    [Senate Hearing 119-19]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 119-19

                             HEARING FROM LENDERS:
                        MANAGING RISK FOR THE LONG-TERM
                            IN THE 7(a) LOAN PROGRAM

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

                                    HEARING

                                   before the

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP

                                     OF THE

                              UNITED STATES SENATE

                        ONE HUNDRED NINETEENTH CONGRESS

                                 FIRST SESSION
                                   __________

                               FEBRUARY 26, 2025
                                   __________

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

                   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                       U.S. GOVERNMENT PUBLISHING OFFICE

    59-473                     WASHINGTON : 2025

                COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                        ONE HUNDRED NINETEENTH CONGRESS

                                  ----------
                            JONI ERNST, Iowa, Chair
                EDWARD J. MARKEY, Massachusetts, Ranking Member
    JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
    RAND PAUL, Kentucky                  JEANNE SHAHEEN, New Hampshire
    TIM SCOTT, South Carolina            CORY A. BOOKER, New Jersey
    TODD YOUNG, Indiana                  CHRISTOPHER A. COONS, Delaware
    JOSH HAWLEY, Missouri                MAZIE K. HIRONO, Hawaii
    TED BUDD, North Carolina             JACKY ROSEN, Nevada
    JOHN R. CURTIS, Utah                 JOHN W. HICKENLOOPER, Colorado
    JAMES C. JUSTICE, West Virginia      ADAM B. SCHIFF, California
    JON HUSTED, Ohio
                    Meredith West, Republican Staff Director
                     Sean Moore, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                                   WITNESSES

                                                                       Page
    Mr. Timothy Fitzgibbon, Senior Vice President, First National
      Bank, West Des Moines, IA......................................    15
        Prepared statement...........................................    17
    Mr. Raymond Lanza-Weil, President, Common Capital, Springfield,
      MA.............................................................    19
        Prepared statement...........................................    21
    Ms. Itzel Sims, SBA Director and Senior Vice President, First
      Security Bank, Little Rock, AR.................................    26
        Prepared statement...........................................    28
    Ms. Mayrena Guerrero, Founder and CEO, Colorful Resilience, West
      Springfield, MA................................................    36
        Prepared statement...........................................    39

                               COMMITTEE INSERTS

    Ernst, Senator Joni & Williams, Roger, U.S. Representative
        Letter dated April 24, 2024..................................     2
    Ernst, Senator Joni
        Letter dated January 21, 2025................................     6

                      ADDITIONAL STATEMENTS FOR THE RECORD

    America's Credit Unions
        Letter dated February 26, 2025...............................    56
    Ernst, Senator Joni
        Statement....................................................    59
    National Association of Government Guaranteed Lenders
        Letter dated February 26, 2025...............................    60

                             HEARING FROM LENDERS:
                        MANAGING RISK FOR THE LONG-TERM
                            IN THE 7(a) LOAN PROGRAM

                                  ----------

                          WEDNESDAY, FEBRUARY 26, 2025

                                       United States Senate,
                                    Committee on Small Business
                                              and Entrepreneurship,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 2:30 p.m., in
    Room 428A, Russell Senate Office Building, Hon. Joni Ernst,
    chairwoman of the committee, presiding.
        Present: Senators Ernst [presiding], Hawley, Justice,
    Husted, Markey, Shaheen, Booker, Hirono, Rosen, and
    Hickenlooper.

                   OPENING STATEMENT OF SENATOR ERNST

        The Chair. I call the Committee on Small Business and
    Entrepreneurship to order. Nearly two years ago, we met to
    discuss the reckless new rules the Small Business
    administration implemented for the 7(a) loan program. They
    removed time-tested underwriting standards that mitigated the
    risk of default for American taxpayers who guarantee these
    loans.
        These new rules also opened the door to foreseeable fraud
    by enabling a potentially unlimited number of unregulated, non-
    depository institutions to become permanently licensed SBA
    lenders, as small business lending companies, or SBLCs. The
    last administration's 7(a) rules were the most drastic changes
    to the program in decades, which is why members on a bipartisan
    basis voiced their concerns. Unfortunately, those concerns fell
    on deaf ears.
        I aggressively sought to understand how the SBA was
    selecting and approving these new SBLCs to participate in 7(a).
    The types of lenders the SBA was looking to license, fintechs,
    were responsible for facilitating widespread financial fraud
    and improper payments in the Paycheck Protection Program. I ask
    unanimous consent to enter into the record an April 24th, 2024,
    letter that I sent with House Small Business Committee Chairman
    Williams, to the SBA requesting information on the SBLC
    selection process.
        Without objection, so ordered.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chair. Two years later, we still have little insight.
    Even the recent SBA Inspector General's report on the subject
    was woefully inadequate. The IG report stated the SBA followed
    its own procedures, but they failed to evaluate whether those
    procedures were adequate. The IG didn't bother to investigate
    whether there was collusion between SBA officials and one of
    the largest applicants for a lending license, Funding Circle
    U.S., nor did the report answer why the SBA and the IG
    concluded the cash position of Funding Circle U.S. was
    sufficient despite the fact that it was losing millions.
        The Biden SBA's dangerous loosening of the underwriting and
    eligibility rules weren't the only efforts to undermine the
    financial soundness of the 7(a) loan program.
        A year before the rule, the agency started to cut the fees
    charged to borrowers and lenders--fees meant to protect the
    taxpayer from having to subsidize bad loans. For three years
    straight, the SBA cut these fees, inexplicably allowing loans
    of up to $1 million to be made without the borrower or lender
    having to pay for the guarantees the American taxpayer
    provided.
        As I said in a letter to President Trump on January 21st,
    the looming 7(a) fee increases are entirely due to the previous
    administration's incompetent management of the program, which
    has harmed taxpayers and the small businesses saddled with debt
    they can't manage, while irresponsible lenders get paid no
    matter what. I ask unanimous consent to enter this letter into
    the record.
        Without objection, so ordered.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chair. We are seeing the impacts of these rule changes
    with the 12-month default rate more than doubling to roughly
    3.2 percent since these rules went into effect, and defaults on
    loans less than 18 months old nearly tripling to almost one and
    a half percent over that same period. While the Biden Harris
    SBA tried to blame this on rising interest rates, defaults on
    SBA loans have been increasing faster than those in the private
    sector, which is evidence of poor policy decisions.
        It should come as no surprise that for the first time in 12
    years . . . [emphasis] 12 years, the 7(a) program lost money.
    This negative cash flow must be immediately addressed by
    reversing the misguided decisions of the past administration.
    This program was designed to operate with zero subsidy and I
    worry we are on the cusp of forcing taxpayers to foot the bill,
    something we should avoid at all costs.
        I want to commend Administrator Loeffler for her
    recognition of these problems in her day one memo released this
    week, and her willingness to hit the ground running. It is
    clear that the solvency of the SBA's lending programs is a
    major priority for the Administrator, who is committed to doing
    what's necessary to ensure their zero-subsidy status is secure.
        Today's hearing provides an opportunity for us to speak
    with SBA participants to understand their concerns about the
    7(a) program's financial stability. It also allows the
    committee to gather concrete suggestions on ways to reduce the
    risk faced by taxpayers while ensuring the program continues to
    be a resource for entrepreneurs who need assistance accessing
    capital.
        I'd like to thank our witnesses for being here today, and I
    look forward to your testimony. I now recognize Ranking Member
    Markey for his opening statement.

