An Empirical Review of the Paycheck Protection Program (House Small Business subcommittee hearing, March 16, 2022)
Summary
The printed transcript of a hearing titled An Empirical Review of the Paycheck Protection Program, on March 16, 2022 before the Subcommittee on Oversight, Investigations, and Regulations of the House Committee on Small Business, 117th Congress (Small Business Committee Document Number 117–050). Opening statements are by Dean Phillips and Beth Van Duyne. The witnesses are William Shear of the United States Government Accountability Office; Dr. Robert W. Fairlie of the University of California, Santa Cruz; Dr. Manju Puri of Duke University Fuqua School of Business; Dr. Iryna Demko of Cleveland State University; and Robert Barnes of PriorityOne Bank, testifying on behalf of the Independent Community Bankers of America. Their prepared statements are printed in the appendix.
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“An Empirical Review of the Paycheck Protection Program (House Small Business subcommittee hearing, March 16, 2022).”
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AN EMPIRICAL REVIEW OF THE PAYCHECK
PROTECTION PROGRAM
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
HEARING HELD
MARCH 16, 2022
Small Business Committee Document Number 117–050
Available via the GPO Website: www.govinfo.gov
AN EMPIRICAL REVIEW OF THE PAYCHECK PROTECTION
PROGRAM
AN EMPIRICAL REVIEW OF THE PAYCHECK
PROTECTION PROGRAM
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
HEARING HELD
MARCH 16, 2022
Small Business Committee Document Number 117–050
Available via the GPO Website: www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
47–102 WASHINGTON : 2022
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELÁZQUEZ, New York, Chairwoman
JARED GOLDEN, Maine
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
MARIE NEWMAN, Illinois
CAROLYN BOURDEAUX, Georgia
TROY CARTER, Louisiana
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANDY KIM, New Jersey
ANGIE CRAIG, Minnesota
BLAINE LUETKEMEYER, Missouri, Ranking Member
ROGER WILLIAMS, Texas
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
CLAUDIA TENNEY, New York
ANDREW GARBARINO, New York
YOUNG KIM, California
BETH VAN DUYNE, Texas
BYRON DONALDS, Florida
MARIA SALAZAR, Florida
SCOTT FITZGERALD, Wisconsin
MELISSA JUNG, Majority Staff Director
ELLEN HARRINGTON, Majority Deputy Staff Director
DAVID PLANNING, Staff Director
(II)
CONTENTS
OPENING STATEMENTS
Page
Hon. Dean Phillips .................................................................................................. 1
Hon. Beth Van Duyne ............................................................................................. 3
WITNESSES
Mr. William Shear, Director, Financial Markets and Community Investment,
United States Government Accountability Office, Washington, DC ................ 4
Dr. Robert W. Fairlie, Professor of Economics, University of California, Santa
Cruz, Santa Cruz, CA .......................................................................................... 19
Dr. Manju Puri, J.B. Fuqua Professor of Finance, Duke University Fuqua
School of Business, Durham, NC ........................................................................ 21
Dr. Iryna Demko, Research Associate at the Center for Economic Develop-
ment, Maxine Goodman Levin College of Urban Affairs, Cleveland State
University, Cleveland, OH .................................................................................. 23
Mr. Robert Barnes, President and Chief Executive Officer, PriorityOne Bank,
North Magee, MS, testifying on behalf of the Independent Community
Bankers of America .............................................................................................. 24
APPENDIX
Prepared Statements:
Mr. William Shear, Director, Financial Markets and Community Invest-
ment, United States Government Accountability Office, Washington,
DC .................................................................................................................. 32
Dr. Robert W. Fairlie, Professor of Economics, University of California,
Santa Cruz, Santa Cruz, CA ........................................................................ 54
Dr. Manju Puri, J.B. Fuqua Professor of Finance, Duke University Fuqua
School of Business, Durham, NC ................................................................. 165
Dr. Iryna Demko, Research Associate at the Center for Economic Devel-
opment, Maxine Goodman Levin College of Urban Affairs, Cleveland
State University, Cleveland, OH ................................................................. 245
Mr. Robert Barnes, President and Chief Executive Officer, PriorityOne
Bank, North Magee, MS, testifying on behalf of the Independent Com-
munity Bankers of America ......................................................................... 358
Questions and Answers for the Record:
Question from Hon. Mfume to Mr. Shear and Response from Mr. Shear ... 365
Question from Hon. Houlahan to Dr. Demko and Response from Dr.
Demko ............................................................................................................ 368
Question from Hon. Houlahan to Mr. Barnes and Response from Mr.
Barnes ............................................................................................................ 370
Additional Material for the Record:
CUNA - Credit Union National Association ................................................... 371
NAFCU - National Association of Federally-Insured Credit Unions ........... 373
UNITE HERE Local 11 .................................................................................... 375
Center for Responsible Lending ...................................................................... 385
Gusto ................................................................................................................. 400
(III)
AN EMPIRICAL REVIEW OF THE PAYCHECK
PROTECTION PROGRAM
WEDNESDAY, MARCH 16, 2022
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building, and via Zoom, Hon. Dean
Phillips [chairman of the Subcommittee] presiding.
Present: Representatives Phillips, Velázquez, Davids, Mfume,
Houlahan, Craig, Van Duyne, Luetkemeyer, Meuser, and Donalds.
Chairman PHILLIPS. Good morning, everybody. I am going to
call the meeting to order. And without objection, the Chair is au-
thorized to declare a recess at any time. And I would like to begin
by noting some important requirements for everybody. Standing
House and Committee rules will continue to apply during hybrid
proceedings. All Members are reminded that they are expected to
adhere to these rules, including decorum. House regulations re-
quire that Members be visible through a video connection through-
out the proceeding. So, please keep your cameras on. Also, please
remember to remain muted until you are recognized to minimize
background noise.
In the event that a Member encounters technical issues that pre-
vent them from being recognized for their questioning, I will move
to the next available Member of the same party. And I will recog-
nize that Member at the next appropriate time slot provided that
they have returned to the proceeding.
For those Members and staff physically present in the committee
room today, in accordance with the attending physician’s most re-
cent guidance, masks are now optional and no longer required.
With that, I will make an opening statement.
First, I would be remiss if we didn’t recognize the speech that
many of us just saw in the visitor center by President Zelenskyy.
We are here to talk about small businesses in the United States
today. And as we do so, I just ask that we all keep in our heads
and our hearts the Ukrainians who are losing not just their busi-
nesses and livelihoods, but, indeed, their lives. And we stand
united as a committee, as a Congress, and as a country to stand
tall in the face of tyranny.
But to the issues at hand. Nearly 2 years ago, the rapid spread
of COVID-19 was wreaking havoc on small businesses across our
country. As people stayed home to slow the spread of the virus,
(1)
2
business for many small firms essentially grounded to a halt. It
was a time of tremendous uncertainty. Small businesses of all
shapes and sizes began to wonder how long could we continue to
pay our rent, our employees, and make our other expenses met.
Congress recognized the pandemic’s threat to small businesses
and the overall economy and moved very quickly and in a bipar-
tisan fashion to pass emergency legislation. In late March of 2020,
Congress passed the CARES Act on a near unanimous basis. The
bill provided over $376 billion in relief for struggling small busi-
nesses. Most of this money was allocated to the newly created Pay-
check Protection Program, commonly known as PPP.
Under PPP, banks and other private lenders made fully guaran-
teed and forgivable SBA loans to small businesses impacted by
COVID. These loans were intended to allow small firms to continue
to pay their employees and to cover other expenses. Since it
launched in April of 2020, PPP has delivered almost $800 billion
in emergency loans, making it one of the most extensive relief pro-
grams in American history.
The Small Business Administration administered more aid dur-
ing the COVID crisis than it did for all other disasters combined
in its 67-year history.
Given the massive scale of PPP and other relief programs, and
the speed with which it needed to be stood up, it was inevitable
that problems would arise. For example, in the early days of PPP,
it became clear that funds were not reaching the most vulnerable
small businesses. Instead, larger companies with preexisting rela-
tionships with large banks were prioritized in many cases in the
smallest businesses’ expense.
The initial rollout of PPP also shut out many businesses owned
by women and minorities. This Committee worked diligently to ad-
dress these inequities in the program throughout the pandemic. We
fought for set-asides for underserved small business and worked to
empower the community lenders that served them. The PPP and
Health Care Enhancement Act created set-asides of PPP funds so
that entities like CDFIs, CDCs, and SBA Microloan Intermediaries
could fairly compete with big banks in the program.
We also passed my bill, in conjunction with Chip Roy, the PPP
Flexibility Act, which made PPP loan forgiveness more accessible
for firms who needed to spend a greater share of their loan pro-
ceeds on non-payroll costs.
And we also passed the Economic Aid Act, which delivered more
relief to the hardest hit small businesses through Second Draw
loans. These changes proved to be effective in making the program
more accessible for small businesses. In later rounds of PPP, the
average loan size reached approximately $44,000, a marked im-
provement over the $199,951 average loan size during the initial
round.
Many researchers have analyzed the effectiveness of PPP in sav-
ing jobs and reaching small businesses throughout the country. We
have a few of those experts with us today. I look forward to hearing
more about their research and discussing the insights they have
gained into the overall efficacy of PPP and the program updates
that Congress has instituted. By looking closely at these findings,
we can better prepare ourselves for future crises and help SBA’s
3
non-pandemic loan programs reach more underserved businesses
more effectively and more efficiently.
With that, I would like to yield to the Ranking Member, Ms. Van
Duyne, for her opening statement.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman, for
holding this critically important hearing and your continued part-
nership on providing proper oversight. In order to respond to the
crushing State and local shutdown orders, the federal government
stepped in with multiple relief programs. The Paycheck Protection
Program was front and center during this emergency period ensur-
ing relief was focused on retaining employees while requiring that
dollars flow to American small businesses through the private sec-
tor lenders. As we approach the second anniversary of PPE’s open-
ing, Members of this Subcommittee and the full Committee are
busy examining how this almost $800 billion program performed.
And this hearing is a continuation of that discussion.
As of March 6, 2020, 86 percent of all PPP recipients have re-
quested loan forgiveness. In response, the SBA has made forgive-
ness payments of approximately $700 billion. These are extraor-
dinary dollar amounts and show the program is winding down but
the work is not yet finished. The SBA cannot wipe its hands of this
program and must stay engaged with this Committee as we con-
tinue our oversight responsibilities.
