. I think it comes back to, again, the well 
established rules that are already set that the SBA is 
proposing to remove. With those guardrails down, we just do not 
know on how these borrowers are going to perform; we do not 
know what their repayment ability is going to be.
    And the reality is, as a Federally regulated lender, as a 
bank, we will still be doing those things. Our regulators 
expect us to do those things. So all of a sudden, our borrowers 
do not have an equal playing field depending on what lender 
they are talking to. The rules would be different because the 
rules are not set by SBA anymore.
    Senator Marshall. Mr. Schwellenbach, as you look at these 
rules for fintech, do you feel like that they are being held at 
the same level as community banks and credit unions?
    Mr. Schwellenbach. I am not sure exactly how to answer that 
question, but I will echo my fellow witness. The rules of the 
program are absolutely critical. If you look at some of the 
internal correspondence by some of these fintech executives, 
talking about these high rates of fraud that they were 
internally seeing during the Paycheck Protection Program, a lot 
of them were very dismissive of these high rates of fraud 
because they said ``Look, this is on the SBA. The rules are 
lax. It is on the government.''
    So if you have lax or nonexistent rules, you know, how can 
you expect companies that are participating to stop this?
    Senator Marshall. So an SBA loan, just by definition, is 
going to be more risky than a PPP loan for a business that has 
been open for 5 or 10 years. What would we need to add to beef 
up the rules that we have seen to try to bring fintech to a 
level playing surface and to try to make sure we do not have 
more fraud? What needs to be added?
    Mr. Schwellenbach. So I want to start off by saying that 
there are some really unusual things about the Paycheck 
Protection Program, and that may be the understatement of the 
day.
    Senator Marshall. That is really not my question.
    Mr. Schwellenbach. Obviously, it was a huge program. In 
many ways, it was more of a grant program since such a high 
percentage of loans were just forgiven.
    So at the front end, you know, there was sort of this 
expectation----
    Senator Marshall. I am sorry, my question is about the PPP 
rules. I am saying, going forward, what needs to be added to 
give us some less rate of fraud and less rate of failure?
    Mr. Schwellenbach. Oh, in the PPP rules or the 7(a)? The 
7(a).
    Senator Marshall. The new 7(a) rules for fintech.
    Mr. Schwellenbach. So I think you want to keep a lot of the 
rules in the 7(a) program and not weaken them. You do not want 
to take them too much in the direction of what you had with 
PPP. You want to know if the borrower can repay. You want to 
make sure that the lender who is processing the loan actually 
verifies that the company seeking the loan actually exists and 
is an active business and is not someone who is just going to 
buy a Rolls Royce with the money and flee to another country.
    So these lenders, or potential lenders, SBA needs to make 
sure that they have their ducks in a row, that they have their 
systems in place, to know their customers.
    Senator Marshall. Okay. I yield back. Thank you.
    Mr. Schwellenbach. And, just one more thing. Even pre-
pandemic, the SBA's Inspector General has found that the SBA's 
Office of Credit Risk Management was not conducting enough 
oversight over participating lenders, and this is all pre-PPP.
    Chairman Cardin. Well, there is a history about the SBA 
regulating lenders, and we recognize that. One of the reasons 
they put the moratorium in effect was because of capacity 
issues to regulate the number of lenders.
    The PPP. We need to understand the challenges that were 
created, but the Paycheck Protection Program was aimed at 
getting money out quickly in order to save not only small 
businesses but our economy.
    It was--and I agree with you, Mr. Schwellenbach. It was 
more of a grant program than a loan program. Although, for 
smaller small businesses it was a loan, and they had to report 
it as a loan. And that was, for many, a factor that slowed them 
down in requesting the help because they did not know whether 
they could handle it on their books.
    So, yes, we have to learn from the experiences under the 
Paycheck Protection Program, but I think your point about where 
we were pre-pandemic and what we need to have now that we have 
a little bit of time to understand what we are doing is to put 
into the program the proper mission requirements and 
accountability and oversight.
