[Senate Hearing 118-88]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 118-88

 OVERSIGHT OF THE U.S. SMALL BUSINESS ADMINISTRATION AND REVIEW OF THE 
              PRESIDENT'S FISCAL YEAR 2024 BUDGET PROPOSAL

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP

                                 OF THE

                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                             MARCH 22, 2023
                               __________

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

                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                            


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

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
53-224                    WASHINGTON : 2024           


            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                    ONE HUNDRED EIGHTEENTH CONGRESS

                              ----------                              

                 BENJAMIN L. CARDIN, Maryland, Chairman
                    JONI ERNST, Iowa, Ranking Member
MARIA CANTWELL, Washington           MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire        JAMES E. RISCH, Idaho
EDWARD J. MARKEY, Massachusetts      RAND PAUL, Kentucky
CORY A. BOOKER, New Jersey           TIM SCOTT, South Carolina
CHRISTOPHER A. COONS, Delaware       TODD YOUNG, Indiana
MAZIE K. HIRONO, Hawaii              JOHN KENNEDY, Louisiana
TAMMY DUCKWORTH, Illinois            JOSH HAWLEY, Missouri
JACKY ROSEN, Nevada                  TED BUDD, North Carolina
JOHN W. HICKENLOOPER, Colorado
                 Sean Moore, Democratic Staff Director
                Meredith West, Republican Staff Director

                            C O N T E N T S

                              ----------                              

                             MARCH 22, 2023
                           Opening Statements

                                                                   Page
Benjamin L. Cardin, Chairman, U.S. Senator from Maryland.........     1
Joni Ernst, Ranking Member, U.S. Senator from Iowa...............     3

                                Witness

The Honorable Isabella Casillas Guzman, Administrator, U.S. Small 
  Business Administration,.......................................     5
    Prepared Statement...........................................     8

              Additional Letters/Statements for the Record

Chairman Cardin and Ranking Member Ernst
    Letter dated March 6, 2023...................................    32
U.S. Small Business Administration
    Response to Letter from Chairman Cardin and Ranking Member 
      Ernst, dated March 20, 2023................................    36
U.S. Department of Justice, Civil Rights Division
    Report ``The Compelling Interest to Remedy the Effects of 
      Discrimination in Federal Contracting: A Survey of Recent 
      Evidence''.................................................    57
Financial Technology Association
    Statement dated March 22, 2023...............................   116
Minority Business Development Agency, U.S. Department of Commerce
    Report dated February 7, 2022................................   120
National Association of Federally-Insured Credit Unions
    Letter dated March 22, 2023..................................   141
SCORE
    Statement dated April 5, 2023................................   143
Ultima Services Corporation vs. U.S. Department of Agriculture
    Report of Defendant's Expert, dated February 4, 2022, 
      corrected April 22, 2022...................................   146

                        Questions for the Record

The Honorable Isabella Casillas Guzman
    Responses to questions submitted by Chairman Cardin, Ranking 
      Member Ernst, Senators Shaheen, Hirono, Hickenlooper, Risch 
      and Young..................................................   369

 
 OVERSIGHT OF THE U.S. SMALL BUSINESS ADMINISTRATION AND REVIEW OF THE 
              PRESIDENT'S FISCAL YEAR 2024 BUDGET PROPOSAL

                              ----------                              


                       WEDNESDAY, MARCH 22, 2023

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 3:00 p.m., in 
Room 428-A, Russell Senate Office Building, Hon. Benjamin 
Cardin, Chairman of the Committee, presiding.
    Present: Senators Cardin [presiding], Cantwell, Shaheen, 
Markey, Booker, Coons, Hirono, Duckworth, Rosen, Hickenlooper, 
Ernst, Risch, Young, Hawley, and Budd.

              OPENING STATEMENT OF SENATOR CARDIN

    Chairman Cardin. The Committee will come to order. I want 
to welcome Administrator Guzman to our Committee and thank her 
for joining us once again.
    It is hard to believe but next Monday will mark the 3 years 
to the date that the CARES Act was signed into law. It has 
arguably been the hardest time to be a small business owner in 
the modern history of our nation. However, it is so encouraging 
to sit here today with the sense that we can and will do more 
to help small business owners.
    I say ``we'' because of the bipartisanship that 
characterizes this Committee and because it was Members of 
Congress from both sides of the aisle that came together again 
and again to provide extraordinary relief that saved hundreds 
of thousands of businesses from disappearing.
    I do not want to downplay the hardship that the pandemic 
has caused for small businesses. Survival over the last 3 years 
has not been easy, and even today I continue to hear about the 
challenges that the pandemic left in its wake: mountainous 
debt, new expectations from customers about safety and risk 
prevention, industries and business models completely 
transformed.
    I also do not want to underplay the severity of the fraud 
that has come to light in some of these programs. Those who 
take advantage of relief that was meant for deserving small 
businesses should be prosecuted to the fullest extent of the 
law. I will work with the SBA and the inspector general to 
ensure that they have the resources necessary to identify those 
who viewed our collective response to tragedy as an opportunity 
to steal from the American taxpayer.
    We are fortunately, though, to be in a position now when we 
cannot only look back and take stock of how the pandemic 
changed what it has meant to be a small business but also look 
forward and take steps to improve the services and support that 
the Federal Government, and the SBA, in particular, provide to 
foster and promote small business development.
    Today I feel greatly optimistic for our nation's small 
businesses and for our Committee. I am delighted to be joined 
by our new Ranking Member, Senator Ernst. Senator Ernst and I 
share a passion for helping small businesses, and we are 
committed to working together to help small businesses. We have 
many shared objectives, and I am confident that working 
together will yield great results for this Committee.
    I am also delighted to be joined by Administrator Guzman 
once again to discuss the Administration's proposed budget for 
the Small Business Administration. From reading through the 
President's budget it becomes clear how much he and 
Administrator Guzman care about the success of small 
businesses. The Administration's budget proposal reflects its 
commitment to harnessing the power of government to lift up 
businesses in underserved communities that have historically 
been denied access to credit and opportunities to contract with 
the Federal Government.
    The fact is that the recent explosion we have seen in new 
business registrations coming out of the pandemic is being 
driven by entrepreneurs in some of our most underserved 
communities, with minorities and especially minority women 
driving the surge. Applications to open new businesses grew by 
37 percent since 2019, and 5.4 million business applications 
were filed in 2021, a record high. In 2020 and 2021, 49 percent 
of new business launches were led by women, with nearly half in 
2020 launched by women of color.
    President Biden and Administrator Guzman understand this 
and have made supporting minorities, women, and entrepreneurs 
across the country, including those in rural America, one of 
the highest priorities of this Administration.
    I want to commend Administrator Guzman for her commitment 
to expanding the reach of the SBA lending programs to 
underserved communities. While we may not see eye to eye on 
some of the particulars of the Administration's strategy, 
including the two ambitious rulemakings unveiled late last 
year, I know we share a common goal to help our country's small 
businesses.
    I want to acknowledge that Senator Ernst and I sent a 
letter to the Administrator on March 6th. It requested a great 
deal of information. It also expressed some of our concerns 
about the rules that were being proposed. On March 20th we 
received a reply to that letter. I am going to make that letter 
and the reply part of this record, without objection.
    Chairman Cardin. I must tell you I was impressed by the 
speed and thoroughness of the reply that we received from the 
Small Business Administration. It is clear that you are 
listening to the comments about the rules that you have 
proposed, and you are willing to make adjustments in those 
rules in order to deal with the legitimate concerns that have 
been raised by the different stakeholders. That is very 
encouraging to all of us.
    And while we still may have some differences, we do not 
differ on what the objective of the mission is, and that is to 
open up more lending opportunities, particularly in 
traditionally underserved communities, so we thank you for 
that.
    I must also stress the importance of ensuring that the SBA 
is equipped to meet the needs of the historic number of 
Americans engaged in entrepreneurship. That is why I introduced 
a comprehensive reauthorization bill this past December that 
sets out my priorities for the new Congress. I would 
reauthorize some of SBA's most important and successful 
entrepreneurial development programs, including the Small 
Business Development Centers, the SBDC Program, programs for 
veterans, business owners, Women's Business Centers, SCORE, and 
the remarkably effective State Trade Expansion Program, STEP.
    I would also make permanent the Community Advantage Loan 
Program, which has shown great success getting capital to 
underserved entrepreneurs. Last year I was so glad to see that 
the Administration extended this program for 2 years, and 
implemented necessary changes such as increasing the maximum 
loan size and expanding the number of lenders that participate 
in the Community Advantage Program. Now it is up to Congress to 
recognize the need to make the program a permanent part of the 
SBA lending toolkit.
    I might acknowledge that the proposed rule, which tries to 
give predictability to Community Advantage lenders moving 
forward under the SBLCs, it is not inconsistent for us to make 
the Community Advantage Program permanent. That is our 
responsibility, and I hope we take advantage of that.
    The reauthorization package also contains two initiatives 
that are personally very important to me. One, the UPLIFT Act, 
which would give the SBA the tools and resources to nurture the 
next generation of entrepreneurs by creating a network of 
incubators and accelerators on the campuses of our nation's 
historically black colleges and universities, minority-serving 
institutions, and community colleges. Second, the NEW START 
Act, which would connect justice-impacted individuals to 
entrepreneurial resources, helping to lower their rate of 
unemployment.
    I look forward to working with Senator Ernst to advance 
these priorities so that we can help more underserved 
entrepreneurs than ever before, in Maryland, in Iowa, and 
across the country.
    Administrator Guzman, thank you for joining us today. I 
look forward to hearing your testimony and engaging in the 
conversations with this Committee.
    And it is now my pleasure to recognize the distinguished 
Ranking Member, Senator Ernst.

