Full text
U.S. GOVERNMENT PUBLISHING OFFICE
WASHINGTON :
47–535
2022
SBA MANAGEMENT REVIEW: OFFICE OF CAPITAL
ACCESS
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
HEARING HELD
MAY 18, 2022
Small Business Committee Document Number 117–056
Available via the GPO Website: www.govinfo.gov
(II)
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELA´ ZQUEZ, 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
(III)
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Nydia Vela´zquez .............................................................................................
1
Hon. Blaine Luetkemeyer .......................................................................................
2
WITNESS
Mr. Patrick Kelley, Associate Administrator, Office of Capital Access, United
States Small Business Administration, Washington, DC .................................
4
APPENDIX
Prepared Statement:
Mr. Patrick Kelley, Associate Administrator, Office of Capital Access,
United States Small Business Administration, Washington, DC .............
34
Questions and Answers for the Record:
Questions from Hon. Houlahan to Mr. Patrick Kelley and Answers from
Mr. Patrick Kelley ........................................................................................
40
Questions from Hon. Luetkemeyer to Mr. Patrick Kelley and Answers
from Mr. Patrick Kelley ................................................................................
41
Questions from Hon. Tenney to Mr. Patrick Kelley and Answers from
Mr. Patrick Kelley ........................................................................................
48
Questions from Hon. Donalds to Mr. Patrick Kelley and Answers from
Mr. Patrick Kelley ........................................................................................
49
Additional Material for the Record:
None.
(1)
SBA MANAGEMENT REVIEW: OFFICE OF
CAPITAL ACCESS
WEDNESDAY, MAY 18, 2022
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The committee met, pursuant to call, at 10:02 a.m., in Room
2360, Rayburn House Office Building, Hon. Nydia Vela´zquez
[Chairwoman of the Committee] presiding.
Present: Representatives Vela´zquez, Golden, Davids, Phillips,
Chu, Evans, Houlahan, Andy Kim, Craig, Luetkemeyer, Williams,
Stauber, Meuser, Tenney, Garbarino, Young Kim, Van Duyne,
Donalds, and Fitzgerald.
Chairwoman VELA´ ZQUEZ. Good morning. I call this hearing to
order.
Without objection, the Chair is authorized to declare a recess at
any time.
I would like to begin by noting some important requirements.
Standing House and Committee rules will continue to apply during
hybrid proceedings. All Members are reminded that they are ex-
pected to adhere to these rules, including decorum.
House regulations require Members to be visible through a video
connection throughout the proceeding, so please keep your cameras
on. Also, remember to remain muted until you are recognized to
minimize background noise.
In the event a Member encounters technical issues that prevent
them from being recognized for their questioning, I will move to the
next available Member of the same party and I will recognize that
Member at the next appropriate time slot provided they have re-
turned to the proceeding.
Our nation’s 30 million small businesses come in all shapes and
sizes across various industries. Regardless of the product they sell
or the number of employees on their payroll, the ability to access
capital is crucial to their success. Unfortunately, our committee fre-
quently hears from entrepreneurs about the struggle to obtain an
affordable loan on reasonable, nonpredatory terms.
The data supports these anecdotes. The Federal Reserve pub-
lished its 2022 Small Business Credit Survey that found that al-
most 60 percent of small employer firms reported not having their
capital needs met.
To fill this gap, the Small Business Administration offers a range
of lending programs to serve businesses that cannot obtain credit
elsewhere.
2
These initiatives are administered by the Office of Capital Ac-
cess, also known as OCA.
OCA carries a loan portfolio of over $1 trillion and oversees tra-
ditional SBA initiatives and pandemic relief programs. Their work
is fundamental to the SBA’s mission of helping Americans start,
build, and grow small businesses.
Today, I would like to hear from our witness about what is work-
ing well at the office and the challenges they face. This is especially
important in the wake of an unprecedented increase in demand for
SBA’s traditional lending offerings.
For example, in FY2022, the 504 loan program experienced
record-high demand and reached the authorized lending limit of
$7.5 billion, causing the program to pause lending in early Sep-
tember.
This increased demand has persisted in FY2022, and the pro-
gram was on pace to be forced to shut down in July before a fund-
ing level adjustment was enacted. We are grateful for the bipar-
tisan and bicameral cooperation between our Committee and the
Appropriations Committee to secure that funding adjustment and
keep the 504 program open for lending this fiscal year.
However, we must continue finding ways that the agency and
Congress can ensure that SBA programs are equipped to keep pace
with demand from small businesses.
