[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]





                                 

 
 TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING 
                             PROGRAM PART I

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              MAY 10, 2023

                               __________
                               

               [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
               
               
                  

            Small Business Committee Document Number 118-011
                Available via the GPO Website: www.govinfo.gov
                
                
                
                            ______

               U.S. GOVERNMENT PUBLISHING OFFICE 
 52-168              WASHINGTON : 2023 
     
                
                
                
                
                
                   HOUSE COMMITTEE ON SMALL BUSINESS

                    ROGER WILLIAMS, Texas, Chairman
                      BLAINE LUETKEMEYER, Missouri
                        PETE STAUBER, Minnesota
                        DAN MEUSER, Pennsylvania
                         BETH VAN DUYNE, Texas
                         MARIA SALAZAR, Florida
                          TRACEY MANN, Kansas
                           JAKE ELLZEY, Texas
                        MARC MOLINARO, New York
                         MARK ALFORD, Missouri
                           ELI CRANE, Arizona
                          AARON BEAN, Florida
                           WESLEY HUNT, Texas
                         NICK LALOTA, New York
               NYDIA VELAZQUEZ, New York, Ranking Member
                          JARED GOLDEN, Maine
                         KWEISI MFUME, Maryland
                        DEAN PHILLIPS, Minnesota
                          GREG LANDSMAN, Ohio
                       MORGAN MCGARVEY, Kentucky
                  MARIE GLUESENKAMP PEREZ, Washington
                       HILLARY SCHOLTEN, Michigan
                        SHRI THANEDAR, Michigan
                          JUDY CHU, California
                         SHARICE DAVIDS, Kansas
                      CHRIS PAPPAS, New Hampshire

                  Ben Johnson, Majority Staff Director
                 Melissa Jung, Minority Staff Director
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Roger Williams..............................................     1
Hon. Nydia Velazquez.............................................     2

                                WITNESS

Hon. Patrick Kelly, Associate Administrator, United States Small 
  Business Administration, Washington, DC........................     4

                                APPENDIX

Prepared Statement:
    Hon. Patrick Kelly, Associate Administrator, United States 
      Small Business Administration, Washington, DC..............    31
Questions and Answers for the Record:
    Questions from Hon. Williams and Answers from Hon. Kelly.....    34
    Questions from Hon. Bean and Answers from Hon. Kelly.........    45
    Questions from Hon. Chu and Answers from Hon. Kelly..........    50
Additional Material for the Record:
    None.


 TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING 
                             PROGRAM PART I

                              ----------                              


                        WEDNESDAY, MAY 10, 2023

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360, Rayburn House Office Building, Hon. Roger Williams 
[chairman of the Committee] presiding.
    Present: Representatives Williams, Luetkemeyer, Stauber, 
Meuser, Salazar, Ellzey, Molinaro, Alford, Crane, Bean, LaLota, 
Velazquez, Golden, Phillips, McGarvey, Gluesenkamp, Perez, 
Scholten, Chu, Davids, and Pappas.
    Chairman WILLIAMS. Good morning, everyone. I now call the 
Committee on Small Business to order.
    Without objection, the Chair is authorized to declare a 
recess of the Committee at any time.
    The committee is here today to hear testimony from Mr. 
Patrick Kelley, the U.S. Small Business Administration's 
associate administrator of the Office of Capital Access. Thank 
you for being here today, sir.
    And now I recognize myself for my opening statement.
    I want to welcome everybody here today to today's hearing 
which will focus on the much-needed oversight of the Small 
Business Administration and their proposed changes to the 7(a) 
loan program. The SBA administers several programs to support 
small business that encourage lenders to provide loans to main 
street who might not otherwise be able to obtain financing. 
Their flagship 7(a) loan program offers government guaranteed 
loans to eligible small businesses for short- and long-term 
capital needs.
    The SBA is in the process of finalizing two rules that will 
represent the most significant changes to the program in 
decades. Well, there are many more troubling aspects of these 
rules. The most problematic in my opinion are the changes to 
the underwriting standards while simultaneously allowing more 
fintech companies to become 7(a) lenders. The SBA is throwing 
away the nine prospective elements of underwriting that lenders 
have been using for decades to determine if a borrower is 
eligible for a government-backed loan. Instead, lenders will 
now be able to use whatever lending criteria they see fit 
considering that taxpayers will go and be the ones on the hook 
if a significant portion of those loans go bad. We should not 
be loosening the criteria for lenders to give loans.
    Additionally, these rules reverse the moratorium on 
licensing new Small Business Lending Companies, better known as 
SBLCs. The moratorium was initially put in place in the 1980s 
because the SBA recognized that they were not capable of being 
the primary federal regulator of these entities. Given the 
unacceptable levels of fraud that occurred in the SBA's 
pandemic programs, I have serious concerns that the agency is 
not up to the task of taking on more responsibility.
    I am not alone in raising these concerns about the SBA's 
capabilities. Last month, when the SBA's Inspector General 
testified before this Committee, he noted the significant 
challenges that the agency will face in managing the increased 
loan volume going forward as well as the significant shortages 
of staff within the department charged with overseeing SBLCs.
    There are serious concerns that these changes to the 
program will be detrimental to taxpayers and small businesses 
alike. If more loans start to default, the fees to the program 
are going to have to be raised, or the agency will come to 
Congress to ask for more taxpayer dollars to make up for the 
shortcomings. The policy noticed released late last night which 
lays out implementation for just one of the final rules is not 
sufficient and does not satisfy our concerns.
    This is an extremely important hearing as we in Congress 
discuss what the future of this program will look like, and 
what we must do legislatively to ensure the programmatic 
integrity of the 7(a) program in the future. I want to thank 
you all again for being here with us today and I am looking 
forward to today's conversation.
    And with that, I yield to our distinguished Ranking Member 
from New York, Ms. Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding this 
important hearing.
    The Small Business Administration's 7(a) program is the 
agency's flagship lending initiative. Under the 7(a) program, 
SBA guarantees significant portions of loans encouraging 
lenders to extend credit to small businesses that might not 
typically be able to obtain financing. So far in FY23, the SBA 
has approved over 30,000 loans totaling more than $14.6 billion 
proving just how integral the 7(a) program is to our nation's 
entrepreneurial ecosystem.
    7(a) loans strengthen local communities, create jobs, and 
move our economy forward. Given the critical nature of the 7(a) 
program, this committee must carefully consider and vet any 
significant changes. Last month, SBA issued two final 
rulemakings that have substantial implications for the 7(a) 
program. The affiliation rule loosens lending criteria, updates 
loan conditions, and eliminates various affiliation standards. 
While the second rule on SBLCs ends the SBA's longstanding 
moratorium on licensing new SBLCs. In the final rule, SBA 
states that it can license and supervise three new SBLCs and it 
is speculated that some, if not all, of these new licenses will 
be granted to fintech companies.
    SBA instituted these rules to address persistent gaps in 
access to capital as part of the Biden administration's broader 
economic agenda.
    Increasing access to capital for underserved entrepreneurs 
has been and will remain a priority for me as the top democrat 
on this committee. However, I am apprehensive about the SBA's 
decision to remove many of the longstanding guardrails and 
program requirements on loan criteria and affiliation standards 
that have served the 7(a) program well while also lifting its 
moratorium on the licensing of new SBLCs.
    I am especially concerned by the possibility of new SBLC 
licenses being granted to non-federally regulated fintechs with 
no experience in 7(a) program lending.
    Researchers have highlighted that fintechs facilitated most 
of the significant fraud associated with the Paycheck 
Protection Program. I appreciate SBA taking this situation 
seriously and the steps the agency has taken thus far to hold 
the blatant actors responsible for their actions.
    With that said, we will be doing a disservice to American 
small business owners by moving forward with changes that 
weaken and destabilize a highly successful program that has 
helped millions of entrepreneurs. The last thing we want is for 
unintended consequences of sweeping changes by rulemaking 
without detailing accompanying SOPs to harm the future of this 
program which is an essential tool for many small business 
owners and entrepreneurs.
    On the matter of SOPs, I remain concerned about policy 
changes being released later at night to everyone's surprise. 
As many of us on this dais have indicated, it is alarming that 
major programmatic changes can come on a whim, no matter the 
administration. These continued changes to the incredibly 
important details are the reason we are taking our time to 
truly understand the impact they will have.
    As SBA moves forward with these rule changes, this 
committee must ensure that they are responsibly implemented and 
do not negatively impact the 7(a) program and individual 
borrowers. Ensuring that businesses owned by women, people of 
color, and underserved groups is an important goal that I share 
with Administrator Guzman.
    I look forward to hearing from Mr. Kelley on the steps SBA 
is taking to ensure these rules do not risk the integrity of 
the 7(a) program.
    I remain committed to filling the gaps in the market in a 
bipartisan and thoughtful way. The Small Business Committees in 
the House and the Senate have proven that we can work together 
to make a difference for our main street businesses.
    Whether during a global crisis or hard fought SBIR 
reauthorization, we have always come together to put politics 
aside and do right by our nation's job creators. I look forward 
to doing just that again and working with the SBA and my 
committee colleagues in both the House and the Senate to find a 
solution.
    Thank you, and I yield back.
    Chairman WILLIAMS. Thank you very much.
    And I will now introduce our witness.
    It is my privilege today to introduce our witness, Mr. 
Patrick Kelley. Mr. Kelley is the associate administrator for 
the Office of Capital Access at the Small Business 
Administration. At the SBA, Mr. Kelley leads the agency's 
Office of Capital Access and has been leading the charge for 
the rules change we speak of. Mr. Kelley is a graduate of 
Colgate University and Boston College Law School. In a previous 
stint at the SBA, Mr. Kelley served as deputy chief of staff, 
deputy association administrator, and senior advisor at the 
agency and also worked at the U.S. Department of Commerce. In 
between his time at the SBA, Mr. Kelley served as the executive 
vice president for channel partnerships at Live Oak Bank where 
he primarily worked for the bank's corporate strategy and 
development team.
    Mr. Kelley, I want to thank you for joining the Committee 
today and I am looking forward to today's important 
conversation.
    So with that I now recognize Mr. Kelley for his 5-minute 
opening remarks.