This sentiment also needs to be emphasized to the Department
of the Treasury who played a significant role in PPP by onboarding
numerous new lenders. And as many new Committee Members
have pointed out, Treasury Secretary Yellen is required by law to
testify before the full Committee on the implementation of the
COVID-19 programs, specifically the PPP. Unfortunately, 325 days
past the date, the challenges small businesses face still haven’t
risen to the level of importance for the Secretary to appear. This
cannot stand.
In the State of the Union, the President stated that we are going
after the criminals who stole billions in relief money meant for
small businesses and millions of Americans. How can we believe
that statement if appearing before our Committee is too difficult a
step to take? Nevertheless, my colleagues are eager to go after
wrongdoers and make necessary changes. And I hope the Treasury
Secretary will testify on this matter soon.
This Committee has a host of issues left to examine regarding
PPP, including fraudulent behavior. Numerous articles and audits
have highlighted trends connecting fraud to certain FinTech lend-
ers. And it is crucial we understand these lenders’ roll within the
programs, and how they interacted with small businesses, deter-
mined eligibility, and if they adequately protected American tax-
payer dollars.
Fraud is unacceptable and we must address illegal behavior and
ensure we recover improper dollars efficiently. Additionally, we
need to learn more about how the SBA conducted PPP loan re-
views. For example, if ineligible businesses entered the PPP, I am
left to wonder how they were treated under the loan forgiveness
process. We must find answers to these essential questions.
Moreover, any PPP conversations should include the lenders on
the ground delivering this program. And that is why I am looking
4
forward to today’s discussion with not only the Government Ac-
countability Office, which has provided extensive oversight
throughout, but also with a community bank lender who is on the
frontline keeping businesses in his community alive. In Text 24,
our private lenders helped disburse over 40,000 loans worth well
over $4 billion. In the numerous roundtables that I have held with
small business owners from around north Texas, besides a tough
labor market and skyrocketing energy prices, a common theme is
how PPP was a lifesaver during the pandemic. And while American
small businesses had been ready to grow their business without
government handouts, our work in Congress is to ensure every last
relief dollar was appropriately spent and that must continue.
And with that, Mr. Chairman, I look forward to our continued
work on this matter, and I want to thank you for holding this hear-
ing. I yield back.
Chairman PHILLIPS. Thank you, Ms. Van Duyne. The gentle-
woman yields back. With that, I would like to introduce our only
witness on today’s first—our best and only witness today on our
first panel, Mr. William Shear, the Director of Financial Markets
and Community Investment for the U.S. Government Account-
ability Office. A frequent panelist representing GAO before us, he
leads GAO’s work in community and economic development, small
business, and SBA’s COVID-19 response programs. Mr. Shear
joined GAO more than 20 years ago and is a dedicated public serv-
ant. He has a master’s degree in public policy and a PhD in eco-
nomics, both from the University of Chicago. He also served as an
adjunct faculty member in the graduate program in city and re-
gional planning at the University of Pennsylvania. We welcome you
back, Mr. Shear, and afford you now 5 minutes for your opening
statement.
STATEMENT OF WILLIAM SHEAR, DIRECTOR, FINANCIAL MAR-
KETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT AC-
COUNTABILITY OFFICE
Mr. SHEAR. Thank you. Chairman Phillips, Ranking Member
Van Duyne, and Members of the Subcommittee, I am pleased to be
here this morning to discuss our work on SBA’s Paycheck Projec-
tion Program, or PPP for short. While my statements before this
Committee on SBA’s emergency loan programs in April 2021, and
previously in October 2020, focused on program administration,
controls, and oversight, and fraud risk management, my statement
today is about how PPP changes SBA and Congress made affected
the characteristics of participating lenders and program recipients.
For this work, we relied on SBA loan level PPP data, as well as
county level business statistics and American community survey
data from the U.S. Census Bureau.
We analyzed PPP loans over three application periods, April 3
through 16, 2020, April 27 through August 8, 2020, and January
11 through May 31, 2021, which we refer to as Phases I, II, and
III, respectively. Over this period, Congress provided commitment
authority of about $814 billion. In summary, early lending during
Phase I favored larger and rural businesses. Specifically, 42 per-
cent of these early loans went to larger businesses, which we de-
fined as those with 10 to 499 employees. Larger businesses were
5
more likely to have a preexisting lending relationship with a bank.
Businesses in rural areas also received a high share of these early
loans relative to their representation among all small businesses.
Traditionally underserved businesses, in particular, businesses
owned by self-employed individuals, members of minority groups,
women, and veterans faced challenges obtaining loans, prompting
Congress and SBA to make a series of changes shortly after the
program launched. For example, SBA admitted about 600 new
lenders, including non-banks, developed guidance helping self-em-
ployed individuals participate in the program, targeted funding to
minority-owned businesses in part through community develop-
ment financial institutions. Through the Paycheck Protection Pro-
gram and Health Care Enhancement Act passed in April 2020, and
the Consolidated Appropriations Act passed in December of 2020,
Congress established additional set-asides for businesses that ap-
plied through CDFIs and other specialized lenders.
Lending to traditionally underserved businesses increased notice-
ably after these changes were implemented. By the time PPP
closed in June 2021, lending in traditionally underserved counties
was proportional to their representation in the overall small busi-
ness community. While lending to businesses with fewer than 10
employees remained disproportionately low, it increased signifi-
cantly over the course of the program.
Chairman Phillips and Ranking Member Van Duyne, I would be
happy to respond to any questions you or the panel would like to
ask.
Chairman PHILLIPS. Thank you, Mr. Shear. I will begin by rec-
ognizing myself for 5 minutes.
The GAO found that banks made more than 93 percent of the
loans during Phase I, which I recall was the first 2 weeks of the
program. Did GAO determine how much of that 93 percent went
to existing clients versus new clients of those banks?
Mr. SHEAR. We refer to research by others as far as the tend-
ency——
Chairman PHILLIPS. Mm-hmm.
Mr. SHEAR.—to serve existing clients, but we don’t have infor-
mation that—to answer that question as far as how much of it
went to existing versus new clients.
Chairman PHILLIPS. Okay. As you are well aware, we made
several changes to the program midway. Some of them included
CDFI set-aside, the 14-day exclusivity period for microbusinesses,
and beginning in 2021, the loan calculation rule changes for Sched-
ule C filers and others. Of those changes, and perhaps others,
which of those were most effective in helping improve access, espe-
cially for underserved businesses, in your estimation, of the modi-
fications that we made?
Mr. SHEAR. The modifications that I tend to focus on the most
are the inclusion of CDFIs and actions taken to help smaller banks
participate. Those are the two that stand out for me. So, I don’t
want to take anything away from the other inclusion that occurred
over the period. But that is what stands out the most to me.
Chairman PHILLIPS. I appreciate it. You know, we know PPP
was designed to expediently distribute funds with oversight and
fraud protection occurring during the forgiveness phase. In your
6
view, did Congress find the appropriate balance between expedi-
ency and fraud prevention? And what aspects of PPE are worth
further research in that respect?
Mr. SHEAR. Our concern from the beginning of the program was
the lack, we called it limited controls. So, I will use the words con-
trols and oversight kind of interchangeably——
Chairman PHILLIPS. Okay.
Mr. SHEAR.—and the lack of, really, what we call sound fraud
risk management. So, that has been a concern from the beginning.
As I have said before this Committee before, that we put the emer-
gency loan programs on GAO’s high-risk list because of our con-
cerns of the lack of oversight, the lack of controls in place, the lack
of sound fraud risk management, and also, findings from financial
statement audits, and just high rates, the inability to estimate im-
proper payments. So, these are all concerns of us. So, it is one that
is our focus has been on SBA’s administration of the program. So,
those are the things that stand out the most for us in terms of we
think the oversight of the program has improved over the period
from the initial period. But we still have concerns with the over-
sight element of it. We are still concerned about the lack of com-
prehensive fraud risk management.
Chairman PHILLIPS. Are there any specific recommendations
you might share with us in the Committee relative to some of that
oversight and fraud prevention that we could still yet at least call
to their attention, or perhaps equally importantly, prepare for in
the future?
Mr. SHEAR. The most progress that has been made, we made a
recommendation in our first GAO-wide report in June of 2020, to
really put controls in place, to really have oversight to protect the
integrity of the program. So, it is dealing, you know, kind of broad-
ly with how do you monitor borrowers to make sure they are eligi-
ble, that they are the intended beneficiaries, and things of that na-
ture.
On that, there is a master review plan that has gone through dif-
ferent iterations. It was recently updated, but it has largely been
intact for the last, I would say, 12 to 14 months. That is one where
there has been some progress made in terms of using largely con-
sultants——
Chairman PHILLIPS. Yeah.
Mr. SHEAR.—in terms of automated reviews, manual reviews, to
oversee it. So, it is like there has been improvement in that area.
We are still looking for some greater movement on that. And the
one area that we still are involved in discussion with SBA about
is the lack of looking at what is called the self-certification for eco-
nomic necessity. So, we have that.
On fraud risk management, we are very concerned about it be-
cause we made two recommendations in 2021, having to do with
fraud risk management to really to do an assessment of fraud risk
to follow GAO’s best practices for fraud risk management, which
include naming a lead entity to do that and of specifying what is
called a fraud risk tolerance. So, we have been looking. We have
been calling for that and to have an action plan to deal with the
fraud issues. It was just in the last few weeks, basically, that SBA
has stood up a lead entity to lead fraud risk management.
7
Chairman PHILLIPS. In the last few weeks, okay.
Mr. SHEAR. Yeah, just in the last——
Chairman PHILLIPS. My time——
Mr. SHEAR.—few weeks.
Chairman PHILLIPS.—is, unfortunately——
Mr. SHEAR. I am sorry.
Chairman PHILLIPS.—my time is well expired.
Mr. SHEAR. I am sorry for the long answer.
Chairman PHILLIPS. But it was important to get that answer.
So, thank you.
Mr. SHEAR. But this is a continuing concern of ours.
Chairman PHILLIPS. Okay. Thank you, sir. With that, I yield to
our Ranking Member, Ms. Van Duyne, for 5 minutes.
Ms. VAN DUYNE. I appreciate that. And I actually want to con-
tinue exactly what you were talking about. So, I feel like you felt
you had to truncate that answer. I am really concerned about the
lack of fraud risk management what you are talking about with the
inability to be able to find some of these fraudulent payments. Can
you give us a little bit more detail? I mean, when we say the lead
entity, who is that? Are you somewhat confident that they are
going to be able to actually do the job of providing that oversight?