                      STATEMENT OF SENATOR MARKEY

        Senator Markey. Thank you, Madam Chair, very much and thank
    you for hosting this hearing to discuss the government's role
    in connecting entrepreneurs with the funding which they need.
    Access to capital is always a top concern for small business
    owners.
        For 70 years, the small business administration's flagship
    lending program, the 7(a) program, has provided government-
    backed loans to small business owners who are not eligible for
    a conventional loan. Without government backing, traditional
    banks would only lend to the biggest, safest businesses in town
    while deeming loans to the smallest as too risky.
        Innovative ideas that benefit communities across the United
    States would never have come to realization. Ideas that start
    in a garage would be thrown away before they can ever get off
    the ground. This is especially true for underserved
    communities, entrepreneurs of color, and women who have an even
    harder time historically getting funding as a result of
    historic discrimination. It wasn't until 1974 that a woman was
    able to get a loan at a bank without a male relative signature.
        Unfortunately, as we all know, discrimination still exists
    today. Black owned businesses are more likely to be denied
    loans or received less money than other borrowers.
        In fact, according to the Fed's small business credit
    survey, in 2023, only 32 percent of black small business owners
    with employees received the funding they applied for, compared
    to 54 percent of white small business owners. This is why SBA's
    lending programs are so critical. They fill gaps. They level
    the playing field. In particular SBA's program, the Community
    Advantage program which is a subset of 7(a), utilizes community
    centered nonprofit and mission-based lenders.
        The program makes small dollar loans with a focus on
    reaching underserved small business owners. While the program
    does not define underserved by race, gender metrics, it reaches
    certain populations better than the traditional 7(a) program.
    For example, in fiscal year 2024, the Community Advantage
    program made 53 percent of its loans to startups, and 43
    percent to entrepreneurs of color. The traditional 7(a) program
    in comparison made only 32 percent of its loans to both groups.
        SBA has a responsibility to address the inefficiencies in
    private lending to support true competition. It is the
    government's responsibility to make sure that there is capital
    for all entrepreneurs regardless of their background. The Biden
    administration understood this. They doubled the amount of
    small dollar loans, maintained a healthy 7(a) loan program, and
    ensured a 99 percent repayment rate, a 99 percent repayment
    rate.
        My witness here today from Massachusetts, Ms. Guerrero, is
    a clear example of an entrepreneur who just wanted to serve her
    community, but struggled to get the funding to do so. She was
    unable to receive funding from her community bank, who is also
    an SBA lender, and she did not have generational wealth to rely
    upon.
        That's where Common Capital, a Massachusetts-based lender
    and SBA's Community Advantage program stepped in. So, thank you
    Ms. Guerrero for taking the time to share your experience with
    the committee. Your story is just one example of why SBA
    programs like the Community Advantage program is so important.
    And I look forward to hearing from our witnesses about their
    experiences with SBA's lending programs.
        And I also want to acknowledge the committee's efforts last
    Congress to codify the Community Advantage program. And I'm
    hoping that we can work together, Madam Chair, on a bipartisan
    basis, not only to maintain the integrity of SBA lending
    programs, but also to ensure that they serve small business
    owners from all backgrounds across our country. Thank you,
    Madam Chair.
        The Chair. Thank you very much, Ranking Member Markey. And
    now I want to extend a warm welcome to all of our witnesses.
    Thank you for joining us today. I want to introduce the two
    witnesses who are testifying today on behalf of the majority. I
    am thankful that these two accomplished community bankers made
    the trip to Washington DC, to share their expertise and insight
    into the SBA's 7(a) loan program with this committee.
        And so, we'll start with my Iowan first, and thank you.
    It's Mr. Timothy Fitzgibbon, who is the Senior Vice President
    at First National Bank from West Des Moines, Iowa. Mr.
    Fitzgibbon started and built the SBA lending business at First
    National Bank, where he has worked since 2017. Previously, Mr.
    Fitzgibbon was the senior vice president at the National
    Council of Higher Education Resources for 12 years.
        And prior to that, he was the director of the Guaranteed
    Student Loan Program at the Iowa College Student Aid Commission
    for more than 14 years. Mr. Fitzgibbon holds a bachelor's
    degree from the best university, Iowa State University.
        And next is Ms. Itzel Sims, and she is the director of SBA
    lending at First Security Bank, headquartered in Searcy,
    Arkansas. Ms. Sims has a 24-year background in SBA lending and
    previously worked at Simmons Bank and Regions Bank. Ms. Sims
    obtained a Bachelor of Business Administration from the
    University of Texas at Dallas. Thank you, again. And I now
    recognize Ranking Member Markey to introduce his witnesses.
        Senator Markey. Thank you, Madam Chair. And I'm pleased to
    introduce our two witnesses who have a business relationship
    and can explain how it works for all small businesses. And I
    would like to add, though, I'm kind of shocked that Mr.
    Fitzgibbon did not go to the finest Jesuit College in Iowa,
    Loras. [Laughter.]
        Senator Markey. I think that Fitzgibbon, somehow, I don't
    know how much they welcomed you home when you didn't go to the
    Jesuit school. Mr. Raymond Lanza-Weil is the president of
    Common Capital, which is a nonprofit community development
    financial institution located in Springfield, Massachusetts.
    Common Capital provides SBA micro loans and community advantage
    loans, as well as technical assistance to small businesses in
    Western Massachusetts.
        Mr. Lanza-Weil's work provides entrepreneurs from
    underserved communities with financing to start and grow their
    business ventures. His team works with borrowers in a holistic
    manner to ensure the success of these small businesses.
        Ms. Mayrena Guerrero is a mental health counselor, and the
    owner and founder of Colorful Resilience, a business that
    provides mental health services to all, but especially to
    people of color, the LGBTQ community, and immigrants. She has
    operated Colorful Resilience for three years. And as a result
    of her entrepreneurial spirit the community advantage loan, she
    now runs a thriving small business with 15 employees, and has
    provided vital mental health services to over 3,000 clients.
        So, it's a perfect example in Springfield of these two
    institutions being able to work together to make sure that we
    have a thriving small business. I thank you Madam Chair for
    welcoming these witnesses.
        The Chair. Yes. Again, thank you to all of our witnesses
    for being here and thank you Ranking Member Markey. Briefly,
    I'd like to take a moment to explain our lighting system there
    in front of you, the little boxes. There are three lights in
    front of you. Green means go. Yellow means you're running out
    of time, and red means to go ahead and quickly wrap up your
    remarks.
        I ask unanimous consent that the witness's full statements
    be included in the record. Without objection, so ordered. As
    your written testimony has been made part of the record, the
    committee asks that you limit your oral remarks to five
    minutes. And with that, Mr. Fitzgibbon, you are recognized now
    for five minutes for your testimony.

           STATEMENT OF MR. TIMOTHY FITZGIBBON, SENIOR VICE
        PRESIDENT, FIRST NATIONAL BANK, WEST DES MOINES, IOWA

        Mr. Fitzgibbon. Chair Ernst, Ranking Member Markey and
    distinguished members of the committee, thank you for the
    opportunity to appear before you today to discuss managing risk
    in the SBA 7(a) loan program.
        My name is Tim Fitzgibbon, I'm a senior vice-president with
    First National Bank, a $1.1 billion community bank based in
    Ames, Iowa, and founded in 1903. I'm testifying today on behalf
    of the Iowa Bankers Association and First National Bank. My
    responsibilities include managing two specialty loan programs-
    SBA and student loan refinance, and I'm also a licensed
    investment advisor.
        I'm here today to share my viewpoint, not just as an SBA
    lender, but also a 40-year participant in government backed
    loan programs, including home mortgages and student loans where
    I've spent a good part of my career, helping borrowers manage
    their debt, improve their credit, and avoid default.
        Risk in any loan program is primarily managed through sound
    underwriting policies. Prudent underwriting ensures equitable
    treatment for all applicants and is intended to be a good
    predictor of a borrower's future success. In short, good
    underwriting protects the consumer along with the lender, and
    in the case of the government backed SBA program, the taxpayer
    as well.
        In 2023, new rules were written for the SBA program with
    the admirable goals of streamlining the application process and
    increasing access to funding for small business owners,
    particularly those in underserved communities. Major
    underwriting changes included removing the applicant's personal
    financial resources from the ``credit elsewhere'' test, waiving
    equity injections, reducing insurance requirements, and
    permitting lenders to ``do as you do'' in underwriting SBA
    loans.
        Reducing underwriting criteria to increase loan access is
    not a new idea in federally backed loan programs, but it has
    not always proved wise. A similar approach was used in the
    1990s to increase home ownership through lowered credit
    standards for private market and FHA loans, which contributed
    significantly to the subprime mortgage crisis of 2008.
        A more recent example continues today with the Federal
    Parent PLUS Student Loan Program. Already low underwriting
    standards were further diluted in the early 2010s, to allow
    more families to access the Parent PLUS program, which has
    resulted in countless older Americans becoming buried in debt
    they cannot afford. Originating government-backed loans for
    borrowers who can never repay them is predatory in nature. It
    is imperative that the SBA closely monitor the impact of its
    reduced underwriting standards on the borrowers it serves.
        To that end, early indicators suggests that there are
    already signs of credit stress for SBA loans made under the new
    rules. For example, according to a recent risk assessment by
    the SBA, ``The Small Business Administration's Flagship 7(a)
    program lost hundreds of millions of dollars in 2024 as agency
    fee reductions combined with an increase in loan defaults to
    result in negative cash flow''. Similar analysis done by third
    party service providers, show loans made under the new rules
    are defaulting at a much faster and higher rate than loans made
    in other years, particularly those originated by non-bank
    lenders.
        I'd like to end my statement with a cautionary observation
    based on testimony provided just last year by Administrator
    Guzman in hearings before this committee, where she suggested
    the SBA should restart its direct government lending program. I
    urge committee members to study the current condition of the
    Federal Direct student loan program before considering such a
    move.
        History has shown that direct government lending can lead
    to expensive loan modifications and even debt forgiveness to
    mask non-performing loans. Loan forgiveness does not manage
    debt, it simply passes the cost onto the taxpayer.
        Iowa banks are committed to providing access to SBA
    financing to our small business communities. While we applaud
    efforts to streamline SBA loan processing and expand in a safe
    and sensible manner, the number of small businesses the SBA
    program can assist, we urge Congress and the small business
    administration to restore prudent underwriting standards and
    ensure proper oversight for all of its lending partners.
        I look forward to your questions, and I thank you again for
    the honor of participating in this hearing. And Senator Markey,
    I'm proud to tell you that my daughter's a Loras graduate.
    [Laughter.]
        [The prepared statement of Mr. Fitzgibbon follows.]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chair. Thank you, Mr. Fitzgibbon. Now we will recognize Mr.
    Lanza-Weil, and you are recognized, sir, for five minutes of
    your testimony.