               OPENING STATEMENT OF SENATOR ERNST

    Senator Ernst. Thank you very much, Chairman Cardin, and 
thank you, Administrator Guzman, for being here today.
    In addition to hearing from the SBA Administrator about the 
budget request today, the Committee also voted on Mr. Dilawar 
Syed's nomination to be the Deputy Administrator of the agency. 
A critical commitment I received from Mr. Syed is to prioritize 
fraud detection and prevention, which is among the greatest 
obstacles facing the SBA.
    A primary focus of the agency should be to aid in the 
recovery of the more than $100 billion in fraudulent and 
improper loans made through the SBA COVID relief programs. 
Report after report has been released from the investigative 
community indicating tremendous levels of fraud, yet the vast 
majority of stolen funds remain unrecovered. These reports 
include a suspected $5.4 billion in loans made using stolen 
Social Security numbers, and $1.3 billion of Economic Injury 
Disaster Loans to applicants with foreign IP addresses. Current 
recoveries by the SBA inspector general total an estimated $9 
billion, but that is just a drop in the bucket.
    The design of the Paycheck Protection Program was to get 
money out the door quickly and to keep employees connected to 
their employer when the government forced our economy to shut 
down. Fraud in ineligible firms were supposed to be flagged and 
recouped on the back end through the forgiveness process, yet 
the Biden administration has forgiven $754 billion, or 92 
percent of all PPP loans, while ignoring the inspector 
general's warnings, wiping their books clean while fraud 
compounds.
    In your testimony, Administrator Guzman, you state that the 
SBA is referring fraud cases to the inspector general but 
without specifics. We all saw President Biden say, in his State 
of the Union address, that the government will go after all 
COVID fraudsters. Despite that claim, the Administration has 
made the decision not to pursue debt collections on roughly 
$1.1 billion worth of PPP loans under $100,000, citing concerns 
about equity and fairness. And folks, we all know who that is 
not fair to. That is the taxpayers. Their hard-earned money 
went into the pockets of potential fraudsters and bad actors, 
and the SBA, under the Administrator's direction, has not 
pursued these collections, even though it is required by 
statute.
    I am concerned the SBA is not pursuing administrative 
recoveries. There is so much work to be done on recoveries 
right now, and the budget priorities the President sent to 
Congress do not reflect that. For instance, your budget request 
to repurpose $14 million for the IG for audits and 
investigations. Comparatively, you request more than twice that 
amount, $30 million, for the Community Navigators Program, 
which was created by the reckless spending in the strictly 
partisan so-called American Rescue Plan. Community Navigators 
became a woke fund, which gave money to Democrats' favored 
organizations, including a diversity, equity, and inclusion 
performing arts nonprofit and a fraternity.
    While the Administration has written off its obligations to 
recover improper COVID aid, the SBA has published several 
controversial proposed rules in the SBA's lending programs. Not 
only is the SBA inappropriately trying to legislate through the 
regulatory process, but these changes threaten to destabilize 
the agency and the taxpayers' balance sheet. In a time where we 
are seeing serious inflation, bank failures, and warnings of 
economic recession, I do have to ask why we are gambling with 
taxpayer money.
    The SBA's proposed rules loosen prudent underwriting, which 
is concerning for large 7(a) loans. It may also lead to 
predatory lending practices in these government-backed loans 
while also opening lending programs to an unlimited number of 
unregulated fintechs, the very entities responsible for COVID 
relief fraud. With these new changes you are relying on the 
assumption that Congress will bail out the SBA in the future.
    Administrator Guzman, this is not Monopoly money. You and I 
know that. And I hope that we will not continue to pass Go and 
collect new appropriations for unauthorized rules, and of 
course, put our taxpayers deeper into debt. The SBA needs to be 
efficient and serve America's entrepreneurs. It does not need 
to be making risky bets on the taxpayer's dime. I urge the 
agency to reverse course on the proposed rules and shift 
resources to reviewing all loans suspected of fraud by 
investigators and pursue administrative recoveries.
    Thank you, Mr. Chair.
    Chairman Cardin. Thank you, Senator Ernst.
    We will now hear from the Administrator, Administrator 
Guzman. First let me thank you so much for your openness with 
this Committee, your availability, and again, I appreciate very 
much the prompt reply to the letter that I wrote with Senator 
Ernst, and thank you for your leadership.
    You may proceed.

