[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
UNDER THE MICROSCOPE: REVIEWING KEY SBA
PROGRAMS WITH ASSOCIATE ADMINISTRATOR
FROST
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MAY 15, 2024
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-051
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-529 WASHINGTON : 2024
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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
CELESTE MALOY, Utah
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MARIE GLUESENKAMP PEREZ, Washington
SHRI THANEDAR, Michigan
MORGAN MCGARVEY, Kentucky
HILLARY SCHOLTEN, 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
Associate Administrator Kathryn Frost, Office of Capital Access,
United States Small Business Administration, Washington, DC.... 4
APPENDIX
Prepared Statement:
Associate Administrator Kathryn Frost, Office of Capital
Access, United States Small Business Administration,
Washington, DC............................................. 29
Questions and Answers for the Record:
Questions from Hon. Williams and Answers from Kathryn Frost.. 32
Questions from Hon. Luetkemeyer and Answers from Kathryn
Frost...................................................... 50
Questions from Hon. Mann and Answers from Kathryn Frost...... 51
Questions from Hon. Velazquez and Answers from Kathryn Frost. 54
Questions from Hon. Golden and Answers from Kathryn Frost.... 59
Additional Material for the Record:
None.
UNDER THE MICROSCOPE: REVIEWING KEY SBA PROGRAMS WITH ASSOCIATE
ADMINISTRATOR FROST
----------
WEDNESDAY, MAY 15, 2024
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, Stauber, Meuser, Van
Duyne, Salazar, Mann, Ellzey, Molinaro, Alford, Crane, Bean,
Lalota, Maloy, Malliotakis, Velazquez, Phillips, Landsman,
McGarvey, Gluesenkamp Perez, Scholten, Thanedar, Davids, and
Pappas.
Chairman WILLIAMS. We will pray first, and then we'll
pledge.
Mr. MEUSER. Lord, thanks for this hearing this morning.
Thanks that we all get to live and serve in the greatest
country in the world. We pray for all the small businesses out
there. We pray for all the folks that have ideas to start small
businesses. We pray that governments would assist when it is
their priority. We also pray for health concerns for everybody
in this room, friends and family as well. We love you and are
grateful for you. Now we will do the pledge. I pledge
allegiance to the flag of the United States of America. And to
the republic for which it stands. One nation, under God,
indivisible, with liberty and justice for all.
Chairman WILLIAMS. Good morning, everyone, and I now call
the committee on Small Business to order. Without objection the
Chair is authorized to declare the recess of the committee at
any time. I now recognize myself from my opening statement. I
want to welcome you all today's hearing, which will focus on
the oversight of the SBA's Office of Credit Risk Management.
This office oversees the SBA's lending programs, including the
Flagship 7a loan program. And in 2023, this program alone lent
over $27 billion to main street businesses. In April of last
year, the SBA finalized two rules that make drastic changes to
the program, which many Members of this committee have
expressed concerns over.
The first rule removed the standardized underwriting
procedures for 7a loans. The 7a program allows banks to offer
loans to businesses that are on the edge of creditworthiness.
In order for the banks to extend these loans, the government
backs between 75 percent to 85 percent of the dollar amount.
Since the taxpayers are on the hook if enough of these loans go
bad, it is very important that there are guardrails in place to
businesses that get these loans and have a realistic chance to
pay them back. Unfortunately, the SBA removed the underwriting
criteria that allowed the program to run smoothly for decades
and is now allowing each individual lender to use their own
standards. This will make oversight of the lending activities
much more challenging for the agency and increased likelihood
of loans going bad. The SBA is reporting that they are seeing
an increase in small dollar loans, but at the same time, we
have seen a sharp increase in early default rates within this
program.
The second rule removed the cap that limited the number of
lenders that could participate in the government lending
program. Only a few years prior, the SBA determined that it
simply did not have the capacity to oversee more lenders. And
now, even though the Office of Capital Access had been
drastically reduced staffing levels, they changed course and
decided to take on more responsibility anyway. So, we have
already seen the SBA ignore some warning signs coming from the
new lenders within the 7a program. And when SBA administrator
Guzman testified to this committee last year. She claimed the
SBA has a rigorous application process for the SBLC program.
However, that claim is contradicted when seeing the SBA awarded
license to Funding Circle. A company that had started operating
losses had standard operating losses the year prior to applying
for this new license and during the company's recent earning
calls, the CEO claimed it would be too costly to get the SBA
lending program functional. Because of this, the CEO stated
that they are looking to sell this U.S. business line. Even
though these comments were made during the application process,
the SBA decided to ignore them and approve their license
anyway.
The final thing I am looking forward to discussing is the
SBA's handling of the EIDL loans under $100,000. The agency
abruptly decided to stop collecting on these loans back in
2022, only to change course over a year later. Now, while I am
pleased that the agency claims they will start collecting on
these loans, I still have many questions about the long term
servicing cost of this portfolio, the amount of taxpayer
dollars that were lost during the year of inaction, and the
estimated recoupment amounts from their efforts. We must ensure
that the SBA is being a good steward of Americans tax dollars.
Now, lastly, I ask unanimous consent, for Representative
Malliotakis, from the great state of New York to waive to the
committee for the purpose of asking questions and without
objection, that is so ordered.
I want to thank you all again for being here with us today,
and I am looking forward to today's conversation. And with all
that, I yield to our distinguished Ranking Member from New
York, Ms. Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. I would like to
start off by thanking Associate Administrator Frost for joining
us here this morning. Ms. Frost, welcome to the committee. The
COVID-19 pandemic opposed a historic threat to our nation's
small businesses. The number of active business owners in the
U.S. plummeted by 3.3 million, or 22 percent, over a two month
period from April--from February to April 2020. The drop in
business owners was the largest on record and losses were felt
across all industries. Underserved small businesses were
especially hard hit. African American businesses experienced a
41 percent drop, while Latino business owners fell by 32
percent and Asian business owners fell by 26 percent.
Throughout the pandemic, the SBA stepped up and offered small
businesses across the country a lifeline. The SBA delivered an
unprecedented $1.2 trillion in emergency grants and loans over
two years. That funding contributed to a historic economic
recovery of 21 million lost private sector jobs, plus 4 million
more private sector jobs than existed before the pandemic.
Beginning in early 2021, thanks to the leadership of
Administrator Guzman, longstanding anti-fraud controls were
reinstituted and new safeguards were put in place to reduce the
risk for potential fraud. Since then, the SBA has been actively
engaged in reducing the risk of fraud throughout the agency by
improving its operation and bolstering its risk management
systems. Across all four pandemic relief programs, the SBA has
screened 49.3 million applications, identified 4 billion in
applications, loans, grants and awards that had had indicators
of potential fraud, and blocked 2.46 million applications due
to likely fraud. That being said, many of the fraudulent
activities that occurred in PPP and the other COVID relief
programs were conducted through fintech's. According to a study
published by the University of Texas, Austin, 9 of the 10 PPP
lenders with the highest rate of suspicious loans were fintech
companies, and the most active fintech PPP lenders generated
over $1 billion in fees from the SBA.
Given the significant level of fraud conducted by fintech
lenders in the PPP, there has been strong bipartisan concern
over two final rulemakings by the SBA last year, which weakened
the underwriting criteria and loosened affiliation standards in
the agency's core lending programs. Most importantly, it lifted
the decades old moratorium on the number of SBLCs, potentially
opening this program up to fintech lenders. There are still
outstanding questions as to one SBLC award to Funding Circle,
and I look forward to hearing from Ms. Frost regarding this
particular license. The SBA's mission is too important to grant
loan making authority to a lender that is not fully committed
to its programs. The SBA has been critical to the success of
millions of small firms through its over 70 years of existence.
Much of that is due to the core lending programs and their
ability to reach businesses that have traditionally been locked
out of the capital market. I hope to hear more about how
Congress can strengthen and improve these programs. Mr.
Chairman, I yield back.
Chairman WILLIAMS. The lady yields back and I now will
introduce our witness. It is my privilege today to introduce
Ms. Katie Frost. Ms. Frost is the Associate Administrator of
the Office of Capital Access at the Small Business
Administration. And at the SBA, Ms. Frost leads the agency's
Office of Capital Access, which oversees major programs like
the 7a lending program. Prior to the current position at the
SBA, Ms. Frost serves as Deputy Associate Administrator of the
Office of Capital Access as well as Policy Advisor and Senior
Advisor for the Office of the Administrator. Ms. Frost holds a
Bachelor of Arts political science degree from UCLA, the Bruins
right?
Ms. FROST. Go Bruins.
Chairman WILLIAMS. And a master's in public policy from
Harvard's Kennedy School. Ms. Frost, thank you for joining us.
And I am looking forward to today's conversation. And before
anything else, I would like to remind you that your oral
testimony is restricted 5 minutes in length. And if you see the
light turned red in front of you, means your 5 minutes have
concluded and you should wrap up your testimony. And if you
don't, I will remind you with a little tap on the gavel. Okay?
I now recognize Ms. Frost for her 5 minute opening remarks.