          STATEMENT OF MR. RAYMOND LANZA-WEIL, PRESIDENT,
            COMMON CAPITAL, SPRINGFIELD, MASSACHUSETTS

        Mr. Lanza-Weil. Thank you and good afternoon, Chair Ernst,
    Ranking Member Markey, and distinguished members of the
    committee. I appreciate the opportunity to speak with you
    today.
        I am Raymond Lanza-Weil, recovering banker and president of
    Common Capital, a 35-year-old nonprofit CDFI loan fund based in
    Springfield, Massachusetts. Common Capital makes loans to small
    businesses that can't get the financing they need from
    conventional lenders, such as banks and credit unions. We make
    loans up to $300,000 and we provide no-cost business education,
    and training to our borrowers; Our business assistance program
    is primarily funded by annual grants from the SBAs microloan
    program.
        Common Capital serves a four-county region with 820,000
    residents. Our annual operating budget is just shy of $2
    million. Even though we're a small organization serving only a
    fraction of the state's geography and population, Common
    capital is the leading SBA Microlender and SBA Community
    Advantage lender in the Commonwealth of Massachusetts.
        Since our founding in 1990, we've made over 900 loans
    totaling more than $35 million to small businesses in western
    Massachusetts. All sorts of loans, not just SBA loans, loans
    that have helped create or retain 2200 jobs. At the end of
    2024, Common Capital's loan portfolio totaled $9.4 million, a
    little smaller than First National Bank's. 54 percent of our
    loan receivable were SBA Micro Loans or Community Advantage
    Loans. And by itself, the CA loans, the Community Advantage
    Loans, make up 34 percent of our portfolio.
        Common Capital's lending is high impact and that includes
    our CA loans. 87 percent of our CA portfolio dollars is loaned
    to businesses owned by people with low to moderate income or
    located in LMI census tracts. 73 percent is loan to startup
    businesses, 47 percent to woman owned businesses and 17 percent
    to veteran owned businesses.
        Common Capital was one of the original Community Advantage
    lenders. Since making our first CA loan in 2012, we've made 41
    CA loans totaling $5.3 million with only one loss. The
    Community Advantage program helps us fulfill our mission of
    creating economic opportunities for people with low to moderate
    income by increasing access to capital for the small businesses
    they own.
        For example, here's a story about one of CA loans. Alan had
    worked in construction in rural western Massachusetts for over
    35 years, when in 2018, he had an entrepreneurial seizure and
    decided to open his own timber frame construction business.
    After three successful years, significant supply chain issues
    and higher prices on construction materials resulted in losses
    on a large fixed price contract. But demand for Alan's
    craftsmanship continued to grow, so the business sought
    financing for new equipment and working capital from their
    bank, which was unable to help them due to their recent losses,
    Alan turned to Common Capital.
        The path to Yes, was challenging because the business'
    assets available as collateral were well short of our
    underwriting requirements. Common Capital was able to offset
    the shortfall with an 85 percent Community Advantage guarantee.
    And today, this rural business has retained its six employees,
    hired new ones, and is thriving.
        As you know, and as this story illustrates, regulated,
    financial institutions can't help every business that applies
    for a loan and nor should they. Banks necessarily say ``no'' to
    some applicants in order to protect their depositors and
    shareholders and to contribute to the safety and soundness of
    our financial system.
        Yet, banks and credit unions are our primary source of
    referrals. We don't compete with banks; we support and augment
    their customer relationships. Referring banks keep their
    customers as depositors and continue to provide other banking
    services to these businesses. When we provide a loan to a
    bank's customer, it's a win-win-win.
        Before I conclude, I want to tell you another story.
    Celeste and Jessica had a combined 30 years of experience
    working as nurses in and around Springfield when in 2021 they
    recognized the growing need for home healthcare in their urban
    communities. They responded by starting their own home
    healthcare agency. Celeste and Jessica could not obtain
    financing from a bank due to being a startup and a lack of
    sufficient collateral.
        Once again, common capital turned to the SBAs Community
    Advantage Program to overcome these challenges and help two
    entrepreneurs start a business that is providing essential
    healthcare services and creating jobs.
        Senators, as I wrap up, I want to tell you that too many
    small businesses and business owners that hear ``no'' from a
    bank successfully search online for easy money. It's available,
    it's expensive, and it's harmful to our business community. To
    combat this, CDFIs like Common Capital and other community loan
    funds try to fill the gap. With our help, these small
    unbankable businesses are creating jobs, generating economic
    activity, and paying taxes.
        These small businesses continue to be bank customers and if
    they do well enough, they'll become bank borrowers as well. We
    accomplish this work with support of the SBA. Our continued
    success and the success of the small business community in
    western Massachusetts depends upon the availability of SBA
    microloans and the CA program.
        I urge you to continue supporting the Community Advantage
    Program, to expand it so that more mission-focused lenders like
    Common Capital can increase access to capital, for low to
    moderate income and low wealth entrepreneurs. Thank you.
        [The prepared statement of Mr. Lanza-Weil follows.]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chair. Thank you, Mr. Lanza-Weil, and we will move next
    to Ms. Sims. And you are now recognized for five minutes of
    testimony.

         STATEMENT OF MS. ITZEL SIMS, SBA DIRECTOR, AND SENIOR
         VICE PRESIDENT, FIRST SECURITY BANK, LITTLE ROCK, AR

        Ms. Sims. Chair Ernst, Ranking Member Markey, and members
    of the committee. Thank you for the opportunity to testify at
    today's hearing. My name is Itzel Sims, and I am the director
    of SBA lending for First Security Bank, which is headquartered
    in Searcy, Arkansas. I'm testifying today on behalf of American
    Bankers Association, Arkansas Bankers Association, and First
    Security Bank.
        Small businesses are the backbone of American economy. The
    SBA 7(a) program helps small businesses that might not
    otherwise have access to capital obtain loans so they can grow
    and create jobs. In my 26th year of making loans to small
    businesses, I'm very proud of the work we do at First Security
    Bank, to assist businesses across Arkansas with 7(a) and other
    small business loans. First Security is a privately held
    community bank with a 1.5 billion in total capital, 8.13
    billion in assets and 1,000 employees throughout Arkansas.
        After holding several SBA lending positions, I joined First
    Security Bank and started an SBA lending platform for 7(a),
    504, and express loans. First Security is right now topped at
    top 10 SBA lender in Arkansas. This is in a very important time
    for 7(a) program. Two years ago, SBA lifted the moratorium on
    the number of non-bank lenders that could participate in the
    7(a) program while simultaneously loosening underwriting
    standards for these loans.
        It has experienced increased defaults since those changes,
    particularly in loans originated by non-bank lenders. This
    committee can play an important role in strengthening the
    program so that all lenders make 7(a) loans in a safe and sound
    manner, that helps small business gain access to capital.
        Here are recommendations for improving the program: in
    2023, SBA lifted the moratorium on the number of non-banks that
    can participate in the 7(a) program, granting six new non-banks
    to participate in the program. At the same time, the agency
    also loosened underwriting standards for loans of $500,000 or
    less. This has contributed to rise of default rates.
        Data compiled by Lumos Technologies show that 7(a) loans
    originated by non-bank lenders in 2023 had a default rate of
    8.1 percent in 2024, which is more than double the default rate
    of 7(a) loans originated by banks in 2023. SBA should return to
    the more robust criteria for underwriting 7(a) loans that had
    been in place prior to 2023.
        Moreover, the agency should focus on increasing the number
    of banks that participate in the 7(a) program instead of new
    non-bank entrants. SBA should also reinstate the loan
    authorization as a required document for 7(a) loans. It should
    also reinstate the requirement that 7(a) small business owners
    provide a 10 percent equity injection when a borrower is a
    startup, or when the borrower was purchasing an existing
    business.
        To increase efficiency, SBA should reinstate the franchise
    directory, a valuable resource that assisted lenders with
    determining the eligibility of a franchise for a 7(a) loan
    before it was discontinued in 2023. Although the focus today is
    on strengthening the 7(a) program, the small business lending
    landscape continues to be threatened by the CFPBs
    implementation of Section 1071 of Dodd-Frank. Section 1071
    requires financial institutions to collect and report detailed
    data on each application for small business credit, including
    the race, sex, and ethnicity of the business owners.
        The CFPB Rule expanded the 13 data points required by
    Congress to 81 data points for each applicant for credit. This
    will significantly increase the cost of credit, decrease the
    availability of credit, and make it harder for us to serve
    small business customers. Congress should repeal section 1071.
        In conclusion, we strongly support the committee's goal of
    strengthening the 7(a) program and facilitating small business
    lending more broadly. We urge Congress to ensure that the SBA
    reinstates previous underwriting standards on 7(a) loans, not
    grant additional non-bank licenses without a demonstrated need
    and proof that the agency can effectively supervise new
    entrants, take the actions to improve the efficiency of the
    7(a) program provided in our testimony, and repeal Section 1071
    of Dodd-Frank.
        This would help strengthen small business lending, and
    enhance the ability of banks to make critical loans that drive
    economic growth in our nation's communities. I really
    appreciate the opportunity to testify and I look forward to
    your questions.
        [The prepared statement of Ms. Sims follows.]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chair. Thank you very much, Ms. Sims. And now, Ms.
    Guerrero, you are recognized for five minutes.