    And, yes, this regulation, these two regulations, are aimed 
at a limited number of new lenders, but the regulation as 
written does not restrict it to just a few new lenders. So this 
could become a model moving forward for competition for 
lenders, and we have to make sure it is done right. It could 
far exceed this Administration in its implementation, so we 
have to make sure we have the proper protections as we start 
this new program.
    I want to--I have been told there is another member that is 
two minutes away, and I want to tell you this: I know this 
member. And he told us one time he was close by for a vote, 
will we hold the vote open, and sort of indicated he was at an 
airport coming in. What he did not tell us is that he was in an 
airport in New Jersey coming in. So we will give Senator Booker 
a few minutes to see if he is here.
    We do have a hard stop in about 10 minutes. There is a 
ceremony in the Rotunda for Speaker Pelosi that I know some of 
us want to attend.
    Senator Marshall. Chairman, I want to go hear one of our 
members speak as well----
    Chairman Cardin. Oh, that is right. We have Senator Shelby 
speaking.
    Senator Marshall. Exactly. So, thank you again to all of 
our witnesses. We do appreciate it. This is a great program and 
whatever we can do to make it better, so thank you.
    Chairman Cardin. I will take a moment to see if Senator 
Booker arrives. If not--he said two minutes. We will give him 
four minutes.
    Well, let me--I will follow up on a few other points while 
we are waiting for Senator Booker. We talked about the 
Microloan program. We talked about the Community Advantage 
programs. It really does get smaller loans out there.
    So, as I asked Mr. Gaines, how do we encourage smaller 
lending within the 7(a) program? Banks like to give out larger 
loans. They would rather give out one large loan than two 
smaller loans that equal the size of a larger loan. So what can 
we do to provide additional incentives for our traditional 7(a) 
program to be more useful to the smaller of the small 
businesses?
    Ms. Murphy. Was that to me?
    Chairman Cardin. That is to you.
    Ms. Murphy. Okay. Well, there are a few things we can do. 
So what Congress can do is make Community Advantage permanent. 
That gets more lenders in, knowing that the program will still 
be here. Have SBA press pause on these rules and let us get it 
figured out on the best way to reach more of these underserved 
borrowers. SBA pull back on the proposed rules, and they can 
lean into CA.
    But specifically, as a lender, what would help is codifying 
small-dollar loans and keeping those no-fee for our borrowers. 
That is powerful, especially for our underserved borrowers. 
Like I said, with the success we have seen with veterans, when 
they all of a sudden find out that, ``Oh, wait, if I do check 
that box, there is no fee for me,'' all of a sudden we are 
getting more.
    And I did want to give you an updated stat on veterans. We 
are up 47 percent year-to-date in 7(a) with veterans.
    Chairman Cardin. As I said, lenders like you have made a 
huge difference in that regard. So, really, congratulations to 
you.
    Ms. Murphy. Thank you, Mr. Chairman.
    Chairman Cardin. We have been joined by one of the most 
distinguished members of the United States Senate and this 
Committee, Senator Booker.
    Senator Booker. I want to say that is a low bar, but. 
[Laughter.]
    I am really grateful. I literally ran over here just to 
hope to ask you this one question. I just want to say to you 
again, my staff--every time in my notes, they always say, thank 
Senator Cardin for the justice-involved entrepreneurs and all 
the work that we have done together to make things better.
    Chairman Cardin. Yes.
    Senator Booker. So I am just continually grateful for the 
leadership of Senator Cardin.
    Hello, everybody. So I just appreciate the SBA's incredible 
efforts on proposed rulemaking to simplify and streamline all 
the lending applications. I am sure that has been discussed. 
Too often, entrepreneurs face an overwhelming, bog-down sort of 
a process that really makes it difficult for them to apply 
because of the burdensome nature.
    But I just want to hone in on one of my issues, which is 
this deep concern I have for some of the unintended 
consequences of paring down the affiliation rule and how it 
could impact the lending market for truly small businesses.
    So to be specific, in 2018, the SBA's Office of Inspector 
General found that the 7(a) lending program was facilitated 
with a widespread abuse in the poultry industry, with huge 
multinational poultry corporations pushing small growers into 
abusive contracts, with funding provided by the 7(a) loan 
program.