     STATEMENT OF THE HONORABLE PATRICK KELLEY, ASSOCIATE 
   ADMINISTRATOR, UNITED STATES SMALL BUSINESS ADMINISTRATION

    Mr. KELLEY. Chairman Williams, Ranking Member Velazquez, 
Members of the committee, it is a pleasure to be here on behalf 
of President Biden, Vice President Harris, and Administrator 
Guzman. As Chairman Williams noted, I have been the associate 
administrator for the Office of Capital Access since March 1, 
2021. During that time I have been responsible for the CARES 
Act programs, as well as the Restaurant Revitalization Program 
which was a part of the American Rescue Plan, and then also in 
July of 2021, I took over responsibility for originations for 
the disaster loan programs. Historically the Office of Capital 
Access has overseen the post-close servicing of those assets.
    With respect to the core programs that have been 
highlighted by the Ranking Member's statement, as well as the 
Chairman's statement, I also oversee the 7(a) loan program, the 
504 program, the SBA Microloan program, and the Surety Bond 
program.
    Since March 1, 2021, under Biden-Harris and when 
Administrator Guzman came on board at the latter part of March, 
we have focused like a laser on the outstanding issues that we 
inherited with respect to fraud, waste, and abuse associated 
with the Paycheck Protection Program, as well as the COVID EIDL 
program. During the 2-year period that I have overseen these 
programs, we have reviewed close to 42 million, 41.9 million 
applications across those programs. We have approved across 
those programs 21 million applications for close to $1.2 
trillion. We have identified $6.7 million suspicious loans. We 
have done that through automatic screenings, as well as data 
analytics or supervised learning tools that the GAO and the 
Inspector General have highlighted are best practice with 
respect to identifying suspicious activity.
    There have been close to 3.8 human-led reviews which have 
resulted in referrals to the Office of the Inspector General, 
and we estimate that a million loans that were disbursed across 
the PPP program and the COVID EIDL program represent $41 
billion of total fraud undisbursed. The estimated number of 
fraud prevented is north of $100 billion. And there was $500 
billion that was never allowed to move forward as an 
application through the automated screening.
    In the coming days, Administrator Guzman will be releasing 
a white paper report detailing all this, as well as the 
detailed steps, the automated screening, the supervised 
learning model that we deployed, as well as the human-led 
reviews and the referrals to the Office of the Inspector 
General.
    President Biden's budget lays out a request for $100 
million for the Office of the Inspector General as a result of 
this. They currently have processed 776 indictments. They have 
testified before this Committee to be working on 500 open case 
files, but certainly, the numbers that we have referred, that 
the SBA has referred to the Office of the Inspector General, 
the so-called bad guys that we believe they should go after 
need resources.
    With respect to the lessons learned from this and how we 
will handle the issues and concerns that were highlighted by 
Chairman Williams and Ranking Member Velazquez's opening 
remarks, we will be moving forward as we did for phase three of 
the Paycheck Protection Program and as we did for the 
Restaurant Revitalization Program with a regulatory compliance 
and fraud framework pre etran authorization and that process 
will validate not only know your customer or fraud issues like 
OFAC and other issues but it will also identify alerts and 
flags with respect to eligibility.
    The core of eligibility is a for-profit company domiciled 
in the U.S., an operating company considered small by SBA size 
requirements with no character issues and legal resident 
status. All of those indicators were vetted in the Restaurant 
Revitalization Program and it is important to understand that 
we did not need to make the tradeoff in 2020 between speed and 
certainty. We were able to stand up a program in 30 days post-
passage, disburse $28.6 billion to 101,000 restaurant and 
related entities, and we were able to do that with certainty 
that there would not be fraud or ineligible folks.
    So I look forward to taking questions and I appreciate the 
opportunity to address any concerns. Thank you.
    Chairman WILLIAMS. Thank you.
    We will now move to the Member questions under the 5-minute 
rule. We need direct answers, not long answers if you would do 
that for us, please.
    Mr. KELLEY. Yes.
    Chairman WILLIAMS. I recognize myself for 5 minutes.
    Last week, the White House put out their Small Business 
scorecard that states the SBA saw a record volume of lending in 
Fiscal Year 2022. This includes $43 billion in capital approved 
for small businesses across SBA products and an increase in 
small loans under $150,000 in the SBA 7(a) loan program.
    Now, this is the opposite of everything that the SBA has 
been saying to justify these rule changes and different than 
what you told our staffs regarding the need to bring more 
lenders into the program.
    So my first question, Mr. Kelley, so who is not being 
truthful, the SBA or the White House?
    Mr. KELLEY. Neither is not being truthful. What we have 
stated is that over a 5-year period there is a 40 percent, or 
50 percent decline in the number of loans and dollars lent 
under $150,000. So what we are reporting in those numbers is a 
year over year increase. So since the Biden-Harris 
administration took over, and as Ranking Member Velazquez 
referenced prioritize making small dollar loans an issue, we 
have seen improvements in year over year. There is still a 
stark decline in the access of capital for the loans under 
$150,000.
    Chairman WILLIAMS. So the SBA's Office of Inspector General 
has found that many nondepository lenders in the 7(a) program 
were subject to limited oversight until a default occurs and 
identified significant issues within the agency relating to 
lender oversight. The Inspector General also noted a failure of 
the SBA to conduct regularly scheduled examinations over high-
risk lenders. In short, the OIG has reported on many issues 
that questions the agency's ability to be a regulator. And I 
share these serious same concerns.
    Last night, the SBA released the policy notice for just one 
of the final rules to lenders that will help implement these 
new rules. It appears that for loans under $500,000, the agency 
removed almost all underwriting criteria and lenders are 
allowed to give out loans however they see fit to anybody. In 
carving out smaller loans from any standard underwriting 
requirement is one of the worst ways to mitigate risk and will 
increase the changes of predatory lending on small businesses 
and taxpayers. So the agency is bringing on more lenders and 
diminishing underwriting standards at a time when the agency is 
already failing to conduct all the necessary oversight over the 
risk lenders. You do not need to be bigger; you need to be 
smaller. And this is a recipe for disaster.
    So Mr. Kelley, what percentage of the current loan 
portfolio is under $500,000? And how will the SBA monitor the 
many different underwriting models that will be used by the 
lenders since you took away the uniform standard?
    Mr. KELLEY. So, two things. First, the reports you 
reference from the Office of the Inspector General reference 
high-risk lenders based on a quarterly rank order that the 
agency and the Office of Credit Risk Management does to all of 
its assets. We rank each outstanding loan as high risk, medium 
risk, and low risk, and then based on the percentage of a 
lender's portfolio, we schedule supervised oversight as a 
result. That report does not single out a type of lender. It 
speaks to all lenders. And the overwhelming majority of lenders 
that the IG has reviewed in its sample set are, in fact, 
regulated entities, banks and credit unions. So that is number 
one.
    Number two, with respect to the underwriting standards, 
since 2004, and under a Republican Congress and under President 
Bush, the program SBA Express, has existed. And for 20 out of 
23 years, when you compare a term loan originated by those 
lenders under that program versus a term loan with a standard 
7(a) referencing the nine criteria that previously enumerated 
in the reg, the term loans with the standard consistent with 
your similarly sized non-SBA policy has outperformed in terms 
of default rate and loss rate.
    So what I would say to Chairman Williams, and I think we 
can all agree, is that letting the marketplace lenders and 
removing red tape has demonstrated in that program which was 
originally a pilot program that a Republican administration 
started. In addition, a Republican administration expanded that 
exact same criteria to Patriot Express for veteran-owned loans 
and Community Express to attack the very same problem that was 
identified under Bush which is the dearth of small dollar loans 
going to sole proprietors. The rough order of magnitude of 
loans under 50,000 in terms of units is somewhere between 40 to 
45 percent annually, and 60 percent of those units have been 
originated in the SBA Express program because that standard 
allows the lenders to follow their credit and collateral 
policies and it has performed better.
    Chairman WILLIAMS. Okay. In a letter my Senate colleagues 
sent you, you stated that the SBA has the same standards as all 
the other federal regulators including the Bank Secrecy Act and 
the other Know your Customer anti-money laundering 
requirements. Now, I have been told this simply is not true. So 
I would like you to set very quickly the record straight. Can 
you confirm that the SBA does, in fact, require all SBLCs to 
comply with the FPSA and KYC regulations, and where can I go to 
see the guidance that you gave to lenders on how to comply with 
these requirements?
    Mr. KELLEY. You can go to the SOP and the letter clearly 
states that all lenders participating, and it should be noted, 
and you noted it in your opening remarks, Chairman, that while 
there has been a moratorium for 40 years, those SBLC licenses 
could always be purchased by any type of lender. And in fact, 
61 times were purchased and approved. And there has not been an 
issue with the Committee in that 40 years regarding those 61 
transfers.
    With respect to the oversight----
    Chairman WILLIAMS. Our time is----
    Mr. KELLEY.--of those entities, it is exactly the same 
across all entity type.
    Chairman WILLIAMS. Thank you.
    I now recognize the Ranking Member for 5 minutes of 
questions.
    Ms. VELAZQUEZ. Thank you, Mr. Kelley, for being here today.
    The rules are set to go into effect within the next week; 
correct?
    Mr. KELLEY. That is correct.
    Ms. VELAZQUEZ. Yet, the SBA did not release any information 
about the implementation of either of these two rules until 
late last night and SOPs still have not been published. Can you 
explain why the SBA has waited so long to release any guidance 
when it knew the rules were going into effect this week?
    Mr. KELLEY. Yes. So as has been noted by Ranking Member 
Velazquez and Chairman Williams, I have participated in the 
Obama administration. I also, as Chairman Williams noted, 
participated for a large SBA lender for 6 years in the private 
sector. There is nothing about the implementation with respect 
to the posting of procedural notices that precede SOP 
publication post rules becoming final. As you know, we are in 