STATEMENT OF HON. ISABELLA CASILLAS GUZMAN, ADMINISTRATOR, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Ms. Guzman. Thank you so much.
    Chairman Cardin, Ranking Member Ernst, as well as the 
distinguished members of the Committee, I appreciate the 
opportunity to share a little bit more about the SBA, the Small 
Business Administration, and the impact we have as well as the 
continuous improvement that we make towards ensuring that our 
small businesses and innovative startups can launch and grow 
successfully.
    The entrepreneurial spirit of the American people and their 
trademark grit, perseverance, and agility that we know so well 
have really made small businesses our nation's most important 
driver of job growth, competition, and innovation. America's 
entrepreneurs have not only helped to deliver an incredible 
economic expansion but they are also powering a huge surge in 
new businesses. In 2021 to 2022, we saw 10.5 million new 
business applications across America, those people who are 
starting businesses, the most that we have had in any 2-year 
span on record.
    And we are already seeing our preexisting businesses as 
well as these new businesses grow by leveraging opportunities 
in our economy that the Biden-Harris administration is 
investing in. I have seen firsthand how these small businesses 
have continued to grow, hire, and retain their workforce as 
well as pilot and adapt, truly trying to ensure that they can 
survive the remaining supply chain challenges, inflationary 
pressures, and a tight labor market. They consistently outline 
that funding their businesses, that growth capital or access to 
working capital, is one of their biggest challenges, especially 
as we see them facing rising interest rates and tightening 
credit standards. That is why helping small businesses access 
affordable capital is a top priority at the SBA.
    In 2022, SBA delivered more than $43 billion across our 
capital programs, and finally reversed a 5-year decline in 
small-dollar lending. But we continue to see large gaps in the 
availability of capital, especially those dollar amounts under 
$150,000. And the funding gap limits entrepreneurial growth, 
especially for the smallest businesses, as well as for 
minority, veteran, rural, and other historically underserved 
communities.
    To effectively address this market gap the SBA has to 
streamline its programs, its regulations, for both loans and 
investments. First and foremost, we need more competition in 
the marketplace, and capacity for small business lending. That 
is why we proposed expanding our distribution networks by 
revitalizing the Small Business Lending Company Program. The 
SBLC rule will make the Community Advantage pilot program 
permanent, sustainable, and provide certainty to the over 100 
nonprofit, mission-oriented lenders who have been effectively 
lending to underserved in the 7(a) program.
    SBA can expand the number of these mission lenders with 
this rule change, serving the hardest-to-reach small businesses 
through a new Community Advantage license, and will also lift 
the cap on regular SBLC licenses, enabling SBA to admit new, 
non-depository lenders, aligned with the agency's mission in 
the 7(a) program.
    Second of all, we are modernizing our loan products and 
meeting our businesses where they are by cutting red tape and 
complexity in our 7(a) and 504 programs. Simplicity is 
critical, based on extensive feedback from our lending partners 
over the past decade. We need to streamline our affiliation 
rules. Those are the rules that lenders have shared are most 
burdensome in our regulation.
    We are also aligning with existing lender best practices on 
credit underwriting, not loosening underwriting. And as we 
implement we will prioritize maintaining the core integrity and 
oversight of SBA's lending programs. Based on past oversight 
performance within the SBA as well as existing structures and 
processes that have been put in place, we can both improve our 
support for underserved communities, these small-dollar loans 
in particular, and strengthen the program integrity at the same 
time.
    Third is that we are adding a provision to help owners with 
business transitions to employee ownership in particular. SBA 
is finding ways for its products to help finance partial 
buyouts, which could help an owner, for example, sell their 
business to employees for a successful exit.
    Finally, a bipartisan interest of this Committee has been 
to attract more private capital to the innovative startups, 
critical to our national economic competitiveness and national 
defense. That is why we have proposed a rule modifying the 
Small Business Investment Company, or SBIC, program with a new 
accrual SBIC license, really to incentivize patient and growth 
capital. We will expand investment opportunities in rural and 
underserved communities by ensuring a diversified portfolio 
across the nation and streamlining the licensing process to 
account for operational experience. The SBA must effectively 
address capital gaps so we can provide that credit and the 
investment to borrowers who cannot find it elsewhere but who 
are powering the economy.
    At the same time, as we move forward with these updates to 
our programs we continue to build on the lessons learned 
through managing the large disaster response. Our COVID relief 
served as important lifelines to help so many businesses, 
preserve jobs, and recover quickly. But while these programs 
have ended, the SBA continues to support small businesses 
through ongoing loan servicing, grant reporting, PPP 
forgiveness, and we will work with the appropriators and 
Congress to ensure the agency has the necessary resources to 
serve these businesses.
    You know, we are maintaining the day one Biden-Harris 
priority to combat efforts really to combat fraud in pandemic 
relief. We instituted standard fraud controls to deliver funds 
with not just speed but certainty, and we implemented the GAO's 
recommendations to improve SBA operations to detect and 
collaborate with the inspector general as well, to recover our 
stolen funds, and continue to work with law enforcement 
agencies.
    I can report that the SBA is more strongly positioned to 
combat fraud, waste, and abuse across its disaster capital and 
other programs as a result of these changes. Then strengthened 
position enables us to better serve the 33 million small 
businesses and disaster survivors into the future.
    Thank you for your time. I look forward to your questions 
and diving into more details.
    [The prepared statement of Ms. Guzman follows:]