I would also like to discuss the steps OCA is taking to help cre-
ate a more equitable small business economy.
SBA data shows that the number of 7(a) loans of $150,000 or less
declined by almost 52 percent since FY2016, and that loans of
$50,000 or less fell nearly 58 percent during the same period.
Administrator Guzman stressed the importance of small-dollar
loans when she testified before the Committee last month, so I
would like to hear more about OCA’s work to ensure that all small
firms have access to the capital they need to thrive.
With the recent news of the COVID EIDL program closure, this
is a very timely hearing for us to discuss the OCA administration
of pandemic relief initiatives. On Thursday, May 5th SBA an-
nounced that it would no longer accept applications for loan modi-
fications, reconsiderations, and appeals due the exhaustion of pro-
gram funding. Today, I hope we can provide answers to the many
Members and businesses calling us who are awaiting application
decisions.
Small employers are leading the way in our pandemic recovery.
Since 2021, entrepreneurs have started a record number of small
businesses, and small firms have created jobs at a historic pace.
However, their continued success is contingent on their ability to
access capital. I look forward to discussing the Office of Capital Ac-
cess and what Congress can do to help the office better serve Amer-
ican small businesses.
I would now like to yield to the Ranking Member, Mr. Luetke-
meyer, for his opening statement.
Mr. LUETKEMEYER. Thank you, Madam Chair, and thank you
for holding this hearing today with Mr. Kelley.
Prior to the COVID-19, the nation’s small businesses and our
economy in general were operating at full speed. The low tax envi-
ronment enabled by the 2017 Tax Cuts and Jobs Act and the smart
3
regulatory environment, we were allowing small businesses to
grow, compete, and create jobs across America. Unfortunately, the
capacity restrictions and shutdown measures of COVID-19 forced
small businesses to think and operate differently.
With limited foot traffic and minimal dollars coming through
their doors, small businesses were left without any options. They
turned to the federal government and the country’s COVID-19 re-
lief measures, in particular, the Paycheck Protection Program.
Overnight, millions of small businesses became aware of the re-
sources and tools available to them at the Small Business Adminis-
tration. Additionally, thousands of lenders raced to assist them.
When I am home, I sit and I talk to small businesses and I often
hear that the PPP saved their businesses. While the nation con-
tinues to recover, our work is not over. Agencies and program of-
fices that ran and played a significant role with these relief meas-
ures must continue to talk and work with Members of Congress.
That is why I am glad to have Mr. Kelley before us this morning.
In addition to helping administer the PPP, the Office of Capital
Access has also in the Biden administration taken the reigns of the
fraud-plagued Economic Injury Disaster Loan program, also known
as EIDL. And the office was involved with the unconstitutional and
underfunded
Restaurant
Realization
Fund
where
Congress
prioritized some restaurant owners over others. To say the least,
we have a lot of questions for this office on how they performed
over the last 2 years.
For example, the Biden administration continues to defer EIDL
payments for small business owners. These loans, which have a
maturity of 30 years, now have a deferment payment of over 30
months. That means the American public, Congress, and law en-
forcement won’t know how the program has performed, now will
they see the true extent of fraud until payments are required. The
SBA’s Inspector General has already flagged this program for po-
tentially $80 to $90 billion in fraudulent loan activity. And yet, this
office, the administrator, and the Biden administration continues to
defer payments.
I would like to remind everyone, the EIDL program was a direct
loan and grant program where the SBA qualified small businesses
and disbursed funds directly. The SBA Inspector General has docu-
mented that an anti-theft was rampant in this program. In fact,
follow-up answers to this Committee by the administrator indicate
that the number of flagged applications for anti-theft has swelled
to over 1 million. This means that criminals go through the SBA’s
open door and entered the program illegally.
Additionally, and just yesterday, the SBA Inspector General
found its independent auditor’s report that the SBA Direct Disaster
Loan Program continues to be overwhelmed with issues. The report
indicates that the program had gross improper payments and an
unknown payments rate exceeding 10 percent, which is higher than
the statutory amount.
Beyond these very large concerns, this office also administers all
of the SBA’s government guaranteed lending programs. These pro-
grams, which are delivered to small businesses through efficient
and responsible public-private partnerships with lenders, assist
4
small businesses when traditional and conventional capital is not
available.
Who is accessing these programs? Who is lending within these
programs? How is SBA overseeing these lenders? These are major
questions that need to be addressed. With all the new interest and
focus on SBA, this office’s list of statutory required duties is long.
We have a lot of work that is mandated in law. New and extra-
neous projects must not divert attention away from what they must
accomplish.