Mr. SHEAR. We are at least glad that they named an entity, ba-
sically.
Ms. VAN DUYNE. So, who is the entity?
Mr. SHEAR. It is like a fraud risk council within SBA.
Ms. VAN DUYNE. Okay.
Mr. SHEAR. Okay. So, they established a council. So, there is a
lead entity with the responsibility and the authority. So, there is
an entity that is on paper that kind of corresponds to what we
would call a lead entity in charge. They are supposed——
Ms. VAN DUYNE. Up until that point, was there a concern that
there was just no accountability within the organization?
Mr. SHEAR. It was like, certainly, there have been extensive
looks at fraud, especially by the IG, by the PRAC, and others.
There has been a look at it, but the concern is the lack of a dedi-
cated entity, and the idea that fraud risk management involves a
very comprehensive and strategic approach. And what didn’t hap-
pen at the beginning of the program and really hasn’t happen yet
is to really come up with an action plan.
So, the way I would characterize it through the oversight func-
tion, it isn’t like SBA’s going, you know, is running blind that they
don’t know, you know, what some of the, you know, as far as what
some of the problems are with borrowers that might not be eligible.
So, they are not flying blind. But what we are looking for is a more
comprehensive approach, a more strategic approach, a more in-
formed approach to really to figure out the patterns of fraud risk—
of fraud that is going on and to manage that risk. We recognize in
an emergency that there—it is logical to allow some tolerance for
fraud in the program. There can be—it recognizes that our fraud
risk framework that in response to an emergency——
Ms. VAN DUYNE. But you are going to have to ask the question
like, I mean, how much fraud is acceptable? I mean, I think——
Mr. SHEAR. We don’t——
Ms. VAN DUYNE.—from our position——
8
Mr. SHEAR.—have a measure. Neither does——
Ms. VAN DUYNE.—we would say none.
Mr. SHEAR.—neither does SBA. But I know the tendency is to
say no fraud is acceptable. And I can say that as a principle, we
don’t want fraud in any program. But there is the notion that if
fraud risk exists, it is just like it might be that strategically that
there might be a reason to tolerate, you know, more exposure to
potential fraud——
Ms. VAN DUYNE. Well, part of that solution seems——
Mr. SHEAR.—in a program than in a regular program——
Ms. VAN DUYNE. Yeah.
Mr. SHEAR.—considering the emergency situation. It is similar
to the situation——
Ms. VAN DUYNE. No, and I am sorry.
Mr. SHEAR. Yeah.
Ms. VAN DUYNE.—but I have very limited time.
Mr. SHEAR. I am sorry.
Ms. VAN DUYNE. I have got like a bunch of questions that I
want to ask.
Mr. SHEAR. Okay. Thanks.
Ms. VAN DUYNE. And I appreciate you going on that. But look-
ing at the potential for fraud, have you conducted any analysis on
potential fraud between banks and non-bank lenders when it comes
to the program? And has your research found out when it comes
to oversight controls in place at the SBA, have you been able to
root out that fraud? So, is there a difference between banks and
non-banks, and where did SBA play a role in that?
Mr. SHEAR. We recognize that there are certain concerns that
have been raised about FinTech lenders.
Ms. VAN DUYNE. Correct.
Mr. SHEAR. Our forensic auditors have ongoing work that still
is looking into the issue as far as it is largely focused on SBA’s
practices, but it also considers the different types of lenders. So, we
have ongoing work on that. One of the things I would like to em-
phasize is that it will probably be years until we know how much
fraud has occurred in this program. And so, what we point to an
awful lot are from real time auditing by the IG community and oth-
ers——
Ms. VAN DUYNE. Mm-hmm.
Mr. SHEAR.—is that what we look for is how much potential
fraud is out there. We observe a high-level——
Ms. VAN DUYNE. Do we have a number for that?
Mr. SHEAR. There are different numbers that have been used
that we have cited from the IG and others as far as how much——
Ms. VAN DUYNE. What potential fraud would you estimate is
out there right now for this program?
Mr. SHEAR. I would have to go back and——
Ms. VAN DUYNE. Can you give me a range?
Mr. SHEAR. I can’t answer it for the record, no. No, because this
is one maybe a year ago when I was really discussing fraud risk,
I would be better prepared. I——
Ms. VAN DUYNE. But you are saying those numbers are public?
Your organization——
Mr. SHEAR. Yeah.
9
Ms. VAN DUYNE.—SBA has made it public?
Mr. SHEAR. We have reported multiple times. We refer to the
IG report——
Ms. VAN DUYNE. But you don’t know what the latest numbers
are at all?
Mr. SHEAR. No. I don’t have the latest numbers in front of me.
I could go ahead——
Ms. VAN DUYNE. Do you know what the difference between
what is acceptable? What you are claiming would be acceptable
compared to what we are looking at right now?
Mr. SHEAR. We have no standard for acceptable. But what we
are saying that for SBA managing fraud risk it is reasonable to
think about how much risk are we willing to take.
Ms. VAN DUYNE. I am just wondering what the delta is.
Mr. SHEAR. Yeah.
Ms. VAN DUYNE. But I am out of time.
Mr. SHEAR. Yeah, okay.
Ms. VAN DUYNE. Thank you, sir.
Chairman PHILLIPS. The gentlelady’s time has expired. Perhaps
we can come to a second round too. With that, I am pleased to rec-
ognize the Chairwoman of the Small Business Committee, the
gentlelady from New York, Ms. Velázquez, for 5 minutes.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman. Thank you, Mr.
Shear, for being here today. I am happy to see GAO validates my
initial assertion that more sophisticated firms that had better ac-
cess and those without preexisting relationships couldn’t get loans
approved no matter how hard. First, they were not able to even
have contact with those banks. And then if they did, those loans
were not approved. So, your report suggests that program changes
made by Congress and SBA helped to increase access for the in-
tended businesses and counties. So, my question to you is, would
empowering CDFIs and MDIs and getting them more involved with
SBA lending help address gaps in the business lending market
identified during PPP?
Mr. SHEAR. You are asking a really good question. And it is
very clear, as you said, that the changes made by the Congress and
the SBA have led to greater access for especially underserved bor-
rowers. So, it is greatly improved in this program. And I want to
go back to what I said about maybe some tolerance for fraud, as
far as, as a strategy is that the considerations involved in an emer-
gency loan program and knowing how devastating the pandemic,
the effects have been on small businesses, especially the most vul-
nerable and the smallest small businesses that might not have ac-
cess to capital. It is a different consideration when you start bring-
ing in more lenders and targeting assistance. I think it is a more
complicated story if you are talking about let’s just say during nor-
mal times, let’s just say the 7A program as far as there are certain
questions like we have followed the Office of Credit Risk Manage-
ment very closely over the years. There are certain other consider-
ations that come into effect.
Ms. VELÁZQUEZ. And I know that——
Mr. SHEAR. Yeah.
Ms. VELÁZQUEZ.—our first consideration must be to be safe
stewards of taxpayers’ money, right? The fact is we haven’t seen
10
fraud committed by CDFIs and MDIs. So, that could be another re-
port or investigation that could be. But the report mentioned poten-
tial fraud in the COVID relief programs. And while FinTech lend-
ers were essential in helping small businesses access PPP loans, re-
search has shown FinTech originated PPP loans are more likely to
be associated with fraud. To balance the interests of safeguarding
taxpayers’ dollars while improving the reach of SBA lending pro-
grams, how cautiously should we proceed with non-bank lenders
accessing SBA guaranteed lending?
Mr. SHEAR. My answer for an emergency program like PPP is
that you especially have the underserved businesses that were real-
ly adversely affected and particularly businesses owned by mem-
bers of minority groups.
Ms. VELÁZQUEZ. Mm-hmm.
Mr. SHEAR. And there might be—it might make more sense
that the FinTech lenders have algorithms that are, you know, con-
sidered color blind, things of that nature. They have served that
segment of the market more heavily than some of the other lenders
have. So, the consideration of pandemic, I think, is different.
I will just state the consideration I think if you are talking about
the 7A program and during normal times, is to focus on the Office
of Credit Risk Management. And we have seen improvements in
that program over the years. We have certainly evaluated it many
times from its creation. And there have been improvements in their
program. I think the focus should be on the ability of that office
to oversee the new lenders.
Ms. VELÁZQUEZ. Okay. Thank you. Many view the PPE as a
stress test of the small business lending market. And GAO’s re-
search and testimony from other panelists show where the gaps in
the program are—were. Do you agree that PPP was a stress test
of the small business lending market and that we should be learn-
ing lessons based on where the gaps are shown to be?
Mr. SHEAR. There are certainly lessons learned. One is that our
next enclosure on PPP in our April report will get into lessons
learned for let’s just say future emergencies.
Ms. VELÁZQUEZ. All right.
Mr. SHEAR. But there is also certain—it casts a light on who is
served by whom in a more general way. So, I think it is something
we should all be mindful of.
Ms. VELÁZQUEZ. Thank you. I yield back, Mr. Chairman.
Chairman PHILLIPS. The gentlelady yields back. And I am
pleased to recognize the Ranking Member of the Small Business
Committee, the gentleman from Missouri, Mr. Luetkemeyer, for 5
minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. And I want to
follow-up on your opening remarks with regards to the powerful
speech and video that we saw this morning from President
Zelenskyy. I agree that it is a very unnerving situation. This is not
a video game that is going on. This is a real-life situation with peo-
ple living and dying and being hurt because of war. I mean, you
take it very seriously, and I hope the administration does just that.
That was a sincere request this morning and I hope they take it
sincerely and act on it accordingly.
11
With that, thank you for bringing this topic to us this morning.
Mr. Shear, welcome again. I always enjoy your discussions with us.
A lot of the things I was going to talk about have been discussed
already. But I want to talk about a little bit with regards to the
IG report that talked about some of the controls that they were re-
questing to be put in place. And as I was talking with them and
actually off the record and on the record here in Committee a cou-
ple of times, they were—I asked them, you know, well, you have
identified fraud. You identified problems within the SBA’s adminis-
tration of these programs. Which by the way it is a Treasury pro-
gram. SBA is administering it. Let’s get that straight. Make sure
we understand that. And throughout the discussion, I kept asking
the question, so, you are giving them processes, and protocols, and
new procedures, are the leaders of the SBA, are they implementing
those? And the answer was, yes. And so, I said, well, what is the
problem, then? And they said, oh, the staff is not implementing it.
The staff is not living up to the—and operating within those proce-
dures. Did you find that same thing that staff didn’t seem to be
willing to comply with the processes and procedures that were put
in place?