STATEMENT OF KATHRYN FROST, ASSOCIATE ADMINISTRATOR, OFFICE OF
CAPITAL ACCESS, SMALL BUSINESS ADMINISTRATION
Ms. FROST. Good morning, Chairman Williams, Ranking Member
Velazquez, and Members of the committee. On behalf of
Administrator Guzman and the entire agency, thank you for the
opportunity to appear before you today. I serve as the
Associate Administrator for the Office of Capital Access, where
I am responsible for the agency's business loan programs,
including our 7a, 504 and microloan program, the agency's
surety bond program, SBA's direct disaster loan program, and
several of our pandemic programs, including the Paycheck
Protection Program, the COVID EIDL program, and the Restaurant
Revitalization Fund.
Collectively, these programs connect creditworthy small
businesses to capital so that they can start, grow and expand
resilient businesses. There's never been a better time to start
a business than under the Biden Harris administration. Since
2021, we have experienced a small business boom in this
country, with more than 17 million Americans filing new
business applications, and this is being led by women and
people of color. This isn't an accident. It is thanks to
intentional policy and program implementation, including
improvements to SBA's loan program. SBA has increased lending
to Latino owned businesses by 80 percent since the start of the
Biden Harris administration, and we have more than doubled SBA
loans to black owned businesses since 2020. We have also
invested in modern technology like MySBA and the unified
lending platform, as well as Lender Match to improve the lender
experience, the borrower experience and reduce loan processing
times. But one of the persistent problems for small businesses
has been accessing capital, especially small dollar loans.
These loans tend to be less profitable and harder to get on the
conventional market, and small SBA loans, those under $500,000,
fell by 40 percent during the previous administration.
Reversing this decline has been one of administrator Guzman's
top priorities, and beginning in `22 into `23, she modernized
SBA loan policy with sweeping reforms to strengthen the network
of SBA lenders and to make it a little easier to work with the
SBA.
In August of last year, those changes went live. To make it
easier to work with SBA, we simplified underwriting
requirements for loans under $500,000 so that they align with
industry norms. We removed unnecessary frictions, including the
complex affiliation rule and complex requirements for
documenting equity injection. And at the same time, SBA
established the most robust front end fraud control system in
the history of the program, something that's been applauded by
our inspector general. To strengthen the network of SBA
lenders, we created the new community advantage small business
lending company, or CASBLC license, bringing 142 mission-based
lenders into the program, and that included 30 new lenders last
fall. We also added three new SBLC's for the first time in four
decades, each of which has a focus on a particular market gap
in SBA lending that includes small dollar loans, lending to
native owned businesses and entrepreneurs, and lending in
persistent poverty counties and rural areas.
We now have nine months of performance data after the
implementation of these reforms, and I am pleased to report on
behalf of Administrator Guzman that the changes are working. In
fiscal year 2024 to date, SBA has approved 22,000 7a loans
under $150,000. That puts us on pace to nearly double the
number of small loans approved in the final year of the
previous administration. Everyone, that is about 1,000 more
small businesses getting a small loan every month compared to
just a few years ago. 7a loans under $500,000 are similarly up
25 percent, and community advantage lending is up 17 percent
compared to this time last year. For this progress, we give
credit to our partners in the lending community. They have
embraced this opportunity, and they have seized it to put more
money in the hands of America's small businesses.
And yet, despite this notable progress, it is still too
hard for many Americans to access capital. The Federal
Reserve's 2024 report showed that half of employer firms who
sought capital did not receive what they needed. So SBA
continues our work to help. In April, our nation celebrated
second chance month, and SBA expanded access to our capital
programs for returning citizens. In May, we expanded the use of
the 504 loan program for projects that reduce energy
consumption. And in March, we raised the cap on SBA's surety
bond program for the first time in 11 years. The president's
2025 budget establishes a path to deliver on the Small Business
Act's long standing directive of directly lending to credit
worthy small businesses who are unable to secure credit in the
private sector. We have extensive experience with direct
disaster lending, including successfully lending nearly $3
billion to over 43,000 borrowers last year. I know there are
many other issues you would like to discuss, and I look forward
to your questions. Thank you.
Chairman WILLIAMS. Thank you. And now we will move to the
Member questions under the 5 minute rule. I recognize myself
for 5 minutes. In this year's congressional budget
justification, I was disappointed to see that plans that the
SBA requested to establish a direct lending program. The SBA is
supposed to be the lender of last resort and not compete with
the private sector. When the Administrator testified on the
Hill last month, she made it clear they would take an act of
Congress to set up a direct lending program. So, Ms. Frost, do
you agree with the administrator that the SBA will not be able
to set up a direct lending program without Congress
involvement? And will you commit that you will not take any
actions to skirt this statutory check on the SBA's ability to
set up the program in the future?
Ms. FROST. The Administrator said during her testimony last
month that we would begin a direct lending business program if
given the tools to do so. Of course, we have had a longstanding
direct disaster loan program for decades, including lending
over $3 billion in the direct disaster loan program last year
to about 43,000 borrowers.
Chairman WILLIAMS. The SBA offered two different loan
options to small businesses during the COVID-19 pandemic, and
the Paycheck Protection Program offered forgivable loans for
businesses and was administered with the help of private sector
lenders. And the COVID EIDL program offered a long term, fixed
rate loan that were distributed with the SBA. That was the main
difference. Now, both of these programs helped main street
businesses stay afloat during the pandemic. But we now need to
reflect on both of these programs to figure out what do we do
moving forward on them. So the COVID EIDL portfolio is still
staying in the government balance sheet, which equates to over
$400 billion. And when an independent consulting firm looked
into what to do with this portfolio back in 2021, they said the
agency should sell all or a portion of the portfolio.
The agency ignored this advice, and since then, the loans
have become less collectible and therefore less valuable to the
private sector. The SBA has requested hundreds of millions of
dollars from Congress each year to continue servicing these
loans. So even though we have requested an analysis of the sale
of the EIDL portfolio for months, we have repeatedly been
stonewalled and told to just look at the PPP data. Well, we
know these programs are fundamentally different, and the
comparisons don't even make sense. So I am going to ask you
once again, has the agency conducted a new analysis of just the
EIDL portfolio to determine if it should be sold? And when will
the committee be able to see the analysis.
Ms. FROST. So the PPP and the COVID EIDL programs were both
first of their kind, brand new programs. And so, of course, the
agency has paid special attention to both programs in terms of
finding the best way to manage these loans and responsibly move
the programs forward. We are finalizing our analysis on a
potential COVID EIDL sale, and we will share that with the
committee when it is complete.
Chairman WILLIAMS. Now, when the SBA changed the 7a lending
rules, Members of this committee repeatedly voice their
concerns that changing the underwriting standards would lead to
increased default rates. Now, the data is now starting to come
in, and it is very troubling. The early default race currently
sits at 0.86 percent, which is over two times higher than the
rate one year prior, which was 0.39 percent. So this not only
increases the risk the taxpayers have to bail out the program,
but it is a death blow to the businesses that attempted to take
out a loan to grow their businesses before they were ready. So,
Ms. Frost, what recourse does the agency have to reverse this
trend? And how will you ensure that lenders are using more
stringent underwriting standards to prevent these defaults?
Ms. FROST. So, using modern technology, we are able to keep
a constant pulse on our loan programs portfolio and how all of
those portfolios are performing. I think it is important to
note that during the pandemic, with a lot of government money
out in our economy, there was a historically low default rate
in our pandemic programs. And what you are referencing right
now, sir, is a regression to the mean, a return to normal, a
return to what we saw in the pre pandemic baseline of what we
kind of expect as a default rate for our loan programs. We're,
of course, keeping an eye on this and other critical metrics.
And we have strong oversight of all of our lenders, with
appropriate enforcement tools and supervision to ensure that
the program stays on track.
Chairman WILLIAMS. Okay. All right. I yield back my time.
And now, recognize Ms. Velazquez for her questioning.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. Associate
Administrator Frost, in response to a September 2023 IG report,
the SBA rerun the analysis for referrals to the Treasury
Department for loans for $100,000 or less. Can you explain this
analysis and why the SBA changed its referral decision?
Ms. FROST. Absolutely. SBA is a data driven organization,
and we are going to make decisions based on the best data
available at the time. The initial analysis that was conducted
on the collectability of these small dollar loans was conducted
in early 2022. Actually, before repayment had even started. So
it was modeling, right. Based on some projections. As the data
came in, we actually updated that analysis three additional
times. And the latest analysis in December of last year showed
that it was likely going to be cost effective if we took that
final collection step of referring to Treasury. And so we began
doing so. And as of today, we have referred over 920,000 COVID
EIDL loans to treasury. That's all of the COVID EIDL loans that
are in default.
Ms. VELAZQUEZ. For the record, isn't it true that the IG
has cleared out that recommendation?
Ms. FROST. Yeah, there were a couple recommendations. I
believe they're either cleared or will be cleared shortly.