         STATEMENT  OF  MS. MAYRENA  GUERRERO,  FOUNDER  AND
          CEO, COLORFUL RESILIENCE, WEST SPRINGFIELD, MASSA-
          CHUSETTS

        Ms. Guerrero. Thank you. My name is Mayrena Guerrero. I'm a
    licensed mental health counselor and entrepreneur in
    Massachusetts. I am honored to be here and talk about my
    experience with the SBA Community Advantage Loan through Common
    Capital.
        My business is Colorful Resilience, a mental health clinic
    that provides outpatient mental health services to Black
    Indigenous People of Color, Lesbian, Gay, Bi, Trans, and others
    with various sexual and gender identities, immigrants, first
    generation people and our allies.
        What sets us apart, is that our team members represent the
    communities we work with. These brings about cultural
    competency that comes not just from education, but shared lived
    experiences with our clients.
        I hold a Bachelor of Science degree from University of
    Catlica Santo Domingo in Dominican Republic, and a Master of
    Science in mental health counseling from Fitchburg State
    University in Massachusetts. Go Falcons.
        After graduate school, I worked in community mental health
    for three years providing outpatient services. After completing
    the necessary hours and passing the licensing exam, I obtained
    my license to practice mental health counseling independently
    in Massachusetts.
        In 2016, I established a private practice marking the
    beginning of my entrepreneurial journey as a solo practitioner.
    My practice filled up quickly as clients discovered me through
    the PsychologyToday.com providers directory. In my published
    profile, I discussed my therapeutic approach and comfort in
    working with immigrants, people of color, and members of the
    LGBTQ plus community like myself. I quickly noticed clients
    sought me out primarily because of our shared identities.
        In 2020, due to the mental health crisis resulting from the
    pandemic and the Black Lives Matter movement, inquiries for
    services increased from two a day to 20. My practice was packed
    and I wondered where to refer individuals seeking support based
    on identity affinity. I realized then that there was a niche in
    the market that was not being addressed, and that is when the
    idea for Colorful Resilience was born.
        If I were going to do this, it will be done right. My
    company will have multiple practitioners and be the work
    environment I always dreamed of. The humanity of the clinician
    will be front and center because happy and healthy clinicians,
    produce better therapeutic outcomes.
        I will do things differently and go against the industry
    standard. My clinicians would receive a guaranteed bimonthly
    paycheck with a salary that exceed the living wage for our
    county, based on the MIT living wage calculator. A yearly
    inflation raise will be essential to prevent a pay cut and an
    annual productivity raise would incentivize meeting
    productivity goals. Both part-time and full-time Employees will
    have access to health and dental care. Additionally, the
    company will reimburse continuing education credits as 15 CEs
    are required annually to maintain our licenses and now, we're
    in year three and in this year, we're able to offer 401k to our
    employees.
        Burnout is a significant issue in the mental health field
    leading to frequent turnover and a mass exodus from the
    profession. I recognize that establishing reasonable and
    sustainable productivity expectations is crucial.
        Furthermore, supporting and encouraging clinicians to
    attain their private practices is essential for maximizing
    their earnings and increasing representation from these
    communities in the field. In other words, my team members were
    not leaving Colorful Resilience because we were a lousy
    employer, but because they were ready to self-actualize
    professionally.
        So, the idea was there and it was a good one, but I needed
    capital. So, I went to talk to my community Bank of 15 years. I
    sat down with a person from Commercial Lending, business plan
    hand, he listened to me and told me it was an excellent idea,
    but that they didn't fund startups. For them to lend me the
    300K I needed to start my business, I would need to have
    assets, assets that amounted to that much, which I didn't. It
    was the bank who told me about Common Capital.
        I went to Common Capital's website and filled out a simple
    form. Then with a business plan in hand I met with them. They
    supported my idea and told me they would work with me to secure
    the funds I needed to make it a reality. Common Capital helped
    me secure an SBA Community Advantage loan for $250,000 and a
    $50,000 microloan at a six-year term and a 7.5 interest rate.
        In addition to the loans, Common Capital helped us get
    marketing and technical assistance help from a third party,
    contributing to our recruitment efforts. From the very
    beginning, Colorful Resilience has submitted monthly profit and
    loss and balanced sheet reports to Common Capital, helping keep
    us accountable as we go. Common Capital invested in Colorful
    Resilience and we continue to experience and support to this
    day.
        On February 23rd, 2022, Colorful Resilience, LLC became a
    registered business entity, and in August of that year, we
    started seeing clients. Today, according to the Boston Business
    Journal, Colorful Resilience is the 27th largest LGBT owned
    business in the state of Massachusetts.
        We're a profitable company currently employing 15 people
    and on track to hire three more full-time clinicians this year.
        We have about 550 active clients and 3000 people have had
    access to care because we exist. Outpatient mental health is
    primary care. Clients who are adequately supported and at
    outpatient mental health level rarely need to access higher,
    more expensive levels of care like partial hospitalization,
    inpatient, or like a residential program. We keep the cost of
    mental health care down. We don't depend on government grants
    to function and we pay taxes.
        Businesses like Colorful Resilience keep the American
    economy going in the right direction. The SBA Community
    Advantage Loan changed my life and the lives of many others. I
    am grateful that this program exists and was lucky to have
    access to it. Please continue to support organizations like
    Common Capital so that they can make businesses like mine
    possible. Thank you.
        [The prepared statement of Ms. Guerrero follows.]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chair. Thank you, Ms. Guerrero, and thank you for your
    work in mental health, we really do appreciate that as well. So
    now we will move on to the question-and-answer portion of the
    hearing, and I will recognize myself for five minutes for
    questions, and I will start with Mr. Fitzgibbon.
        So, Mr. Fitzgibbon, as you know, the Biden administration
    significantly weakened underwriting standards in the SBA's 7(a)
    loan program. Since those changes were implemented, the 12-
    month default rate has more than doubled and the early default
    rate has almost tripled. How important are strong underwriting
    standards to the long-term stability of the 7(a) loan program?
        Mr. Fitzgibbon. Thank you, Senator. I think prudent
    underwriting provides the foundation for long-term stability.
    There are other factors like guarantee fees and so on, but
    they're not as important as underwriting. It's truly the
    cornerstone of managing debt.
        The Chair. Yes, that's good. And Ms. Sims, thank you for
    being here today. The previous administration allowed
    additional non-banks, including fintech firms to participate in
    the 7(a) loan program. So as a community banker, how do your
    underwriting processes differ from those that are non-bank
    lenders, such as fintech firms, and how do these differences
    affect the loan performance in the 7(a) loan program?
        Ms. Sims. Community bankers, we live and we dine and we use
    the services that business owners have. So, we see people, when
    we provide loans, we're not just providing loans to paper,
    we're providing loans to people. So, we try to find financial
    solutions and complement our banking needs through SBA
    programs, depending on how much assets they have, how much
    capital they need.
        And so having that availability through the SBA program is
    imperative for us. The credit underwriting is the same for SBA
    lending. We still have to make sure that the loan can be repaid
    back, but a lot of times our entrepreneurs need education. They
    need to know how much debt they need to have; they need to have
    a budget. I like to say the saying, if you don't plan, you plan
    to fail.
        And a lot of times these business owners need guidance from
    us as a community banker to be able to either say, hey, you
    need to start with us, or they may need to start with a
    Community Advantage lender just to get started. So just being
    there to educate the client makes us very different than
    fintech, which is where my concern is.
        Fintech is more about a predatory approach and trying to
    just give money as fast as they can. And they don't really see
    them as human. They just see them as another source of
    financing and getting rates. So that's where my concern is the
    most, is the fact that they're taking the human approach away
    from community banking when you allow fintech to take over.
        The Chair. Yeah, I do appreciate that support. Thank you.
    And Mr. Fitzgibbon, the SBA has had four straight quarters of
    negative cash flow. Over roughly that same period upfront
    borrower fee revenue has decreased by 13 percent while loan
    purchases, which occur when SBA has to buy a defaulted loan
    from a lender have increased by 73 percent. How concerning are
    these trends and what steps need to be taken to ensure that the
    7(a) program continues to operate at zero subsidy from the
    taxpayer?
        Mr. Fitzgibbon. Well, thank you, Senator. I mean, four
    quarters of data is you can't draw every conclusion from four