the 30-day window before the rules become final. We wanted to 
get the procedural notice out before the rule becomes final. We 
achieved that and the SOPs will follow. The language that is 
reflected in those procedural notices will be reflected in the 
SOP.
    Ms. VELAZQUEZ. Okay. When do you expect the SOP to be 
published?
    Mr. KELLEY. I think it will be published, if not today, 
this week.
    Ms. VELAZQUEZ. When you went to the Senate you stated that 
it will be released on May 3.
    Mr. KELLEY. Yes.
    Ms. VELAZQUEZ. Why did you not release it on May 3?
    Mr. KELLEY. Chairman Velazquez, could I----
    Ms. VELAZQUEZ. Ranking Member. Soon to be Chairwoman.
    Mr. KELLEY. Sorry, sorry, I apologize. Sorry. Sorry, 
Chairman Williams. Sorry. Apologies. Apologies. I gave you a 
promotion there.
    So, I, too, would like a promotion. I would like to be able 
to deliver timelines----
    Ms. VELAZQUEZ. Okay. My question then is, you know, you say 
May 3. It did not happen. How is the SBA expecting lenders to 
comply with the rule without the SOP?
    Mr. KELLEY. So as a person that worked for the nation's 
number one SBA lender by dollars lent in the private sector, 
when rules were changed, so, for example, in 2018, 2017, rules 
were promulgated by the Trump administration. The order of 
operations that we are following is exactly consistent and 
prior----
    Ms. VELAZQUEZ. That does not make it right.
    Mr. KELLEY. Well, it makes it necessary in terms of there 
is an order of the way that APA and our procedures call for in 
terms of you pass the rule, the rule becomes final, you cannot 
operate until the rule has become final. If you want to give 
the guidance before the rule becomes final, which we have done, 
and then you do not want to proceed or create confusion that 
lenders can operate before the rules become final.
    Ms. VELAZQUEZ. Have you considered delaying the rules in 
order to give lenders and borrowers more time?
    Mr. KELLEY. No, because the changes in the rules, 
specifically the underwriting criteria, all remove red tape and 
bureaucracy that banks and credit unions in my 13 years of 
being exposed to this have asked for repeatedly and routinely 
over every year.
    Ms. VELAZQUEZ. Okay. The final rule changed the definition 
of an SBLC from what was proposed in the rule. The proposed 
rule stated that an SBLC was ``only to make loans pursuant to 
the 7(a) and Microloan program.'' But in the final rule, SBA 
deleted the word ``only.'' By removing the word ``only,'' was 
the intent to allow SBLCs to begin making non-SBA loans?
    Mr. KELLEY. Well, today, all of our lenders make non-SBA 
loans. We are responsible for overseeing the loans that they 
make within our program. And as the IG has highlighted in its 
Management Challenges Report, the key areas that we are 
responsible for oversight are eligibility and reasonable 
reassurance of repayment. And so, we are responsible for 
overseeing that.
    I cannot speak to the exact clause that you are talking 
about but the intent has always been an SBLC----
    Ms. VELAZQUEZ. Right here. Right here. Small business 
lending companies. It is a nondepository lending institution 
that is SBA licensed and is authorized by SBA to--and what was 
proposed in the proposed rule, in the draft, only to make loans 
pursuant to section. The word ``only'' was deleted.
    My question to you is, if SBLCs were to begin issuing both 
SBA-backed loans and non-SBA loans, are you concerned that 
these lenders will prioritize their private issuances over 
their SBA portfolio defeating our goal to increase access to 
capital for the smaller loans?
    Mr. KELLEY. Yes. So, and feel free to engage with lenders 
on this point. But one of the things that happens today is non-
bank lenders or competitors make loans that are subordinate to 
senior debt or SBA loans today. So it is the case today that 
small business owners seeking working capital seek out 
additional capital if they can get it.
    With respect to the issue that you are speaking to, we 
dealt with this issue, for example, in the Community Advantage 
Program where a community advantage lender, a CDFI, was 
originating loans on an interim basis and then refi-ing them 
into the Community Advantage loan program.
    Ms. VELAZQUEZ. What I do not understand is why did you make 
the deletion? Why did you delete ``only''?
    Mr. KELLEY. Yes. I am happy to follow up with your staff.
    Ms. VELAZQUEZ. Okay.
    Mr. KELLEY. Because while I a lawyer----
    Ms. VELAZQUEZ. My time has expired.
    Mr. KELLEY.--I have to take a look at the actual citations 
that you are citing. Yeah.
    Chairman WILLIAMS. All right. Thank you.
    I now recognize the Members for 5 minutes.
    And I first recognize Mr. Luetkemeyer from Missouri for 5 
minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    Welcome, Mr. Kelley.
    When you opened your remarks you said you are here 
representing the president and vice president of the United 
States. Have you spoken to them recently?
    Mr. KELLEY. No. I am a political appointee and so I work at 
the pleasure of the----
    Mr. LUETKEMEYER. But you are representing them you said.
    Mr. KELLEY. Of course.
    Mr. LUETKEMEYER. Okay. Do you talk to the White House 
administration at all about----
    Mr. KELLEY. Yes. Yes.
    Mr. LUETKEMEYER.--the programs?
    Do you know if Ms. Guzman ever talks to the White House?
    Mr. KELLEY. Yes.
    Mr. LUETKEMEYER. Does she talk to the president?
    Mr. KELLEY. Yes. She was with the president Monday, last 
Monday.
    Mr. LUETKEMEYER. Well, that is a first because I can tell 
you we have asked that question multiple times of her in this 
Committee and we never got an answer from her. That may be the 
first time she has ever met with him as far as we know.
    Mr. KELLEY. It was a publicly attended event in the Rose 
Garden----
    Mr. LUETKEMEYER. Was it about small business issues?
    Mr. KELLEY. It was for National Small Business Week. Yes.
    Mr. LUETKEMEYER. Okay.
    Mr. KELLEY. And it was celebrating the nation's small 
businesses.
    Mr. LUETKEMEYER. Well, I hope she talked about some of 
these programs and how they are----
    Mr. KELLEY. She did.
    Mr. LUETKEMEYER.--negative affecting the small business 
community because that to me is what needs to be done.
    Okay, Mr. Kelley, how many people are at the SBA?
    Mr. KELLEY. I think----
    Mr. LUETKEMEYER. In the office here in D.C.?
    Mr. KELLEY. In the office here in D.C.? I am not sure what 
the total head count for the agency is I think something around 
2,000-plus. And then it goes up and down.
    Mr. LUETKEMEYER. How many people are in your department? 
Let's put it that way.
    Mr. KELLEY. So there are 300 FTE in the historically 
defined Office of Capital Access. We----
    Mr. LUETKEMEYER. Okay. How many people showed up for work 
today?
    Mr. KELLEY. All of them.
    Mr. LUETKEMEYER. In this building, in your SBA building, 
how many of them showed up today?
    Mr. KELLEY. I do not have a head count of who showed up 
physically today. As you know----
    Mr. LUETKEMEYER. Are they all required to show up to work 
every day?
    Mr. KELLEY. Yes.
    Mr. LUETKEMEYER. I am not talking about off campus being 
qualified work. I am talking about physically being in your 
office.
    Mr. KELLEY. They are complying with what they have been 
asked to do.
    Mr. LUETKEMEYER. That is not what I asked. I am sorry; that 
is not what I asked.
    Mr. KELLEY. I understand that but that is how I am 
answering your question.
    Mr. LUETKEMEYER. I asked a question of whether they are 
actually showing up in the office that you work in----
    Mr. KELLEY. Yes. I understand----
    Mr. LUETKEMEYER.--every day.
    Mr. KELLEY. I understand your question. And civil servants 
are complying with what they are asked to do. They serve----
    Mr. LUETKEMEYER. No, you are not answering my question.
    Mr. KELLEY.--on behalf of the public and they are 
responsible to comply with what they are asked----
    Mr. LUETKEMEYER. Okay. So they are not showing up at your 
office is what you are saying because----
    Mr. KELLEY. They are doing their job as they were required 
by their position descriptions and as their supervisors----
    Mr. LUETKEMEYER. Okay. So you are telling me that they are 
not which that goes to the point----
    Mr. KELLEY. Well, it is no different than any of the 
private sector entities that are doing exactly the same thing.
    Mr. LUETKEMEYER. I am not talking about the private sector, 
Mr. Kelley. I am talking about your office that you are in 
charge of. The people are not showing up personally to sit at a 
desk in your office building to do their work. You are allowing 
them to do it from home which that is fine if you want to do 
that but the next question is whenever you have, well, in 2019, 
the inspector general claimed that the Office of Credit Risk 
Management failed to perform effective oversight over the OCRM, 
only conducted 108 of its planned 358 reviews of high-risk 
lenders. COVID-19 only exasperated this issue as oversight 
staffing levels decreased by an additional 38 percent. Despite 
this, the SBA has lifted the SBLC moratorium allowing for more 
nondepository entities who are purely regulated by the SBA 
rather than federal regulators to enter the market. So it goes 
to the point that the inspector general said you need more 
oversight and you have less people to do it and they are not 
even at the office to do it themselves. This is a problem. It 
is a big problem.
    So, you know, I guess the rational is how do you expect to 
get anything done whenever you do not have anybody in your 
office?
    Mr. KELLEY. Well, judging by the fact that the agency 
supported $1.2 of lending and grant activity over a 2-year 
period where the entire agency was teleworking, I think we have 
demonstrated that we will do our jobs.
    Mr. LUETKEMEYER. Well, thanks to the banks and credit 
unions that were able to put that all out, which goes back to 
the point I was wanting to make here a little bit ago. You 
talked about I think $1.2 billion that went out the door which 
was great. And you talked about one million applications I 
think it was, $41 billion in fraud.
    Mr. KELLEY. Yep.
    Mr. LUETKEMEYER. What percentage of that is EIDL versus 
PPP?
    Mr. KELLEY. It is roughly 45-55 PPP to COVID EIDL. So, for 
$46 billion we paid the lenders to----
    Mr. LUETKEMEYER. Okay. So the EIDL program----
    Mr. KELLEY.--instances of fraud.
    Mr. LUETKEMEYER. The EIDL program was roughly $400 billion 
and they had about $20 billion worth of fraud. And then the PPP 
program was about $800 billion and they had about less than $20 
billion in fraud.
    Mr. KELLEY. Or we paid the lenders $46 billion in servicing 
fees for a 4 percent fraud rate.
    Mr. LUETKEMEYER. So it goes to the point though that the 
PPP program was highly successful and most of the fraud, 
according to the IG report, was in the fintech fraud.
    Mr. KELLEY. That is not what the IG report----
    Mr. LUETKEMEYER. Mr. Ware was sitting in that seat about a 
month ago.
    Mr. KELLEY. He did not say that. He did not say that.
    Mr. LUETKEMEYER. And that is what he said. So it is hard 
for you to dispute that, sir.
    Mr. KELLEY. It is easy to dispute----
    Mr. LUETKEMEYER. So the problem is that you are trying to 
make up your own set of facts----
    Mr. KELLEY. I am not.
    Mr. LUETKEMEYER.--which are not verified by the Inspector 
General Report.
    So, again, whenever you go back to the compliance of KYC, 