Mr. SHEAR. We haven’t seen evidence of that. But we haven’t,
you know, focused that closely as far as the processes followed by
the employees. But what we have focused on have been the dif-
ferent, you know, automated checks, manual checks, and the like.
And so, that is what we——
Mr. LUETKEMEYER. Well——
Mr. SHEAR.—focused on.
Mr. LUETKEMEYER.—you sort of alluded to something a
minute ago with respect to the reaction of SBA to your suggestions
saying that they, in essence, and I don’t want to put words in your
mouth here, but basically you said they didn’t take some of your
suggestions seriously. They didn’t act on them. They didn’t put ev-
erything in place that you suggested. You know, it taking a long
time for them to actually implement some of these things. So, do
you think they take your recommendations and the IG seriously?
Because it has taken until now and you just said a minute ago that
just 2 weeks ago they started to implement some of these things.
I mean, it looks to me like we are really not taking anything seri-
ously from the folks who could actually be helping them clean up
their mess.
Mr. SHEAR. The things that stand out for us and it becomes
part of discussions that I and my colleagues have had with SBA
and that the Comptroller General has had with the administrator,
which is the designation of the high-risk designation. And we are
concerned that it has taken so long to set up an entity to manage
fraud risk. It is very late in the game to be doing that. And so, that
stands out. And there is also concerns that has come out of the fi-
nancial statement audits from the last 2 years that there are con-
cerns about the accounting and the internal controls pointed out by
that. And those really stand out for us as something that we wish
that action would have been taken more quickly in both areas.
Mr. LUETKEMEYER. Well, your statement there, sir, I thank
you for it, is that it has taken 2 years to get something done. I
mean, it would appear to me, I mean, if I am managing the agency,
12
you know, it may take, you know, 6 months to a year to get some
new changes in place, get people used to the new processes, but 2
years? It looks to me like they are just saying no thank you. We
are going to work on this in our own time. Either that or they are
so overwhelmed with the process and all of the work they are hav-
ing to do that they can’t get to it. Is that a possibility?
Mr. SHEAR. You bring up a very real possibility. And one of the
things that I would point out is that you do have this master re-
view plan in place as far as oversight. But it is a little bit more
of a reactive policy. They learn from what they see from, you know,
from the focus of that master review plan and we are really looking
for something more strategic to address these issues.
Mr. LUETKEMEYER. Well, I hope instead of learning——
Mr. SHEAR. And that has——
Mr. LUETKEMEYER.—from what they——
Mr. SHEAR. That has——
Mr. LUETKEMEYER. Okay.
Mr. SHEAR. That has taken a long time.
Mr. LUETKEMEYER. Instead of learning from what they see, I
hope they listen to what you say.
Mr. SHEAR. Okay.
Mr. LUETKEMEYER. Because it would certainly be helpful to
them. I have just got a couple seconds left and I just wanted to
make one more comment with regards to FinTechs. I agree with
Chairman Velázquez that this is a concern. It appears that that is
where most of the fraud was in the PPP program. Idle programs
are whole another animal. But it does appear that from the statis-
tics we saw, that the FinTech folks were actually not very good at
protecting the integrity of the program. Would you agree with that
statement?
Mr. SHEAR. I don’t think there is enough information available
to draw that conclusion. So, maybe we are just——
Mr. LUETKEMEYER. You don’t have——
Mr. SHEAR.—we are cautious.
Mr. LUETKEMEYER. You don’t have any idea that the losses
were so significant compared to the banks and credit unions in this
instance because they have a know your customer rule in place
that the FinTechs don’t? That it didn’t protect the ability of the
banks and those folks to do their job right versus the FinTechs?
Mr. SHEAR. Let me just make the observation at a very simple
level. We looked at lending over three periods of time and there
were certainly evidence of significant potential fraud in the pro-
gram in all three phases, and——
Mr. LUETKEMEYER. But you haven’t quantified it yet.
Mr. SHEAR. We haven’t quantified it and, again, I will go back
to the statement——
Chairman PHILLIPS. The gentleman’s time——
Mr. LUETKEMEYER. Are you——
Chairman PHILLIPS.—has expired.
Mr. LUETKEMEYER. Are you keeping——
Mr. SHEAR. We don’t know——
Chairman PHILLIPS. Mr. Shear, we have to wrap this up.
13
Mr. SHEAR.—how much fraud. We don’t know how much—we
will not know for a while how much fraud has occurred in the pro-
gram.
Mr. LUETKEMEYER. I think it is very important that we quan-
tify that. And I thank you for your testimony and I thank the
Chairman for his indulgence. Thank you.
Chairman PHILLIPS. The gentleman’s time has expired. Now, I
am pleased to recognize the Vice Chair of the Committee and the
Chairman of the Subcommittee on Contracting and Infrastructure,
the gentleman from Maryland, Mr. Mfume, for 5 minutes.
Mr. MFUME. Thank you very much, Mr. Chairman. I want to
thank you and the Ranking Member for convening what I consider
to be a crucial hearing. Mr. Shear, thank you for being with us this
morning. As we all know, if I can deliberately be redundant, the
Paycheck Protection Program supported small businesses across
our nation during the pandemic by allocating, as we know, $800
billion to cover payroll and operational costs. And it was such an
incredible program that it lifted businesses that were in the most
need and kept them afloat. So, you can understand why there is
so much concern here about fraud and fraud assessment and how
do we not do the same thing again.
I believe, however, that to truly invest in a program like this, we
have to be compliant to our oversight and our fiduciary responsibil-
ities as a committee, and not only applaud the success, but to also
point out failures where we see them. And the driving force behind
the program was paychecks for employees. It was very simple. Yes,
we care about every aspect of business and operations, but the pro-
gram was designed to protect employees. So, as you might imagine,
some of us have been hearing stories that just go against the grain.
Mr. Shear, there is a hotel in my district, the Merriweather
Lakeshore Hotel that received a PPP loan for almost $1.1 million
on April 10 of 2020. On April 15, 5 days later, the Merriweather
Lakeshore Hotel fired 100 of its employees and then closed to the
public. According to PPP regulations, the hotel, correct me if I am
wrong, was required to spend 60 percent of its loan on payroll
costs. Yet it remained closed from that point during the entire pe-
riod after that. And then based on information provided to me, the
hotel refused later, a year later, to hire 98 of the 100 people that
it had let go who had been out of work for all of that time. So, I
am just trying to get some sense about this notion of give you
money, take money. Give you money under one claim, and then
under that same claim, in this case, 100 people are let go a few
days later.
So, could you tell me whether your research as shown whether
this industry, the hotel industry, or other industries that have re-
ceived cumulatively billions of dollars through this program, have
also failed to return workers back to jobs after receiving the money
to protect the paychecks of those workers.
Mr. SHEAR. Our work hasn’t drilled down into the very impor-
tant issue that you raise. What our work has identified is the idea
that this is a program out of the starting gate that relied heavily
on borrower self-certifications. So, I can’t speak to the hotel, even
though I will mention I live in your district in Baltimore. But I
know what hotel you are talking about.
14
Mr. MFUME. God bless you. You are a great American.
Mr. SHEAR. Okay. Thank you. But I will say that I can’t com-
ment on the one hotel or any specific industry. But we are con-
cerned how much the program has relied on self-certifications and
this is why we have followed so closely the oversight that has been
put in place to examine whether borrowers are complying with the
requirements of the program and whether the borrowers are, in
fact, eligible for the program. So that is where our focus has been.
Mr. MFUME. Well, I hope now that you have this example based
on the information that has been provided to me, that someone at
GAO will look into this. I know you are not the Inspector General,
but all of us are going to get instances where we have these
strange, strange kind of situations where people receive money,
they fire people, and then they close down, and then the loan is ul-
timately forgiven, as this one was a year later. I would appreciate
it if you could look into that and if you could let myself and, of
course, the Committee know of your response.
Mr. SHEAR. Okay. I would be glad like as far as questions you
want to put in our questions for the record. We normally don’t com-
ment on one entity, but we will see what we can do in response
to your question. So, I thank you.
Mr. MFUME. Thank you. And I hope you will take it as a con-
stituent request. Back to you.
Mr. SHEAR. Okay.
Mr. MFUME. Thank you, Mr. Chair.
Chairman PHILLIPS. The gentleman yields back. And now I rec-
ognize the Ranking Member of the Subcommittee on Economic
Growth, Tax, and Capital Access, the gentleman from Pennsyl-
vania, Mr. Meuser, for 5 minutes.
Mr. MEUSER. Thank you, Mr. Chairman. Thanks to the Rank-
ing Member. Thank you, Mr. Shear. Before I get started, I just
want to go on record quoting our Chairwoman Velázquez last year
when she stated how unfortunately Treasury Secretary Yellen has
declined to appear before us in complete disregard for the law,
which requires her to do so. That was last May that that comment
was stated and Secretary Yellen has still failed to appear. Ranking
Member Leutkemeyer has mentioned it many times in most meet-
ings. It is just quite irresponsible and it runs counter to the law.
So, it is kind of hard for us to, you know, you know, explain that,
and it is not our job to explain it. I think maybe the Secretary
could explain it when and if she appears here.
But moving along. So, PPP did a tremendous amount of good.
There is no question. It was a lifeline to thousands of businesses
throughout my district and elsewhere. The Treasury Department
at the time was very accessible. We were on the phone with then
Secretary Mnuchin often, you know, getting it going. Many of us
spent countless hours, 12, 13, 14 hours a day probably in the first
2 weeks of its inception dealing with banks, dealing with busi-
nesses, and helping it through.
So, but the bad news is the level of fraud. Now, the PPP, the
numbers that I have and I don’t know, Mr. Shear, you can—it is
about $4 to $5 billion that is estimated, in fraud in the PPP out
of—what was the total, $840 billion? Something of that nature. So,
you know, $4 billion is a lot of money to say the least. But the
15
problem lies in the EIDL. And the EIDL has, I believe the total
EIDL was in the neighborhood of $260 billion and yet, nearly $80
billion in fraud. Now, we all know that the PPP was done in co-
operation with the SBA and local banks, primarily local community
banks. The EIDL done straight through SBA. So, clearly, the know
the customer, right, KTC, is quite imperative for a program to have
any integrity, right? I mean, that is almost like the simplest of an-
swers, simplest of solutions. So, I am certainly hoping the GAO and
moving forward the SBA that we recognize this and do what we
can do to, you know, that we do things in such partnership with
the KTC ideas being followed.