Ms. VELAZQUEZ. As you are no doubt aware, there has been
significant bipartisan concern around the SBA decision to award
Funding Circle an SBLC license. Can you explain the SBA
decision to continue to move forward with the award to Funding
Circle, even after the CEO's announcement to sell its U.S.
operations?
Ms. FROST. It was important to note that we had a strong,
objective and career driven process to select the three new
SBLC's. And that process actually had three phases. I'd like to
walk through them quickly. The first was the due diligence
committee, which were subject matter experts on my team who
reviewed each and every loan.
Ms. VELAZQUEZ. Ms. Frost, can you talk to me about just
Funding Circle? Because I have too many questions. I don't want
to hear the story of the other two, but specifically the one
that the CEO made the announcement to sell its operation in the
U.S.
Ms. FROST. Absolutely. So all applicants went through the
same process. But speaking specifically to Funding Circle, they
were selected for a reason. They met SBA's requirements. They
had a strong business plan that was going to help fill a market
gap of small dollar loans across this country. And we are eager
to work with Funding Circle to deliver on the promises in that
application.
Ms. VELAZQUEZ. Okay. Yes or no? Did the company share its
intention to sell its U.S. operation with the SBA prior to the
award?
Ms. FROST. At the time of the award, we were not aware of
that, no.
Ms. VELAZQUEZ. You were not?
Ms. FROST. At the time of they were selected last fall, we
were not aware.
Ms. VELAZQUEZ. If Funding Circle had expressed that
intention, would the SBA have considered that as part of their
application?
Ms. FROST. You know, I don't know about a hypothetical
scenario in which, you know, we would have had different
information at the time.
Ms. VELAZQUEZ. It is very real now.
Ms. FROST. Well, I can tell you at the time that they were
selected, we were able to review full company financials,
including audited financial statements, their management team,
their experience, as well as their business plan.
Ms. VELAZQUEZ. Yes or no? Now that the SBLC licenses have
been granted, has the SBA had any discussion with Funding
Circle about its decision to sell it is U.S. operation?
Ms. FROST. Yes. My team is regularly in contact with
Funding Circle and the other SBLC's, including kind of regular
oversight conversations, onboarding, conversations about
technical capabilities, et cetera.
Ms. VELAZQUEZ. Have you had any discussion with Funding
Circle about its decision to sell its operation?
Ms. FROST. Yes, we have. My team reached out to them the
night after their earnings call, when they made that public,
and we have had several follow on discussions.
Ms. VELAZQUEZ. Yes or no, has the SBA had any discussion
with Funding Circle about its potential acquisition by a third
party?
Ms. FROST. Yes.
Ms. VELAZQUEZ. Am I correct in my understanding that the
other licenses are currently available to be purchased or
transferred?
Ms. FROST. Yes, they are. So there's, of course, 14
historic SBLC licenses. Those have traded hands through private
sales for over 40 years. And SBA regularly conducts an overview
of each and every change of control for an SBLC license.
Ms. VELAZQUEZ. According to Funding Circle, the U.S.
subsidiary is amply funded. Do you agree with that statement?
Ms. FROST. During their application, they showed that they
were amply funded.
Ms. VELAZQUEZ. When was the last time that the SBA examined
capital levels?
Ms. FROST. So I know that we had to actually see money in
the bank for them before they signed their 750 agreement, which
was done about a month ago.
Ms. VELAZQUEZ. A month ago. Funding circle also expected to
start lending in April. Have they started making any loans?
Ms. FROST. They have not yet.
Ms. VELAZQUEZ. Has Funding Circle signed a 750 agreement
with the SBA?
Ms. FROST. They have signed, and we would like them to
start making loans as soon as possible.
Ms. VELAZQUEZ. Does the SBA have any plans to award any
additional licenses beyond the three that were just awarded?
Ms. FROST. We have awarded three at this time, and that is
our plan.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Lady yields back. I now recognize
Representative Mann from the great state of Kansas for 5
minutes.
Mr. MANN. Thank you, Mr. Chairman. Associate Administrator
Frost, thank you for being here. Your engagement with this
committee is important. I represent the Big First district of
Kansas, which is 60 primarily rural counties in the western
central, a little bit in the eastern part of our state. My
district is home to more than 20,000 small businesses, and more
than 80 percent of our employees in the Big First district are
employed by small businesses, which help drive our economy and
define the American dream. Unfortunately, I've heard time and
time again from small business owners in the Big First who've
been forced to shut their doors and end their livelihoods
because of an aggressive, overly intrusive, and politically
charged federal government. Specifically, I've personally met
with one of several mom and pop firearm dealers in my district
who the ATF forced to surrender their licenses and their way of
life and stop contributing to their communities over minor
cleric or clerical errors, like misspelling a name or using a
county abbreviation in their documentation, which the President
has declared zero tolerance for. I am concerned that parts of
the federal government are being used as a bludgeon to stamp
out small businesses that may or may not align with
administration on a given political issue, especially with
respect to brick and mortar gun stores on main street. This
should not be a political issue. It is fundamentally un-
American to crush small businesses simply because they do not
agree with those in power on politics. A handful of questions.
Are federally licensed firearm retailers eligible for SBA
loans, and if so, which type of loans are they eligible for?
Ms. FROST. So, our loan programs at SBA support all types
of small businesses across all different industries to include
those who would sell firearms.
Mr. MANN. Does the SBA have any policy that applies
additional eligibility requirements to federally licensed
firearm retailers?
Ms. FROST. We do not. We have additional policy
requirements on many different types of small businesses, for
example, gas stations, but we do not have any on firearms
firearm sales.
Mr. MANN. How many loans does the SBA have with federally
licensed firearm retailers, and are they separately tracked, or
how do you review, monitor, and oversee those loans?
Ms. FROST. So we track by NAICS industry code, but I don't
know offhand, don't have the numbers in front of me in terms of
how many, maybe two businesses that sell firearms.
Mr. MANN. Could you maybe get that for me through the NICS
code? If you could get to my office, the number of SBA loans
that exist with our mom and pop, our smaller, our small
businesses that are federally licensed firearm dealers, that
would be very helpful.
Ms. FROST. Happy to work with you on any agency requests.
Mr. MANN. And we can follow up on that. Are you aware of
federally licensed firearm retailers being singled out in any
way by the administration?
Ms. FROST. You know, I am laser focused on giving loans to
American small businesses, and so that is what my office does
and where my attention is.
Mr. MANN. Where have you seen loan growth while you've been
in your position? In other words, what industries or segments
have you seen that is growing, specifically in terms of new
loans that are being generated?
Ms. FROST. Yes, we have seen tremendous growth in small
dollar loans. So small dollar loans are up overall during the
Biden Harris administration and looking this period of this
year so far to last year, we're up about 25 percent in loans
under $500,000 to all sorts of industries. Some of the core
industries that our loans support would be things like
restaurants and other mom and pop shops in downtowns across
America.
Mr. MANN. Great. Thank you, Mr. Chairman. With that I yield
back. And thank you again for being here this morning.
Chairman WILLIAMS. Gentlemen yields back. I now recognize
and welcome back Mr. Representative Phillips from the great
state of Minnesota.
Mr. PHILLIPS. Thank you, Mr. Chairman. And greetings,
everybody. Ms. Frost, I recognize that about 85 percent or so
of the EIDL and PPP loans that are subject to fraud were made
under the last administration. So it is hard to hold all of you
accountable for that. But I want to be prospective and ask
where the $349 million that's been requested for fiscal year
2025 to support oversight, how specifically that will be used?
As detailed as you can provide us.
Ms. FROST. Yes. There's two things I'd like to highlight
about our budget request with regard to the kind of pandemic
programs in the COVID EIDL portfolio. One would be for COVID
EIDL servicing center, and that is to ensure that we have
excellent customer service for the millions of Americans and
small businesses who hold COVID EIDL loans, and that we're
appropriately recouping that money through repayment and other
collection activities. And the second thing I'd like to
highlight is----
Mr. PHILLIPS. Can I ask? I want to hear the mechanics, the
how, is it human? And one of my questions is AI. Is there any
intention or interest in using artificial intelligence to do
the work of perhaps thousands of people to actually assess
these loans and identify which ones might be fraudulent?
Ms. FROST. Yeah, the rest of the--another portion of the
budget request will go to the OIG to kind of track down these
fraudsters. We actually, during the pandemic program under the
Biden Harris administration, stood up a machine learning tool
to help automatically screen all of the pandemic loans,
including those done under the previous administration. And we
used that really as a triage to help kind of best use our human
led resources for human manual reviews.
Mr. PHILLIPS. And was that successful?
Ms. FROST. I believe it was very successful.
Mr. PHILLIPS. Okay, so any plans to further integrate such
technology?
Ms. FROST. I will say there are lots of ideas. We do not
have any concrete plans at this time.
Mr. PHILLIPS. Okay. Anyway, so back to the use of the 349
million.
Ms. FROST. Yeah. So the two things I'd like to highlight
there would be the work of our COVID EIDL servicing center
based in Fort Worth, Texas. And as I mentioned, also requesting
additional support for the OIG so that they can go after these
fraudsters. We have referred millions of loans to the office of
the inspector general. They've got a big job, and they need
some additional resources so that they're actually able to
pursue the fraudsters and get this money back for the federal
government.