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    Chairman Cardin. Well thank you. I agree with you 
completely about the challenges we have with access to capital 
from traditionally underserved communities and small businesses 
that have been left behind in the past. When you look at the 
7(a) and 504, the two primary programs that the SBA sponsors 
the numbers are not terribly encouraging when you look at 
target groups that you would want to see more representative of 
their numbers in our community underrepresented in the amount 
of 7(a) loans and 504 loans. So I agree with you. We need to 
open up the program, and I think that is what you are intending 
to do.
    But one program that you have mentioned that has worked 
well is the Community Advantage 7(a) program. They are smaller 
loans, and the numbers there are much more encouraging as far 
as reaching traditionally underserved communities. And you took 
steps to extend that program and now, under a rule that you are 
considering, you are going to use the SBLCs as a way of 
continuing these programs beyond their current expiration date.
    I really want to get a better understanding, because it 
seems like the CAs are working, and what worries me is as you 
transition into a new program do we maintain the strength of 
the Community Advantage programs to make sure that they stay 
focused on the underserved communities or do they now get lost 
in this new rule that you are proposing that could cause them 
to become too expensive and go toward larger loans rather than 
the smaller loans?
    Ms. Guzman. The Community Advantage lenders are the CDFIs, 
the Community Development Financial Institutions, the CDCs, the 
Community Development Corporations, who are, by mission, 
oriented towards filling gaps in the marketplace with 
underserved communities. Across the SBA's portfolio we serve 
about 58 percent to underserved communities, and this 
portfolio, in particular, has a higher index.
    But what they will share with you directly is that they 
have been unable to scale. We do about 500 loans within the 
Community Advantage program, and just over 50,000 to 60,000 
across our portfolio. They will say that not having that 
permanence disincentivizes investment in expanding the program. 
And so in order to really, truly put the wind behind their 
sails, giving them an option to access the SBLC program--which, 
in the past, Community Advantage lenders have done, because you 
can get the existing 14 licenses within the SBLCs--that that 
gives them more empowerment to truly raise the capital, get the 
liquidity that they need to scale, and serve these underserved 
businesses across the country.
    And so we are hoping by establishing this option for 
Community Advantage partners to get into the SBLC program they 
will be able to develop scale and better serve across the 
country.
    Chairman Cardin. Well, we share with you the view that it 
should be made permanent. We recognize that you consider that 
done by your regulations. We think Congress could support this 
by action. So I think we are on the same page as to trying to 
get the predictability to the CA lenders.
    I could talk about a lot of things in the budget that I am 
very excited about and agree with completely, et cetera, but I 
am going to use my time on a disappointment that is in your 
budget, a couple of areas that I am surprised that you would 
not have a greater priority. And one is the field offices. We 
have heard from so many of our members of this Committee about 
the service levels at field offices, that they need to 
strengthen, and you have a flat budget in regard to the support 
for the field offices. That is our outreach office. That is 
where the locals can get the information they need. Small 
businesses do not have the deep pockets, and the Small Business 
field offices can help make that connection to the SBA 
services.
    So what was the rationale for level funding the field 
office operations where the other programs saw some increases?
    Ms. Guzman. I was proud to see, overall, our 
entrepreneurial development programs increase by $14 million in 
the budget, which speaks to that ecosystem locally, that small 
businesses need across our resource partner networks, 
obviously. But the field is a big part of that, as a gateway, 
in essence, to Federal services. They market our services to 
about 1 million businesses and stakeholders every year, and 
obviously that is a huge impact. When we look at our budget, 
though, year over year, we have seen, in essence, a decline in 
our salaries and expenses, our S&E, as the increases do not 
account for the year-after-year COLA, the cost-of-living 
adjustments, that we have to put in. So we have been unable to 
grow our staff across the field.
    And so as a result, feeling the consequences across the 
agency, not within just the field offices but everywhere where 
we touch directly to small businesses, for example, through our 
Capital Access, that has tremendous customer service and works 
directly with small businesses.
    So obviously we want to continue to see our resources 
expand and be able to better support and reach more businesses 
every day in the field, as well as across our programs. So I 
look forward to continuing to work with you and the 
appropriators to see if we can continue to support 
entrepreneurial development through the SBA.
    Chairman Cardin. And we will work together. I just point 
out you will find, from the members of this Committee, we have 
a lot of confidence in our field offices, and we recognize that 
they are stressed. With all the new opportunities that are 
being given through the COVID programs, et cetera, there is 
even greater need in the field.
    Senator Ernst.
    Senator Ernst. Yes. I will yield my time to Senator Risch 
for the time being, so he can get back to his other committee.
    Senator Risch. Thank you very much. I appreciate that. I 
want to make a short statement, and then I will have some 
questions for the record. So thank you so much.
    First of all, thank you to both of you for holding this 
important oversight hearing. Access to capital is one of the 
most significant hurdles facing small businesses as they start 
and grow, especially in our current economic environment. We 
all know that.
    With that said I am concerned that new rules put forth by 
the SBA could jeopardize the 7(a) program's integrity. Although 
the SBA believes these rules will increase access to capital in 
underserved communities, I am concerned it will do just the 
opposite. The new rules would allow new unsupervised entities 
like fintechs into the program, weakening underwriting 
requirements, erode affiliation standards, and much more.
    I have a number of questions about this and I will submit 
that for the record. But I do have one question I will ask Ms. 
Guzman now, and that is, the SBA is proposing to cut millions 
in funding for the Small Business Development Centers, who are 
essential to maintaining the strength of small businesses in 
Idaho and across the country. I wonder if you could explain to 
us what prompted that? What was crossing your mind when you 
thought about reducing that funding that has been so important 
to us?
    Ms. Guzman. Thank you so much for the question. Again, I 
would reiterate that the budget for entrepreneurial development 
did increase overall by $14 million, and we continue to invest 
in and expand our programs for veterans specific support around 
contracting and [inaudible] as well as for expanding our 
network through [inaudible].
    Senator Risch. So are you taking the money away from the 
Small Business Development Centers for these other programs? Is 
that what you are telling us?
    Ms. Guzman. Overall, we are working to increase and enhance 
the entrepreneurial ecosystem overall. The SBDCs, we just 
celebrated SBDC Day, are an important part of that network.
    Senator Risch. It was not much of a celebration when they 
found out they were getting their budget cut.
    Ms. Guzman. They reach about 300,000 businesses every year, 
and during the pandemic actually increasingly working in 
collaboration and partnership across our networks, which is a 
great thing for our small businesses. We are encouraged by that 
and we will continue to look towards working with the 
appropriators----
    Senator Risch. What does better than the SBDCs as far as 
promoting small businesses? You are taking this money and 
putting it somewhere else. Where is that somewhere else that 
does better than the SBDCs?
    Ms. Guzman. Across all of our entrepreneurial development 
programs----
    Senator Risch. That is not an answer. That is just saying 
you are taking it out and throwing it to the wind. 
Specifically, where is that money going instead of the SBDCs?
    Ms. Guzman. The entrepreneurial development includes our 
Women's Business Centers, our Veterans Business Outreach 
Centers, as well as our SCORE partners, the SBDCs, of course, 
specific services around contracting and capital access, so 
that we can get in and provide technical assistance to get 
contract ready, financial ready. All of it is advisory 
services, free advisory services to American small businesses, 
and that is the really key part of what the SBDCs deliver, as 
well as all of our great grantees across those programs.
    Senator Risch. Well, I am going to have to look at the rest 
of the budget, but I have got to tell you, I am deeply 
disappointed that that cut has been made and the money is being 
spread somewhere else. And we are going to try to reverse that, 
unless you can show me where those dollars will be doing better 
than the SBDCs.
    Thank you, Mr. Chairman. I appreciate that.
    Chairman Cardin. Senator Risch, I share those concerns. I 
think the SBDC program, as well as the field offices, play a 
critical role on outreach to the small businesses that do not 
have the resources to figure these things out. The other 
entrepreneurial partners are very important. Do not get me 
wrong.
    By the way, the SCORE program and the STEP program were 
also reduced in the budget, which I have some questions about 
as well. But I do think that the SBDCs are critically 
important, so I share those concerns.
    Senator Risch. Well, Mr. Chairman, I concur with you 100 
percent, and it is possible she has got a better place for the 
money. But I want to hear it, not just saying, well, we are 
going to put it out and spread it amongst these. I mean, it 
does not make sense when we have such a successful program. 
There is nobody saying that this program is not successful. So 
I really object to taking it away from them and putting it 
somewhere else. If she can make a case, which she has not here, 