BSA, how do you get the fintech companies to be able to comply 
with that? Because this is where the problem is. This is where, 
and now you are expanding to the fintech companies. It really 
begs the question of do you know what the hell you are doing? 
Because it is putting the fox in charge of the hen house again. 
You are allowing the very people who are the problem children 
to be involved in the program and continue to do things without 
any oversight. This is crazy.
    Mr. KELLEY. It is not. And as I mentioned in my opening 
statement, and as we demonstrated in the Restaurant 
Revitalization Program as well as Phase 3 of PPP, we have and 
will place in front of etran authorization our fraud----
    Mr. LUETKEMEYER. Were those sort of oversight principles in 
place during the PPP program?
    Mr. KELLEY. Yes.
    Mr. LUETKEMEYER. And they were not adhered to and this is 
why the fraud----
    Mr. KELLEY. They were not in place during 2020 under the 
Trump administration. They were in place under the Biden-Harris 
administration.
    Chairman WILLIAMS. Time is expired.
    Mr. LUETKEMEYER. So we put fraud controls----
    Chairman WILLIAMS. Your time has expired.
    I now recognize Mr. McGarvey from Kentucky for 5 minutes.
    Mr. MCGARVEY. Thank you, Mr. Chairman.
    Mr. Kelley, thank you for being here today and for 
providing insight of the SBA's intentions with these proposed 
rules. I know a lot of small businesses would not be where they 
are today without the SBA's support including from the 7(a) 
program. It is critical that we have 7(a) remain an effective 
program so that small businesses have this, particularly 
minority-owned businesses, businesses that would struggle 
without access to capital.
    Under the affiliation rule, the SBA is eliminating 
standardized underwriting requirements for loan issuance and 
replacing them with a system that considers lending criteria 
like a borrower's credit score and history and their business's 
earnings and cashflow. Under the policy noticed that were 
released late last night and kind of surprised everybody here 
on the Committee, the SBA is now clarifying that loans over 
$500,000 still have some semblance of underwriting 
requirements.
    It still seems that the SBA is requiring the bare minimum 
of prudent lending standards even though the procedural notice 
from last night indicates underwriting standards applied to 
larger loans. Can you explain to us why some mandatory 
underwriting requirements were left untouched and if this could 
have the potential to affect the SBA's ability to protect small 
businesses from inappropriate loans and the 7(a) program from 
significant loan losses?
    Mr. KELLEY. Yes. So as I mentioned in my opening statement, 
the criteria for underwriting and collateral for loans under 
$500,000 has been used historically since 2004 and before that 
in a pilot program. So we can look at the default and loss rate 
history for, and incidentally, 5 out of 10, in some cases 6 out 
of 10 loans, each fiscal year from 2004 to 2023, were 
originated with that criteria. So we have performed subsidy 
calculations and managed to zero subsidy in nearly all of those 
years with the exception of the Great Recession and a few 
exceptions during the Trump administration to zero subsidy. So 
we do not have to guess whether or not that criteria works or 
what its impact will be because we can look at the last 23 
years of its performance.
    Mr. MCGARVEY. I appreciate that but at the same time as it 
is removing standard underwriting requirements, the SBA is 
lifting the SBLC moratorium. And I think potentially that is 
opening the program to non-federally regulated lenders through 
the SBLC rule. So, do you think the combination of these two 
rules could create a loan evaluation environment where 
federally regulated lenders that have stricter requirements 
will be forced to compete with non-federally regulated lenders 
not subject to the same underwriting requirements?
    Mr. KELLEY. No, because the 2004 SBA Express pilot program 
was created with advisory under the Bush administration with 
banks, for banks. And it is the banks that have historically 
used that. So the top 25 depository institutions have credit 
score loans in the SBA Express program, the Community Express 
program, the Patriot Express program for years. Credit scoring 
is used by every bank on the consumer side and it is used to a 
varying degree, depending on loan size, in the commercial 
sector. This is not a new development. You heard Deputy 
Inspector Sheldon Shoemaker in the Senate hearing speak to that 
fact towards the end of the hearing. It is in the transcript 
where he reflects on the fact that financial technology, 
including credit scoring, is used by banks and credit unions 
today. It is the banks and credit unions who have made up the 
majority of our lending year in, year out, will continue to do 
so, and they are the ones that have sought out the changes that 
we have put in the SOP. Now, as depository institutions, do 
they want additional competition from nonbank lenders? No, they 
do not. But in terms of the actual eligibility and underwriting 
criteria, these are changes they have asked. The National 
Association of Development Corporations, which represents the 
504 CDCs of which there are over 200 in the country, have been 
working on eligibility issues since 2011 in the Obama 
administration where they called for the elimination of the 
personal resource test, as well as the affiliation rule change 
that we have made final.
    So these are things that have long been understood as 
necessary to remove red tape and bureaucracy to get small 
dollars out of the loan. It impacts not just the size of the 
loan but it impacts every gap in the marketplace. So, for 
example, in rural America there is a dearth of construction 
financing. There is a dearth of loans to businesses with no 
collateral. All of these issues are why this program exists, 
and why lenders are looking to make the core product more cost-
effective.
    Mr. MCGARVEY. I appreciate that. And obviously, you know, 
for our small businesses we want to have less red tape and 
bureaucracy that we can have access to capital in our small 
businesses. But this is still a piecemeal approach of 
regulatory and procedural changes often that do not have enough 
guardrails in them. They often come at the last minute. Do you 
think that the SBA is risking confusing lenders and borrowers 
about the actual rules by which they are expected to comply?
    Mr. KELLEY. No, because the rules that are reflected in 
those procedural notices exist today and what is piecemeal is 
their application. What has made the agency, so what has made 
lending for SBA hard is you have to hire a nerd like me to 
figure out all of the different variations within the SOP. What 
this administrator has done is said you do not have to hire a 
nerd like Patrick Kelley.
    Chairman WILLIAMS. Time is up.
    Mr. KELLEY. You can harmonize the rules to optimize the 
outcome.
    Chairman WILLIAMS. I now recognize Mr. Meuser from the 
great state of Pennsylvania for 5 minutes.
    Mr. MEUSER. Thank you, Mr. Chairman.
    Mr. Kelley, earlier when Mr. Luetkemeyer was asking you 
about the number of employees in the office you dodged, you hid 
the answer. That is a big difference in the private sector. If 
you ask that question to a private sector company and I ask 
them often they will say, yeah, 50 percent of our customer 
works remotely, 50 percent tech service works remotely. You 
would not answer the question. You were embarrassed by it. And 
you----
    Mr. KELLEY. I said, I said, no, sir. I said----
    Mr. MEUSER. There is no question. I take back my time.
    Mr. KELLEY.--100 percent, I said 100 percent, no, sir----
    Mr. MEUSER. Repeatedly today, you know, something, you 
might do what you want in your bureau. We have oversight here 
and you are going to follow the rules of this Committee.
    The SBA has the 7(a) rules, have caused great concern among 
both Republicans and Democrats. Mostly everyone I speak to 
feels that you are hell bent on rushing these rules without any 
concern for Democrats and Republicans, ignoring the final rule. 
Why is that?
    Mr. KELLEY. It is not the case.
    Mr. MEUSER. We believe it is based upon the facts of the 
situation and the fact that you are just blowing off any 
recommendation or question. But you just state that is not the 
case and that is that?
    Mr. KELLEY. Would you like me to elaborate?
    Mr. MEUSER. Well, by moving the program, the 7(a) portfolio 
towards a more subjective underwriting method for loans under 
$500,000, how does that protect taxpayers from losses, the OIG 
has concerns, and you have actually used language, maybe not 
you, to do what they do for loans under $500,000, which is 75 
percent of all the 7(a) loans, how does that instill confidence 
in us?
    Mr. KELLEY. The standard that you are speaking to 
consistent with similar size non-SBA loans and the euphemism 
that was explained at a bank trade association conference, do 
what you do, has been around for over 2 decades and is 
reflected in every budget that has been passed since then with 
respect to the subsidy calculation. So, lenders came, banks, 
credit unions, came to the SBA and said back in the 2000s under 
the Bush administration there is too much red tape associated 
with small dollar loans, loans at that time under $350,000, and 
then this body raised the threshold for Express from $350,000 
to $500,000. That standard has been in existence. The lenders 
know this. I understand that they are upset about three 
additional non-depository institutions potentially becoming SBA 
SBLCs and they have equated that with fintech and that is why 
we are discussing the concerns, which are legitimate. Safety 
and soundness is terribly important.
    I have been a part of the agency's creation of the Office 
of Credit Risk Management since 2010. I was involved with the 
regs that were put forward to create the Paris framework----
    Mr. MEUSER. Thank you.
    Mr. KELLEY.--the smart framework.
    Mr. MEUSER. ON April 20th, we sent you a letter. Chairman 
Williams, Vice Chair Luetkemeyer, Chairwoman Van Duyne, myself, 
about the ability of SBA to be able to handle this, these new 
responsibilities related to the concerns of IG Ware. It was 
April 20th, 3 weeks ago, basically. You have never responded. 
Any reason you did not respond or can we expect a response 
sometime in the future?
    Mr. KELLEY. Yes, you can expect a response.
    Mr. MEUSER. Okay. Any time? Can you tell me when?
    Mr. KELLEY. In short order. The process goes through an 
agency clearance process.
    Mr. MEUSER. Okay. April 12th, press release, the SBA stated 
that these new rules will utilize modern technology to make 
lender oversight and borrower protection stronger. Can you tell 
us what the technology is to make borrower protection stronger?
    Mr. KELLEY. Yes. So, the way that Bank Secrecy Act laws are 
complied with today is the use of third party databases where 
you take a unique identifier from each applicant. So in our 
case we are dealing with TIN, tax ID number for business, 
applicant, and then owners of 20 percent or more, or in banking 
vernacular, beneficial owners. We run that against databases to 
create alerts and flags across 19 different screening 
categories which traverse eligibility. I mentioned the 
eligibility criteria earlier. And also, run them against lists 
like OFAC and other fraud issues. So for the first time in the 