Mr. PHILLIPS. Okay, appreciate that. A question about, you
know, the decision that was then changed about the loans under
$100,000, to pursue those. Can you just talk about how that
decision was first made and why it was changed?
Ms. FROST. Yeah. So the decision was first made in early
2022 based on the best data and modeling available at that
time. But actually, none of the portfolio had entered
repayment. And so, we have updated that analysis now several
times. And, you know, the longstanding policy of the agency has
been to use all cost effective collection mechanisms to recoup
the money from the COVID EIDL program on all sizes of loans.
What changed is the analysis showed, based on updated data,
wasn't previously available, that it would likely be cost
effective to conduct that final step of collections of
referring to Treasury. And so we have begun doing so.
Mr. PHILLIPS. And lastly, with your experience so far at
SBA, if you could wave a magic wand and change anything that
you've seen so far quickly, what would that be?
Ms. FROST. I would love better access to IRS tax data.
Mr. PHILLIPS. Okay, thank you. We'll get to work. With that
I yield back, Mr. Chair.
Chairman WILLIAMS. Gentlemen yields back. I now recognize
Representative Crane from the great state of Arizona for 5
minutes.
Mr. CRANE. Thank you, Mr. Chairman. Appreciate you being
here. Ms. Frost. Ms. Frost, what is the SBA's number one form
of capital generation?
Ms. FROST. You know, I believe that our loan programs are
powerful tools to support American small businesses.
Mr. CRANE. I said capital generation. Do you guys generate
any capital? Ms. Frost, where are you getting all this money
that you are so excited here today to give out to American
small businesses?
Ms. FROST. So, one of the incredible things about our loan
programs is that they're subsidy neutral. It is one of the most
impressive public private partnerships in America. And so, we
partner with our loan, our loan, private sector lenders, and
through fees and recoupment on our loan program, it actually
operates at zero subsidy to the taxpayer. It is really an
incredible partnership.
Mr. CRANE. So you guys don't have a product or a service
that we don't know about at the SBA, that you guys are selling?
Ms. FROST. We----
Mr. CRANE. Little tchotchkes, hats, t shirts, anything like
that?
Ms. FROST. No, we manage our loan programs under my office
as well as the surety bond program.
Mr. CRANE. So is it fair to say, Ms. Frost, that you guys
take money from the American taxpayer and then redistribute it
to small businesses that you guys deem priority?
Ms. FROST. I don't think that's quite accurate. However,
our direct disaster loan program does not operate at zero
subsidy. That one is subsidized by the taxpayer to help small
businesses across the country who've been impacted by
devastating disasters.
Mr. CRANE. So you guys don't generate any money, right?
Ms. FROST. No, actually, the programs generate funding
through fees and then recoupment on loans.
Mr. CRANE. Okay, Ms. Frost, what would you have to say to
Americans that are paying their taxes, that fund these lending
programs that aren't starting, small businesses that feel like
they're being left out and they don't benefit at all from them?
Ms. FROST. I think that the entire economy and the entire
country benefits from a vibrant small business economy. You
know, if you are visiting restaurants, if your child goes to
childcare, you know, if you kind of do recreational activities,
you are benefiting from America's small businesses, and I am
incredibly proud to support them.
Mr. CRANE. Yeah. Do you feel like they're benefiting from
the inflation that the record high inflation that we're seeing
right now, Ms. Frost?
Ms. FROST. I believe inflation's about 3 percent right now,
and it is fallen significantly.
Mr. CRANE. Yeah. Okay. Ms. Frost, how much was the SBA
defrauded during COVID?
Ms. FROST. The agency's best estimate on pandemic program
fraud is $36 billion.
Mr. CRANE. $36 billion. I've heard the numbers are quite a
bit higher than that, to the tune, there was about $200 billion
worth of fraud.
Ms. FROST. So some confusion, there is, there's a
difference between what we'd consider potential fraud and then
likely fraud. And the way to best think about this is it is
kind of like a metal detector, right? When you first walk
through a metal detector and it goes off, you need to look into
it a little further, but you don't actually know if it is
something dangerous or if it is just a big belt buckle. So that
potential fraud is like that metal detector going off. SBA
found over $400 billion in potential fraud through our
automated screening. That was the first of our four step
process. Our second step was using data analytics, including
that machine learning tool I just mentioned, to refine that
fraud down or refine the potential fraud down so we could
conduct manual reviews. That was our third step. We conducted
millions of manual reviews on pandemic loan programs. And then
the fourth step is referring that over to OIG. So you can think
about it much like the metal detector. Maybe the metal
detector's going off a lot, but you have to actually
investigate each and every one to get a sense of what's real
and what's just a big belt buckle.
Mr. CRANE. Okay, so your claim is $36 billion. Is that what
you said?
Ms. FROST. That's the agency's best estimate, yes.
Mr. CRANE. Okay. Is there any chance that you guys will
recoup any of that?
Ms. FROST. You know, so recoupment for fraud is done
through the law enforcement community. That starts with the
SBA, Office of the Inspector General. It includes the Secret
Service, the Department of Justice, et cetera. And I know the
President's budget requested additional funding for the SBA OIG
for exactly that purpose, to go after the money.
Mr. CRANE. Ms. Frost, you said in your testimony, under the
Biden Harris administration, there has never been a better time
to start a small business. Is that correct?
Ms. FROST. That's correct.
Mr. CRANE. The Bureau of Labor Statistics reports that
since Biden took office, we have $7 trillion added to national
debt, 36 consecutive months of inflation above 3 percent,
producer price index is 19 percent increase. Consumer price
index, 19.4 percent increase. Credit card interest rates, 20.75
percent increase. Household debt for every American is $18,100
increase in taxpayer, and then 100 million working age people
not participating in the workforce. Do you still stand by that
statement?
Ms. FROST. I do. And I think that the data supports that.
Americans across this country are starting businesses. The past
three years have been the three highest business start years on
record, and we have had over 17 million new business filings
since the start of the Biden administration.
Mr. CRANE. Well, what about those statistics I just read
you?
Ms. FROST. I think it is incredibly difficult to be a small
business owner in America. And I admire each and every one of
them for the tenacity that they have to continue working,
regardless of the condition, to support their communities.
Mr. CRANE. Thank you, Ms. Frost. Thank you, Mr. Chairman. I
yield back.
Chairman WILLIAMS. Gentlemen yields back. I now recognize
Representative Pappas from the great state of New Hampshire for
5 minutes.
Okay, he's not here. All right. We now recognize
Representative McGarvey from the great state of Kentucky for 5
minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman. Thank you for being
here, Ms. Frost. Like Ranking Member Velazquez and so many of
my colleagues here today on this committee, I remain focused on
increasing capital and access to capital for those who lack it,
and ensuring that everyone does have that chance at the
American dream of starting a business, of having it be
successful. I'd like to spend some time today on the changes
the SBA made to lending programs and its April 2023 rules on
business lending. The finalized affiliation and lending
criteria rule removed the concept of control of one entity over
another as a basis for finding affiliation, arguing that the
concept of control has proven particularly burdensome for
applicants and lenders to understand and implement. As part of
that change, the SBA stopped publishing its franchise
directory. About a fifth of SBA lending goes to franchising,
and SBA Capital is an important source of startup funding for
franchisees. So Associate Administrator Frost, now that the
rule is final and the SBA no longer publishes the franchise
directory, have you seen a change in the speed of approval for
franchisee lending applications?
Ms. FROST. I would need to go check with the data to look
specifically at the speed for franchisees, but I can tell you
that the turn times in our loan processing centers are down.
They're very quick right now, and I am very proud of the team.
Mr. MCGARVEY. Awesome. And has the SBA's decision to
eliminate the directory led to, I should ask, what positive and
negative changes have occurred as a result of the SBA's
decision to stop publishing the franchisee directory?
Ms. FROST. I think our changes on the affiliation rules
should be celebrated as a way that government has reduced
unnecessary friction in our loan programs. You know, the
concept of affiliation is this inherently governmental concept
we developed for the SBA loan programs. And our lenders would
constantly say, you know, they had to hire a team of lawyers to
work through it. Now it is clear, it is based simply on
ownership. Who owns the business and who does the business own?
A business owner can understand it. Our lenders can understand
it, and it is clear for everyone involved.
Mr. MCGARVEY. From serving as a legislator for a long time,
I know that sometimes even the best intended policy has
unintended consequences. Have you seen any unintended
consequences from this change?
Ms. FROST. We have not at this time, no. Small dollar
lending is up tremendously since last year, about 25 percent
for loans under $500,000.
Mr. MCGARVEY. Thank you. Several of my colleagues and I
have expressed concern to Administrator Guzman about the SBA's
decision to award an SBLC license to Funding Circle. When she
was before this committee in March, there were significant
questions about Funding Circle's capital, adequacy, and
performance prior to them obtaining the SBLC license. Are we
setting a precedent where lenders with inadequate capital
levels and significant losses can be let into that program?