then maybe I will go along with it and agree that we should 
take the money away from the SBDCs and put it to a place where 
it will make----
    Chairman Cardin. Discussion to continue. Senator Shaheen.
    Senator Shaheen. Thank you, Mr. Chairman, and Administrator 
Guzman, thank you for being here.
    I am sure you will not be surprised to hear that I share 
the concerns that both the Chairman and Senator Risch have 
expressed not only about the SBDCs but about the district 
offices. The last 3 years have been really critical in New 
Hampshire for our small businesses, as you know, and many of 
them have survived through COVID only because of the work of 
the SBA and our district offices.
    And as a member of both this Committee and the 
Appropriations Committee, I am concerned about proposal that I 
think the SBA is working on that would limit staffing and 
funding to our district offices. It appears that resources are 
being consolidated in the central office.
    And as I am sure you remember, I asked you about this issue 
last April, and the omnibus budget in December directed the SBA 
to report details on district office staffing and funding 
levels for the last 5 years. Do you expect that we will get 
that report on district-level staffing in the near future?
    Ms. Guzman. Yes, Senator. That report is being finalized 
now, so I expect it by this week, so potentially tomorrow or by 
the end of the week, for sure.
    Senator Shaheen. Great. And is there anything that you can 
share with us today about what our district offices can expect 
in terms of resources for the next year?
    Ms. Guzman. Well again, we will work with the appropriators 
and hopefully see an increase that reflects a potential for 
growing our staff. What I will share, and the field often 
references themselves as the tip of the spear, and they are, 
and provide a critical function, but I want to make sure that 
it is clear that I need to balance the entire priorities of the 
SBA with the limited resources that we have. The rest of that 
spear is the products that we deliver, the certifications that 
businesses count on to do business with the Federal Government, 
as well as the capital access programs and the disaster 
programs.
    So all of that is really critical work, and the field has 
been an incredible customer service arm that is on the ground 
with small businesses, and that is highly valued. But as we 
look towards trying to go beyond our reach at the SBA, as we 
did with PPP, go beyond this million marketed to within the 
field and the 300,000 reached within the SBDCs or the couple 
hundred thousand with SCORE, et cetera, all those numbers, we 
want to go beyond. We know that businesses were not connected 
to the SBA, because we saw that in the first 2 weeks of PPP. 
And so we are trying to evolve and make sure that we are 
meeting their needs into the future so that it is more 
inclusive.
    Senator Shaheen. And I certainly support that. In New 
Hampshire, however, it is the district office that makes that 
connection to small businesses. They are not connected to the 
SBA without that service that is provided by the district 
office, or the SBDCs, and again, I share Senator Risch's 
concern.
    Last year, the New Hampshire SBDC advised more than 1,400 
clients, up from less than 900 in 2019, and the SBA has 
requested a 14 percent cut to SBDC funding for 2024. That works 
out to a cut of $105,000 in New Hampshire, even though they are 
advising 60 percent more clients. I think that is untenable. 
And the last time the SBDCs received this little funding was in 
2016, so it is really a major cut to their budget. And again, 
you have commented on where you think that money should go, but 
I share the view that those other programs are not going to 
provide the same kind of service that is currently being 
provided by the SBDC in New Hampshire. So I am sure we will 
continue to have this discussion in this Committee and at the 
Appropriations Committee.
    I also want to ask you about the State Trade Expansion 
Program, the STEP program, which has really made a huge 
difference in new Hampshire in terms of increasing exports. 
During 2022, we saw a 14 percent increase in exports over 2021, 
and I think the STEP program had a lot to do with that. There 
are some questions about how we make that more flexible, more 
responsive to the needs of small businesses. So can you talk 
about what you might be considering in terms of how that 
program can better address the concerns that the people who are 
using it have?
    Ms. Guzman. Well, thank you, and the STEP program supports 
51 states and territories current, and we look to continue to 
expand and grow that to all 56. It is a critical program. We 
have been evaluating right now what a small business exporter 
is. We have relied on the Department of Commerce data that 
showed 267,000 businesses were exporters. But that did not 
account for the true reality that small businesses are 
accidental exporters as soon as they put their website online, 
and those digital providers out there will tell you that a 
majority of their businesses on Etsy, et cetera, are actually 
exporting.
    So we have done some research of our own to account for 
those 2,500-and-under exports who are shipping in small batches 
and found with those, along with the service providers that are 
surveyed, not counted one by one, we actually have more about 
1.3 million exporters. And so really trying to recognize that 
digital service providers, these digital sales that are 
happening on e-commerce around the world, are important. So 
constantly we will update and modify the program and simplify 
it so that our states can continue to get the performance that 
they are getting out of the program.
    Senator Shaheen. Well, I can tell you in the Appropriations 
Committee I am arguing that we should fully fund that program 
at its authorized level.
    So thank you. Thank you, Mr. Chairman. I look forward to 
the conversation.
    Chairman Cardin. Senator Ernst.
    Senator Ernst. Yes, thank you, and you will not be 
surprised to hear that in Iowa as well we are concerned about 
the SBDCs and the field offices. So I think there is a lot of 
agreement from this Committee that we are concerned about the 
funding there.
    So, Administrator, I have been watching the news, as most 
folks have, about Silicon Valley Bank and Signature Bank, and 
those regional and community banks are very critical to our 
small businesses and their lending. When the credit market 
tightens we have historically seen a higher volume of SBA 
lending. Signature Bank is one of the largest lenders in the 
7(a) secondary market, and they have now ceased buying new bids 
on 7(a) loans. This will make it very difficult for our lenders 
to continue to have liquidity to make new loans, especially 
those non-depository institutions like our small business 
lending companies.
    So what is the Administration doing to oversee Signature 
Bank and communicate the updates with those lenders?
    Ms. Guzman. Well, obviously the quick action by the 
regulators to ensure that the small businesses and the 
individual depositors were safe across the banking industry was 
important, as banks need liquidity to do lending across the 
board. You know, obviously we are tracking closely all of the 
financial institutions that either hold our loans or that 
participate in our securities, whether that is on our Small 
Business Investment Companies or within our guarantee program.
    You know, the Administration continues to take strong 
action to ensure that the banking industry continues to be 
supported and resilient during this time, as signaled by the 
Secretary of the Treasury as well as the regulators. So the 
SBA's view is that this just demonstrates further why we need 
to address the capital gaps and fix our programs to better 
reach and support banks who have liquidity issues right now, 
and a guarantee would be perfect for their bottom line.
    Right now, 4,000 of the 4,500 community banks, for example, 
who serve so many communities across the nation, have not done 
an SBA loan in the last 2 years. And so we need to get them 
back in, simplify the program, and make sure that they can use 
their prudent credit underwriting standards in order to deliver 
these loans.
    Senator Ernst. And this would be a prime example why strong 
underwriting is really important as well. I hope that this has 
been a one-off situation, but I think it is encouraging many of 
those institutions to go back and relook what their practices 
are. So again, I hope it is a one-off.
    Administrator, recently Chairman Cardin and I sent you a 
letter detailing our concerns about two of our recent proposed 
rules regarding affiliation and the SBLC moratorium that could 
open SBA lending programs to fraud, predatory lending 
practices, and other vulnerabilities. These rules are without 
congressional input or authorization, and in spite of recent 
fraud levels witnessed in COVID relief programs.
    So when should we expect those final rules?
    Ms. Guzman. Those are still currently in process. We are 
accounting for all the public comments that we received over 
the 60-day period of time. And what I would share with you is 
that obviously we are taking into account all the 
recommendations that we have received, not only through public 
comment but by continuous feedback from this Committee as well 
as the advocates out there who are supporting as well as 
opposing.
    So we are still in process. It is beyond the regulation. We 
want to make sure that all processes are in place and our 
operating procedures, so that we can be ready to support or 
lenders. This is about expanding access to capital with 
prudent, demonstrated programs, such as the SBLC that has 
already done over $14 billion over the decades that it has been 
in action, as well as, of course, the SBA Express, that uses 
the credit underwriting standards that we are moving towards 
within this new reg change, and they have been successful. Over 
20 of the last 23 years, SBA Express term loans have 
outperformed against the 7(a) term loans.
    So we are confident that that credit underwriting standard 
that we are putting forward has data to support it. So these 
are administrative regulatory changes that we think will 
streamline for our banking partners, especially getting those 
community banks in, as well allowing us to expand our 
distribution networks.
    Senator Ernst. Okay. And I know we did receive your 
response. I do want to thank you as well for the letter that 
was sent back to Chairman Cardin and I. You do continue to 
state that PPP is the basis for removing most of the 