agency's history, and what is highlighted in the IG's report is 
that delegated lenders have historically not had anything pre-
approved prior to obtaining etran authorization. So, under this 
administrator we are instituting this not just in our CARES Act 
programs but in the general business loan programs, including 
7(a) and 504.
    Mr. MEUSER. When I was revenue secretary in Pennsylvania we 
implemented something similar. Do you know how much it costs? 
And is it ready and when will it be ready to be implemented?
    Mr. KELLEY. Yes. The great aspect of this from a cost 
perspective, and this is something we should all celebrate, is 
that the oversight fees beginning in 2017 can be charged to all 
the lenders and are on a pro rata basis. And we are able to use 
other contract vehicles based on a performance base to 
institute the technology.
    Mr. MEUSER. Thank you.
    Chairman WILLIAMS. Time is up.
    Mr. MEUSER. Thank you.
    Chairman WILLIAMS. Thank you.
    Next, I recognize Ms. Chu from the great state of 
California for 5 minutes.
    Ms. CHU. Associate Administrator Kelley, I want to thank 
you and Administrator Guzman for partnering with me to provide 
a disaster declaration for my community of Monterey Park, 
California, in the aftermath of the tragic mass shooting in 
January that took the lives of 11 people. The eligibility for 
these disaster loans will truly help our small businesses 
surrounding that shooting site tremendously. So, thank you for 
that.
    I also want to thank you and the administrator for your 
focus on increasing lending in underserved communities and your 
4-year partnership in making the new Community Advantage SBLC 
program as effective as possible for lenders and small 
businesses.
    I was pleased to see in SBA's recent notice on May 1st that 
the Community Advantage SBLC will, indeed, be required to make 
60 percent of the loans in underserved markets, as in the 
current Community Advantage program. I also want to thank you 
for clarifying in the notice what loan loss reserve 
requirements these lenders will face and for modeling these 
requirements after legislation that I introduced last Congress. 
These loan loss reserve requirements will ensure that these 
small, nonprofit lenders who have been making Community 
Advantage loans for more than 5 years will have greater 
flexibility and more capital to do even more lending.
    However, the May 1st notice does not address the capital 
requirements and oversight fees that the new Community 
Advantage SBLCs can expect. The current Community Advantage 
pilot program lenders do not have capital requirements which is 
important because these are small, nonprofit lenders with far 
less cash on hand than larger financial institutions like 
banks. Regular SBLCs currently have a capital requirement of $5 
million which would be extremely prohibitive if applied to 
these mission lenders.
    Additionally, the regular SBLCs face much higher oversight 
fees than current CA pilot program lenders, and would again be 
cost prohibitive if applied to the new Community Advantage 
SBLCs. The lack of clarity on these questions is especially 
concerning because the final rule goes into effect on Friday.
    We have heard that a standard operating procedure is 
forthcoming and will cover these details, but can you confirm 
that the upcoming SOP will clarify that the oversight fees and 
capitalization requirements within the Community Advantage SBLC 
program are to remain unchanged from what Community Advantage 
pilot program lenders currently face?
    Mr. KELLEY. Yes. And with respect to capital requirements, 
as you mentioned, there is a capital requirement threshold for 
for-profit SBLCs. The capital requirement for the Community 
Advantage pilot program had historically been applied not on a 
balance sheet but on a per loan basis because of the issues 
that you highlight for the nonprofit lenders. It has 
historically been 10 percent based on your bill and Chairman 
Cardin's bill. And working with the community, the threshold 
has been established at 5 percent with a sliding scale for 
trialing portfolio performance that is good over 36 months to 
come down. So, there is no ambiguity. The capital requirement 
has always been applied through the loan loss reserve on the 
individual loan in the Community Advantage program. That is 
what the procedural notice lays out.
    For the entire pilot program, Community Advantage lenders, 
like all lenders--SBLC, credit unions, banks, CDCs, all 
lenders--are subject to oversight and oversight is charged on a 
pro rata basis. So the reason that the Community Advantage 
lenders do not pay as much oversight as for example, Live Oak 
Bank would have paid, is because in 12 years, together, all 100 
plus entities have originated 7,000 loans over a billion 
dollars. Whereas, for example, Live Oak does close to $2 
billion in 1 fiscal year.
    So what will continue is on a pro rata basis we will apply 
oversight to all lenders.
    Ms. CHU. Well, the most important question is will that be 
in the SOP?
    Mr. KELLEY. Yes. It is in the SOP today. That is how 
Community Advantage lender oversight has been applied. I know 
there has been confusion created in the marketplace by a single 
voice but I can assure you they have always been charged a pro 
rata basis and will continue. And that is true for all lenders.
    Ms. CHU. And then the high fees. There was a question of 
the other SBLC lenders having high fees and then the Community 
Advantage program lenders cannot hardly afford them.
    Mr. KELLEY. So I am not sure what that references but let 
me see if I can just clarify.
    So, fees charged to borrowers are universally applied 
across all lenders and interest rates are capped and universal 
to all Members. So that was true. What historically was true in 
Community Advantage pilot----
    Chairman WILLIAMS. Time is up.
    Mr. KELLEY. Sorry.
    Chairman WILLIAMS. Time is up.
    Mr. KELLEY. Okay.
    Chairman WILLIAMS. Next, I now recognize Mr. Stauber from 
Minnesota for 5 minutes.
    Mr. STAUBER. Thank you, Mr. Chair.
    As a former small business owner, I understand how 
important it is for small businesses to have access to 
affordable credit without loan programs that enable our small 
businesses. They will not be able to grow, support jobs, and 
help countless Americans achieve that American dream.
    The Small Business Administration's, including the 7(a) 
loan program had been a huge success in my opinion and an 
important tool to small businesses across our great nation.
    Like many of my colleagues here today, however, I am 
troubled by the rules that were finalized last month by the 
Biden administration addressing the 7(a) program. While I 
support allowing flexibility for our small businesses and 
lending institutions, we must ensure the necessary guardrails 
are place to protect this program.
    I have heard from 7(a) lenders and businesses in my 
district, including community banks and local credit unions 
that are worried that these rules will jeopardize the future of 
the 7(a) program.
    Mr. Kelley, annually, about how many investigations or 
reviews did the SBA conduct into high-risk lenders?
    Mr. KELLEY. I think it is in the order of magnitude, 
depending on the fiscal year of $300,000, $400,000.
    Mr. STAUBER. Okay. The SBA's inspector general reported 
that the SBA failed to conduct 108 of the 358 planned review of 
high risk lenders in the Fiscal Year 2020. That is a third of 
the high-risk lenders that the SBA missed.
    Under the new rules, the SBA will be lifting the moratorium 
on new licenses and grants for small business lending 
companies.
    With the lifting of this moratorium, what do you estimate 
will be the increase in new loan activity?
    Mr. KELLEY. So I do want to clarify something that has been 
mentioned regarding the IG report. What the IG report speaks to 
is that is levels of supervisory review on site, offsite. And 
so what it references is that those reviews were conducted. 
They were just conducted at a different level of review in 
terms of procedure. So I just want to clarify that.
    The second thing that I want to speak to with respect to 
the estimate, so the estimate was included in the proposed rule 
and the final rule. And so at cruise altitude, typically SBLCs 
contribute about 450 loans per fiscal year. For example, we 
have three SBLCs today that are in the top 10 of SBA lending. 
And as I have mentioned, these licenses have changed hands over 
the last 40 years 61 times. And the agency has been responsible 
for approving who becomes an SBLC. So, we review their safety 
and soundness, their portfolio of performance. And if we do not 
want to grant a license, we have the discretion not to do so.
    Mr. STAUBER. Do you think the SBA has the capacity right 
now to do the oversight?
    Mr. KELLEY. Yes.
    Mr. STAUBER. Okay. Do you think lenders and financial 
institutions need to have proper regulator oversight in order 
to protect consumers, yes or no?
    Mr. KELLEY. Yes.
    Mr. STAUBER. Do you believe the Small Business 
Administration has the capacity, expertise, or bandwidth to be 
the sole regulator of any financial institution?
    Mr. KELLEY. Yes. And what I would like to clarify on that 
point because it is important, the use case for what we oversee 
is loan assets. And it is a simpler use case to stand in than 
it is for OCC or FDIC because, for example, with FDIC or OCC, 
they have first order problems that they need to address. Let's 
say the loan portfolio, commercial estate is underperforming. 
They have second order of concerns, which is the depositors. So 
if a bank goes under, are we going to honor deposits?
    Then they have third order, which is the impact of that in 
the local marketplace. We have shown throughout the SBA's 
history that if a lender comes and goes and dissolves, we can 
transfer the book of assets to another SBA lender and it does 
not create the disruption or the need for intervention on the 
part of the federal government. So those loan portfolios can be 
transferred. They are conforming assets, which means they are 
easy to underwrite from a diligence perspective. We have a rank 
order of the quality of the credit profile on a quarterly 
basis. And as a result, a willing buyer will take that asset 
portfolio.
    So if we decide that someone is not participating in 
lending as we do on a quarterly basis through the Loan 
Oversight Committee, we can remove their delegated authority.
    Mr. STAUBER. Okay.
    Mr. KELLEY. The director of OCRM can suspend them at her 
complete discretion for up to 2 years pending an investigation. 
And we can ultimately debar the lender from participation.
    Mr. STAUBER. Thank you for that explanation.
    At the end of the day I have two main concerns. First, the 
SBA's track record in protecting against fraud, most recently 
during our PPP leads me to conclude that the SBA does not have 
the capacity to carry out its oversight rule over an expanded 
7(a) program, let alone act as a chief regulator of any 
financial institution.
    Second, I am deeply concerned that local community banks 
and credit unions in Northern Minnesota will have more 
oversight, scrutiny, and regulation put on them than the 
Silicon Valley fintech startups. We must protect the 7(a) 
program. And I yield back.
    Mr. PHILLIPS. Mr. Chairman, before Mr. Stauber leaves I 
think we should wish him a Happy Birthday.
    Chairman WILLIAMS. Well, I do not know if he wants us to or 
not.