Ms. FROST. I think it is important to note that in
selecting the new three SBLC's, including Funding Circle, we
reviewed full financial audited statements for each of the
applicants to include Funding Circle, and they were
appropriately capitalized. Now, every SBLC needs to meet our
standards, and should there be any change in ownership or
control for Funding Circle or any other SBLC, we review the
kind of buyer, if you will, to ensure that they still met our
standards. And we have conducted reviews like that as these
previous licenses changed hand in the private markets over 40
times over the past few decades.
Mr. MCGARVEY. And as you guys have looked at this and
what's happened, have there been any discussions about the SBA
changing its metrics when considering applications for SBLC
licenses going forward.
Ms. FROST. I believe we had a strong and objective process
for selecting our SBLC's. Kind of had three phases. The first
phase was the due diligence committee, where subject matter
experts on my team reviewed each and every application that
came in, and they basically binned those applications as
recommended for consideration or not recommended. Then it went
to phase two, which was the review committee that included
experts from around the agency to include legal, like our CFO's
office, the Office of Investment, and we discussed and debated
the recommendations of the due diligence committee. Right. You
ask questions, you bring in other experience. And then finally,
the third phase was the license committee vote. That was five
career Members of our senior executive service, and they voted
unanimously to select the three SBLC's that were selected last
fall, which are Arkansas Capital Corporation, McKinley Alaska
Growth Capital, and Funding Circle. And so that's kind of our
process. I think it was a very strong, career led process, and
I am proud of the team.
Mr. MCGARVEY. Thanks. And the last 30 seconds, just sort of
an open ended question. What would you like to see from this
committee that you would think help continue to grow small
businesses in this country?
Ms. FROST. I think there's a lot that we can continue to do
to improve our loan programs. We're regularly talking with our
lenders and Members of your staff to do that. So some of the
areas that we're excited to continue focusing on include what
can we do for refinance capability within the 504 loan, and
what can we do to improve line of credit products under our
loan programs overall.
Mr. MCGARVEY. Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Gentlemen yields back. I now recognize
Representative Davids from the great state of Kansas for 5
minutes.
Ms. DAVIDS. Thank you, Chairman. And thank you to you and
the Ranking Member for holding this hearing today. And thank
you to Associate Administrator Frost for being here to testify.
Sorry I am short. I definitely appreciate the work that you and
the folks at the Small Business Administration are doing to
help our nation's entrepreneurs. You know, one of the top
concerns we hear about from small businesses in our districts,
and you've already heard it today, is access to capital. And I
know your office is absolutely critical in ensuring that our
main street businesses have the lending opportunities that they
need to succeed. And with that in mind, I do want to touch on
the Community Advantage Program.
And as folks know, this is a mission based lending program
that was transitioned into the small business lending company
program last year. In doing so, the SBA is attempting to
support lenders that are better able to reach underserved
entrepreneurs. That includes veterans, women, folks in rural
areas, native owned small businesses. And this is with smaller
dollar loans. So I am curious if you could tell me, to date,
what progress have these mission based lenders made in
improving access to capital for the underserved entrepreneurs
that you all are trying to reach? And what kind of generally
are SBA's goals for the community advantage lenders in the
coming year or so?
Ms. FROST. Thank you for bringing up the Community
Advantage Program. Mission based lending holds a special place
in my heart, and I am proud of the that we did last year to
create the community advantage small business lending company
license, where, as you mentioned, we brought 142 lenders onto
that license so they can now conduct 7a lending that included
30 new mission oriented lenders last year. We have been clear
that our top priority this year is getting those 142 lenders up
and settled in the program. We developed a strong training. It
was a 16 hours training, I believe, for each of them, and they
have been working through it. I think we're either done or very
nearly done with all of them on that. And community advantage
lending is also up about 17 percent through quarter two of this
year compared to the same time last year. We believe that the
community advantage lenders are embracing the permanency of
this license such that they're able to plan technology,
recruitment and funding to better support these mission driven
loans in the hardest to reach communities around the country.
Ms. DAVIDS. And then are there any aspects of that that you
think that we probably need to know about as you move forward
with continuing to implement and get the training going and
that sort of thing, are there any issues that you are seeing
yet or anything that we should be aware of as we plan?
Ms. FROST. I think that our smaller lenders and our mission
based lenders face a lot of challenges, including kind of
finding the business, bringing them in, as well as securing
sources of funding for lending. So SBA is always interested in
how we can support smaller lenders, and especially our
community driven lenders in liquidity. So just having the money
to conduct the loans, that's something that we're really
interested in.
Ms. DAVIDS. Okay, thank you. And then I know in your
testimony, you mentioned the SBA's revamped Lender Match tool,
which includes the community advantage lenders. And the tool is
important in connecting small businesses to SBA backed lending
opportunities. But I do often hear from our kind of local small
business owners and entrepreneurs that the SBA's tools and
programs can seem daunting or complicated, which you actually
kind of spoke to earlier. I am just curious how SBA has
incorporated that feedback and has been reworking the Lender
Match tool or other systems, if there are other systems that
you've been reworking, to help those platforms specifically for
access to capital work better?
Ms. FROST. So we relaunched Lender Match this past spring
under the MySBA platform. Lender Match is an incredible tool.
About 50,000 small businesses each month come into Lender Match
looking for capital, and they can match with about 1,000 SBA
lenders, including, as you mentioned, over, I believe, 250 or
so community based lenders who can provide those loans. We kind
of serve as the matchmaker through this process, and our
relaunch this spring had tremendous improvements for our
smaller lenders and our community driven lenders. Most notably,
we went from what we'd consider a cold lead to a generated
lead. So we ran all these small businesses through our risk
mitigation framework to check for core elements of fraud and
eligibility. Some of the big lenders could already do that sort
of thing on their own, but now everybody gets that information,
and we now have a 48 hour window for all of our lenders to look
at the kind of leads coming in from these businesses and act on
them. Previously, it was a kind of quickest draw wins, or at
least quickest draw gets an advantage, which, of course, would
advantage larger lenders who were able to hire staff on that
topic. Now, everyone has the same 48 hours window.
Ms. DAVIDS. Thank you. I appreciate that. We might follow
up a little bit after this, but I yield back.
Chairman WILLIAMS. The lady yields back. And I now
recognize Representative Meuser from the great state of
Pennsylvania for 5 minutes.
Mr. MEUSER. Thank you very much, Mr. Chairman. Thank you,
Ms. Frost. Appreciate you being here. So, there are some
lenders who feel that they are inaccurately or inappropriately
not receiving their funding for their guaranteed loans that
they extended. As you and I had a conversation, and they feel
as if they followed the four requirements which you outline and
know extremely well. Confirm receipt of bar of certifications,
confirm receipt of information that a bar was eligible, confirm
the dollar amount, follow applicable BSA requirements. So, are
you aware that there are lenders who feel they've fully
complied with these four requirements, but are seeing denials?
Ms. FROST. So I am aware of these lenders, and I've
actually had one on one or private conversations with many of
them. But I think it is also important to note that SBA had
clear underwriting standards for the PPP program. They were
significantly less than the underwriting standards for our
traditional 7a loan program, as it was an emergency program.
But those underwriting standards were published in the IFR, the
Interim Final Rule, in April of 2020, and stayed consistent.
And we are ensuring that all of our lenders met those standards
for underwriting before granting guarantee purchase.
Mr. MEUSER. But there are some that feel that the
proverbial goalposts have moved and the documentation
requirements have somewhat changed. Can you commit to honoring
the guarantees made to lenders who complied with the
requirements laid out in statute and regulation or in the FAQ's
at the time the loan was made?
Ms. FROST. We will absolutely honor the guarantee for all
lenders who met the requirements for the program.
Mr. MEUSER. Sure. Okay. So what is the timeframe for some
of these disputes?
Ms. FROST. So when we're conducting a guarantee purchase
review, it is depending on the risk rating of the file. It is a
loan by loan review, and we request documentation from our
lenders in many instances so that we can continue to move
through the loan file. So we need to work in partnership with
our lenders. They need to submit those documents to us in a
timely fashion, and our team needs to review them quickly, and
our team stands ready to conduct that work.
Mr. MEUSER. Work if we know of some very serious issues
where some lenders may go out of business, or so they claim,
can we make specific requests to you, and can you provide to
them in detail what it is you need from them in order to
properly assess their funding?
Ms. FROST. Absolutely. We have been consistent and clear
about what meets the standards for underwriting for the PPP
program in our guarantee purchase review, and we will pass that
information along to you and your team, as well as any lenders
who are seeking it.
Mr. MEUSER. And can that be done within like a three to
four week period if we were to submit that to you?
Ms. FROST. We can get that done quickly.
Mr. MEUSER. Okay, that's great. So, changing subjects. The
CEO of Funding Circle, one of the three companies to be awarded
a new SBLC license, reported two months ago that they basically
couldn't handle it wasn't worth it, et cetera. The question is,
is it common practice? And I assume it is not common practice,
but why would the SBA approve an SBLC for a company with
mounting losses and unwillingness to provide capital, as
Funding Circle has disclosed?