affiliation test, and I just need to restate that Congress did 
not authorize a permanent change to larger 7(a) loans for 
affiliation or underwriting criteria because of COVID programs.
    Further, this is yet one more example of this 
Administration not letting an emergency go to waste, and 
instead using the COVID crisis as justification for more of 
that government spending and overreach. And I will come back to 
this if we get a second round of questions here, because I do 
have a little bit more than I would love to discuss on this 
issue.
    And I will yield. Thank you.
    Chairman Cardin. Senator Rosen.
    Senator Rosen. Well, thank you, Chairman Cardin, Ranking 
Member Ernst for holding this hearing, and thank you 
Administrator Guzman always for your vast amount of knowledge 
and care for the Small Business Administration. And I am going 
to give a plug for our Nevada small business district offices, 
state offices. They went above and beyond during COVID, and 
they just helped thousands of small businesses, and we are 
really grateful, and I think we all share that concern.
    But I want to move over to students who want to open up 
small businesses because in my home state of Nevada, small 
businesses, of course, 99 percent of business, small business, 
is the economic engine of our communities, and of course, 
diversity is our strength. So I want to ensure that minority 
entrepreneurs and small owners have the proper resources to 
thrive.
    To address this I was proud to introduce the Minority 
Entrepreneurship Grant Program Act with Senator Tillis last 
Congress. And our bipartisan legislation would establish 
minority entrepreneurship program at SBA to award grants to 
MSI, minority-serving institutions, and HBCUs, the historically 
Black colleges and universities, to promote and increase 
opportunities for minority student business ownership and 
entrepreneurship. And I am glad to see the President's budget 
proposal supports funding this technical assistance to colleges 
and universities to further promote entrepreneurship.
    So Administrator Guzman, how would you plan to use such 
funding to address the needs of aspiring young students serving 
through MSIs and HBCUs?
    Ms. Guzman. Thank you so much for that question, and the 
Administration has focused on ensuring that we truly can 
support all of our small businesses. There is a changing face 
of entrepreneurship, as you have seen in your home state. Women 
and people of color are starting businesses at the highest 
rates, yet they do not have the same success outcomes due to 
lack of capital. And so it is a critical gap, and that is what 
the SBA's mission is, to fill those capital gaps. So obviously 
we are committed to deploying the programs that are authorized 
and ensuring that we prudently deliver the objective of 
Congress to reach these businesses.
    We are currently, though, setting up networks to be able to 
work with MSIs. Specifically, expanding the number of MSIs 
within our Women's Business Center network is example, by 3x. 
And they exist within our SBDC network as well, and we are 
continuing to try to partner so that students are more informed 
and ready to launch their great idea if that time comes.
    And so we are committed to, as well, serving those 
institutions and working in partnership with them, and we 
continue to explore options. So we would be happy to provide 
technical assistance on that and give you the support needed to 
deliver our program.
    Senator Rosen. Thank you. I appreciate that.
    I want to turn now to something that Nevada has a lot of 
small businesses in. It is home to nearly 100 legally operated 
cannabis businesses across our state. And one of the greatest 
barriers for these businesses is lack of access to capital and 
resources. So I have made it my priority to ensure there is an 
expansion, an SBA loan eligibility for small businesses in the 
Nevada and nationwide, and in November of 2022, I introduced 
the Fair Access for Cannabis Small Business Act. So that is 
going to ensure that those legally operating cannabis small 
businesses, they will have access to loans and programs 
provided by the SBA.
    So how do you think SBA can assist state legal cannabis 
businesses and what else do you think Congress can do to break 
down the barriers here?
    Ms. Guzman. Well, currently cannabis is, of course, a 
Federal Schedule 1 substance. We are not allowed to lend to any 
businesses in the cannabis field. We are happy, though, to 
provide technical assistance around our programs to make sure 
that you receive that support from the SBA experts in terms of 
the program implementation and what that would mean.
    Senator Rosen. Thank you. We are going to keep working on 
that.
    And I am very pleased that the Ranking Member and I have 
something we love to talk about, a great bill that we have done 
together for childcare providers, and we want to expand that 
loan eligibility for them. Because in Nevada, and, of course, 
across this nation, parents of nearly 75 percent of children 
under the age of 5 do not have access to a licensed childcare 
provider, whether if it is because of lengthy waitlists, long 
distances, high costs, things are just unaffordable.
    So in many instances the annual cost of childcare is more 
expensive than a year of college tuition in my state. And so 
currently only for-profit childcare providers have full access 
to all the SBA loan products, and so while nonprofit providers 
only have access to the SBA's microloan program, and that is 
capped at $50,000.
    So other loan products, such as 7(a) and 504 loan programs 
are just off limits, and it really is blocking access for these 
nonprofit childcare providers to establish things right in the 
local community, really to support our families.
    So Senator Ernst and I have the Small Business Childcare 
Investment Act--we are very proud of that one--to allow these 
nonprofit childcare providers to take advantage of everything 
the SBA has to offer.
    So will you commit to working with us to be sure that we 
can advance this effort to provide nonprofit childcare 
providers access so that everyone has access to good quality 
childcare, wherever they live?
    Ms. Guzman. Yes. Most definitely, as I shared, childcare is 
a priority area for us. We do boot camps for childcare 
entrepreneurs and would be happy to look at expanding access to 
capital across our programs and provide technical assistance to 
you.
    Senator Rosen. Thank you. I appreciate it.
    Chairman Cardin. Senator Hickenlooper.
    Senator Hickenlooper. Thank you, Mr. Chair, and 
Administrator Guzman, what a delight to see you, and to follow 
your success from afar. I appreciate all the hard work.
    Ms. Guzman. Thank you.
    Senator Hickenlooper. As you know, the recent Federal 
Reserve study shows that fintech leaders, quote/unquote, ``have 
a potential to create a more inclusive financial system, 
allowing small businesses that were less likely to receive 
credit from traditional lenders to access credit and to do so 
at a lower cost,'' end quote.
    How can fintechs fill gaps in the market in the SBA program 
and get more dollars to traditionally underserved communities 
that usually try for the first time, in many cases, to access 
capital?
    Ms. Guzman. Studies have shown that fintechs operate more 
successfully in ZIP codes that are more banking deserts, that 
they are able to fill capital gaps. Just if you look at them as 
a business model they are going after the gaps that the banks 
are not going after, so those small-dollar loans is where they 
have made a lot of headway.
    While there have been good and bad actors in the fintech 
industry in the past, they have demonstrated, within our 
programs, that they helped to ensure that underserved 
communities were able to access critical programs at the SBA.
    Senator Hickenlooper. Great. 7(a) operates to provide 
capital to those who cannot otherwise access it, but also have 
the ability to repay loans. In order to lower the risk to the 
program and target SBLC lending to smaller businesses, would 
SBA consider imposing initial caps on the loan sizes for new 
SBLCs that are gradually increased as new SBLCs mature in this 
program?
    Ms. Guzman. The SBLC is an established program for multiple 
decades, and what we are trying to do is drive in our licensing 
program, our licensing component of the proposed SBLC program, 
a drive towards filling market gaps, which is in the small-
dollar lending space. And what we are trying to do is 
incentivize loans, especially $500,000 and under, within this 
program, and then broadly across our 7(a) program. So we are 
continuing to look at ways to ensure that happens through our 
oversight and protections that are in place. So I am happy to 
look into this further with you.
    Senator Hickenlooper. Yeah, I saw that there were a number 
of comment letters on the rule to remove the moratorium on 
SBLC, and we look at that in a supportive way.
    I thought I would ask a question also about, as a veteran 
borrower of the 504 program, are there ways we could expand 
that program as well? And I realize those loans generally are 
smaller than the 7(a) loans and not as popular with the banks, 
or certainly different kinds of lenders. But I look at 
especially truly small businesses, immigrant-founded 
businesses. It is a unique way they can enhance their exit when 
they actually sell their business. When you own your real 
estate it is a big difference, and in my case, the multiple of 
free cash flow was almost double because we owned the real 
estate, compared to if we were just selling that cash flow.
    Ms. Guzman. The 504 program, I agree, is one of the 
critical mainstays for small businesses who have to be able to 
defend and stay in the location that they started in. In many 
cases it gets expensive. So owning that real estate also is a 
retention strategy for longevity.
    We are looking at the 504 program currently, but as well, I 
would say that the rule changes that we are making right now 
are supported by NADCO, which is the National Association of 
Development Companies, who are organized around our 504 
program, to deliver this program. They will tell you that the 
affiliation rule is a barrier, which focuses too much on 
control and not enough on just simple ownership. So NADCO is 
completely supportive as they believe that will unlock some 
capital and obviously propel the 504 program further.
    So I am looking forward to being able to streamline the 
program, cut the red tape, and have the support of NADCO.
    Senator Hickenlooper. Great. I think that is perfect, and I 
think the potential, especially at some of the franchise 