    quarters of data, but it's all we have, and it is alarming for
    the comparison to the other vintages. So, I think looking at
    borrower fees is probably, and lender fees and reintroducing
    them is probably necessary.
        I would say that the cost of inaction is high, because
    regardless of the cost of the taxpayer, every loan that
    shouldn't have been made those defaults, ruins the financial
    life of that small business owner. And so, you could take a
    wait and see approach for the year and see if things normalize,
    but I think there's a human cost to that, that to me seems
    unadvisable.
        The Chair. Okay. Thank you. And now I would like to ask a
    question to all the lenders on the panel. Over the last five
    years, we have seen a dramatic expansion in the use of lender
    service providers or LSPs by SBA lenders. These LSPs assist SBA
    lenders by referring processing and servicing loans and are
    often increasing the volume of SBA lending.
        Does your company utilize an LSP and could you just talk
    about the proper role of an LSP in assisting SBA lenders and
    Mr. Lanza-Weil I'll start with you first and then we'll go to
    the other lenders.
        Mr. Lanza-Weil. Well that's easy: No, we don't.
        The Chair. Okay. Thank you. [Laughter.]
        The Chair. Mr. Fitzgibbon.
        Mr. Fitzgibbon. We don't use them. I think they play a
    helpful role if the lender that they're partnering with has
    good guardrails. But I think in combined with a fintech lender
    that it's all about churning volume, I think that they can be a
    part of the problem.
        The Chair. Okay. Thank you, Ms. Sims.
        Ms. Sims. Starting an SBA department in a community bank is
    daunting. It's a difficult task. And so, it can be very
    alluring to look at an LSP. I looked at it at one time when I
    was starting the department, but it's really difficult to keep
    consistency of your culture of who you are as a bank when you
    outsource it to somebody else. Keeping that consistency and
    also keeping the culture of your bank is out of your control.
        And a lot of times the customer experiences very bad
    customer service because they're not only dealing with us,
    they're also dealing with the LSP. If it's sold in the
    secondary market, they're not able to renegotiate their
    interest rates. So, they're also putting some guardrails on
    that. So LSPs do have a sense of purpose, don't misunderstand
    me, but they can also abuse that situation. So, we do have to
    enter that cautiously when using LSPs.
        The Chair Okay. Thank you, that's very helpful.
        Ms. Sims. And we do not use LSPs, by the way.
        The Chair. Okay. Thank you very much. I appreciate that. I
    will turn it now to Ranking Member Markey for your questions.
    Thank you.
        Senator Markey. Thank you so much. And so great news,
    really, really, really great news. In the United States last
    year. Last year, the Biden administration, 886,000 jobs
    directly related to 7(a) were either created or retained, great
    number. Another great number in Donald Trump's last year before
    Covid 2019, the 12-month default rate on 7(a) program 2.75,
    percent last year the last year of the Biden administration,
    2.76 percent default rate.
        Now, we do admit that the default rate did go down to 1.32
    percent at the height of COVID, but that was because of this
    great committee's work, passing the PPP program, passing the
    EIDL program, we were actually able to lower the default rate
    because of our actions to help those small businesses.
        But it's returned to normal, Trump 2.75 percent Biden 2.76
    percent. So, we'll give Trump the win there by one 10th of 1
    percent. Okay. He wins in that one category, but let's just say
    we're back to normal in terms of the 7(a) program and we should
    be very, very proud of the work that all these business people
    are doing out there.
        This SBA Community Advantage program has demonstrated
    success in making small dollar loans to small business owners
    that struggle. We see this story here in Springfield,
    Massachusetts. We see the lender and the recipient creating
    some capitalist magic that otherwise would not exist.
        And these lenders don't just provide loans: they provide
    financial help, marketing help, technical assistance that
    otherwise Ms. Guerrero and people like her, all across the
    country creating 886,000 jobs would not otherwise have. Which
    is kind of this brilliant construct that we have. So, Mr.
    Lanza-Weil, you say in your testimony, we lent to people, not
    to paper. Can you explain how common Capital's approach to
    making a loan to small business contrasts with a conventional
    lender.
        Mr. Lanza-Weil. Absolutely. We're a high touch lender. It's
    all about building a relationship with a borrower, with an
    applicant. You know, my first day on the job as a bank trainee
    in 1986 an old-time lender who smelled like cigar smoke, pulled
    me aside and said, you got to know this, know your borrower,
    it's the first rule of lending.
        And I think sometimes in larger institutions, and certainly
    in fintech, which I'm not here to bash, we lose sight of that.
    I think Ms. Sims referenced it as well, building a relationship
    with an applicant, getting to know that person as a human
    being, getting to know them as something beyond the paper on
    which their credit report is printed is so important. And we
    invest a lot of time. It's inefficient, it's slow, it's high-
    touch, and it's highly effective.
        Senator Markey. I agree with you. When I needed student
    loans, I was sitting next to my mother and father at the First
    National Bank in Malden, and Mr. Wentworth the banker, he said,
    Mr. and Mrs. Markey, you paid every month on the mortgage, so
    we trust you. So, we'll give the loan. There you go, high
    touch, they knew the customer.
        So, Ms. Guerrero, talk about how Mr. Lanza-Weil and his
    operation was able to help you.
        Ms. Guerrero. Gladly. Common Capital has been just super
    helpful. The truth is that I really don't know how we would
    exist as a business if Common Capital and the SBA Community
    Advantage Loan program was not available to us.
        I like the fact that the support that we received from
    them, I mean, you told me earlier there were nine people in
    your team. I really don't know the nine of them, but I know six
    of them by name. And I know how to get a hold of them for
    questions or anything like that. And that is just that
    relationship that I don't have with my community bank.
        Senator Markey. And so, give us one quick example, if you
    can, of something that they could help you to do that you
    would've had no capacity as a startup or small business.
        Ms. Guerrero. I mean, exist, sincerely, Senator, who
    would've given me the--okay, my other option to get the money
    to start my business would've been a predatory lender that
    would've given me a really high interest rate in terms that
    were really not conducive to profitability. So, it's as simple
    as that.
        Senator Markey. And you could have found them in
    Springfield, Massachusetts.
        Ms. Guerrero. Oh, of course.
        Senator Markey. The predatory lending?
        Ms. Guerrero. You can find them anywhere.
        Senator Markey. Oh, yes. So, you are just a perfect example
    of a wonderful system creating 886,000 jobs that is working
    with the default rate equal to the Trump years. Okay. Which is
    just an incredible achievement. So really helps to show how
    America can be great in helping startups to get over that
    financial hump.
        The Chair. Thank you, Ranking Member. And I do want to
    stress, it's the early defaults are really the issue that we're
    getting at today. The last three years, loan defaults are
    rising faster than pre COVID levels. And the program is losing
    money for the first time in a dozen years. So, it is something
    that we do need to scrutinize and we need to understand why
    this is occurring. So, we will go next to Senator Husted. You
    are recognized for five minutes of questions.
        Senator Husted. Thank you very much. Welcome to all of you.
    Thanks for being here today. I have a background overseeing a
    small business development center. I have a background on the
    board of a community bank, where I was on the loan committee,
    and I know how much our regulators scrutinize what loans we do
    make and what loans we don't make.
        And that this is--the community banks around the country
    are very close to their customers, and they know these issues
    quite well. But what I don't know well, I've only been a
    senator for four weeks. [Laughter.]
        Senator Husted. So, I'm, I'm trying to catch up on all the
    things that have happened in the past, and I know Mr.
    Fitzgibbon and Ms. Sims, you talked about rule and fee changes
    that had happened under the Biden administration, and I want to
    understand that better, and how that impacted the 7(a) program
    and just what the exposure and the risk of that.
        So just help educate me a little bit more about what that
    means, what the impact is, Mr. Fitzgibbon I'll talk, start with
    you.
        Mr. Fitzgibbon. Thank you, Senator. So, briefly, the rule
    changes reduced the underwriting criteria, and over the last
    couple of years the guarantee fee and the lender fee were
    waived up to, I believe it's a million dollars, no guarantee
    fee to the borrower up to a million dollars, this year it's no
    lender fee up to $500,000. So those are fees that support the
    program in a sense, it's skin in the game for the borrower.
    Those have been waived for a couple of years.
        The concern is that the lessened underwriting criteria has
    resulted in loans being made that shouldn't have been made and
    that's what's driving up delinquency and default rates.
        Senator Husted. Okay. And Ms. Sims.
        Ms. Sims. So, when you get insurance, you have to pay a
    premium to have insurance. So, you think of the government
    guarantee in that sense, is that typically when you're asking