So, I will just ask you this. As you are working on integrity and
quality and such, are you, from the GAO standpoint, is the SBA
implementing for loans and forgiveness programs right now more
on the quality end of things, such as in systems? Or are they hiring
people? What, Mr. Shear, is being done to fortify the process as
well as bring a higher level of scrutiny to the integrity of the over-
all system, as well as assure our forgiveness program is being done
in a manner that those who deserve forgiveness are receiving?
What are we investing in? What are we—how are we improving?
Mr. SHEAR. Yes. I will refer to we have reported, you know, on
these GAO-wide reports, we have had quite a few and a lot of en-
closures on the PPP program. We had a standalone report last
summer, in addition to the one I am testifying on today, having to
do with controls. And so, the—what I will point to for PPP, in par-
ticular, is we—oh, we also had a standalone report on SBA’s use
of supplemental appropriations to help support the emergency loan
programs. So, we know that there is heavy reliance on contractors
as part of the oversight. So, we know that Guidehouse is very much
front and center in terms of, among other things, automated con-
trols. We know that Deloitte is very heavily involved. We know
Goldschmidt is very heavily involved. And it is a mix of the auto-
mated reviews, the manual reviews, and the overall checks for kind
of like the quality of that system.
So, that is what we observe as where there has been a oversight
structure that has been in place for some period of time.
Mr. MEUSER. I know that. Do you agree that the system with
the PPP in cooperation with community banks proved far more ef-
fective and efficient than a straight EIDL loan through the SBA?
Mr. SHEAR. With EIDL——
Chairman PHILLIPS. A quick answer, sir. Our time has expired.
Mr. SHEAR. Yeah, with EIDL, it is—there is another set of cir-
cumstances and there is another set of contractors that are in-
volved with it. But I will go back to just my observation that we
don’t really know, we won’t know for a long time how much fraud
has occurred in both programs. And I would want to point to the
oversight structure——
Chairman PHILLIPS. Okay. Thank you. Thank you, Mr. Shear.
Mr. SHEAR. I would want to point to the oversight structure for
both.
Chairman PHILLIPS. All right. Thank you. The gentleman’s
time has expired. I am going to give an award to the first among
us who stays within his or her 5 minutes, myself included. With
that, I am pleased to recognize the Chairwoman of the Sub-
16
committee on Economic Growth, Tax, and Capital Access, the
gentlelady from Kansas, Ms. Davids, for 5 minutes.
Ms. DAVIDS. Thank you, Chairman and to the Ranking Member
for holding this hearing today. You know, the Paycheck Protection
Program was absolutely an essential lifeline to small businesses
across the country during the height of the pandemic. And small
businesses in the Kansas 3rd received over 2,000 PPP loans total-
ing somewhere around $820 million. And that critical funding real-
ly helped small firms in the 3rd District that I represent maintain
their rent and payroll while they learned how to operate and adjust
to extraordinary challenges that the pandemic presented. Unfortu-
nately, we did see that, you know, larger banks overlooked the
smallest businesses, those owned by minority or veteran and
women-owned businesses while they were originating the PPP
loans.
And, you know, in fact, in your testimony, or maybe in response
to one of the questions, you mentioned, Mr. Shear, that the commu-
nity-based lenders like CDFIs were instrumental and that that was
a key piece of the modifications that we made. I am curious, Mr.
Shear, what factors, from your point of view, led community-based
lenders to being so much better at reaching those businesses?
Mr. SHEAR. Thank you for the question. I think that you look
at the missions of entities such as the CDFIs and you can see that
they have a focus on what is often called the underserved commu-
nity of small businesses. So, I would point to that. As far as the
smaller community banks, you know, I would say that especially
when you look at rural areas, I think that the smaller community
banks really played a role. So, here I am not talking about special-
ized lenders, per se, but I think that a lot of it is that what is the—
what is kind of like the mission of——
Ms. DAVIDS. Mm-hmm.
Mr. SHEAR.—the various entities. With banks, you have a little
bit more. And I am not saying this to criticize banks, but you have
a situation where serving your customers it is a huge incentive to
serve your customers. And that sometimes can lead to serving cus-
tomers that are your existing customers that and aren’t as focused
on those customers, those small businesses that might be under-
served.
Ms. DAVIDS. So, are we seeing, now that, you know, the PPP
is closed to new applicants, but we are seeing applications coming
in for the forgiveness portion of these programs, of this new pro-
gram, and I am curious if you are seeing, again, a similar kind of
gap as it relates to the traditionally underserved or disadvantaged
business entities.
Mr. SHEAR. We did some analysis around just like we did for
in, you know, that is in my statement today, for loans that were
made, looked at the forgiveness process. And what the biggest
thing that has come out of that is the very large percentage of for-
giveness applications that have been approved. And so, nothing—
we didn’t report on it. We don’t plan to report on it, but I will just
state that nothing really stood out in terms of whether the forgive-
ness process itself and to say was in some way could be called det-
rimental to any particular group.
17
Ms. DAVIDS. Okay. Well, I appreciate your taking the time to
testify before our Committee today. And, Mr. Chair, I yield back.
Chairman PHILLIPS. The gentlelady yields back. And now, I
recognize the gentleman from Florida, Mr. Donalds, for 5 minutes.
Mr. DONALDS. Thank you, Mr. Chairman. Mr. Shear, according
to the PRAC Small Business Administration Paycheck Protection
Program Phase III Fraud Controls Report in January of 2021, the
SBA OIG reported that nearly 55,000 PPP loans worth about $7
billion went to potentially ineligible businesses or fraudulent recipi-
ents. The report goes on to say that 100 percent of the case—in 100
percent of the cases the PRAC reviewed included one or more false
statements on the PPP loan application that would have made the
applicant ineligible. The PRAC has said that the SBA could have
used IRS data to determine improper payments prior to disburse-
ment. That opportunity to conduct pre-disbursement checks is no
longer available. Have you considered the use of available commer-
cial data like business information such as payroll, utility, or rent
information to conduct reviews or audits of PPP loans?
Mr. SHEAR. Our forensic auditors who really take the lead and
have worked with us very closely on the fraud issues certainly use
what we often call data analytics in the use of different datasets,
including it might be from the Postal Service, the Do Not Pay list
out of Treasury, and various other types of databases that are
available to examine those issues. And certainly, the PRAC and the
SBA IG have been very involved in those types of examinations. At
GAO, it is really our forensic audits group that we work with close-
ly have taken a close look and continue to take a close look at cer-
tain patterns that are present that might suggest fraud or cer-
tainly, where the flag goes up that there could be potential fraud.
Mr. DONALDS. Okay. All right. So, looking forward, would you
recommend that any future relief programs similar to PPP or other
pandemic programs leverage available third-party data for
verification purposes to prevent fraud, abuse, mismanagement, and
also to reduce the need of costly after-the-fact remediation or en-
forcement?
Mr. SHEAR. Absolutely.
Mr. DONALDS. Mm-hmm.
Mr. SHEAR. The whole role of data analytics of examining and
coming up with a structure and in this case, it would have been
great to come up with a comprehensive approach using different
data sources to ensure the integrity of the program, but really to
ensure that the fraudsters don’t get it. The shift now has been
more toward because of the passage of time, is, you know, when I
was before this Committee last year, our emphasis was on prevent-
ative controls, and that is exactly what you are talking about. Pre-
ventative controls are great. Now, we are in a situation, meaning
the IG community, SBA, and others where you are trying to chase
down fraudsters. And that is a much more costly kind of approach
to the fraud issue than putting in preventative controls to begin
with.
Mr. DONALDS. Thank you, Mr. Chair. One final statement just
more for, you know, our colleagues here on the Committee. When
it comes to, in my view, when it comes to the role of CDFIs versus
traditional commercial banks versus community banks, one of the
18
things we have to always remember is that CDFIs have a specific
mission that has been granted, frankly, by us. Commercial banks
and even credit unions that used to have a specific mission, they
have obviously had mission creep in their original mission. But the
community banking industry and the national commercial banking
industry and even the super regionals, one of the issues that they
do face is the regulatory burden that has been unleased on their
industry by us here in Congress.
And so, if they have to deal with significantly higher regulatory
burdens, specifically in the community banking space, which is why
the community banking space has decreased substantially over the
last decade in the United States, that is the reason why so many
of our smaller businesses struggle with access to capital. And that
is why you have new industries like FinTech who are coming up
to fill that space. That is in direct response to the regulatory envi-
ronment that has been unleashed in banking since the passage of
Dodd-Frank back in 2009.
So, I think it is important for the Members as we look at what
has happened during the pandemic and access to capital issues,
that we understand it is the regulatory environment that has fed
industries like FinTech and these other opportunities to flourish. I
yield back, under time, by the way, Mr. Chairman.
Chairman PHILLIPS. Duly recognized, Mr. Donalds, as Mr.
Mfume also, and also Ms. Davids gets an award. Seeing no other
questions, Mr. Shear, we want to thank you for your time and your
dedication to this very important work. So, we now excuse you and
we will just take a few moments to set up our next panel. Thank
you.
Mr. SHEAR. Okay. Thank you very much.
Chairman PHILLIPS. All right. We want to welcome our wit-
nesses on our second panel today. I will take a minute to introduce
each of you before your testimony.
Our first witness on panel two, Dr. Robert Fairlie, Professor of
Economics at the University of California, Santa Cruz. Professor
Fairlie has testified before Congress numerous times on policy
issues related to small businesses and we are thrilled to have him
before us again today. Professor Fairlie’s most recent work focuses
on third and final round of PPP, which ran during the first half
of 2021 and successfully targeted program funds to underserved
businesses. We look forward to hearing about this important re-
search and the implications it has on SBA’s non Covid business
loan programs.
We welcome you, Professor Fairlie.
Our second witness is Dr. Manju Puri. Professor Puri is the
J.B.—oh, I never know how to say—Fuqua—sorry—Fuqua Pro-
fessor of Finance at Duke University’s Fuqua School of Business in
Durham, North Carolina. She and her co-authors’ research looks
specifically at the intermediary supply effects of using banks as the
primary delivery mechanism for PPP loans and how it contributed
to the prioritization of big businesses early in the program. Pro-
fessor Puri has also served as a senior advisor for the FDIC center
for financial research.
We welcome you, Professor Puri.
19
Our third witness is Dr. Iryna Demko. Dr. Demko is a research
associate at the Center for Economic Development at the Maxine
Goodman Levine College of Urban Affairs at Cleveland State Uni-
versity where she specializes in economic impact studies. In addi-
tion to reviewing PPP loan data, Dr. Demko and her research team
also conducted a series of interviews with PPP borrowers of all
sizes in Northeast Ohio. We look forward to hearing how the PPP
loan data you observed tracks with the anecdotal evidence that you
received.