Ms. FROST. So it is actually pretty common in the financial
industry for businesses to take a loss for a couple years
during, for example, a growth period, or at the start of a new
loan fund program. So losses for a specific period is not in
and alone itself considered a huge negative indicator. You do
want to, of course, ensure that the company is properly
capitalized, that they have appropriate loan loss reserves, and
that they have prudent lending standards. Funding Circle did
meet all of those requirements.
Mr. MEUSER. Okay. But it didn't work out for them very
well.
Ms. FROST. I mean, I know that Funding Circle has expressed
they may sell, but that may happen and it may not.
Mr. MEUSER. So we have had questions about Michigan
registration initiatives in cooperation in partnership with the
SBA. Do you feel, A, that that's appropriate, and B, are there
taxpayer funds being utilized to register voters, specifically
in areas that seem to benefit one party over another?
Ms. FROST. So I should be clear that I do not work
specifically on this issue. But I understand from colleagues
that this is simply providing information, much like a DMV,
motor voter law, kind of just a link on our website.
Mr. MEUSER. Yeah, it is more than that. I mean, there's
active engagement, there's kiosks, there's talk. There's
certainly, even if it is a dollar, would you agree that even if
it is $20 of taxpayer money, that is inappropriate?
Ms. FROST. Sir, as I mentioned, I don't work on this
program. From what I understand, it is simply helping very,
very busy small business owners get easy access to the state,
kind of nonpartisan place to register to vote.
Mr. MEUSER. I am over my time. Thank you, Mr. Chairman. I
yield back.
Chairman WILLIAMS. Gentlemen yields back. I now recognize
Representative Scholten from the great state of Michigan for 5
minutes.
Ms. SCHOLTEN. Thank you so much, Mr. Chair. And thank you
to Associate Administrator Frost for coming today. In your
testimony, you discussed several ways in which the SBA, of
course, is working to increase access to capital, something
very important to me. My colleague, Mr. Meuser, and I just
passed a great bill addressing this issue. In regards to
establishing services such as the My SBA loan portal, how do
these technologies assist small businesses who need more
support, and are there improvements you are looking to make to
these systems moving forward?
Ms. FROST. So the MySBA platform is an incredible kind of
one stop shop or single entry point to SBA that will eventually
cover all of our programs. We're kind of bringing them on, you
know, as we're able. And so, for example, our disaster loan
program is now on the unified lending platform under MySBA,
this provides a modern, mobile first application for our
customers so that small businesses are able to interact with
the SBA using modern tools. They can do things like paying
online, setting up recurring payments. They can make kind of
some basic servicing actions, do that on their own in the app,
and we have easy access to a messaging portal and our customer
service center if they need a little more help.
Ms. SCHOLTEN. That's great. In your testimony, you also
talk about significant progress that the SBA has made in making
small dollar loans more available. However, you also note that
half of the employer firms who applied for more capital didn't
receive what they needed. Can you speak to any common issues
that cuts across this group of firms and what prevented them
from receiving the capital they requested? And are there areas
in which the SBA can expand support to these businesses? What
is it doing to address it, in other words?
Ms. FROST. Yeah, so the report that I mentioned where half
of the businesses seeking funding did not receive it. To be
clear, that wasn't just SBA loans. That was a Federal Reserve
study, their employer firm study they do every year that looks
at small businesses across America seeking access to credit
through a number of different means. I actually think that the
SBA loan products play a critical role in expanding access to
credit overall in this country, and I want to make sure every
business knows about them and our Lender Match tool as an easy
way to get connected to SBA lenders.
Ms. SCHOLTEN. Making sure that small businesses know about
the products that are available is also a passion of mine. We
encounter numerous businesses all the time saying, you know, I
didn't know about that. What are you doing to make sure that
they're aware specifically about these products?
Ms. FROST. So my team works closely with several other
teams at SBA who support getting the information out about SBA
services and programs. That includes our field office. We have
68 field offices around the country, our Office of
Entrepreneurial Development, who works in close partnership
with resource partners around the country to reach America's
small businesses and support them through SBA programs and
through all other programs available to support small
businesses.
Ms. SCHOLTEN. That's great. Lastly, I really appreciate the
work that the SBA has done to prevent instances of fraud,
including implementing new technologies to better provide
screening and close collaboration with the Inspector General
and other law enforcement agencies. It is also police week here
on the Hill, and I wonder if you could tell us more about your
work with law enforcement agencies to combat fraud. And are
there ways that Congress can help support this work?
Ms. FROST. The way that our risk mitigation framework now
works is that when the business submits information, we use a
number of private sector and public databases, private sector,
excuse me, and public, like government only sometimes
databases, to check the information provided to validate it
against these third party databases. Basically, to check that
it is true and correct. We then are able to move those loans
forward that are either if there's a hold, we're able to clear
it, or we're able to say that there's no potential fraud
concern. This is all done pre origination. And this risk
mitigation tool was launched for our business loan programs for
the first time ever last August. You know, traditionally, it
was the lender's responsibility only to kind of prevent fraud.
SBA thinks that we are stronger when we work together in
partnership with our lenders, so they're going to keep doing
their part. Now we're stepping up to do our part. And of
course, anything that looks potentially fraudulent, or likely
fraudulent, we refer to the office of the Inspector General.
And the president's budget request did request additional
funding for OIG so that they can go after the fraudsters,
especially those who committed pandemic fraud.
Ms. SCHOLTEN. Thank you. I yield back.
Chairman WILLIAMS. Gentlelady yields back. I now recognize
Representative Stauber from the great state of Minnesota for 5
minutes.
Mr. STAUBER. Thank you, Mr. Chair and Ranking Member
Velazquez. Ms. Frost, we have a Minnesota business supporting
227 good paying jobs that has had a miserable and disappointing
experience with the SBA's PPP audit and appeals process. The
primary frustration with this process has been the lack of
clarity and communication from the SBA throughout the entire
process. Not only has the SBA failed to respond to two letters
submitted by impacted organizations, but the SBA has also
failed to respond to two elected officials from the state of
Minnesota, Senators Klobuchar and Congressman Emmer,
respectively. Ms. Frost, what is the SBA's procedure for
following up on inquiries made by appealing parties?
Ms. FROST. So, we, of course, take all agency requests from
Members of Congress and other elected officials seriously. You
know, my office responds to them, and then, of course, it moves
through an interagency concurrence process. So we work closely
with our colleagues on any of those requests.
Mr. STAUBER. Okay, so the business requested a response.
Senator Klobuchar requested a response, and so did Congressman
ever. No response. Can you commit today you'll work with them?
Ms. FROST. Absolutely. Happy to work on any agency
requests. And if you pass along the name of that small
business, I will get it to my team so that we can look into it.
Mr. STAUBER. Thank you very much. Now, on to something.
Another concern that I have with the SBA's procedures. Ms.
Frost, when was the last time that you talked to Patrick Kelly?
Ms. FROST. I had lunch with Patrick a few months ago.
Mr. STAUBER. A few months ago? Explain. Two months ago?
Three months? Do you remember?
Ms. FROST. I don't remember offhand.
Mr. STAUBER. A couple months ago?
Ms. FROST. Yeah. Maybe December or so.
Mr. STAUBER. Okay, December. Has Patrick Kelly spoken to
you about any policy changes since he departed from the SBA?
Ms. FROST. You know, Patrick and I don't speak regularly,
but when we had lunch, we talked primarily about our families.
I have a young daughter, and he has two children.
Mr. STAUBER. So you didn't talk about any policy changes
since he departed from the SBA?
Ms. FROST. We talked about some of the work that we had
done together, but we primarily focused on personal matters.
Mr. STAUBER. Okay. Has Patrick Kelly spoken to you about
Funding Circle in any capacity since he departed from the SBA?
Ms. FROST. No.
Mr. STAUBER. Do you know what Funding Circle is?
Ms. FROST. Yes, of course. Funding Circle is one of our new
SBLC's.
Mr. STAUBER. One of the three new ones, correct?
Ms. FROST. That's correct.
Mr. STAUBER. That he lobbied for? Correct.
Ms. FROST. I am unaware of any contact between Patrick and
Funding Circle, or any connection.
Mr. STAUBER. Has Patrick Kelly ever given you or any
employee at the SBA either political or career, any
instructions or advice relating to Funding Circle receiving an
SBLC license?
Ms. FROST. No.
Mr. STAUBER. Not at all. Not at all?
Ms. FROST. No, not at all.
Mr. STAUBER. Are you aware of Patrick Kelly working with
Funding Circle in any capacity?
Ms. FROST. I am unaware of any connection between Patrick
and Funding Circle.
Mr. STAUBER. Are you aware of any type of consulting
agreement that Funding Circle has with government forward where
Mr. Kelly is currently employed?
Ms. FROST. I am unaware of any connection between Patrick
and Funding Circle.