COVID programs must be concluded effectively, efficiently, and
responsibly. Traditional programs need to be calibrated and staffed
appropriately. Unfettered policymaking and decision making will
not stand.
However, I am glad the SBA will be at least here today to testify
because I cannot say the same about Secretary Yellen. Even
though she is charged with onboarding new PPP lenders and de-
spite being statutorily required to testify, she continues to ignore
this Committee and America’s small business.
As I said earlier, our work is not done. With soaring inflation,
the economic environment for small business is not great. However,
despite these challenges, small business owners have the resiliency
to drive our nation forward.
With that, Madam Chair, I look forward to today’s conversation
and the many conversations before us regarding SBA’s Office of
Capital Access. And I yield back.
Chairwoman VELA´ ZQUEZ. Thank you, Mr. Luetkemeyer. The
gentleman yields back.
With that, I will now introduce our sole witness today, Mr. Pat-
rick Kelley. Mr. Kelley is currently serving as the Associate Admin-
istrator of the Small Business Administration Office of Capital Ac-
cess. This is Mr. Kelley’s second tour of duty at SBA. He previously
served as Deputy Chief of Staff, Deputy Associate Administrator,
and Senior Advisor at SBA during the Obama administration. Prior
to his current service at SBA, he was an executive with an active
lender in the 7(a) program. His blend of public and private sector
experience has been invaluable as he lead the SBA efforts with the
third round of PPP funding and now in the critical forgiveness
stage. Mr. Kelley is a graduate of Colgate University and Boston
College Law School.
Welcome, Mr. Kelley. You are now recognized for 5 minutes.
STATEMENT OF PATRICK KELLEY, ASSOCIATE ADMINIS-
TRATOR, OFFICE OF CAPITAL ACCESS, UNITED STATES
SMALL BUSINESS ADMINISTRATION
Mr. KELLEY. Thank you. Good morning to the Committee. Good
morning, Chairwoman Vela´zquez, Ranking Member Luetkemeyer.
On behalf of our Administrator, Isabella Guzman, it is my pleasure
to be here.
As the Chairwoman noted in my bio, my name is Patrick Kelley.
I am the associate administrator for the Office of Capital Access.
Since last March 2021, so just over a year, I have had the oppor-
tunity to serve alongside some of the greatest civil servants that
this country has put forward.
5
For the last 24 months, civil servants in the Office of Capital Ac-
cess and cross-office of Disaster Assistance have put forward over
a trillion dollars of lending that as was noted by the Ranking Mem-
ber’s remarks, is greatly appreciated all over the country by small
businesses. They are dedicated, outstanding, and it is my privilege
to work with them.
Over the last 12-plus months, our office has been responsible for
the PPP program round three which originated another $6.1 mil-
lion roughly PPP loans in phase three. The COVID EIDL program
we took over in July and that has led to an additional 300,000
more or less, loans made in 2021 until today. Each of those pro-
grams is hundreds of billions of dollars.
In addition, as was noted, I had the pleasure of administering
the Restaurant Revitalization Program on behalf of Administrator
Guzman were we put out $28.6 billion to 101,000 restaurant-re-
lated entities more or less in 45 days from the bill’s passing. That
particular program was an opportunity to work with grant recipi-
ents who are near and dear to all of us. You cannot tell the story
of your life without a restaurant or related entity, and certainly,
that is true for me.
With respect to the core programs, as Chairwoman Vela´zquez
noted, the lending in our core programs in fiscal year 2021 contin-
ued at a pace. In addition to the 504 numbers that were cited, the
7(a) program also distributed $35 billion to roughly 50,000 small
businesses. So those particular programs will continue to be of use
as we move forward for small businesses, most especially to attack
the problems that Chairwoman Vela´zquez spoke about earlier with
respect to accessing small dollar loans which continues to be a per-
sistent challenge. And we have recently begun to address that by
building off of one of I think the bipartisan successes of the PPP
program. As you all know, in round three, community financial in-
stitutions were given an exclusivity period at the outset of that pro-
gram in order to onboard those parts of the community that felt
they were underbanked in rounds one and two. That led to 600
community financial institutions making roughly $30 billion of ad-
ditional PPP loans more or less over that phase three.
As was mentioned, we have 5,000 lenders who participated in the
PPP program. They span financial technology companies, which
historically are not eligible to lend in the program. Community fi-
nancial institutions which historically have been limited to the
Community Advantage Program, and obviously, banks and credit
unions. In a typical 7(a) year, about 1,900 banks make at least one
loan, and over a 5-year period it is roughly 4,000.
