[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
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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
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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
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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:]
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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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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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