    Mr. LUETKEMEYER. Mr. Chairman, I second that.
    Mr. PHILLIPS. I withdraw my motion.
    Mr. STAUBER. I am celebrating my 39th birthday 19 times, 
Dean.
    Chairman WILLIAMS. Okay. I now recognize Ms. Davids from 
Kansas for 5 minutes.
    Ms. DAVIDS. Thank you, Chairman. And thank you, Mr. Kelley 
for joining us. I think that this has probably been one of the 
more lively Small Business Committee hearings I have been in. 
But it, I think, reflects how imperative oversight is as it 
relates to protecting our small businesses and then, of course, 
as Mr. Stauber said, the integrity of the 7(a) program.
    I want to jump right into a follow up actually to some of 
the questions that Mr. Stauber was asking which is around the 
regulation of the lenders. Can you like share a bit about where 
you believe the SBA's statutory authority comes from to examine 
what would normally be the core requirements of a lending 
institution or depository institution that has the variety of 
assets that you were describing earlier, whether it is capital 
requirements, liquidity, risk management. Can you share where 
you believe the statutory authority comes from for SBA to be 
able to do that?
    Mr. KELLEY. Yes. Under the Trump administration there was a 
law passed with the Republican Congress outlining and detailing 
the role and responsibility of the Office of Credit Risk 
Management located in the Office of Capital Access to do all of 
those things which has historically been understood to be 
authorized under our administration of the program from the 
Small Business Act, section 7(a), which requires that we 
determine reasonable reassurance of repayment and eligibility 
for the program. So in order to determine reasonable 
reassurance of repayment----
    Ms. DAVIDS. I am sorry; your reasonable reassurance of 
repayment is not the same thing as ensuring that you have the 
ability to fully examine the allocation of assets, liquidity 
requirements, and risk management overall of an entire entity 
in the same way that depository institutions are.
    Mr. KELLEY. So, if you are talking about asset allocation, 
like long-term dated Treasuries with respect to deposits, 
agreed. And that is not what we do. If you are talking about 
assets generated in our program and their ability to be repaid 
to the taxpayer without the guaranty being honored then we do 
have the authority.
    Ms. DAVIDS. Okay, so I want to, I also want to follow up on 
some of the questions that Mr. McGarvey was asking because I 
will give you the benefit of the doubt. I think that you were 
responding to his question about lenders by talking about the 
borrowers and the need to reduce red tape, both on the 
borrower's side and on the lender side. Could you expand a bit 
on what you mean when you talk about the reduction of red tape? 
Because the request for less red tape from lenders is not the 
same thing as opening up the program for additional lenders 
that are not being regulated or overseen in the same way that 
depository institutions are. And I just want to make sure that 
I am fully understanding your response and real quick, because 
I have a feeling you will use the rest of the time, when it 
turns red, if you could just stop and make sure that it would 
not be more appropriate to follow up with a written response to 
the question you might find that the rest of the hearing will 
go a little bit smoother.
    Mr. KELLEY. Agreed. And I want to apologize to Mr. Meuser 
for my Irish coming up, and I understand that we will be able 
to answer questions as we normally do, so. I am passionate 
about defending civil servants and the role that they have 
played in the pandemic, so I apologize.
    So, with respect to your question about lenders, so what I 
am describing, and this is I guess important and I hope to 
leave you all here where we are in agreement is that for time 
in memorial, the subsidy calculation has incorporated the 
underwriting and collateral criteria and all that we have done 
is harmonize across a standard 7(a) small loan with an SBA 
Express term loan, that standard that more lenders have used 
historically every fiscal year. And so if the object of the 
exercise is to engage, for example, the 4,500 community banks 
more meaningfully. So it has been reported that 83 percent of 
those same 4,500 community banks did not make a single 7(a) 
loan in the 2 previous fiscal years prior to 2020 Paycheck 
Protection Program. So if we want them to meaningfully be 
available in their communities, we need to optimize the 
responsibilities----
    Ms. DAVIDS. Can I stop----
    Mr. KELLEY.--the criteria that they need.
    Ms. DAVIDS. Can I stop you there? I absolutely recognize 
that. I just will add that some of the fintechs that we have 
been talking about are not subject to all of the rules and 
regulations in oversight that our community banks have been 
adhering to for a very long time.
    With that, I will yield back.
    Chairman WILLIAMS. I now recognize Mr. Ellzey from the 
great state of Texas for 5 minutes.
    Mr. ELLZEY. Thank you, Mr. Chairman.
    Mr. Kelley, thank you for being here. Howdy. How are you 
doing? Thank you for being here.
    You have got a long history of service as a civil servant, 
and I understand that you want to defend the folks that you 
work with. That is highly admirable, and I understand that you 
went to Colgate and then BC Law. So you are an immensely 
talented man. You worked at a bank and, you know, Mr. Williams 
has been in business for, oh, a couple of eons, I think. But he 
has been a small business man for many, many years. My 
colleague from Missouri has as well been in business for a 
long, long time.
    I have never heard Mr. Luetkemeyer get upset before and 
somehow you managed to do that. And I am not sure if I heard 
the answer or not but it is kind of a proforma question that we 
have been asking in all of our Committee hearings after the 
declaration that the COVID catastrophe is over. How many folks 
are going to work? Because it does not matter the Committee 
that we are on. You look across the street at a government 
building and there is generally not a whole lot of people there 
and the parking lots are empty, and I think that that goes 
directly to the service that the taxpayers who are paying for 
these services are receiving and oftentimes it does not really 
matter the agency that it is in. And you have got your rice 
bowl that you are worried about and not worried about any 
others. It does not matter if we ask DHS, HHS, or anybody else. 
We ask how many people are at work? Because Mr. Williams cannot 
run a car dealership if half of his people are not showing up. 
They cannot work remotely. And I do not think people get a good 
service if folks are not showing up to work.
    So, when that question comes up, just understand it is not 
aimed at you or anybody else but the question as the oversight 
authority for all of these agencies, as the funding authority 
is Congress's for all of these agencies, the simple question 
is, how many people are at work? And it may be a different 
answer. You are clearly a talented attorney. Maybe the question 
is, what is the policy on how many people get to show up? I 
will let you answer the question, but my policy is I have to 
show up at work. We are not doing remote anymore. I do not 
think any of the other agencies in our government should be 
remote anymore because we are seeing a declination of service 
to the taxpayer.
    So you have the floor now. What is the policy on how many 
people have to show up to work?
    Mr. KELLEY. Yeah. So the policy is you have to--so I 
understand that we disagree with what I am about to 
characterize. But you have to show up to work. So every single 
federal employee has to show up to work. As far as telework, 
and telework policy, Chairman Williams mentioned that I worked 
at the Department of Commerce at the U.S. Patent and Trademark 
Office. That is a distributed workforce as well and has long 
had a telework policy in place in processing trademarks and 
patents.
    We have a distributed workforce. Folks show up to district 
offices, loan production centers, as well as headquarters. And 
the policy today is that for each 2 week, biweekly period, you 
physically need to come into the office 3 days out of that 
period. And so, for example, I worked at a bank that Chairman 
Williams suggested, and we did something unconventionally where 
we did not have branches. Most banks have branches across the 
country. We chose not to use branches which is a physical 
presence in a physical footprint, to lend money. And that has 
served Live Oak as a comparative advantage in terms of its cost 
structure to become the nation's number one small business 
lender.
    So there are many different approaches to performing and 
optimizing how you deliver your service and your products. And 
so what I am arguing on behalf of the civil servants is that 
they are working hard I can attest to you. And as has probably 
been demonstrated and as you reflected, I expect that people 
perform as well as myself.
    Mr. ELLZEY. Well, BC Law is a good law school. It is a 
simple question. It really is. Virtual presence is actually 
absence. When you are a civil servant you need to be in the 
office because otherwise you cannot be supervised properly. I 
do not care what business it is. I know some airlines I will 
call up the customer service line and I will hear dogs barking 
in the back and I know they are not at work and I am not 
getting good service. I think it is expected by the taxpayer 
that civil servants be exempted from a private company. They 
are not like a private company. A private company can do 
whatever it wants. Civil servants need to be showing up for 
work. So is there a percentage in your policy that says how 
many people have to be at work every day? Does it exist or not?
    Mr. KELLEY. One hundred percent of policy without 
supervisor approval of leave of absence, you know, scheduled 
vacation, sick days, et cetera, have to show up to work. And 
there is a telework policy in place which I have explained the 
contours of.
    Mr. ELLZEY. All right.
    Mr. KELLEY. And you need to comply with that.
    Mr. ELLZEY. Okay. Well, I am almost out of time so I am not 
going to get the answer but, you know, folks need to be showing 
up in the office at work. We are seeing across the government 
an inability to effectively accomplish the job on the part of 
the taxpayer. But I thank you for your time and I yield back.
    Chairman WILLIAMS. Thank you.
    I now recognize Ms. Gluesenkamp Perez from the State of 
Washington for 5 minutes.
    Ms. PEREZ. Thank you, Mr. Kelley, for joining us here 
today.
    As a former small business owner, who successfully applied 
for a 504 Loan, I know that small business owners want 
streamlining when it comes to SBA programs. We do not have time 
to waste reading SBA regs.
    As part of the new SBA affiliation rule, the rule removes 
the detailed list of factors that the SBA currently utilizes 
when determining whether a loan applicant is credit worthy. 
Could you speak to the intent behind this rule?
    Mr. KELLEY. Yes. So the thing I would like to clarify, too, 
is affiliation is used for two purposes in underwriting alone 
historically at the SBA. And in the conventional commercial 
market affiliation is used solely for reasonable reassurance 
and repayment. So the impact of any affiliates to cashflow. 
Okay?
    In our programs today, tomorrow, and forever, the impact of 
an affiliate to cashflow remains and will continue to be the 