We welcome you, Dr. Demko.
And now I would like to yield to the Ranking Member, Ms. Van
Duyne, to introduce our final witness.
Ms. VAN DUYNE. Thank you, Mr. Chairman.
Our next witness is Robert Barnes. Mr. Barnes is the president
and chief executive officer of PriorityOne Bank in Magee, Mis-
sissippi. PriorityOne Bank is a community bank with over a dozen
locations throughout Mississippi and Mr. Barnes is testifying on
behalf of the Independent Community Bankers of America, also
known as ICBA.
Mr. Barnes has a long history of serving Mississippi businesses
and communities as he started at the bank nearly 40 years ago.
During this time he has held numerous positions and has had lead-
ership roles. He is currently on the board of the Mississippi Bank-
ers Association and is the Chairman of ICBA’s legislative issues
committee. Additionally, he holds membership on numerous eco-
nomic, health, and education boards.
Mr. Barnes also served on the governor’s pandemic economic re-
sponse team, known as Restart Mississippi.
Mr. Barnes, welcome to the Committee. Your experience and
background as a community banker will be invaluable as we have
this conversation today.
I yield back.
Chairman PHILLIPS. Thank you, Ms. Van Duyne.
Professor Fairlie, you are now recognized for 5 minutes for you
opening statement.
STATEMENTS OF ROBERT W. FAIRLIE, PROFESSOR OF ECO-
NOMICS, UNIVERSITY OF CALIFORNIA, SANTA CRUZ; DR.
MANJU PURI, J.B. FUQUA PROFESSOR OF FINANCE, DUKE
UNIVERSITY FUQUA SCHOOL OF BUSINESS; IRYNA DEMKO,
RESEARCH ASSOCIATE AT THE CENTER FOR ECONOMIC DE-
VELOPMENT, MAXINE GOODMAN LEVIN COLLEGE OF URBAN
AFFAIRS, CLEVELAND STATE UNIVERSITY; ROBERT BARNES,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, PRIORITYONE
BANK
STATEMENT OF ROBERT W. FAIRLIE
Mr. FAIRLIE. I thank you. Thank you, Chairman Phillips, Rank-
ing Member Van Duyne, and Members of the committee. It is an
honor to testify before you on the Paycheck Protection Program.
I am a professor of economics at the University of California,
Santa Cruz, and I have studied entrepreneurship, racial inequality,
and small business policy for over 25 years. I have been asked to
20
discuss the findings from my research on small businesses in the
pandemic and the allocation of PPP funds to communities of color.
The economic impacts of the pandemic have been especially se-
vere for small businesses, workers in minority communities. In my
research early in the pandemic, I found that the number of active
business owners in the U.S. plummeted by 22 percent from Feb-
ruary 2020 to April of 2020. African American businesses were hit
the hardest, experiencing a 41 percent drop in business activity.
LatinX business owner activity fell by 32 percent, and the Asian
business owner activity dropped by 26 percent. Job losses were all
much higher for workers of color. Black unemployment hit a peak
of 17 percent and LatinX unemployment hit a peak of 18 percent.
Anticipating these potential losses, one of the stated goals of the
CARES Act was to prioritize serving underserved markets and
businesses owned by socially and economically disadvantaged indi-
viduals. In the beginning of the pandemic, however, minority busi-
nesses and communities were generally delayed in obtaining finan-
cial assistance through the PPP. Research of mine and others
found that the first round of the PPP went disproportionately less
to minority communities. In the second round of PPP funding
Fintech lenders were more involved in making loans and disburse-
ment to minority businesses and communities improved.
A few months after the program ended in the summer of 2020
Covid cases began to rise rapidly and social distancing restrictions
returned. Given these concerns, the PPP restarted in January 2021
with a strong emphasis on helping eligible borrowers in under-
served and disadvantaged communities. A head-start for applica-
tions through CDFIs, a 2 week exclusion period for applications
from very small businesses were introduced. Access to loans was
emphasized for sole proprietors and independent contractors that
didn’t have employees.
From January to February—or, sorry, from January to May 2021
6.7 million loans totaling $278 billion were provided. But did these
funds in the rebooted program get disbursed to minority commu-
nities as intended or did the program struggle with equitable loan
disbursement.
So what we did is we analyzed the 12 million loans proved
through all 3 rounds of the PPP. We basically had five main find-
ings. First, we find evidence of the strong positive relationship be-
tween PPP loans and the minority share of the population in the
third round. We analyzed this relationship using several different
measures and found consistent evidence that minority communities
received loans.
Second, in contrast to this finding, we found a negative relation-
ship for the first round in 2020 and a less positive relationship for
the second round in 2020.
Third, we found a stronger positive relationship between minor-
ity share for loans in first draw of loans than second draw of loans
in 2021. This is important because it might capture persistence in
racial inequities from the first round, because a small business can
only obtain a second draw loan if that business indeed received a
first loan draw in the earlier round in 2020.
Fourth, we found that PPP loans also went to self-employed busi-
ness owners without employees in minority communities.
21
Fifth, many more banks and financial institutions were involved
in the third round, including Fintechs and CDFIs, which helped
spread funds to small businesses in underserved markets.
To conclude then, the rebooted program in 2021 appears to have
been disbursed to communities of color as intended. Although it is
too early to tell what the long-term effects are from the third round
of funds for small businesses in the country, there is no doubt that
access to capital poses one of the most important barriers for small
businesses. This is especially true for small business owners of
color. Half of black families in the U.S. have less than $14,000 in
total wealth, half of LatinX families have less than $32,000 in total
wealth, whereas the median level of wealth among white families
is $187,000.
Black owned businesses also start with substantially less capital
than white owned businesses and these disparities continue over
time.
I believe that two things could help us move forward. First, we
need to continue to provide access to capital for struggling busi-
nesses. One method to do this is to increase the range of financial
institutions both geographically and by type. Increasing involve-
ment of a wider range of financial institutions appears to have
helped improve access to loans to communities of color.
Second, we need more awareness and action on increasing the di-
versity of suppliers and producers. Consumers often value knowing
where their purchases of goods and services help disadvantaged
businesses and workers, but consumers and firms need information
to make these choices.
Additionally, governments and businesses can increase diversity
in their suppliers, all of which will help provide a steadier stream
of revenues to disadvantaged and small businesses. This in turn
will help with the access to capital issues.
Thank you for the opportunity to present the findings from my
research on this topic. I look forward to hearing your comments
and questions.
Chairman PHILLIPS. Thank you, Professor Fairlie.
And now I recognize Professor Puri for 5 minutes for your open-
ing statement.
STATEMENT OF MANJU PURI
Ms. PURI. Subcommittee Chair Phillips, Ranking Member Van
Duyne, and Members of the Subcommittee, thank you for inviting
me to testify in front of you today.
I am Manju Puri, the J.B. Fuqua Professor at the Fuqua School
of Business, Duke University. I have over 25 years of research ex-
perience examining financial institutions and bank relationships. I
will be drawing on my research today on PPP.
When Covid hit, small businesses were particularly vulnerable.
Small businesses typically have cash on hand that only lasts for a
month without revenue and in fact less than a quarter of them can
survive even two months without revenue. They are the engine of
growth, accounting for 61 million jobs, so clearly it is important to
support them and to so quickly.
So the question is, what lessons do we learn about the speedy de-
livery of financial support in times of crisis from PPP? Let us start
22
with banks as the delivery channel in PPP. Now, banks seem like
a natural and obvious way to distribute funds. They have large net-
works, they are all over the country, they are in every nook and
corner. Most small businesses have accounts with banks. But does
using banks as the delivery channel shape the supply of PPP? It
is important to look at the funding prioritization of banks.
When PPP was originally announced there was a scramble for
funding. There were lines outside the doors of banks. The entire
initial allocation of $349 billion was exhausted in a few days, by
April 17, 2020. And then after a pause of ten days, it started again
on April 27 with the second allocation of $320 billion.
So looking at who gets PPP early, before April 20, 2020, gives us
a rare and clean window as to the prioritization allocation prior-
ities of banks across clients. In particular, we distinguished be-
tween large and small banks, how they treat large and small firms,
whether they treat them differently, and what is the role of bank
relationships.
Now, arguably, big and small banks have different business mod-
els, right. The value added by big banks is access to one stop shop-
ping, networks, et cetera, which are perhaps more relevant for
large firms. On the other hand, small banks specialize in relation-
ship-oriented lending, as suggested by the 2018 FDIC small busi-
ness lending survey.
I would like to briefly give you the following findings based on
three data sets and a very large new data set on UCC filings of
bank relationships.
One, small banks deliver PPP funding more promptly. Two, if
you are a firm with a bank relationship, you get PPP early. Now,
this is especially true if you have a relationship with a small bank.
Three, all banks in general prioritize large firms, however, the
crowding out effect of small banks is fully eliminated and even re-
versed when firms have relationships with small banks. This sug-
gests that the small firm-small bank relationship is special and it
should be leveraged in future and other funding initiatives.
Now, a second set of lessons concerns funding hesitancy. PPP
funding is remarkably cheap. When it was announced, firms that
took PPP saw a stock price reaction positive 1 percent, yet several
firms returned PPP and when they returned it they again saw a
positive stock price reaction, actually of 3 percent—three times.
Why so? Our research suggests that the market values the fact
that these firms returned PPP, that is frees from the uncertainty
of the threat of a government investigation, especially when there
is uncertainty about the scope and the timing.
So let me close by summarizing the key takeaway. The main
point is intermediaries matter when you are delivering government
funding. In PPP funding is delivered sooner by small banks and
when there are banking relationships, especially with small firms.
The crowding out of small firms is less when small firms have
small bank relationships.
A second lesson is that just as there are clear norms and ex ante
eligibility of PPP, there should also be clear guidance on ex post
investigation to help remove funding hesitancy.
But perhaps the most important lessons is about intermediaries.
In designing financing programs for small firms, policy makers
23
should recognize and leverage the specialness of small bank-small
firm relationships.
Thank you and I would be happy to field any questions.
Chairman PHILLIPS. Thank you, Dr. Puri.
And now I recognize Dr. Demko for 5 minutes for your opening
statement.
STATEMENT OF IRYNA DEMKO
Ms. DEMKO. Thank you for the invitation to testify at the hear-
ing titled ‘‘An Empirical Review of the Paycheck Protection Pro-
gram’’. It is an honor for me to present before you and answer
questions.