    These are awful tournament systems. They are living in--
these farmers are living in horrific debt. They are small 
growers. They are independent on paper but were found by the 
SBA to have little control over their operations. The larger 
scale poultry integrators oversaw and dictated every aspect of 
their functions, from where and how to walk through the houses, 
the frequency and timing of inspections, and how to record the 
results. They provided detailed construction specifications for 
growers' broiler houses, site grading equipment, signage, and 
other attributes, really down to the smallest aspects of their 
business they worked at.
    So SBA OIG concluded that these practices were so egregious 
that it was inappropriate for the taxpayer dollar to be 
subsidizing the poultry industry at all. And across the Federal 
Government today, from USDA's Proposed Rule on Competition and 
Market Integrity under the Packers and Stockyards Act, and the 
Department of Labor's efforts to address worker 
misclassification in the industry, the Biden administration, I 
am grateful, is working to crack down on these efforts.
    So I guess for the panel, I just--for the SBA, do you think 
it is appropriate for large corporations to be benefitting from 
a small lending program? Really, what they are subsidizing is 
this god-awful process.
    And then do you think the proposed rule which would 
eliminate the requirement to consider control of a company, 
providing adequate guardrails to ensure these large 
corporations are continuing to siphon this 7(a) lending program 
from high growth small businesses and start-ups really to these 
multinational poultry organizations that are so abusive?
    Ms. Murphy. The simple answer is ``no.''
    Senator Booker. That is a great answer. All right. Thank 
you very much.
    Ms. Murphy. The affiliation rules, as written right now, 
that we all do have, just like we talked about the well 
established underwriting requirements that are also as part of 
the affiliation rule, proposing to be removed, these all were 
put in there for exactly that reason. There was something that 
has happened in the past, and we are now trying to prevent that 
behavior. SBA, in this rule, is proposing to take all of these 
out.
    Now affiliation was simplified under the Community 
Advantage Pilot Program back in May, and we are looking to see 
how is that working.
    Senator Booker. Okay.
    Ms. Murphy. But Community Advantage loans are limited to 
$350,000 and under. So what this does is it would remove 
affiliation requirements right down to--and we did not talk 
about it, is the franchise directory. The franchise directory. 
Right now, the SBA has provided the lenders with a list of all 
the franchise concepts. They have reviewed the documents and 
said: Yes, this is not affiliated. This loan is eligible. So 
you, as a lender, your borrower has control over their own 
business. They do not have a multinational corporation.
    Yes, they tell them what the sign says. Yes, McDonalds is 
not making hot dogs; they are making burgers. But at the end of 
the day, SBA is even taking that away now, something that is 
working really well, and that is being removed as well as part 
of the proposed rule.
    Senator Booker. Did you want to comment?
    Mr. Villarreal. No. I just wanted to say, as Ms. Murphy 
said, we are a Community Advantage lender, and so SBA is our 
regulator. But we are capped at $350,000. We were at 250 until 
earlier this year. So while it may work under the Community 
Advantage, which is a smaller loan program, very targeted to 
entrepreneurs of color, start-ups--half of our loans are to 
pure start-ups--I think we do need to be cautious about 
expanding this at this current moment and let us see how it 
works within the way we are working it with Community 
Advantage.
    Senator Booker. I appreciate that because the poultry 
industry is so abusive to these so-called small, independent 
businesses and they are preying upon a lot of these programs 
designed to help independent, small businesses and they have 
created a system that really is not that.
    Sir, thank you.
    Chairman Cardin. Senator Booker, you always add to the 
hearing. So I appreciate you being here and your questions, and 
I appreciate your friendship and your service in the United 
States Senate.
    Senator Booker. Thank you. Thank you very much, sir. Thank 
you very much.
    Chairman Cardin. The Committee record will remain open for 
one week in case members have additional questions that they 
would ask you to respond to.
    We really thank you all, but we are not dismissing you 
without a request that we will be seeking your guidance as we 
continue to work on ways to improve the tools available at the 
SBA as well as responding to the rulemaking that the 
Administration just recently announced.
    And with that, the Committee will stand adjourned. Thank 
you.
    [Whereupon, at 3:45 p.m., the Committee was adjourned.]

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