So one of the tasks that Administrator Guzman has put our of-
fice on is ensuring that we build off of the momentum of participa-
tion by simplifying the products on behalf of our lending inter-
mediaries so that they might leverage digital tools and take advan-
tage of the secondary market tool which is an excellent resource for
SBA 7(a) lenders.
And finally, the 504 program continues to be an outstanding re-
source. Certainly, as we contemplate a rising interest rate environ-
ment, a 25-year-fixed rate note is an incredibly powerful tool. The
other great part of that particular program is owner-occupied real
estate, so it enables a small business owner to build value in terms
6
of an asset and allows for a third-party lender to participate in the
deal.
With that, I will yield back the time.
Chairwoman VELA´ ZQUEZ. Thank you, Mr. Kelley. I will recog-
nize myself for 5 minutes.
Mr. Kelley, earlier this month, we learned COVID EIDL funds
had run out, and I am concerned that the agency did not have a
more detailed plan to notify constituents about the changes in the
program.
Mr. Kelley, could you please let the Committee know where the
breakdown occurred and what do we say to our constituents who
have been dealing with this confusion?
Mr. KELLEY. Sure. Thank you, Chairwoman.
First off, it is important to note that there were about 61,000
workable files at the close of business on May 6th and all of those
workable files across appeals, reconsiderations, and loan modifica-
tion requests that are eligible for funding did, in fact, get approved
for funding and have funds obligated. And that is as of Monday,
May 16th. There is a population, for example, within the reconsid-
eration which was roughly about 9,000 applications for which folks
will not be approved, were not approved, and that is the result of
issues related to credit criteria, tax information, various issues. But
I do want this Committee to know and for the small businesses to
know that we did honor all of the applications that were in before
the funding expired and came in at the tail on May 5th and 6th.
Second, it is important to understand what this population is.
The program has been in wind down since December 31st of 2021
when applications for new borrowers were no longer allowed past
that date. So, for example, the 5.4 million startups, businesses that
came online in 2021 would not be able to access this particular
product. But the 3.6 million borrowers that were made in 2020 are
seeking loan modifications or reconsiderations.
It is also important to note that the program does not allow a
loan increase past 24 months for the original note. As this Com-
mittee knows, 3.6 million loans were originated in roughly 120
days in the spring of 2020 and so that 24-month period is tolling.
And so we have exhausted the funding as Chairwoman Vela´zquez
said, and it is also timely because the loan increases were going to
toll for 93 percent.
Chairwoman VELA´ ZQUEZ. Okay. We need a commitment from
you to work with all the Members, and not only the Members of
this Committee but across the board, to provide transparency and
finality to this process. I will ask you to communicate that to the
loan officers and district offices so that they are aware that that
is a commitment that you make to this Committee.
I understand that SBA plans to transfer all disaster lending to
OCA soon. We have seen the Office of Disaster Assistance do good
work in response to major disasters, especially in Puerto Rico after
Hurricane Maria where ODA provided over $2.2 billion in disaster
loans. Can you guarantee this transfer will not compromise the
ability of SBA to respond to natural disasters?
Mr. KELLEY. Yes. And it is important to note that the Office of
Capital Access will solely be responsible for the lending but the Of-
fice of Disaster Assistance will continue and be involved in pre-
7
paredness which is obviously an important first step in any dis-
aster.
Chairwoman VELA´ ZQUEZ. Thank you. Congress waived the per-
sonal guaranty requirement in the CARES Act to ensure coops and
ESOPs could access PPP and EIDL funds. For 7(a) loans, SBA con-
tinues to require an unlimited personal or entity guarantee which
virtually no co-op can provide based on their business structure.
Given the precedent set with PPP to not require a personal guar-
anty for loans to ESOPs and co-ops, why does SBA continue requir-
ing a personal or entity guaranty for 7(a) loans to co-ops and
ESOPs?
Mr. KELLEY. So, as Administrator Guzman has reflected in her
public comments and maybe even before the Committee, this is an
important opportunity to ensure that employees get ownership in
the small businesses, and obviously, to deal with succession plan-
ning which I know from my lending experience is acute for the
Baby Boomer generation in particular. This is an important tool
and we are working, for example, with the USDA which also sup-
ports, as you know, loans to small businesses, specifically for coops.
And with that guidance, we are working on addressing issues to-
gether with the lender.
Chairwoman VELA´ ZQUEZ. Thank you. My time has expired.
Now I recognize the Ranking Member, Mr. Luetkemeyer, for 5
minutes.