    for a government guarantee, it's protection on the loan for the
    bank.
        And so I've been an SBA lender for my entire career, and
    I've seen the fees my entire life where, you know, SBA has
    provided this guarantee, this insurance to the lender, AKA, the
    customer gets this insurance as well, there's protection on
    their side, so there's benefit for the customer on that side,
    but typically, because we don't want this to be a burden on
    taxpayers, they self-fund through these fees.
        And so that's, really important to understand that we don't
    want the fees to be inappropriate, but we also want to make
    sure that they're not impacting the taxpayer money.
        Senator Husted. So, you, so summary, you think that would
    improve default rates and it would help sustain the program so
    that it's not a burden.
        Ms. Sims. So, sustainability is the key, right? We want to
    make sure it can be in the black. We don't want it to be in the
    red. So, if we see that there's problems there, we got to see,
    we got to reevaluate the situation when it comes to you know,
    the underwriting, that's something else that I've never seen,
    what we call the SOP dramatically change, to ``do what you
    do'', that's the rule. And makes it very complicated to know,
    because I, as a community bank can operate differently than
    another community bank.
        And having the regulations so loose, if you do what you do,
    also doesn't provide what I call a level playing field. And so
    that's important to also understand is that the SOP has
    changed. And now if you feel comfortable providing loans that
    are what I would say, not prudent, then you're allowed to do
    that because you are not regulated in the same way as maybe a
    community bank that has higher regulations.
        Senator Husted. Great. Mr. Lanza-Weil, do you have a
    thought on that?
        Mr. Lanza-Weil. Thank you, Senator. I don't know much about
    the fees. What I do know is about underwriting standards. We're
    required to maintain our underwriting standards even when the
    rules change in the SOP, the standard operating procedures. I
    think what we are hearing is that there are some lenders that
    haven't followed their own prudent underwriting guidelines. And
    that's perhaps not the fault of the program, that's the fault
    of the lender.
        So, I'd be cautious about throwing the baby out with the
    bath water. Our default rate hasn't changed, and among all the
    CDFIs I know, the default rate hasn't changed because we're
    very focused on making good loans in our market. It sounds as
    if there's a lot of lenders out there that aren't doing that.
    And they should have more guidance and be more careful. And I
    would hate for their imprudent lending to harm our prudent
    lending.
        Senator Husted. Okay. Thank you.
        The Chair. Thank you, Senator. Senator Rosen.
        Senator Rosen. Thank you. Chair Ernst, Ranking Member
    Markey, and thank you all for being here and just spending,
    well, of course, your life working with small businesses and
    for your work really in the mental health space, it's so
    needed.
        And I'm going to give a little bit of a plug here for
    Nevada's credit union and community banks, I know them all so
    well. And I will say during the COVID crisis, but all the time,
    like you said, they're in the neighborhood. These are their
    friends, their neighbors. They know people have a relationship
    with them. They know if maybe a family emergency happened and
    they can't pay something now, and they'll pay it later. And
    they really want to see communities thrive. So, I just know the
    importance of this kind of lending and that special touch that
    you can give it. It's very meaningful.
        And so, I think we can all agree that the 7(a) program,
    it's a vital source of funding for our small businesses. And
    Nevada business have received over 700 loans totaling $355
    million just last year alone of 99 percent of businesses in
    Nevada, or small businesses, by the way. Although we're known
    for those big casinos, 99 percent are the small businesses. But
    it should be a shared bipartisan priority for the program, like
    you say, to run as efficiently as possible.
        And you know, I'm really thankful for your testimony so
    far, but it's not surprising that loan defaults delinquencies,
    they're more likely in times of economic uncertainty. And small
    businesses may face declines in sales or subsequent cash flows,
    mental health, of course I think you're going to stay pretty
    steady there. But similarly, poor economic conditions can put a
    strain on lenders who may be tightening their criteria and they
    reduce their loan volume.
        And so, we might look at looming tariffs, unreliable
    federal funding, economic uncertainty. It's critical we
    understand, again, the impact it's going to have on all of you.
    So, Mr. Lanza-Weil, can you discuss how the broader economic
    picture in this country is going to, in fact, affect maybe the
    borrower's loan performance and your lending activity?
        Mr. Lanza-Weil. Thank you, Senator. I think you said the
    word already, it's the uncertainty. The uncertainty that's
    existing in the marketplace today because of so much rapid and
    chaotic change is making it hard for us to plan. I don't know
    what the SBA's budget will look like next year. None of us do,
    obviously. I hope it's robust. But as we begin planning for our
    next fiscal year, we don't know how much money we can count on
    for an SBA grant that supports the business assistance that is
    so critical to supporting entrepreneurs like Mayrena.
        The business education and training that we provide is
    focused on helping people create and understand and use their
    financial statements and the management of their business.
    Mayrena knows how to be an exquisite mental health counselor,
    but probably didn't know much about QuickBooks before she came
    to us, or how to market her business.
        Senator Rosen. She learned pretty quickly us, and then
    that's what we're going to ask. How's the business environment
    impacting you and the uncertainty impacting you? You're working
    together, giving her the training, the resources, understanding
    how to be successful. How are you feeling in this moment?
        Ms. Guerrero. Well, it is true that the need for mental
    health services is there, but it's also true that the economic
    landscape is making--for example, I'm noticing that my clients,
    instead of booking weekly, they are booking biweekly because
    they can't afford the copay, or they have a hard time affording
    the deductible. Or like, people are losing their jobs, which
    means that they're losing access to healthcare. Or there could
    be like an executive order like freezing government funds,
    which affects Medicaid and Medicare, and that's 20 percent of
    my income. So definitely there's an impact in my business.
        Senator Rosen. Well, I want to go back to something you
    just mentioned. The importance of the SBA resource partners, as
    we see, it makes you successful. You're a great counselor, but
    maybe you didn't know QuickBooks when you started. And so, we
    have to bring that critical support and the training for our
    small business owners, from veterans' business outreach
    centers, small business development center, women business
    centers, and the like.
        I was so proud to bring the first ever Veterans Business
    Outreach Center to Nevada. We have almost a quarter million
    veterans in Nevada, very entrepreneurial. And really provide
    that tailored support and that free counseling, that technical
    assistance so that they can do what they do. And I know I have
    a short time left.
        Can you talk Mr. Lanza-Weil about the importance of this
    financial management counseling? I know all of you could really
    speak to this, but that's a big part of what you're helping a
    small business owner do, and how critical it is that we keep
    these resources flowing or their success and payback of the
    Loans.
        Mr. Lanza-Weil. Absolutely. Many of our applicants and
    borrowers have received services from our local small business
    development center network, and from our Women's Business
    Resource Center, which is the Center for Women in Enterprise,
    which serves all of New England and has had to lay off some
    staff already, because they are not getting the federal funds,
    they need on an ongoing basis to pay their staff to provide
    services to small businesses.
        The way we mitigate risk in a community development
    financial institution is with hands-on business assistance and
    training. By making Mayrena a better business person, she's
    also a better mental health counselor, and a better, a more
    sustainable and viable business in the long term.
        And at this particularly uncertain time, if the economy
    worsens, banks will tighten their lending as they always do.
    And CDFI loan funds, which are countercyclical, we'll see an
    increase in demand. And that increase in demand means that
    we'll need more help from our service partners to serve the
    businesses that we're able to make loans to.
        Senator Rosen. Well, thank you. I do believe small
    businesses are the engine of our economy in every state. Thank
    you for having this hearing, Madam Chair, and we need to
    continue to invest in the good work that you're doing. Thank
    you. Great.
        The Chair. Thank you, Senator Rosen. Senator Booker, you
    are recognized.
        Senator Booker. Thank you so much. I was excited to get on
    this committee when I got here, because I spent so much time as
    the mayor trying to get more access to capital for businesses
    in the City of Newark. And we were able to see an explosion
    during a recession, of new investment into our city,
    entrepreneurs succeeding. It was one of the best experiences
    that I got on this committee and it's been one of the better
    bipartisan committees that I've had here, and just finding ways
    because all of us know in our states, there's so much
    investment worthy people.