programs, where franchisees could be encouraged to purchase 
their building as well. There are very, very few franchise 
companies that do that. Some of them own the property 
themselves and allow their franchisees to rent it from them. 
But I am a big believer of that long-term success.
    Last question, and we talk about this every time we have 
been together, reauthorization. It has been 20 years. How can 
we talk about reauthorization in such a way that we can 
reaffirm our commitment to Main Street?
    Ms. Guzman. Well, obviously the SBA celebrated its 70th 
year this year, and we were focused and founded to ensure 
competition and innovation exist in our economy through small 
businesses. You know, SBA has evolved dramatically since it was 
last reauthorized in terms of the types of programs, like STEP, 
SBA Express, and some great programs that exist at the agency 
today.
    But we look forward to working collaboratively with the 
Committee as reauthorization is considered, and based on that 
ensure that the programs and services that we offer to small 
businesses are supported. I can only offer my support to make 
sure that that process is as effective for our small businesses 
and the outcomes that they need.
    Senator Hickenlooper. Great. As always, thank you for your 
public service. I yield back to the chair.
    Chairman Cardin. Senator Budd.
    Senator Budd. Thank you, Chairman. Administrator, thank you 
for being here. I appreciate your time today.
    Back on February 16th, President Biden issued Executive 
Order 14091, and it has to do with the opportunity for 
entrepreneurs. I think that we would all agree that we should 
be providing more opportunity to entrepreneurs of all 
backgrounds.
    But here is where the concern is, is about the true purpose 
of this executive order. For example, the title of Section 3 is 
``Delivering Equitable Outcomes Through Government Policies, 
Programs, and Activities.'' Furthermore, the phrase ``equitable 
outcomes'' is used no less than eight times throughout the 
document.
    Given the repeated usage of this term ``outcomes,'' 
Administrator, under your leadership is the SBA, is it 
primarily concerned with equality of opportunity or equality of 
outcome?
    Ms. Guzman. Equality of opportunity. I mean, we see that 
there is a great disparity in the systems and supports for our 
small businesses across the board in underserved communities. 
And as we work to fill gaps as the agency and ensure that all 
small businesses, entrepreneurs with great ideas have the 
opportunity to grow their business, commercialize it, start it, 
et cetera, we want to make sure that our programs are 
accessible to all of our entrepreneurs.
    Senator Budd. I mean, your language is powerful. Why the 
use repeatedly of ``outcome'' versus ``opportunity''? I mean, 
for decades EEOC is about opportunity, not outcomes. I know it 
was not random. I was just seeing if there was a philosophy 
behind that.
    Ms. Guzman. Well, you know, I know that if we present more 
opportunities, you know, as studies have shown, when we invest 
in all of our businesses they can have better outcomes. So I 
think that is the connection for me, is that I know if I 
deliver opportunity, if I deliver access to key programs, the 
success factors that businesses need, that we can see better 
outcomes for all of our businesses.
    Senator Budd. I think that is critical. I mean, I like how 
you addressed that, but if we are presenting more opportunities 
let us talk about presenting more opportunities rather than 
what it is going to get to, because that is what we do. We want 
equal opportunity. So we are just paying attention to that and 
seeing--we want to level the playing field of opportunity, so I 
would agree with you in that.
    The SBA's proposed affiliation rule tells lenders that they 
no longer need to consider well-established underwriting 
criteria and instead allows lenders to do what they believe is 
an acceptable loan. So let us not forget that the current 
underwriting criteria, it stabilized the 7(a) program, it 
minimized losses to taxpayers, and kept the cost of capital to 
borrowers reasonable.
    So your proposed rule would, as I understand it, would 
erase those standards and it would create a system where 
lenders could use a taxpayer-backed portfolio to engage in 
extremely risky loans. That could dramatically impact portfolio 
performance, loss rates, and ultimately cost to borrowers.
    This is concerning to me, and I think that it should be 
concerning to the Committee. So if you would, do you believe 
that lenders should consider experience and the strength of a 
business when making a government-backed loan?
    Ms. Guzman. Thank you so much for that question because I 
do want to clarify here that we are basing the credit criteria 
simplification on history. We have the SBA Express program, 
which is about 45 percent of our current volume, on which zero 
subsidy is based. And that portfolio has performed well. Twenty 
out of the last 23 years, actually those SBA Express term loans 
outperformed regular 7(a).
    And so when we are deferring to credit underwriting 
standards of the banks we are still holding them accountable to 
that essential factor of ability to repay, first and foremost. 
And so they are allowed to adopt their own credit underwriting 
standards and alternative underwriting standards, which they 
have been effectively performing at zero subsidy throughout the 
program.
    So we are using that data and that experience at the SBA to 
inform this new regulatory reform that will simplify and 
attract more community banks and others into the program. So 
thank you for that question.
    Senator Budd. Thank you. I think with 23 years of success, 
as you mentioned, that we need to continue to look at things 
like--and what is your opinion on looking at past earnings, 
projected cash flow, future prospects of abs when making 
government-backed loans? I think you alluded to that some, but 
I just wanted to elucidate that and see where you stand on 
that.
    Ms. Guzman. A lot of our financial institutions will 
leverage that data, that history. I mean, they look at the tax 
documents as well as performance and ability to repay. But I 
think we are deferring to the lenders with this credit 
criteria, obviously, and ensuring that they can continue to 
perform in the program. I think that is what we have been 
hearing from our lenders for quite some time, and they have the 
performance to back it up.
    Senator Budd. Thank you. I appreciate you being here today.
    Chairman Cardin. Thank you.
    Let me ask you--we will start a second round for those that 
would like to ask a question. Your budget has flat funding for 
the Office of Credit Management, which surprises me. All of the 
conversations we have had here about the responsibilities of 
expanding opportunities for capital for small businesses, it 
seems to me that puts more responsibility rather than less 
responsibility on the SBA, on credit management. Can you 
explain?
    Ms. Guzman. Yeah. The Office of Credit Risk Management is 
really critical, of course. You know, when some of these 
programs were initially started using pen and paper, they were 
able to leverage technology. We have a very strong team of 29 
individuals, plus 7 contracts, with staffing and technology to 
help us manage our portfolio. We perform quarterly reviews of 
the portfolio as well as more deep dive risk reviews and 
improper permit reviews, so that we can ensure that we are 
holding our lenders to a high standard and are able to identify 
risk and problems in the portfolio early.
    So we continue to support this office, and the office has 
done thorough analysis to ensure that it is resourced and able 
to support the expansion of these regulatory forms through the 
SBLC.
    Chairman Cardin. So you have adequate resources to do that 
with a flat budget?
    Ms. Guzman. Yes, and we have proposed an additional 30 
nonprofit Community Advantage lenders and an additional 3 non-
depository institutions on top of that. So those numbers were 
based on an analysis of capacity at our Office of Credit Risk 
Management.
    Chairman Cardin. Let me go to a different subject and ask 
for your help, and we are coordinating this with the Senate 
Finance Committee. We are extremely concerned about what we 
hear from small businesses in regard to compliance with the tax 
laws of our country, that it is extremely difficult for small 
businesses that use basically the individual tax returns to do 
their taxes, that there needs to be more sensitivity to small 
businesses.
    We are going to try to weigh in with the Senate Finance 
Committee. It is their jurisdiction but they want to work with 
us on this. I would certainly welcome whatever help you could 
give us in your experiences with the small businesses that you 
operate with where the major needs are for reform within our 
tax code, to help small businesses.
    Ms. Guzman. Yes, we are happy to provide that technical 
assistance. Obviously, tax returns are really critical in our 
COVID relief programs as well as our ongoing programs.
    Chairman Cardin. Right. I assume you have had a lot of 
contact in that regard.
    Ms. Guzman. Correct. Yes. And we definitely recognize that 
small businesses want tax fairness, and for them that means 
simplicity, easy to understand. You know, they do not have the 
lawyers and accountants to hire to try to help them navigate a 
complex tax system, and it is oftentimes complicated for them 
to track some of these filings, and that is why you see 
challenges when they go to seek capital.
    So as much as we can to simplify the process for them, that 
will help them access capital and help them start and grow more 
effectively.
    Chairman Cardin. We have had discussions during this 
hearing about minority-serving institutions and HBCUs. I just 
really want to applaud the efforts that have been, at least in 
my state of Maryland we have gone from one Women's Business 
Center to four Women's Business Centers. We have a women's 
Business Center located at Bowie State University, the oldest 
of our HBCUs. Morgan State university is also engaged in this. 
We have a Business Innovation Center at Bowie State. We have 
really engaged our minority-serving institutions in a way that 
has expanded tremendous opportunity, and Maryland has been one 
of the leading states in the nation on the start of minority 
small businesses.
    So I just think we need to just learn from those 
experiences and build on those experiences, because we do reach 
communities we have not traditionally reached. And I think your 
Administration is doing an excellent job in that regard, and I 