Mr. LUETKEMEYER. Thank you, Madam Chair. Welcome, Mr.
Kelley.
In your opening statement, you briefly discussed the SBA’s Di-
rect Forgiveness portal. On the morning of August 30, 2021, an
email signed by you was sent to PPP lenders. You state, and I
quote, ‘‘Going forward the SBA will be conducting independent out-
reach and audits on lenders who have not actively communicated
to borrowers on the availability of forgiveness. This outreach will
be primarily focused on those lenders who are not participating in
direct forgiveness. To avoid these lender audits, we would encour-
age you to opt in to Direct Forgiveness and maintain an active and
aggressive outbound campaign to your PPP borrowers.’’
Why do you think it is necessary, Mr. Kelley, to threaten the
lenders like that?
Mr. KELLEY. I do not believe that I was threatening. What we
were responding to was banks communicating directly to the Office
of Capital Access personnel that they were withholding starting
forgiveness process in order to smooth out earnings across 2021
and 2021. So at the time of that note, what we were trying to help
was the small businesses that were also notifying the office that
they did not have access to a portal in order to seek forgiveness.
The note, I will grant you, if I could rewrite it, I would, but the
sentiment was that we have tools that we made available for over
1,500 lenders that have serviced 2.5 million PPP loans.
Mr. LUETKEMEYER. Well, thank you for that but the tone was
such that it looks like to me like you were trying to intimidate the
lenders there into doing something which begs the question, why
do you think it is your job to manage the loan portfolio for the lend-
ers? Do you not think they know their lenders better than you do
such that if they felt that this person was eligible for forgiveness
8
that they would probably have contacted them? If it was somebody
they did not feel was worthy of forgiveness they probably would not
contact them? I mean, I believe that they are the lender, you are
the guarantor in the PPP program, why would you want to get in
the middle of that relationship?
Mr. KELLEY. We wanted to get into the middle of that relation-
ship because there were direct reports from small businesses that
banks were not making forgiveness available for their borrowers.
And so what is important——
Mr. LUETKEMEYER. Do you not think it would be better then
to send out a reminder to the banks or update them on the fact
that, hey, you realize that the forgiveness process has started. You
need to be contacting these folks. We think it would be a good idea
to go through your portfolio and take a look at it instead of trying
to threaten them like that. That is not what SBA should be in the
business of. Not managing their portfolio for them, that is up to the
lender. That is not in your job description in this PPP program.
Mr. KELLEY. So I agree that we should let the lenders execute
forgiveness if they, in fact, are doing that, and we support that. To
your point, we do extensive outreach with respect to forgiveness
immediately when I joined the agency beginning in March of 2021.
Mr. LUETKEMEYER. Okay. Next question. According to SBA’s
Inspector General, to date, how much potential fraud was identified
within the EIDL program?
Mr. KELLEY. So, I do not believe that the Office of the Inspector
General has stated an estimate of exact fraud. What they have
done is a series of reports that reflect estimates of improper, ineli-
gible loans. For example, the largest bucket, which reflects the
number that you are quoting is the fact that in 2020——
Mr. LUETKEMEYER. I have not quoted a number yet, Mr.
Kelley. I was waiting for you to do that. The number in the report
is $84 billion that they anticipate could be fraudulently accessed
funds.
So, how much was identified in the PPP program?
Mr. KELLEY. So, again, there has not been a definitive number
released by any of the auditors. What is true about both of the pro-
grams is that there were choices made in 2020 in both programs
which created the opportunity for an increased likelihood of fraud.
So, for example, in PPP, specifically, one of the audit findings ref-
erenced 50,000 duplicate loans. That was the direct result of the
decision by the Secretary of the Treasury at the time to make the
loan accounting system——
Mr. LUETKEMEYER. I understand the problem. In the report
they are talking about roughly 5 percent of the loans to be fraudu-
lently accessed.
In your opinion, when you look at 20 percent versus 5 percent
roughly, did the private sector do a better job of getting these loans
out and preventing fraud?
Mr. KELLEY. Well, they are two different programs. So, for ex-
ample——
Mr. LUETKEMEYER. Why are they different then? In what re-
spect do you feel they are different, that they were able to, one not
prevent fraud and the other one, at a minimal rate, versus the
other one with a 20 percent rate?
9
Mr. KELLEY. Well, first off, I do not agree that the IG or any
of the auditors has identified the percentages that you are speaking
to——
Mr. LUETKEMEYER. Well, Mr. Kelley, with all due respect, all
you do is you take the amount of money that has gone out the door,
you take the amount of money that they think has been fraudu-
lently accessed, and you divide that out and you come up with a
percentage. One is roughly 20 percent on EIDL loans, roughly 5
percent on PPP. So my question is, if the direct lending of SBA is
resulting in a 20 percent rate versus the private sector is only 5
percent, we have got a problem.