Mr. STAUBER. Per Funding Circle's own statements, it
intends to sell its license, as it has intended to do since
before the SBA officially awarded it. Since the agency
continues to ignore Congress, today, I feel compelled to pass
on a clear warning. If the license ends up in the hands of a
former SBA employee, there will be an investigation into such a
clear ethical violation. I hope we will not have to provide
such oversight. And with that, Mr. Chair, I yield back.
Chairman WILLIAMS. Gentleman yields back. I now recognize
Representative Gluesenkamp Perez from the great state of
Washington for 5 minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Mr. Chair. Associate
Administrator Frost, thank you for being here today. As my
colleagues have heard me share many times before in committee,
before coming to Congress, I owned an auto repair and machine
shop with my husband, and we utilized an SBA 504 loan to buy
our shop. And that program was truly a vital source of capital
for me, and I know it is for many other small businesses
working in the trades. I will say we did have a hell of a time
going through the process. When Administrator Guzman was here
in January, I asked her about what the agency was doing to make
the experience more navigable for first time entrepreneurs who
don't have a year to spend on the process. I am hoping you can
provide an update on the agency's enhanced platform now that it
is up and operational. How has it enhanced customer service?
And how are you fielding a Representative sample of input from
all sizes of businesses? Mom and pops up to the big guys, not
just the folks that have a compliance department or
administrators. And how would that feedback be incorporated?
Ms. FROST. Thank you for your question. I share your
passion for making our programs accessible and easy to
understand. And of course, the changes that we introduced last
August, we believed really reduced some of these unnecessary
frictions that made the program so complex, especially for
first time folks come in to get a loan, or for anyone looking
for those smaller dollar loans that, of course, often are
underrepresented. Small businesses are first time startup
businesses or businesses in the trades, rural businesses, et
cetera. And so we're really proud of those reforms. We have
seen small dollar lending respond, and we're up about 25
percent compared to the same time last year. Now, I think
there's still more good work to be done on this and would be
happy to work with you and your team on how we can further
improve the loan programs.
Ms. GLUESENKAMP PEREZ. Are you aware of how applicants
feedback might be incorporated or responded to, and how it is
fielded? How is that feedback solicited?
Ms. FROST. So primarily for our business programs, our
business loan programs, they work through private sector
lenders, or for the 504 program through our CDC partners, our
community development company partners. And so each and every
one of them will have kind of different setups, different
experiences on how they interact directly with the small
business borrower. But we believe that setting the conditions
for success will be kind of reducing those unnecessary
frictions for the program. Right. If the lender can then better
understand the program, they can better explain it to the small
business. And of course, my team regularly works with lenders.
We're actually now setting up the first ever small business
lending advisory council that we can connect with the lenders
directly. And importantly, on that advisory council, we are
reserving seats for Members of the small business community to
be there, as you are mentioning. Hopefully all sizes of small
businesses can be represented so we can hear directly from them
as well.
Ms. GLUESENKAMP PEREZ. Yeah, I would love the opportunity
to engage on how those positions will be allocated, that it is
not just like cute shops or big guys, that it is truly machine
shops, auto shops, the kind of nuts and bolts of keeping our
economy rolling. And thank you for your work. I am wondering if
you could share how the updated tool will make it easier for
borrowers to connect with lenders and compare rates for SBA
backed loans. Any insight into how this might be helpful for
rural entrepreneurs?
Ms. FROST. Yeah, so I think that Lender Match our tool to
support our small business borrowers and connect them with SBA
lenders is incredibly important for our rural small businesses
as I am sure you know, there are so many more banking deserts
in this country about 1,700 last report that I saw, and that's
especially true in the rural areas of this country. But now,
anyone you know, you can, if you can access the Internet, you
can go to Lender Match, you can put in some simple information
about your business and the type of capital you need, and you
are matched with up to, there's 1,000 participating lenders who
can respond to that request. Some of the improvements we just
made on this platform include bringing it under the MySBA
platform. So again, that's our one stop shop. We're moving
everything under that umbrella and also making it such that all
of our lenders have the same 48 hours window before they're
able to kind of click into support or opt in to a lead from a
small business. That means from a small business perspective,
and this is the most important perspective, after two days, I
can log on and I can see all of the lenders who I've matched
with, and I can select which lender I'd like to potentially get
more information from and potentially get a loan from.
Ms. GLUESENKAMP PEREZ. Do you anticipate any particular
impacts on rural communities access to capital through that?
Ms. FROST. I certainly anticipate that rural communities
will use this tool, and I am excited to look into what we see
and how the changes from the spring have hopefully impacted
that program.
Ms. GLUESENKAMP PEREZ. Okay, thank you so much. I yield
back.
Chairman WILLIAMS. Gentlelady yields back. And I now
recognize Representative Maloy from the great state of Utah for
5 minutes.
Ms. MALOY. Thank you, Mr. Chairman. Hi. In preparation for
this hearing, I reached out to some of the local chambers of
commerce and regional banks in my district that spent a lot of
time working with small businesses. And a lot of their mission
is to try to get small businesses up and running and stable to
help these economies in rural Utah. And when I reached out and
asked about this hearing, I got a lot of complaints about the
SBA, and I've grouped them into a couple of broad categories
that I want to talk about.
So with the Chambers of Commerce, one in particular had an
MOU with the SBA for trying to get SBDC assistants to a lot of
the new and emerging small businesses. And they have gone
through a lot of hurdles and hoops and made sure that people
are registered with the right agencies, and they filled out the
right paperwork, and then they're not getting a lot of funding.
And so, it is been a frustrating experience for them that they
were really enthusiastic about having this partnership and
thought it was going to be really helpful and now they feel
like it is a bureaucracy without a lot of benefit.
And then with the regional banks that specialize in lending
to small businesses, they had a similar complaint. They feel
like the SBA programs have a high cost of participation, a lot
of bureaucracy, a lot of hurdles, and then not a lot of benefit
in the end. And so they don't feel like they can recommend them
to their customers. But then with things like EIDL loans, the
SBA is directly competing with these same banks that are there
and the communities, trying to make sure that our main streets
are vibrant. And then they're competing directly with a federal
agency that's supposed to be helping and isn't really helpful.
And so I am going to start with the banks. How does the SBA
view its role in relation to private banks, especially
considering direct lending initiatives that compete with
private sector loans?
Ms. FROST. I believe that our business loan programs are
one of the most incredible public private partnerships in this
country, where we partner, we SBA partner with the private
sector lender. They, of course, deliver the loan, and we
provide a government guarantee on that loan. I know you
mentioned some of the lenders you spoke with said the programs
were cumbersome, a little clunky, and that's feedback we have
been receiving for decades at SBA. We did take action on that
last year to reduce some frictions, especially for smaller
dollar loans. But I believe there's more work to be done on
that as well.
Ms. MALOY. So what's the best way for lenders in Utah to
give feedback to the SBA? Because they're right there on the
ground. They're seeing what's not working. How do we get their
feedback to you so that we can improve these programs?
Ms. FROST. Any lender who's interested in learning more
about SBA loans, please send them my way to my team. We do have
regularly quarterly calls on our key business loan programs
where folks can submit questions, so lenders can submit direct
questions. We have several different email addresses for each
loan program where they can submit questions. And my team holds
regular webinars providing information out to the lender
community.
Ms. MALOY. Okay, I am going to have my staff follow up with
you as soon as we're done here, because I think they would jump
at this opportunity because they're really frustrated with how
it is going. And then for the Chambers of Commerce, how does
the SBA evaluate the effects, effectiveness of partnerships
like this, where you have an MOU with an organization and
you've got mutual goals, but the smaller entity, the rural
Chamber of Commerce, or the local Chamber of Commerce doesn't
feel like it is mutually beneficial anymore. The SBA is a large
federal entity. It is hard to adjust. How are you evaluating
how those partnerships work and adjusting so that they work for
local chambers?
Ms. FROST. So I am not familiar with the particular MoU you
are speaking about. And actually, the SBDC program is largely
run out of the Office of Entrepreneurial Development. So a
different office at SBA. I'd be happy to refer those questions
over. But I can tell you I recently took a trip to Alaska to
visit one of our new SBLC's, McKinley, Alaska growth capital.
And there I also had the opportunity to visit some other
lenders who support rural communities. They've got a lot of
rural communities in Alaska, much like in Utah, as well as the
rural communities and small businesses out there. And so, I do
have some good firsthand perspective on how hard it can be to
serve rural communities. And SBA is extremely interested in
helping our capital programs better serve those small
businesses.
Ms. MALOY. Well, from the people I represent, there's a lot
of frustration that the potential is there for these to be
really helpful, but the reality, it just isn't panning out. So
I am going to have my staff follow up with you. Let's see if we
can get some of these things fixed. Thank you for your time
with that, Mr. Chairman. I yield back.
Chairman WILLIAMS. Lady yields back. And now I recognize
Representative Landsman from the great state of Ohio for 5
minutes.
Mr. LANDSMAN. Thank you, Mr. Chair. Thank you for your
testimony and all your work today. I just have a few questions.