        I remember the now Secretary of State and I working
    together in the midst of the pandemic when the PPP loans coming
    out. But we found an arbitrary rule that disbarred people who
    had been justice involved returning offenders.
        They'd had to be out of for five years before they could
    qualify for a PPP loan, that was arbitrary and just dumb. And
    my Republican colleagues agreed, and we got it fixed under the
    Trump administration.
        So, it's just a great environment for us to continue to try
    to do good work. I'm a big person who believes in
    entrepreneurialism and the power for communities of capitalism,
    the double, triple, quadruple bottom lines that we find.
        And so, I just want to jump into some areas really quickly.
    One concern having had so much experience with Microloan
    programs inspired by the Grameen Bank in my community I'm
    really worried that we've had, you know, 15 years of mission-
    based lenders through the Community Advantage program that have
    worked closely with small businesses to help them get the
    capital they need, which is often small.
        But in January, the SBA announced it would increase the
    loan maximum up to half a million dollars, which I think is
    going to have a really stunning impact. And right now, I'm
    hearing from lenders that they haven't had communication,
    really from the SBA on whether they can offer increased loans
    to small business owners. There's a lot of delay going on.
        I got an extraordinary note from a small business lender in
    New Jersey, ``Last week, we had to decline a loan request from
    a farmer in Mullica Hill, who sought to expand his seasonal
    open-air farm into a larger year-round operation. The business
    was doing well despite its seasonal limitations. His goal was
    to provide his community with high quality produce plants and
    specialty groceries year-round instead of in his current just
    five-month operation.
        However, during our review, we determined that he required
    more than $350,000 to complete renovations, purchase equipment,
    and secure the necessary working capital for successful
    expansion. He was concerned about the risk of
    undercapitalization. We had to decline the request. Given his
    limited collateral, securing traditional bank financing would
    have likely been a challenge for him. We believe the borrower
    needed Community Advantage 7(a) loans of at least $450,000.''
        So, it's disappointing that small businesses in New Jersey
    are missing out on opportunities with these larger loan
    possibilities. And so just I'm hoping you shed some light on
    this, Mr. Lanza-Weil, have you been able to offer increased
    loan amounts in addition to the small ones that you're probably
    very familiar with? what would the impact be for your business
    folks?
        Mr. Lanza-Weil. For a long time, Senator our loan limit has
    been only $300,000. So, there's not been an effect in the past
    for the changes in the loan limits. But we'd like to raise our
    loan limit internally for all sorts of loans. And we find that
    most of our larger loans, and a larger loan for us is a loan
    over $75,000, our people coming to us with insufficient
    collateral.
        So, if we're going to raise our loan limit, we need an
    increased loan limit on the Community Advantage program in
    order to be able to continue to help low asset and low wealth
    individuals.
        Senator Booker. So, I just think there's a lot of common-
    sense fixes. I have some other questions I'm going to ask for
    the record that I don't think we'll be able to get through and
    the chairwoman is just rough on me. She particularly picks on
    New Jersey. So, I'm going to ask some questions for the record.
    I hope that you all will respond.
        I want to thank the four of you because I know your heart
    and your determination, you do this work really to see
    communities' flourish. And it means a lot to me that you would
    come down here and testify before the United States Senate. I
    know time is money, as you all know that, so it means a lot to
    me that you're here.
        But I hope you'll be as the hearing is open, I hope that
    you'll be responsive to some of the other questions I have that
    I think can really inform this committee, which I hope
    continues its record of just working in a bipartisan manner to
    help folk out. So, thank you.
        The Chair. Thank you. Senator Booker. My ears perked up
    when you said farmer?
        Senator Booker. I know.
        The Chair. I was so invested in----
        Senator Booker. It's fourth largest industry. People don't
    think it is the garden state, you know.
        The Chair. In New Jersey, folks. [Laughter.]
        The Chair. Thank you, Senator Booker. Now we will recognize
    Senator Hirono for five minutes. Thank you.
        Senator Hirono. Thank you, Madam Chair. I just happen to
    have met with some farmers from Hawaii, and they have unique
    challenges because we are in the middle of the Pacific, and
    there are all kinds of invasive species, including axis deer.
    And, you know, people don't know that we have, yes--sheep and
    others, but be that as a it may.
        I think in you, Madam Chair, we have somebody who supports
    the that we can give from SBA, particularly to entities such as
    farmers and the people in rural areas. For Mr. Lanza-Weil, I
    just heard you say that you would want the loan limits to be
    raised, what is the loan limit that you are working with right
    now?
        Mr. Lanza-Weil. I believe it's $350,000.
        Senator Hirono. And that you would like that raised to
    what? And it requires the Congress to raise that limit?
        Mr. Lanza-Weil. I don't know who requires to raise that
    limit. Okay. But 500,000 would be helpful to us.
        Senator Hirono. Is that because based on your own
    experience, that the amount of the kind of loans that people
    requests are more in the 500 range as opposed to the 300,000
    range?
        Mr. Lanza-Weil. Senator, we see when they come to us with
    our $300,000 loan limit, we see them scaling their plans and
    their ask to what they think they can get from us. If we had a
    higher loan limit, then they might reach further for the stars.
    And of course, everything's gotten more expensive over time.
    That's just the nature of money and time together, the time
    value of money, I think they taught us in in business school.
    So, our $300,000 loan limit has become somewhat obsolete. And
    $300,000 doesn't necessarily help launch many small businesses.
    We need to see more resources for that.
        Senator Hirono. I saw Ms. Guerrero, you are nodding your
    head, you would agree with loan limit issue?
        Ms. Guerrero. Definitely. I could have used $500,000 at the
    beginning of my business. And the reason why I say this is
    because I got that $300,000 from Common Capital, and about two
    years later, I needed an additional $100,000 from another
    lender. So, if I would've had that money from the beginning,
    that would be much easier for me.
        Mr. Lanza-Weil. If I may, Senator, excuse me for
    interrupting. As Mayrena said, as a business grows, if they
    outgrow us, at least in Western Massachusetts, there's not
    another resource. We need to have more resource so we can help
    the businesses as they grow, not just as they establish.
        Senator Hirono. Oh, that certainly makes a lot of sense.
    Ms. Guerrero, you got your loan through the Community Advantage
    program, which was created frankly not too long ago, and it was
    started as a pilot program. Could I ask, how much was your loan
    from the Community Advantage program?
        Ms. Guerrero. The Advantage Program gave us $250,000. And
    then I had an additional 50 grand microloan.
        Senator Hirono. So, without the Community Advantage program
    that you would have had a hard time getting your business off
    the ground?
        Ms. Guerrero. It would not have happened, Senator, because
    I wasn't going to fall prey of like predatory lending.
        Senator Hirono. How are you doing now?
        Ms. Guerrero. Oh, we are doing really well. We're really
    excited. I must say we're in conversations with Boston Impact
    Initiatives, which is a venture capital sort of firm that works
    with minority owners. And they're going to do a structured
    equity deal with us and just give us money so that we can have
    doubled the workforce that we currently have. So, we're about
    to grow significantly.
        Senator Hirono. Congratulations.
        Ms. Guerrero. Thank you.
        Senator Hirono. I really wish you the best. Mr. Lanza-Weil,
    then can you speak a little bit more about the importance of
    community lenders, because community lenders in a state like
    Hawaii, very important, but that's where your experience lies.
    Can you talk a little bit more about how important these kinds
    of lenders are in your----
        Mr. Lanza-Weil. Absolutely. I think any high touch lender
    is very important. I started my career at a community bank in
    the San Diego area. To the extent that the bankers on either
    side of me are community lenders who have a high touch
    approach, I think that's very important.
        I think on the continuum of credit, we need everything from
    community lenders that are certified CDFIs and other community
    loan funds on through to community banks and credit unions.
    It's the know your borrower conversation, that I think perhaps
    you weren't in the room for yet, Senator. The first rule of
    lending is-know your borrower. Smaller banks, community banks
    and community loan funds get to know their borrowers, and that
    enables them to say yes more often and to manage the risk when
    they do say yes.
        Senator Hirono. So, for the two witnesses who are sitting
    to the left and right of you, are you both community lenders?
        Ms. Sims. Yes. I'm an SBA lender that works for First
    Security Bank, and we're community bank.
        Senator Hirono. So, you certainly would agree that
    community lenders like yours very important.
        Mr. Fitzgibbon. Yes. Senator, we're community bank in the
    middle of Iowa.
        Senator Hirono. Thank you. Thank you, Madam Chair.