responsibility of lenders to look at. With respect to 
eligibility, which is a uniquely government requirement that 
the business be a small business based on SBA's size 
requirements, historically the agency took the position which 
we believe weas a red tape bureaucratic position which is the 
business needs to be independently owned and operated and it 
chose to construe independently owned and independently 
operated as two separate clauses as opposed to, say, a non-
severable clause like cruel and unusual punishment.
    So what we are applying and what we saw work in the 
Restaurant Revitalization Program and the COVID EIDL program to 
a varied degree in the Paycheck Protection Program is a 
standard ownership test. So you know who owned your business. 
If I asked in the community who owns your business they would 
tell me to see you and the buck would stop with you. What was 
happening with the affiliation is that a subjective criteria of 
totality of the circumstances to determine whether third party 
management agreements that you entered into, you the small 
business owner enter into, creates negative control deemed by a 
federal government employee. So the federal government will 
tell you who controls your business based on the agreements 
that you have entered into with a third party.
    We believe that that is wrong. And so we took the position 
that independently owned and operated should be viewed like 
cruel and unusual punishment as a nonseverable cause for the 
purpose of determining eligibility because size standards, 
meaning total number of employees for certain NAICS codes, 
revenue standards for others, and in the loan program since 
2010 when Ranking Member Velazquez passed the Small Business 
Jobs Act, includes the alternative size standard. And we found 
in both the government contracting division and in these loan 
programs is that even accounting for affiliates in eligibility, 
the businesses are still considered small.
    So if the definition of removing red tape and bureaucracy 
is to remove that, that is what we are doing. But with respect 
to whether or not we will get paid back as taxpayers, the 
requirement for affiliated analysis remains as it always has 
been.
    Ms. PEREZ. Thank you.
    Mr. Kelley, if a small business owner is denied a loan they 
can request reconsideration?
    Mr. KELLEY. Mm-hmm.
    Ms. PEREZ. The affiliation rule extends the list of people 
who can consider the reconsideration request and make a final 
decision to include the designated director of the Office of 
Financial Assistance and the SBA Administrator. Are there 
guardrails in place to ensure that these changes were not 
subjected in the consideration process?
    Mr. KELLEY. Yes. But I think what we should understand is 
that that rule was exactly responding to public concerns on the 
part of both lenders and borrowers that the process, by 
requiring it go all the way to the top of the House each time 
led to, you know, delays. And so this gives us the discretion 
to let the folks who, you know, we have talked a great deal 
about, the civil servants at work, to make those decisions 
based on their experience. So you will get a faster response.
    But in terms of the process, there are second look 
processes. You know, to the extent that people are trying to 
influence things, there is, as you all know, anonymous hotlines 
for tips to the IG and so forth. And those are all, you know, 
functional.
    Ms. PEREZ. Sorry. So could you describe those guardrails a 
little bit more in detail?
    Mr. KELLEY. Yeah. So the process as outlined, so for 
example, when the IG talks about its risk management challenges 
for anything, it starts with are there identified roles of who 
is responsible? What steps have to take place? Did those steps 
take place? And was there a second look process to ensure that 
there is not the discretion of a single individual. And those 
processes are outlined in the SOP. The roles, the whole, and 
then the second look aspects of it.
    Ms. PEREZ. Okay. Thank you.
    Mr. Chairman, I yield back.
    Chairman WILLIAMS. Also, let me remind all Members to turn 
their mics on when they need to.
    I now recognize Ms. Salazar from Florida for 5 minutes.
    Ms. SALAZAR. Thank you, Mr. Chairman. And good to talk to 
you, Mr. Kelley. My name is Maria Salazar. I represent the City 
of Miami where SBA is like the crown jewel. People really think 
that this agency is really cool.
    And ever since I got to the Committee 2 years ago, my first 
term, I had the honor of taking Administrator Guzman to my 
district. I am not sure if you are aware of that trip. I took 
her to Eighth Street. She was able to see, although, small 
businesses, the drycleaner's, and the flower shops. And people 
that look at the SBA as the crown jewel.
    You said that you are a political appointee, so that means 
that you know what the private sector looks like and how it 
works. And you said that you were a nerd. So nerds in the 
private sector usually do well meaning that they have, they can 
make a good name for themselves.
    So I just want to share a couple of ideas and then ask you 
three questions. We are very disappointed with the SBA. And we 
are trying to figure out how we can make this agency better for 
the average American small business owner. So I am going to ask 
you a couple of questions and I want you to answer me as if I 
were that let's say Indian American who wants to set up this 
drycleaners and he needs a small little help from the SBA 
because, you know, that is the American dream. And he tells 
you, look, I have called 10 times. The online service does not 
really work. I have uploaded my information seven times. Every 
time I call I talk to somebody else and it is very difficult 
for me, the Indian American wanting to set up this drycleaner's 
to get to the finish line and get the money. You are telling me 
and from the information we have is that now the SBA has 30 
percent less personnel. When I spoke with Administrator Guzman 
she told me that she was going to improve the online services, 
the people, the operators, the people on the other side. That 
it was going to be streamlined and that service was going to 
look beautifully.
    My question to you is this. Tell me one thing that you are 
proud of in this last 12 months that you and Administrator 
Guzman have established and instituted to help this Indian 
American to get his loan so he can open up that drycleaner's in 
simple terms.
    Mr. KELLEY. Yes. So first, I just want for your use case 
because I assume it is a constituent. That constituent should 
find a different lender because we work through third-party 
lending intermediaries. So if you are seeking a small business 
loan in either the 7(a) or the 504 program and you are having 
those issues that you have described, there are plenty of banks 
and credit unions across the state of Florida, I am sure in the 
city of Miami and certainly nationally, that they should go to.
    Ms. SALAZAR. But sometimes they do not want to touch that 
person and that person needs to go straight to the federal 
government. The SBA, that is what we are there for.
    Mr. KELLEY. Yes. So----
    Ms. SALAZAR. So let's suppose that he does not want to be 
touched because he is too small. We have to provide a good 
service and we are not. So go back. So do you agree with the 
fact that the agency that you are helping to run is not 
providing the service that the average small business owner 
believes; yes or no?
    Mr. KELLEY. So are you recommending that the Office of 
Capital Access and SBA take advantage of the authority we are 
afforded until the Small Business Act, section 7(a) to do 
direct loans as a final chance credit not available elsewhere?
    Ms. SALAZAR. Sometimes that is the last resort that person 
has.
    Mr. KELLEY. Okay. So in order to do, so the Agency has not 
done direct loans in its 7(a) program or general business----
    Ms. PEREZ. But I am talking about what you are proud of is 
what I am saying. What is it that you have in the last 12 
months, along with Mrs. Guzman established in order to redress 
some of the problems that I just mentioned which are endemic?
    Mr. KELLEY. Yes. So what we would be proud of is the rules 
that we have talked at great detail in this conference because 
to the extent that the use case you are describing is 
struggling with their bank or credit union or nondepository 
lender and having that terrible experience that you described, 
we want to take off the sidelines more credit unions and banks. 
So, for example, credit unions are thousands of depository 
institutions across this country----
    Ms. SALAZAR. I am sorry I am interrupting. So you are 
telling me that they are going through your online system, when 
they are going through your computer system, when they are 
going through your staff----
    Mr. KELLEY. That is what I am trying to clarify. The way 
that the program is set up, there is a waterfall under Section 
7(a) of the Small Business Act which says that you should seek 
a conventional loan first. If you are not able to seek credit 
not available elsewhere, you can go to a participating lender 
for a loan guaranty. And so we work through that lending--all 
of the interactions, all of the online, the call center that 
you are describing, the experience is governed by the 
individual lender. If we were to use our authority for direct 
lending which we have under Section 7(a)----
    Chairman WILLIAMS. Your time is up.
    Ms. SALAZAR. We will get back to you on that because that 
is not my experience. Thank you.
    Chairman WILLIAMS. I now recognize Ms. Scholten from the 
great state of Michigan for 5 minutes.
    Ms. SCHOLTEN. Thank you, Mr. Chair. And thank you, Mr. 
Kelley. Hillary Scholten from Michigan's 3rd Congressional 
District. Wonderful small businesses throughout the region.
    I think that the theme of today is oversight. And the 
importance of providing oversight to these nuanced rules. A lot 
of my questions and concerns have been covered here today so I 
am not going to repeat them but I do want to add my voice to 
those saying just how critical it will be for our Committee to 
continue to provide the necessary oversight. I have heard from 
financial institutions again and again just how concerned they 
are about the implementation of these rules.
    My question for you is, the SBA has repeatedly said that 
these rules will increase small dollar loans and expand access 
to capital for underserved communities. Can you go more in 
depth on the success of the Community Advantage Program and why 
the SBA chose to create this new type of SBLC and what sort of 
was the genesis there? Thank you.
    Mr. KELLEY. Yeah. So, if we build off of your colleague, 
Representative Salazar's example where in that case she was 
describing an Indian American drycleaning small business 
seeking a small dollar loan amount and being frustrated by the 
third party lender's customer service experience, et cetera. We 
need a wider distribution channel so that that person does not 
have to rely solely on one lender. They can go to the entire 
marketplace. And historically, certified development financial 
institutions were not eligible to participate in the 7(a) 
programs. So beginning in 2011, under the Obama administration, 
we temporarily lifted the moratorium so you are allowed under 
pilots to waive regulations. So we lifted the moratorium, 
issued temporary licenses. And we did that to experiment for 
safety and soundness reasons, but to experiment that those 