I am a research associate at the Center for Economic Develop-
ment in the Maxine Goodman Levine College of Urban Affairs at
Cleveland State University. I am also from Ukraine and my family
is in Ukraine right now.
I have focused my research on the access of minority, Hispanic,
and female owned businesses to PPP loans. In 2020, these busi-
nesses received smaller PPP loans than their business counterparts
of the same size. For example, Hispanic owned business with less
than four employees received 5 percent smaller loans compared to
non-Hispanic owned business of the same size, or $828 less.
Minority owned businesses received 11 percent less per employee
than white owned business, or $1,000 less.
Larger companies displayed increased discrepancies in loan
amounts. On average, female owned businesses with less than four
employees received 17 percent smaller loans than male owned busi-
nesses of the same size. And female owned businesses with 20 to
500 employees received 22 percent smaller loans than male owned
businesses of the same size.
I conducted over 20 interviews with a variety of PPP loan recipi-
ents. The sample consisted of businesses in Northeast Ohio where
nearly 40 percent of previously employed residents filed for unem-
ployment as the pandemic started. I interviewed small businesses
that received PPP loans from about $20,000 to over $2 million. The
sample included female owned, male owned, minority owned, and
white owned businesses. Every respondent expressed appreciation
for the assistance provided by the government in the form of PPP
loans. And the majority stated that the loan helped them retain
employees. In general, businesses that received smaller loan
amounts reported more difficulty with the loan application process,
filing multiple loan applications with multiple banks and pursuing
more unique funding sources, such as Fintechs. Respondents cited
the reason for this difficulty stemming from the size of their busi-
ness.
For example, a business owner complained, I couldn’t get any-
one’s attention or response because I am a small business.
Some respondents stated that lenders could have been
incentivized to work with businesses of diverse ownership and size.
Beyond the difficulty in finding a lender, many recipients of
smaller PPP loans expressed frustration over loan amount limits
and permitted uses. Many interview respondents didn’t realize that
rent, mortgage, and utility payments could be included in the re-
24
quested PPP amount. As a result, they missed out on the oppor-
tunity to receive higher loan amounts.
Most businesses do not have experience in doing their financial.
They had a steep learning curve to understand how to apply for the
learn. For us it was all foreign language, said one PPP recipient.
This highlights the importance of communication strategies and
free technical assistance to guarantee the success of a public policy.
From a policy perspective, if the goal is to target ethnic dispari-
ties and support inclusion in federal aid for entrepreneurs, then the
program cannot be one size fits all. In 2021 SBA set aside a 2 week
exclusive application period for smaller businesses with fewer than
20 employees. While a few small businesses interviewed in North-
east Ohio did mention that exclusive application period was a valu-
able change, others felt that it was not long enough.
Interview findings didn’t confirm biases by lenders or the SBA
against minority or female owned applicants. Businesses that re-
ceived unequal treatment from PPP lenders not based on the demo-
graphic of their ownership, but when their business was smaller.
These findings have important implications because previous lit-
erature found that minority owned firms are substantially smaller
than white owned firms.
Research compared in male and female business owners also
found women operating smaller business in terms of annual turn-
over and employment size. As such female and minority owned
businesses tend to fall under business the case of businesses that
may have applied for smaller PPP loans.
I am looking forward to your questions. Thank you.
Chairman PHILLIPS. Thank you, doctor. And just to say once
again, all of us, this country, this Committee, this Congress, have
you and your family in our hearts and all of Ukraine. And we know
how difficult it is to be with us today and we are grateful that you
are here.
Thank you.
Ms. DEMKO. Thank you.
Chairman PHILLIPS. And with that, I now recognize Mr. Barnes
for 5 minutes for your opening statement.
STATEMENT OF ROBERT BARNES
Mr. BARNES. Thank you, Chairman Phillips, Ranking Member
Van Duyne, and Members of the Subcommittee.
I am Robbie Barnes, president and CEO of PriorityOne Bank in
Magee, Mississippi. I testify today on behalf of the Independent
Community Bankers of America and want to thank you for this op-
portunity.
PriorityOne Bank is a $900 million community bank with 230
employees and 15 branches in 5 counties. Our markets are rural,
suburban, and urban. We are also a community development finan-
cial institution, serving a predominantly low to moderate income
market.
The paycheck protection program was a natural fit for the busi-
ness model of community banks. We are small business lending
specialists with local knowledge and deep roots in the communities
that we serve. My bank’s PPP lending is typical of most community
banks. We made a total of over 1,200 loans for roughly $40 million.
25
Our average loan amount was $32,500 and our smallest loan was
for only $350. PriorityOne Bank’s long history as an SBA 7A lender
helped us to navigate sometimes challenging SBA channels on be-
half of our borrowers.
My written statement includes stories that illustrate the impact
of the PPP. One of those stories is of a minority owned nail salon
in our community that received first and second round funding for
a total of less than $12,000. Though this borrower did not initially
qualify for a second-round loan, we analyzed her cash flows and de-
termined that her 40 percent revenue drop was pandemic related,
which qualified her for additional funding. That business survived
the pandemic and was able to remain open. This is just one of any
number of examples I could offer. All the community banks have
similar stories and results.
Community banks made nearly 60 percent of PPP loans, sup-
ported nearly 50 million jobs. What is more, community banks
made nearly 72 percent of the PPP loans to minority owned small
businesses and 81 percent of PPP loans to women small businesses.
I am proud that my industry stepped up to support the survival
of these diverse businesses at a time of crisis. The challenges of the
program are well known to this Committee. The task far exceeded
the scale and technological capacity of anything the SBA had pre-
viously undertaken. However, the agency was dedicated to making
the program work and continued to adapt and improve.
The forgiveness phase of the program brought a separate set of
challenges, but our upfront process and strong relationship with
most of our borrowers made forgiveness on the back end relatively
straightforward. We did not make loans that we were not confident
would qualify for forgiveness. Ninety percent of our PPP loans have
been forgiven and we fully expect the remaining ones to be forgiven
as well. We have experienced no cases of fraud or default.
As you consider the lessons of the PPP in designing future SBA
lending programs, I would emphasize the critical role played by
community banks. SBA programs work best in partnership with ex-
perienced on the ground community bank lenders who are com-
mitted to the borrower’s success. There is a strong network of com-
munity banks, CDFIs, and other lenders in every market in the
country to meet demand for small business borrowers. The SBA on
its own simply does not have the resources or the know how to ef-
fectively reach thousands of small business borrowers.
What is more, community banks offer our borrowers a long-term
relationship that goes well beyond the initial loan. It includes prac-
tical real world business counseling, mentoring, and networking op-
portunities. This is our core value proposition and it is one that is
especially important for startups. The SBA simply cannot replace
this kind of relationship lending.
Further, the involvement of banks is critical to reducing fraud.
Community bankers know their customers, they know the dif-
ference between a legitimate business and a shell business set up
to perpetrate a fraud because they meet with business owners, visit
their businesses, and see their operations. With an on the ground
presence, the SBA cannot assist borrowers first-hand. The distance
from the borrower makes direct lending vulnerable to fraud.
26
Community banks must not be sidelined in the critical task of
creating access to capital. We are committed to working with this
Committee and the SBA to ensure the 7A program is reaching the
smallest borrowers.
Thank you again for convening today’s hearing and for the oppor-
tunity to offer a community bank perspective on the paycheck pro-
tection program and other SBA programs.
I’m happy to answer any questions you may have.
Thank you.
Chairman PHILLIPS. Thank you, Mr. Barnes. And to all of our
witnesses, we appreciate all that you have shared with us and for
being with us today.
I am going to begin by recognizing myself for 5 minutes and di-
rect my first question to you, Mr. Barnes.
You just stated that PriorityOne Bank has experienced zero
cases of fraud in over 1,200 loans to the PPP program. So assuming
that would be true for most of the banks in PPP due to their pre-
existing relationships with most of their borrowers, shouldn’t the
government be focused more now on investigating non bank origi-
nated PPP loans where fraud is certainly more likely to have oc-
curred in your estimation?
Mr. BARNES. In my estimation I think that the community
banks do have an advantage, if you will, because of our relation-
ships with our customers and existing borrowers. However, we did
serve customers—or I guess non-customers, those that applied for
us that were not currently customers of our bank. But as alluded
to earlier in this hearing, we have a know your customer policy we
have to abide by. And we live and we work with and we see these
businesses, you know, day in and day out. So it is very easy for us
to determine legitimate businesses from those that may not be.
I can’t speak for those lenders who may have made loans in com-
munities or markets outside of where they operate and how that
might have affected fraud and—because as I said in my earlier
opening remarks, we didn’t experience any fraud. And I think that
you can probably assume that most of the community banks also
had the same experience.
Chairman PHILLIPS. Thank you, sir.
Dr. Demko, you repeatedly heard about the need for a central-
ized application portal to standardize the information that small
firms had to submit that would help lenders from becoming over-
whelmed with processing applications, especially for smaller loan
amounts.
As you know, the private sector has largely abandoned this seg-
ment of the market because the fixed lending costs often outweigh
the potential returns for lenders.
So do you believe that these findings support the creation of a
targeted direct loan product from SBA to better reach those over-
looked by the banks?
Ms. DEMKO. I think that centralized application portal may
help businesses with access to the loans. And it is not just that,
it is also free technical assistance with the applications, because
many of applicants didn’t know what to do with the application.
And I think that exclusive application period may help as well.
27
Chairman PHILLIPS. Any other methods that you think can be
considered to better reach smaller underserved firms?
Ms. DEMKO. So when we look at the distribution of minority
owned and female owned businesses, among 1 million minority
owned businesses, 64 percent, they employ less than 4 employees.
And among 1.2 million of female owned businesses, 65 percent em-
ploy 4 or less employees. So I think that exclusive—if we want to
reach small businesses, exclusive application periods may really
help.
Chairman PHILLIPS. Okay. I appreciate it.
Dr. Puri, I know your findings stopped short of including CDFIs,
but do you think that would be valuable to consider for other re-
searchers? Especially given their greater likelihood of having had
relationships beforehand?
Ms. PURI. What our research suggests is that relationships are
important, and not just any kind of relationships. It is small firm-
small bank relationships. And I think any way that you leverage
this can only be helpful, right. And so, so more broadly, whether
it is community banks or other small banks or vehicles to do it, I
think that would be helpful.
Chairman PHILLIPS. Okay. I appreciate that.