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. And all I want you to do is acknowledge
the fact that that is the case. And you have two separate entities
here who are direct lending and there is a big difference in the re-
sults.
Mr. KELLEY. Yeah.
Mr. LUETKEMEYER. That has to be acknowledged. You cannot
deny the facts. It is in the reports.
Mr. KELLEY. Sure. What I can acknowledge is that in the PPP
program, for example, the top 25 depository institutions in the
United States originated 96 percent of their PPP loans to existing
customers. Those existing customers had already, as you know,
gone through KYC and were on the books either as depositor or
loan borrowers. For community banks that number is 83 percent.
The Disaster Loan program is a credit, not available elsewhere,
last resort program. As you know, and the Committee reflected in
the Economic Aid Act the fact that——
Mr. LUETKEMEYER. So the point though, Mr.——
Mr. KELLEY.—there was a need for folks that had not received
funding.
Mr. LUETKEMEYER. With all due respect, Mr. Kelley, the
point—I reclaim my time. The point is that there are things in
place that help minimize fraud in one situation that are not there
in the other that we need to take a look at.
I thank you. I yield back.
Chairwoman VELA´ ZQUEZ. Time has expired.
Now we recognize the gentleman from Pennsylvania, Mr. Evans,
for 5 minutes.
You are muted, Mr. Evans.
Mr. EVANS. I am muted.
Some of my constituent business owners have been working with
the SBA on EIDL reconsideration for a year or more. Several of
them have been in the process for so long due to reasons beyond
their control such as tax documents expired between SBA loans
have been delayed in submitting the document to the IRS. Can you
explain the timeline going forward for these cases and those that
are either submitted or approved status?
Mr. KELLEY. Yes. So, as I mentioned earlier in the testimony,
there were roughly 61,000 outstanding workable or eligible files
which meant that they were either seeking an appeal of a previous
decline, a reconsideration of a previous decline, or a loan modifica-
tion which is an increase to their existing loan. One of the per-
sistent challenges in this particular program is the disconnect be-
10
tween the choice that was made in 2020 regarding not validating
tax income for 3.6 million borrowers versus the desire in the Eco-
nomic Aid Act for 2021 to require, again, as is the case historically
for natural disaster lending at SBA to verify tax income.
It is important to remember that the tax information that we are
seeking for these borrowers is their 2019 filing. It is now May
2022. For the reconsideration requests, in almost all cases the
original denial is due to a discrepancy that has been reviewed by
a loan officer with respect to an amended tax return. The amend-
ment is seeking a higher increase amount than the borrower is eli-
gible for and not surprisingly, the borrower is not happy with the
outcome, which as I know from ending is an unfortunate byproduct
of making loans.
The thing that is important about 2022, as I mentioned earlier,
is that the opportunity for seeking loan modifications begins to toll
because the original notes for 93 percent of the loans were origi-
nated in 2020 and the 24-month window will toll.
Mr. EVANS. Has money been set aside for applications that have
been approved but not received funding?
Mr. KELLEY. Yes. So there are approved and obligated bor-
rowers who have not executed closing at their own discretion. And
they will continue to have the opportunity to close the loan or not
close the loan, in which case we will cancel it. But in all cases, we
began communicating to the outstanding applicants for loan modi-
fications, reconsiderations, and appeals beginning in February, and
notified them directly through email directly to their account and
spoke directly through call center and loan officer response to the
actual borrowers’ request.
Mr. EVANS. Will those in submitted status be able to receive
funds?
Mr. KELLEY. So it depends on what you mean in terms of sub-
mitted, Congressman Evans. So I apologize. Are you referring to
new applications or loan——
Mr. EVANS. Those submitting a status. Those submitting a sta-
tus. Will they be able to receive funding?
Mr. KELLEY. So, yes. So, all of the submitted eligible reconsider-
ation, appeal, and loan modification requests that were received on
or before May 6th, totaling roughly 61,000 requests will have been
processed, and those that are eligible for funding in the case of a
loan modification increase, which is roughly 40,000 in that bucket,
have received notification. And those funds will be obligated for
them to close today or at a later date at their discretion.
Mr. EVANS. I thank you, and I yield back, Madam Chair. Thank
you very much.
Chairwoman VELA´ ZQUEZ. The gentleman yields now.