just really wanted to put that on the record.
    The one area that I hope we will continue to work on is 
returning citizens, criminal justice-impacted individuals. We 
still could do a lot more, and I know there is some bipartisan 
interest in our Committee to try to do that. So I welcome your 
thoughts on how we can expand opportunities for justice-
impacted individuals.
    Ms. Guzman. Thank you for that, and I would welcome the 
opportunity to work on that. It is something that the SBA has 
taken up. We addressed this directly within the Community 
Advantage expansion, an extension effort that we led last year, 
in ensuring that returning citizens who entrepreneurial are 
able to access capital within our programs. And so we would 
continue to look at how we can better support them through our 
technical assistance, capital programs, and all of our support 
networks.
    Chairman Cardin. In many respects there are less barriers 
to entrepreneurship than there is to employment, so it is an 
area that we really can expand opportunity.
    Senator Ernst.
    Senator Ernst. Yes. Thank you, Chairman. And I want to go 
back because I think the SBA Express, you have brought that up 
a few times now, and you said that you have the data to justify 
the underwriting through SBA Express. So if you do have that 
data I would love some follow-up. My staff had sent questions 
about Express several months ago and we have not yet received a 
reply. So perhaps your staff could assist us with that this 
week.
    So going back to the proposed lending rules, you have 
stated that the final rule, or will the final rule eliminate 
our credit analysis, the control and management affiliation 
test and character and reputation criteria for the 7(a) 
program. I think Senator Budd was asking something similar to 
this, but will the final rule eliminate those criteria?
    Ms. Guzman. The final rule on affiliation focuses on 
affiliation eligibility of control. And so I know that you had 
mentioned earlier that we have referenced the PPP portfolio as 
an example of removing affiliation. With the PPP it was unique 
in that they removed affiliation related to control but also 
impacted the size standard at the SBA as well, by allowing 
location-specific analysis.
    So for affiliation, obviously we are committed to making 
sure that we continue to look at ownership, that our lending 
partners obviously continue to look at the ability to repay, 
which means that they will have to have the cash flow, the 
assets with collateral that are unencumbered for them to be 
able to support a loan, and an ability to access SBA lending in 
particular.
    So affiliation eligibility is being removed. As well, we 
are going to simplify the way that banks access our program by 
allowing their credit underwriting standards to be deployed. So 
as long as they are able to continue to use their credit 
underwriting standards, obviously we review our lenders on an 
ongoing basis to make sure that they are held to a high 
performance standard and not including risky loans into the 
portfolio.
    But yes, those are the two key areas around the affiliation 
rule. And then, of course, allowing for partial buyout, so that 
owners can start to exit successfully by selling part of their 
business only.
    Senator Ernst. Sure, and I do want to caution because I 
know we do hear from, if you look at the 504 program, those 
lenders do support the changes in the underwriting because it 
does help streamline and provide efficiency in their program. 
But we do not want to conflate the 504 program with our 7(a). 
Those are completely different programs. They operate 
differently and there is different levels of risk to our 
taxpayers. So I do hope that that is taken into consideration.
    So then, as well, if we can talk a little more about the 
Small Business Lending Companies. So will that final rule put a 
firm limit on those SBLCs?
    Ms. Guzman. The rule itself proposed lifting the 
moratorium, and so we estimated what the capacity at the SBA 
would be, noting our Office of Credit Risk Management capacity 
to provide oversight to review the applications and ensure 
continuous oversight for that program. So with the small 
business licensing companies there is not a cap imposed. 
Currently there are 14 SBLCs in the program, operating. They 
have changed hands about 60 times. So we have a strong system 
in place and a process to approve them, but we are looking at 
capacity.
    Senator Ernst. And again, that raises concerns with me 
because we have had that 40-year moratorium, but as we are 
looking forward and we are talking about the different types of 
institutions that we will be opening the door for with the new 
rule, it really leads to an unlimited number of fintechs that 
could come into the institution.
    So I just want to raise the red flag there. I really do 
believe that this needs to have congressional authorization.
    With that, Senator Cardin, I will yield back.
    Chairman Cardin. Senator Coons.
    Senator Coons. Thank you, Chairman Cardin and Ranking 
Member Ernst. Administrator, it is great to see you again. 
Thank you for the opportunity to work together for another 
Congress and to do more for our small businesses nationwide.
    I really just had two questions I wanted to ask you about. 
First, I would be interested in your overall impression of 
SCORE. SCORE is a program that was originated in Wilmington, 
Delaware, and from what I have heard from Delaware businesses--
I just did a small business roundtable, actually, yesterday--
has provided fairly high levels of service, at very affordable 
cost. For most it is free. It has got a remarkable leverage 
ratio. If I understand right, there are 10,000 volunteer 
mentors nationwide, supported by a paid staff of about 50, and 
last year they helped clients start more than 30,000 businesses 
and create over 100,000 jobs. The client base is two-thirds 
women, roughly half minority, 10 percent veteran, and about 40 
percent of their volunteers are women or minorities.
    I remember they had some significant problems in an OIG 
report 4 years ago. My strong impression is that under new 
leadership they have addressed that and there is a steady 
increase in demand for their services.
    I put together budgets when I was a county executive. I 
understand the challenges of striking a balance. But I was 
surprised to see a proposal to cut their budget by 40 percent. 
Is there some problem or issue with their performance that 
maybe I am not aware of, or is there a reason that SCORE was, 
in some way, focused on for that significant of a cut in the 
budget proposal?
    Ms. Guzman. SCORE is one of our critical parts across our 
entrepreneurial development programs. While we are requesting 
an additional $14 million across those programs we recognize 
that there are gaps in service out there and we are trying to 
work with limited resources and fulfill the needs, try to 
reverse some of the trends that we saw early on in the pandemic 
to ensure that more businesses are able to access and learn 
about the SBA.
    So, you know, in terms of balancing our entrepreneurial 
development priorities we are trying to do more for veterans, 
more around capital access, more around government contracting, 
to get firms contract ready, as well as more around navigators 
to connect those underserved businesses to our incredible 
network resource partners as well as our programs at the SBA.
    So it is more about working within our limited resources to 
expand our reach across the board.
    Senator Coons. If I hear you right, there is no problem or 
issue with SCORE whatsoever, valued member of the whole team. 
Just had to make a choice between, if we are going to put more 
in here or here we have got to take something out of here.
    Ms. Guzman. That is correct. We are just trying to balance 
an ecosystem within limited resources.
    Senator Coons. Well, in my view it has a strong record of 
cost-effectiveness, and I am likely to work to sustain its 
funding and to figure out some way, on a bipartisan basis, that 
we can provide additional resources along the lines that you 
have also requested. We will have a number of conversations 
about it. I think it is a great program and I am hoping we can 
see it reauthorized in this Congress.
    One other question. This just a specific individual 
question from a bank president from Southern Delaware Community 
Bank. His name is Jack Riddle, and they handle a fair number of 
SBA loans. He reached out to me in writing and said, ``Is there 
any reason that a smaller or community bank cannot be an SBA 
preferred lender,'' his point being that they have 
significantly more paperwork and a significantly higher 
guarantee requirement than one of the major banks in our state.
    And he had asked if we had ever discussed or considered a 
pilot program that might allow a community bank, with proper 
guardrails, for a small amount, say a loan of under half a 
million, to be able to show that they are capable of being an 
SBA preferred lender.
    Did the question make sense?
    Ms. Guzman. I believe so, yes, and I definitely welcome the 
opportunity to work directly with this lender as well as other 
lenders in Delaware and across the nation because we are 
looking to expand those, especially community banks, to 
leverage our guarantee and get capital into those small 
businesses.
    So, you know, I do not know the specifics of the case so I 
am sorry I cannot comment further on it, but I would welcome 
the opportunity to try to ensure that they can participate, at 
scale, with the SBA.
    Senator Coons. Thank you very much. I will forward the 
letter to you and hopefully we will get him a timely response. 
I appreciate your service.
    Ms. Guzman. Thank you.
    Senator Coons. And I appreciate, Mr. Chairman and Ranking 
Member, that we had a productive business meeting and hearing 
today.
    Chairman Cardin. Thank you, Senator Coons.
    Senator Ernst, anything further?
    Senator Ernst. No, Mr. Chair. Thank you. Thank you, 
Administrator.
    Ms. Guzman. Thank you.
    Chairman Cardin. Administrator Guzman, again thank you for 
being here today, but more importantly thank you for your 
leadership and your willingness to engage this Committee, 
members of the Senate, as well as stakeholders on making these 
important decisions.
    The record of our Committee will remain open for 2 weeks 
for questions for the record. We would ask, Administrator 
Guzman, you respond promptly to those questions.
    And there being no further business, the Committee stands 
adjourned. Thank you.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]

      

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