        The Chair. Thank you very much. And I think we'll go ahead
    and wrap our hearing. Okay. I want to say thank you so much for
    the witnesses for being here today. This was a very productive
    conversation. Really appreciate your time and input to the
    committee today.
        And I ask unanimous consent that the record of today's
    hearing remain open for two weeks for members to submit
    questions, revise and extend their records, and submit
    additional information into the record. Without objections, so
    ordered. And with that, the Committee on Small Business and
    Entrepreneurship----
        Senator Markey. Can I make a closing statement? Okay.
    Please, you'll like it, I promise.
        The Chair. Oh, we will allow. Proceed.
        Senator Markey. Thank You. Just want to say that the
    Community Advantage Program was a pilot program and is still
    not law. And the Senate Small Business Committee, in its wisdom
    in 2023, passed out of this committee by 18 to one, the
    codification of the Community Advantage Program. It was blocked
    on the floor by Senator Paul, which is a common fate for many
    pieces of legislation, I might say. But we could work together
    once again, to try to try to pass that bill.
        And I just wanted to note that even in early defaults, it
    was 1 percent during the Trump administration back in 2019, and
    it was 1 percent last year in the Biden administration. And it
    went down lower actually, because of PPP and--but even the
    early default is kind of just returning to where it was before
    COVID.
        And the 7(a) loan program is healthy. 99 percent of loans
    are being repaid despite the short-term increases in the
    default rate. This rate is actually normalizing back to pre-
    pandemic levels, which is great. And I just want to go back to
    Mr. Wentworth at the First National Bank of Malden.
        I remember sitting there, it looked a lot like you. Well,
    Mr. Wentworth really didn't look like you, Mr. Lanza-Weil, if
    you know what I mean. But the earlier generation, those old
    waspy bankers in New England, in that small city. And my father
    drove a truck for the Hood Milk company, and my mother was very
    mad at me for losing the full scholarship. You know, that I
    should have studied harder, she said, and we are sitting there,
    and my mother said, take out as much money as you want, Eddie,
    because you're going to pay it back, not your father. He's not
    going to take a second job.
        And I was in Congress at age 30, and because I went to the
    school at Boston College Law School, I was elected at age 30.
    Those loans helped; my father's a milkman. And I was paying
    back the student loans for six years as a member of Congress. I
    was the poorest member of Congress, all I had was student debt
    and my car payments. I had no other assets, but he knew his
    lender. I mean, he knew his customer, he knew who he was
    loaning to. It was my mother and father, and they would make
    sure I paid it back.
        So essentially, that's the essence of who you are. You're
    giving people who maybe the rest of the world can't quite see
    as well as they could, but because you know them and you trust
    them, you make them work at the same level as other businesses
    that maybe have those pre-existing relationships. So, I thank
    you so much, Madam Chair.
        The Chair. And witnesses, stay put. We had one member sneak
    in before the fall of the gavel. So, Senator Hickenlooper, you
    are recognized for five minutes.
        Senator Hickenlooper. Thank you, Chair and I appreciate you
    allowing the meeting to extend. I appreciate your indulgence.
    This is something I really care about, but in a previous life,
    seems like several lives ago, I came in as a new governor in
    Colorado, and we did a bottom-up economic development plan.
        We went to all 64 counties, got everyone to write an
    economic development plan of what did they see in 50 years for
    their community, what should the state do to get there? And we
    took all those together and we made something, we called the
    bottom-up Economic Development Plan. And it was amazing how
    universal the vision was. Some was obvious, cut red tape and
    needless bureaucracy. Sometimes it was, get a better workforce
    training, stop marketing the state for skiers, but for
    entrepreneurs. But one thing we heard everywhere was to find
    ways to get better access to capital, for people trying to
    start small businesses.
        So, Mr. Lanza-Weil, I guess I'll start with you. This
    Community Advantage program of expanding access to capital for
    underserved communities. I mean, it supports so many
    entrepreneurs in a variety of small businesses and helps them
    in accessing capital. In many cases, they wouldn't be able to
    find that capital anywhere, they're not from a community that
    has a lot of family money or friends and networks already in
    place.
        So how has the Community Advantage program made it easier
    for Common Capital to reach some of these underserved
    communities?
        Mr. Lanza-Weil. Thank you, Senator. I recall you were in
    the brewery business, is that correct?
        Senator Hickenlooper. I was a brew pub, so it was a really
    a restaurant, but it had a brewery inside of it.
        Mr. Lanza-Weil. When three of our 41 Community Advantage
    borrowers have been micro-breweries.
        Senator Hickenlooper. Oh, get out. Really. Who knew?
        Mr. Lanza-Weil. It's true fact. Every single one of our 41
    community Advantage borrowers came to us with a weakness that
    we could not overcome through our standard underwriting. It's
    almost always a lack of collateral.
        We have people that have saved money for years to have
    their 10 percent equity injection. They've gotten the
    experience they need in their industry. They have a good
    business plan that's reasonable and achievable. They're buying
    assets in some cases with their loan, in the case of Mayrena,
    it was couches and clocks. In the case of a microbrewery, it's
    some hard assets that have more value, but every small business
    that forms it starts up needs working capital. And that doesn't
    act as collateral on its own.
        So, we've needed the CA program to help bridge the gap when
    we've had a collateral deficiency. And I want to make clear
    Senators, that that doesn't cover the whole thing. The
    guarantees only 75 or 85 percent, or in one exceptional case,
    90 percent. We're still taking risk in the formation of that
    business, as is the entrepreneur who's put everything they have
    into it. And if it weren't for the Community Advantage Program,
    we wouldn't be able to make many of those loans. Mayrena
    expressed already that her business wouldn't exist without it.
        Senator Hickenlooper. Yes. I appreciate that and I salute
    you for all that work. I--all of you really, when I read the
    docket last night, it was really impressive. Mayrena, obviously
    the small businesses are important, not just for the
    entrepreneurs and not just for the employees, but for the
    communities they serve. In many cases, they serve a niche. And
    one of the wonderful things about small businesses in
    underserved communities, people live there. They know what the
    niche is, they know what the community needs. And I think
    that's an advantage that many businesses don't have.
        You've talked about how the SBA programs helped you start
    your business of Colorful Resilience--love the title. We
    entrepreneurs spend our lives thinking of good titles, good
    names but I love the notion of Colorful Resilience in terms of
    mental health. It's a very powerful image. How would you
    describe the impact of your business on your community?
        Ms. Guerrero. Well, huge really, because the communities
    that we serve, the BIPOC, LGBT, first Generation immigrant
    communities, have just historically been underserved, just
    forever. And that gap became greater after the pandemic. And
    so, we all know that there's a mental health crisis. There's a
    lack of providers for the demand of mental health services. So,
    our existence and that cultural competency that comes from
    working with providers that have shared identities, has been
    huge. It's a huge impact in the community.
        For example, my marketing budget is $80; $50 for my
    website, $30 for my Psychology Today directory. Why? Because
    clients come to me. I don't go looking for them. So that tells
    you the impact that it has in the community.
        Senator Hickenlooper. Absolutely. Amazing.
        Mr. Lanza-Weil. Senator, may I add to that please?
        Senator Hickenlooper. You have to talk to the chair because
    I'm out of time.
        Mr. Lanza-Weil. Madam Mayrena's business is not the only
    culturally competent and focused mental healthcare business
    that we financed. And we have, I think, a total of five mental
    health therapy businesses in our portfolio. But Mayrena's and
    one other are very much focused on people of color and others
    that have been traditionally underserved.
        Senator Hickenlooper. It's a great example. I'm so glad you
    guys could find time to come here. And I will watch, I've been
    running around, but I'll watch the videos tonight to catch up.
    Anyway, I yield back to the chair. Thank You.
        The Chair. Thank you. Senator Hickenlooper. Okay, we're
    going to try this again. Thank you very much. To our witnesses,
    thank you again for being here today, really productive
    discussion. Thank you for making it in right before the fall of
    the gavel.
        So, at this time, I will ask unanimous consent that the
    record of today's hearing remain open for two weeks for members
    to submit questions, revise and extend their records, and
    submit additional information into the record. Without
    objection. So, ordered.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chair. And with that, the Committee on Small Business
    and Entrepreneurship stands adjourned. Thank you all very much.
        [Whereupon, at 3:51 p.m., the hearing was adjourned.]

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