You know, I am going to yield the reset of my time and now rec-
ognize the Ranking Member of the Committee, Ms. Van Duyne, for
5 minutes.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman.
Mr. Barnes, before we get into the PPP discussion, I just want
to ask you about the economic reality that we have on the ground
today. You have got small businesses, I am sure, coming to you.
What are they telling you about what they are facing right now
with inflation, rising gas prices, the labor market? Can you just
help me explain what small businesses are coming to you with
today?
Mr. BARNES. Surely, Ms. Van Duyne.
You know, businesses are still experiencing a lot of issues right
now they are having to deal with—of course, inflation being one.
One of the big issues that we are experiencing in the markets that
we serve is the fact that—is getting employees back to work. You
know, they are just—at this point in time they are still under-
staffed, still looking for qualified employees to come back in and
help their business. Inflation has not helped at all, of course, and
that puts a tax on the small businesses. It is not a governmental
tax, but it is certainly a tax that they are still having to absorb.
So there is still—small businesses are still struggling out there.
And of course we are relationship lenders, as all community banks
are. We work with our customers extremely closely, our borrowers.
We communicate with them on a regular basis and we stay in close
touch with them. And it is a difficult time. You know, Covid has
knocked our businesses back down two or three times. When you
think you get up, all of a sudden another wave comes and you are
knocked back down.
But hopefully we are toward the end of this and we will see some
improvement as we move forward.
Ms. VAN DUYNE. I appreciate that answer.
28
And I agree with your statements on direct lending. From a
fraud and efficiency perspective, private sector lenders have con-
sistently out performed—I think you have heard that form all of
our witnesses today—while also safeguarding taxpayer dollars. But
from your perspective, what does history tell us about the govern-
ment getting involved in direct lending? And at the end of the day,
did the programs better assist small businesses as compared to the
private sector driven 7A loan program?
Mr. BARNES. You know, based on my experience, and I have
been a lender for a number of years and have—been an SBA lender
and done a number of 7A loans as well as 504 loans, and I think
the partnership between banks and SBA is a good partnership. The
government getting involved in direct lending I think has proven
that it does not work. Borrowers in general don’t have a high level
of trust, to be honest with you, in dealing directly with a govern-
mental entity. I don’t think they are going to be able to reach those
borrowers. It is a complex process to go through when you are deal-
ing with SBA. It is just the facts of the matter. We as bankers un-
derstand that, we learned the process, we can navigate that and
help our customers be able to obtain the funding that they need
through that process. But from a direct lending standpoint, I am
afraid you are going to alienate a lot of customers that may other-
wise be able to be served through a banking relationship and a
guaranteed loan process by going with the direct lending.
Ms. VAN DUYNE. And thank you for that.
You know, I also appreciate you talking about just kind of the
excessive regulations that we see being faced by a lot of the small
businesses today. You know, we are trying to get a bill passed that
would actually address exactly that.
So when it comes to access to capital, I believe there should be
always—have a conversation on how these regulations are affecting
small lenders. So, for example, we see that the CFPB is in the
process of promulgating rules for Section 1071.
can you share the community bank’s perspective on this rule
making?
Mr. BARNES. Certainly, I will be more than happy to.
Rule 1071, as you know, was mandated under the Dodd-Frank
Act and is something CFB has no option but to implement. How-
ever, as currently presented and proposed, the rule goes beyond
what is mandated in Dodd-Frank as far as collection of data. And
basically what the rule is is a HMDA type rule for small business
lending. But what is being required right now—or presented or
proposed by CFPB, goes beyond those requirements, is going to ex-
pose I think our borrowers to potential concerns about their right
to financial privacy. It is going to put information out available to
the public that is going to be information that could be detrimental
to them from a competitive standpoint. And our borrowers are
hugely concerned about that. We have been hearing from a number
of them about this and we don’t have a choice but to comply with
it, obviously. But I think that it could force some of these borrowers
to seek other options as opposed to the banking system because of
the fact that they are concerned about the information that is going
to be collected and their invasion of privacy.
29
Ms. VAN DUYNE. I appreciate your testimony here today. I
think it is something that we really need to look at and make sure
that we are advising, because SBA’s job is really to be able to sup-
port and advocate for small businesses. And if we are adding addi-
tional regulations and additional hurdles to being able to move on
in your business, I think that is doing a detriment and the exact
opposite of what we should be doing.
So thank you very much for your testimony here today, and all
the witnesses.
And I yield back.
Chairman PHILLIPS. Seeing no other Members asking ques-
tions, we are going to do one more quick round. I have one question
for Dr. Fairlie.
And, Doctor, I recognize—recall that you came here last year and
provided testimony and I want to welcome you back to the Small
Business Committee.
Perhaps you could just take a moment and share how your cur-
rent report builds off of last year’s.
Mr. FAIRLIE. Yes. So previously I reported on what was hap-
pening to small business owners. So some of the numbers that I
briefly mentioned, you know, one of the most troubling was the 41
percent drop in black business owner activity.
And so I have been studying the pandemic and studying small
businesses over the pandemic. And that kind of evolved over time
into really being interested in what was happening with the policy
solution, so the PPP program. And so since then I have been study-
ing what has happened over those three rounds.
You know, seeing that kind of first round and studying it care-
fully and seeing that a lot of minority communities were not receiv-
ing those funds, and then going to the most recent study in the
2021 program and seeing that it made a big difference. There was
a huge shift in terms of what we found in terms of that relation-
ship with minority communities. So it was kind of a positive sign
that the changes in the program really made so much of a dif-
ference.
Chairman PHILLIPS. Thank you, sir.
Mr. Barnes, your testimony mentions ICBA’s support for SBA’s
504 program, which, as you know, is experiencing significantly in-
creased demand that caused a brief lending pause at the end of the
last fiscal year.
So how disruptive is it for a vital lending program like that to
be under the annual threat of a shutdown due to increased de-
mand?
Mr. BARNES. In my experience, it is hugely disruptive. And I
want to thank Congress for continuing that program and providing
additional funding to allow it to continue. I have actually been in
situations personally where I was the lender of a 504 loan and the
funds ran out before the 504 loan was funded. And we had to
wait—the customer had to wait on their business loan for almost
4 months before they could get any funding for it. You can imagine
that 4 months, if they had been operational, they would have been
employing people, obviously generating income, and paying taxes
on that income. And it would have been a commerce for the com-
munities it served. But it is hugely disruptive when you have got
30
a deadline you are coming up against, you have got a finite amount
of funds that you can draw from and there are more than enough
of borrowers out there looking for those funds.
So thank you again for the additional funding and additional
time.
Chairman PHILLIPS. Yeah, just to follow up on that, sir. Unlike
the 7A program, 504 still lacks a provision that allows SBA to ad-
just the funding level without needing Congressional approval. So
without such a provision the program is under constant threat of
a shutdown if the pace of lending exceeds the expected levels.
So, in your estimation, sir, should the 504 also have what we
might call a shock absorbing mechanism, as 7A?
Mr. BARNES. In my opinion I think that would be a great idea.
Like I said, it would allow us to be able to serve borrowers when
they need to be served and not have a disruption to their business
model going forward.
Chairman PHILLIPS. Thank you, sir.
I am going to yield back the remainder of my time and recognize
the Ranking Member, Ms. Van Duyne, for 5 minutes.
Ms. VAN DUYNE. Thank you.
I just have one quick question, Mr. Barnes. You stated that we
did not make loans that we were not confident would qualify for
forgiveness because we did not want to saddle anyone with unin-
tended debt. And this struck me as significantly important in con-
trast with perhaps how some of the other non relationship lenders
might have treated customers.
So can you talk to the Committee a little bit more about this
statement and how you operated under this program?
Mr. BARNES. Certainly. I will be happy to.
In every case when a borrower came to use for a PPP loan, we
walked them through the process. We asked them for information
to basically be convinced that they were eligible for the PPP loan
and also that it would stand up through the forgiveness applica-
tion. We many times worked with their accountant or financial ad-
visor that they may have been working with through their business
together, information. So we wanted to make absolutely sure that
we didn’t put a customer in a situation where we were trying to
help and all of a sudden we have made it worse because they have
now another loan that they have to pay, and they were already
struggling to pay the initial loan that they have on their business.
So I think it is just relationship banking. I mean that is what
we do every day. We have a relationship with that customer, we
work with them, we try to make sure that we improve their situa-
tion, we don’t harm them by putting them in a worse situation.
And our lenders are—you know, understand that, they are very
good at that. We had lenders here that worked 24 hours a day, you
know, 7 days a week trying to kind of build an airplane while we
were in flight, to get this program up and going and started. And
it was very, very frustrating, but I think in the end our main objec-
tive was to help as many customers and as many businesses in the
communities that we served as we possibly could.
Ms. VAN DUYNE. I think you just proved again that there is
no—you know, there is no questioning that people on the ground
who know their community, who are working in the community
31
with actual real people completely outweigh the D.C. bureaucrats
in being able to be efficient and effective and help in the commu-
nity.
So thank you very much for your testimony today.
I yield back.
Chairman PHILLIPS. The gentlelady yields back.
And with that, I want to thank all of our witnesses again for
joining us today. Your research analyzing PPP is a vital tool for all
of us on this Committee as we work to make SBA programs reach
the smallest of small businesses throughout the country. And it is
heartening to see that the changes Congress did institute had a
profound effect on entrepreneurs that were initially shut out of
PPP.
It is also vital that we take the lessons learned from the PPP
program and apply them to current and future SBA programs.
Making these programs more accessible and equitable will en-
sure that more entrepreneurs can pursue their dreams and that all
small businesses have a chance not just to survive, but to thrive.
I also want to note that the passage and implementation of PPP
was an acknowledgment of Congress’ responsibility to help small
businesses during the COVID-19 pandemic. For the hardest hit
small businesses and disproportionately impacted industries, in-
cluding restaurants, live events, and fitness, the fight is still far
from over. We have to once again acknowledge our responsibility
to maintaining the strength of our small business ecosystem and
I would argue pass additional targeted relief to ensure that our na-
tion’s most resilient small businesses do not close their doors after
surviving 2 years of this terrible pandemic.
I urge the inclusion of such relief in any supplemental COVID-
19 bill that comes before this Congress.
With that, and without objection, Members have 5 legislative
days to submit statements and supporting materials for the record.
And if there are no further business to come before the Com-
mittee, without objection, we are now adjourned.
Thank you, everybody.
[Whereupon, at 11:42 p.m., the subcommittee was adjourned.]
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