I mean, you know, the paperwork issue is a big one, and I am
glad you are working on it. I wonder if you, we have a little
more time, if you could just talk a little bit more about what
you have found to be the biggest barriers or the feedback that
you get on these quarterly calls or wherever. In terms of just
the bureaucracy around this, obviously we want to avoid fraud
and we want to make sure the loans get to the right people. We
also want to make sure that this is something that everyone can
access, particularly those who don't have big staffs. Right.
And so, I am curious about what you've heard and what in an
ideal world, you would do to address those concerns. And then
as part of that, what help do you need from this committee?
Ms. FROST. So, as I mentioned, we are kind of regularly
engaged with the SBA lender community, where we both share
information and receive input back from them. So just as an
example, last week there was a lender conference here in
Northern Virginia that I was able to attend, as were several
Members of my team. This one was focused primarily on our 504
loan program, and we talked a lot about different restrictions
around refinance opportunities in the 504 loan program, how we
may be able to expand that. And that's something that my team
is looking very closely at and plan to do in the near term.
I've also started something with my team where when we're
launching a new product or we're moving forward with a new
capability, we're doing our user acceptance testing with some
of our smaller, often community based lenders. So, for example,
I've mentioned several times during this hearing that we
launched an update to Lender Match. We worked with some of our
CA SBLCs to kind of try that before we did the full launch.
Right, just to get their input. Similarly, we're working to
modernize what's called 1502 reporting, which is our monthly
report coming from the lenders on the status of their loan
portfolio. And we have engaged with some of our smaller and
community lenders to get their feedback on that product as
we're finalizing the build around it.
Mr. LANDSMAN. Thank you very much. Can I just ask you about
the unified lending platform? It seems to me that the
technology, and I know this has come up already to better match
potential borrowers with options, opportunities to do that with
without a ton of staffing or paperwork, where you are simply
making it easy using technology to help find some of these
folks, but also when they search certain keywords, they find
themselves on a platform, maybe the website, where they can
very quickly get some questions answered and determine what
opportunities there might be for them. Is that something that
you envision the ULP doing, and where does this go? What's the
next set of iterations, and what's that vision?
Ms. FROST. Thank you for that question. I think that Lender
Match is an incredible tool to help our small businesses match.
As you are mentioning, using technology. Very little kind of
regular SBA resources are needed here to conduct these
introductions between small businesses and lenders on an
ongoing basis. I think some of the ideas that you are speaking
about here certainly seem worthy of additional consideration
about how can we use technology to better explain our programs
in an understandable way, both for the lender community and
especially for the small businesses, and would be happy to work
with your team as we dive into those ideas.
Mr. LANDSMAN. We would love to work on this. I mean, I am
on the VA committee and we're doing something similar with VA,
which is to, you know, when a veteran goes and looks for
something, something pops up that they're working through,
which would just say, hey, we don't know if you are eligible
for these things, but if you give us just basic service
information, in this case, basic business information, we'll
tell you very quickly what you might be eligible for. And that
begins a conversation that doesn't exist at the moment. And so,
if that is really an option, we'd love to work with you on
that.
Ms. FROST. Absolutely. And I think that Lender Match does.
It has a lot of those same components and same ideas. So a
small business can come into Lender Match and say, here's some
basic information about my business, and here's the sort of
capital that I need. They submit that in. And then our lenders,
the thousand or so lenders we work with through Lender Match,
including about 250 community lenders, they each set up
profiles and they say, this is the type of small business I
want to work with, and these are the sorts of loans I provide.
And together, then they get matched. I believe the data, and
we'll look this up to make sure I've got it right, is that the
average small business is matched with nine lenders.
Mr. LANDSMAN. Wow.
Ms. FROST. That's nine opportunities to kind of say, hey,
maybe this is the right lender.
Mr. LANDSMAN. My time is up, and I want to be respectful of
the Chairman. We'll follow up. Thank you very much. I yield
back.
Chairman WILLIAMS. Gentlemen, yields back. I now would like
to welcome and recognize Representative Malliotakis, good
friend from the great state of New York, for 5 minutes.
Ms. MALLIOTAKIS. Thank you. Thank you, Mr. Chairman and
Ranking Member, for allowing me to join the committee today.
Ms. Frost. My constituent, Mr D'Andrea, runs an owner operated
restaurant named the Roadhouse Restaurant. It is remained in
the heart of my district in Staten Island for nearly 53 years.
During the COVID pandemic, the Roadhouse Restaurant, like so
many other small businesses across the country, ran into
difficult financial times. With severe COVID restrictions in
place by New York City, business slowed and Mr. D'Andrea looked
to the SBA for a lifeline, and he now finds himself on the
verge of financial ruin with his retirement. The equity of the
building that the business resides under threat of foreclosure
due to no fault of his own. But an admitted coding error, quote
unquote coding error in the administration. Of the Restaurant
Revitalization Fund by the SBA, Mr. D'Andre was granted
$244,734 through the program on June 7th, 2021. Half of the
initial grant, $123,857.69, was sent directly to the New York
State Department of Taxation and Finance for payment of the
Roadhouse's outstanding taxes. Now, Mr. D'Andrea was even given
an assessment ID of the New York state taxes, taxes paid by the
U.S. Department of Treasury. But on October 28th of 2021, the
funds sent to the New York State Department of Taxation and
Finance were returned to the Treasury because they lacked
documentation and they had no idea what it was supposed to go
to. They had no idea it had to go to the Roadhouse's accrued
tax debt. So, since the return of these funds, Mr. D'Andrea's
business has been assessed with additional taxes and penalties
associated with the original tax debt of the state of New York.
To date, these taxes and penalties are at a sum of $343,000.
Now, in February of 2022, my office engaged on behalf of my
constituent, and in numerous letters and emails with the SBA,
my staff was given excuses for missed deadlines for response.
They were told that Mr. D'Andrea would receive the remaining
funds in the following RRF disbursements, which never came to
fruition. And then half of the award was improperly distributed
to New York State due to the coding error, they admitted this.
Mr. Chairman, I would like to submit the email correspondence
for the record. Using the words of SBA staff themselves in
November of 2022, they then looked into, ``the circumstances
surrounding Treasury's offset of part of the award to the
Roadhouse Grill that occurred because of delinquent taxes owed
by Mr. D'Andrea's company.'' And they said, ``that should not
have occurred in the RRF program, but for a coding error, we
have no way of correcting that at this stage in the program.''
So how is it that we have Mr. D'Andrea received only half of
the funds he was awarded. His debts are still unsatisfied with
the New York State Department of Tax and Finance. The SBA
admitted that half the funds were wrongly sent to New York
State due to the, quote, ``coding error.'' And now the SBA is
threatening legal action on the full amount unless he perjures
himself on the SBA portal and certifies that he received the
$244,734, the complete amount, which he did not. So this is an
error that the SBA--so I guess that's my first question to you.
Ms. FROST. So the Restaurant Revitalization Fund was, of
course, one of our pandemic programs, and it helped thousands
of restaurants across this country find their feet.
Unfortunately, that program was oversubscribed, significantly
oversubscribed. And so although it was a $30 billion program.
SBA got that money out in record time with record small amounts
of fraud.
Ms. MALLIOTAKIS. In this particular case, he was given the
money, right? He was given half the money, but it was an error
that it was sent to the state of New York and it was sent back
to you, so you should have that money. The thing is, is that he
should be given the money that he is entitled to. Do you agree?
Ms. FROST. As I mentioned, the program was oversubscribed,
and so, unfortunately, we were not able to give funding to all
of the eligible restaurants.
Ms. MALLIOTAKIS. He received the grant. He did receive the
grant, right. He was part of the group that was eligible. And I
guess my question is, you know, this was an error on behalf of
the SBA. They admitted to it. The money was there. They gave it
to the state. The state returned it. I don't know what you guys
did with it, but the fact is that he's owed this money, and now
you are trying to penalize him even further if he doesn't sign
this form, which would be a lie. He can't sign that form
because he didn't receive the total amount that he was due. And
so, I can understand that you don't have the specifics,
perhaps, of my case and front of you, but I've been working for
four years to try to resolve this issue. This is a small
business that's going to go out of business. His whole
retirement is going to lose everything if you guys don't work
with us to address this.
Ms. FROST. So my heart goes out to the small businesses who
are still struggling to recover from the pandemic. And I know
that my team is prioritizing, ensuring that we are doing
everything we can to support them. But the Restaurant
Revitalization Fund in particular, is challenging because we
were limited in the funds we were able to provide to eligible
businesses.
Ms. MALLIOTAKIS. Okay, well, I hope to have your commitment
to try to resolve this issue.
Ms. FROST. Happy to work with you and your team on that.
Ms. MALLIOTAKIS. Thank you very much.
Chairman WILLIAMS. Lady yields back. And I now like to
thank our witnesses for your testimony, Ms. Frost, and
appearing before us today. Without objection, Members have five
legislative days to submit additional materials and written
questions for the witnesses to the Chair, which will be
forwarded to the witness. I ask the witness to please respond
promptly if there's no further business with abject and the
committee is adjourned.
[Whereupon, at 11:24 a.m., the committee was adjourned.]
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