I now recognize the gentleman from Texas, Vice Ranking Mem-
ber Mr. Williams, for 5 minutes.
Mr. WILLIAMS. Thank you, Madam Chairwoman, and Ranking
Member Luetkemeyer.
Mr. Kelley, I have three questions. I have got a bunch of ques-
tions. But I would appreciate you keeping your answers to a quick
yes or no on these first three questions.
11
Do you believe the SBA, regardless of who is in the White House,
should fight for lower taxes, less regulations, and advocate for
Main Street America?
Mr. KELLEY. I absolutely believe that the SBA should fight for
small businesses.
Mr. WILLIAMS. Regardless of who is in the White House?
Mr. KELLEY. Correct.
Mr. WILLIAMS. Do small business owners prefer capitalism over
socialism?
Mr. KELLEY. I cannot speak for small business owners.
Mr. WILLIAMS. Do you think that capitalism built the country,
not socialism that we see today in the Biden administration? Do
you think that when you go out and see small business owners like
myself that they say we would much rather have capitalism than
socialism? I mean, are you a capital?
Mr. KELLEY. Am I capitalist? Yes.
Mr. WILLIAMS. Okay. But do you think Main Street America
wants that over socialism?
Mr. KELLEY. I cannot speak for all of Main Street America.
Mr. WILLIAMS. Okay, well, you work for the SBA, but okay,
that is fine.
The other question would be, have you ever owned a business?
Because we were talking about your private sector experience. The
Chairman was talking about that. Have you ever owned a business
and started it with your capital and met a weekly payroll?
Mr. KELLEY. No, I have not.
Mr. WILLIAMS. But you still feel like you see the issues that
face small business even though you have not had that experience?
Mr. KELLEY. For 6 years between the Obama administration
and the Biden-Harris administration I built a lending practice for
asset-based lending and business acquisition loans and made a half
a billion dollars of loans available for small businesses. Yes, I feel
pretty fluent in the issues related to small business.
Mr. WILLIAMS. But it is also different when you have your own
capital behind it. And we have some people in this administration
who have never owned a business either. That is a problem we
have.
So as a small business owner myself, I still own a business in
Texas, I have about 300 employees that work for me for over 50
years. I can tell you that President Biden’s SBA is out of touch
with Main Street America. Inflation continues to skyrocket as
Americans struggle with the rising cost of gas and groceries and
you see that even from your perch how inflation is choking small
business, not to mention that America’s labor force participation
rate is close to a 45-year high leaving small businesses under-
staffed and on the verge of shutting down.
Meanwhile, through all this, the administration’s fiscal 2023
budget requests millions of dollars under the SBA’s lending pro-
gram to go towards climate initiatives. We have got businesses out
there begging to be able to participate, stay open, and you are out
there talking about climate initiatives. It is shocking to me that the
SBA would request more taxpayer dollars for climate change in
lieu of directing money to provide businesses with access to capital.
And I can tell you that I know businesses in my district in Texas,
12
they are concerned about their ability to compete in the future and
are looking to SBA to be a nonpartisan resource that has their best
interest in mind and they are not worried about climate change.
So Mr. Kelley, as you talk with small business owners like me,
what is the bigger concern today, climate change or inflation?
Mr. KELLEY. Well, specifically for the Natural Disaster Loan
Program which we have talked about here, the fact of the matter
is that the number and the impact of natural disasters has been
on the rise. And so what the budget refers to is the fact that we
are going to continue to need to make both consumer loans for
property damage deltas that are not made up by their private in-
surance to put homeowners back in their homes, as well as small
businesses for working capital once they have been leveled by a tor-
nado, an earthquake——
Mr. WILLIAMS. Of course, this is before they have been leveled
by a tornado or earthquake. They just want some help.
Mr. KELLEY. Yes.
Mr. WILLIAMS. And you are out there absorbing a budget full
of climate change which people are not interested in right now that
takes cashflow away from those businesses.
Mr. KELLEY. So for the businesses that are wrecked by the nat-
ural disaster, that is an opportunity for them to get back on their
feet. And our core programs, for example, during the Obama era,
we leveraged the 7(a) program to do a dealer floor plan financing
report. So you own an auto dealership. We stood in when the deal-
ers were being closed and shuttered when there was the potential
of the auto manufacturers going down and provided 7(a) capital.
That was done through community banks to support auto dealers
to make sure that they could get access to floor plan financing.
So you are right; we have two programs. One that is an uber
credit not available elsewhere, which is to say when a business
owner is at the worst moment in their life, we stand in to help
them.