lenders who were embedded in communities where, for example, 
there are 1,700 banking deserts across rural and urban areas 
where there is not a bank branch within a 10 mile radius but 
there are CDFIs. And so the theory was if we have a diverse 
array of distribution channels, using the same core product 
that is ultimately beneficial to the lender and borrower. It is 
beneficial to the borrower because they get a fixed rate, they 
get a capped rate product and longer repayment terms with no 
prepayment penalties. That longer repayment period is good for 
the lender as well because it qualifies more loans. And then 
the backstop of the government guaranty in the secondary market 
helps them manage liquidity.
    So 7,000 loans have been made during that pilot for a 
billion dollars, and the distribution for underserved, 
including rural, HUBZone, veteran, small business, a business 
startup in business less than 24 months, that criteria for 
underserved has been met, you know, I think 60, 70 percent of 
the time.
    And incidentally, as was mentioned in the Senate hearing, 
our core product, whether it is a dollar loan or a $5 million 
loan over indexes in comparison to the commercial market to 
that same definition of underserved but we have seen a gap for 
women-owned businesses who make up a sizeable percentage of 
sole proprietors and yet, a single digit percentage of loans 
received through the SBA program. And it is in part because the 
census shows that those businesses are overwhelmingly sole 
proprietors, which means they are seeking very small dollar 
amounts, loans less than $150,000. And when you talk to a 
community advantage lender, you talk to a bank like JPMorgan, 
Chase, TD or large banks and you ask them why is there a 
disconnect? The disconnect is the cost-effectiveness of being 
able to underwrite and close the loan. And so we have responded 
by addressing the red tape that they have identified so that 
they can make a more cost-effective offering because we 
believe, and we take them at their word, that they will find 
these customers in their marketplace.
    Ms. SCHOLTEN. And have the results been borne out?
    Mr. KELLEY. Well, yes, in terms of, so the community 
advantage programs results over index in the underserved 
category even in comparison to a high number. And then with 
respect to minorities and women, it performs better. So, yes.
    Ms. SCHOLTEN. I yield back my remaining time.
    Chairman WILLIAMS. I now recognize Mr. Crane from Arizona 
for 5 minutes.
    Mr. CRANE. Mr. Kelley, thanks for joining us today. You 
probably do not know this. I am a small business owner myself 
so I definitely understand how tough it is to start a small 
business, pay employees, you know, deal with an everchanging 
economy. Do you know how I got my startup capital for my 
business, sir? I sold my motorcycle. Yeah. One of the best 
decisions I ever made.
    Sir, are you aware that Pew Research shows that 20 percent 
of the American people do not trust the federal government?
    Mr. KELLEY. I am not.
    Mr. CRANE. Okay. Well, they do not. And I think that if you 
polled this cross section of our citizens today you would 
probably see something similar.
    Sir, are you aware, yes or no, does the American taxpayer 
fund the SBA?
    Mr. KELLEY. Yes.
    Mr. CRANE. Okay. Does the American taxpayer--hold on. Hold 
on a second. Does the American taxpayer fund your salary, sir?
    Mr. KELLEY. It does.
    Mr. CRANE. Okay. Mine, too, as well; right?
    Mr. KELLEY. Yes.
    Mr. CRANE. All right. So, sir, Mr. Kelley, who is on the 
hook if these loans are defaulted on?
    Mr. KELLEY. So that is what I was going to explain with my 
exception. So, with respect to supporting the loan programs, 
and this is a really cool thing for you and all of the folks 
that might be----
    Mr. CRANE. Real quick, sir. Real quick. My time is running.
    Mr. KELLEY. The fees and the collection from liquidated 
collateral creates a profit for the federal government that 
enables us to waive fees for the borrowers and lenders and not 
ask for appropriate dollars at SCORE in order to support the 
7(a) and 504 programs.
    Mr. CRANE. Hold on a second. All right. First of all, the 
federal government does not make a profit. I think most people 
here are smart enough to know that. Do you guys know how much 
national debt we are in right now, anybody? Almost $32 trillion 
of national debt. Okay. So this government does not make a 
profit. As a matter of fact, it continues to spend money, upon 
money, upon money that we do not have. It just continues to 
print money that we do not have. And that is my problem here, 
Mr. Kelley. This town, these administrations that make up this 
town, the lobbyists, the special interests, are notorious for 
being poor stewards of the American taxpayer dollars. And now 
you are trying to implement changes to these loan programs to 
make it easier to lend people money that we do not even have. 
That is the problem. And it is for that reason, and because of 
the debt, the times that we live in, in our history in this 
town, in this government of showing zero fiscal responsibility 
that I do not support these changes and I do not think they are 
appropriate.
    I yield back my time. Thank you.
    Chairman WILLIAMS. Okay. I now recognize Mr. Phillips from 
Minnesota for 5 minutes.
    Mr. PHILLIPS. Thank you, Mr. Chairman.
    Welcome, Mr. Kelley. I want to start by thanking you. I 
know there are lots of things you could be doing with your life 
other than this, and I want to thank you for your service.
    I do a series in Minnesota called On the Job with Dean 
where I visit small business and work a shift for 2 or 3 hours 
and have learned a ton, the good, the bad, the ugly about the 
SBA. But mostly the good as a resource, as a provider of 
capital, and also mentorship. And I want to thank you for what 
you do.
    Just last week I was in Eden Prairie, Minnesota visiting 
the Asia Mall, which is a converted big box store, an 
extraordinary place. Administrator Guzman and a second 
gentleman came to visit. I worked a shift as a stockboy and a 
cashier and once again saw SBA loans creating a wonderful story 
of success in my district.
    And I also am a deep believer in shared success, in 
employee ownership. And have been trying to push both this 
Committee and my colleagues to look at ways where we can build 
bridges to more shared ownership. Our Ranking Member has a 
wonderful bill. I will be introducing one next week as well, 
and I want to focus on that. I know some of the changes, at 
least in the recent past, the 7(a) has only financed about five 
employee ownership changes in control. I know under the 
affiliation lending criteria rule now partial buyouts will be 
allowed under 7(a). So if you could just speak to how you think 
that might increase access to capital for employee ownership 
and any comments you might have.
    Mr. KELLEY. Yes. And not to pour salt in the wounds, but 
the forthcoming SOP will have delegated authority for ESOP 
transactions. So I did want to mention that.
    So with respect to partial buyout, the reason that this was 
put in here is to affect employee ownership. And historically 
what is challenging about an ESOP is that it is a formal 
process that requires role-based compliance. So, a fiduciary, a 
designated employee to take time away from, you know, doing the 
duties of a stockboy as you suggested to perform their roles to 
stay in compliance with the regulations governing that.
    So it works for a certain size company. It does not work 
for what President Biden has characterized as the Mom and Pops 
or the smallest of the small. So, what partial buyout does is 
it builds off of a process that has worked well for 7(a) 
lenders, which is change of ownership. A third of all SBA loans 
are either full partner buyouts or full stock or asset 
purchases today. This is a transaction that they do a lot of. 
And so now, today, an existing ownership can dilute their 
common stock ownership to their employees and the business's 
cashflow can pay for that transaction. And of course, all 
parties with 20 percent or more of stock in the company will 
remain on the hook with an unconditional personal guaranty.
    So we believe this transaction will be cost-effective. It 
will be one familiar to our core lenders and they will 
originate more details that way.
    Mr. PHILLIPS. Okay. Are there any other structural barriers 
that you think could be addressed to further increase 
availability of resources for ESOPs?
    Mr. KELLEY. So, we looked at ESOPs when I was lending, so I 
built out a lending division prior to the last role that was 
referenced and did about a half billion of lending. And we 
looked at ESOP transactions. They actually have very favorable 
benefits if, for example, you are a defense contractor. Okay? 
So, cost plus and things like that for reimbursement. But for 
the core businesses that are in your districts, the transaction 
costs were too high for the seller and the time it took to 
affect the transaction meant for a lender that, you know, we 
needed to move on to originate more loans. And really, 
everything about a lender, and this is good or bad or however 
you want to look at it, is I have got to meet my quota for that 
quarter and I have got to hit that bonus at the end of the 
year. And so I have to move on a timely basis.
    Mr. PHILLIPS. Okay. I appreciate it. A couple of quick 
questions.
    With turmoil in the banking sector, have you noticed any 
hesitancy amongst lenders in recent weeks, months, as it 
relates to 7(a)s?
    Mr. KELLEY. Well, it was cited that, you know, the lending 
is on track for about $14 billion today. I think there is no 
question, the Fed has reported this, it is in whatever 
periodically you consume each day, that there is going to be a 
tightening of the credit box. Now, in SBA lending, a tightening 
of the credit box normally means that this is a tool that 
becomes, you know, more handy, right, for the lenders. And the 
challenge, and I really want to reiterate why we are doing all 
these changes. In 7(a) lending today there are 20 lenders doing 
50 percent of the lending nationwide every year.
    Mr. PHILLIPS. Can you say that again?
    Mr. KELLEY. Twenty lenders do 50 percent of the lending. 
So, a nation that has 33 million small businesses, because of 
the red tape and bureaucracy that we are removing but 
historically has been in place, has supported 20 lenders. And, 
you know, I have called myself a nerd here so I will take 
another. It needs nerds like me at the bank to comply with the 
rules. So we are trying to level the playing field so that we 
can get 4,400 banks and thousands of credit unions off the 
sidelines into using these programs.
    Mr. PHILLIPS. Thank you. My time is expired so I yield 
back. Thank you, Mr. Kelley.
    Chairman WILLIAMS. Okay. I would like to thank our witness 
for your testimony today, for appearing before us today. I 
think you see this Committee is bipartisan. We want the best 
service out of the SBA that we can get.
    Without objection, Members have 5 legislative days to 
submit additional materials and written questions for the 
witness to the Chair which will be forwarded to the witness.
    I ask the witness to please respond promptly, and you have 
been asked to do that today.
    So if there is no further business, without objection, the 
Committee is adjourned.
    [Whereupon, 11:33 a.m., the committee was adjourned.]
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