Mr. WILLIAMS. Okay.
Mr. KELLEY. And for the core main street businesses, we pro-
vide working capital, owner-occupied real estate and business ac-
quisition——
Mr. WILLIAMS. Do not forget small businesses that need oper-
ating capital before the big storm as you refer it.
Mr. KELLEY. Absolutely.
Mr. WILLIAMS. That is ready capital they can employ people
with and create more jobs.
Chairwoman VELA´ ZQUEZ. Time has expired.
Mr. WILLIAMS. As opposed to something down the future.
Thank you. I yield my time back.
Chairwoman VELA´ ZQUEZ. The lady from Kansas, Ms. Davids,
is recognized for 5 minutes.
Ms. DAVIDS. Thank you, Chairwoman. I am glad we are having
this hearing today. As the Chair on the Subcommittee on Economic
Growth, Tax, and Capital Access, I am really glad that we are tak-
ing time to work with the Office of Capital Access.
This hearing comes, of course, at a critical time. Just recently,
the SBA announced that the COVID EIDL funds have been ex-
hausted leaving a lot of business owners, particularly in the Kan-
13
sas 3rd frustrated and disappointed. I know my office has been
working with a lot of small businesses that have had trouble get-
ting their EIDL applications processed in a timely manner. Wheth-
er that is because of the IRS or SBA processing delays, eligible
small business owners have been extremely frustrated to discover
that after months of paperwork and back and forth with govern-
ment agencies that there is not funding available for them and that
is, of course, not through any fault of their own.
I know Mr. Evans and a couple of other people have touched on
this. I want to make sure that I have a clear understanding of the
process going forward. When you were responding to Mr. Evans’s
question, I believe that you said that even in instances of applica-
tions being—I guess I will give a hypo. If a business applied and
was inappropriately flagged for fraud and then ultimately their ap-
plication is determined to be eligible, there are funds available for
those applicants; is that correct?
Mr. KELLEY. There can be funds made available. There are not
currently any funds available for that. What is important to note
is that in your hypothetical, that particular borrower had been
seeking that particular reconsideration and had over 14 months to
seek the loan increase. So what I can say is that for 98 percent of
the applicants, we respond to those requests in less than 30 days,
and the funding for the loan modification increases, the average
size of which is about $100,000 to $200,000 takes place in less than
3 weeks. And for the $2 million loans, it takes about 5 weeks to
process. So as of May 6th, the total inventory of those challenges,
and I want to say to everyone on the Committee and you, Rep-
resentative, if there are any individual issues that you want me to
chase down, I am happy to do that. But in terms of the workable
inventory, we did go through all of those and made sure that those
folks were funded.
Ms. DAVIDS. Okay. And is that regardless of whether we are
talking about IRS delays or folks being inappropriately flagged for
fraud? Going forward, I just want to make sure that everyone has
been—because we will definitely follow up with any constituents
from the Kansas 3rd who have seen these delays who have been
extremely frustrated with the back and forth or lack thereof. I just
want to make sure that what you are saying is that your under-
standing is that you have essentially exhausted all of the applica-
tions whether somebody was inappropriately flagged for fraud or
went through the delays with the IRS that all of those applications
have been processed and anybody who has been approved has al-
ready received their funding?
Mr. KELLEY. Yes. And what I am also saying is that when
Members send us constituent challenges it falls into two buckets.
Either they did not file in 2019 and they are seeking an increase
for more than a year because in 2020 they were able to get the ad-
vance as well as the loan up to $150,000 without needing to vali-
date taxes, which of course is the subject of all of the audit reports.
For the 2021 population, the 300,000 have had the year to seek
new applications. New applications ended on 12-31. And for the
second predominant reason is amended returns where the increase
request that the borrower is seeking is higher than the previously
stated taxes. And so in those instances there is interrogation on the
14
part of the loan officer and the team leads as there should be to
determine that.
With respect to fraud per se eligibility, those issues are dealt
with pretty rapidly with respect to, you know, as soon as the flag
fires and it is an automated flag. So it is most likely that the con-
stituent’s issue is related to taxes.
Ms. DAVIDS. Okay. All right. Well, thank you. And we will fol-
low up.
Thank you, Chairwoman. I yield back.
Chairwoman VELA´ ZQUEZ. The gentlelady yields back.
Now we recognize the gentleman from Pennsylvania, Mr.
Meuser, Ranking Member of the Subcommittee on Economic
Growth, Tax, and Capital Access.
Mr. MEUSER. Thank you very much, Madam Chair. And I
thank the Ranking Member, Mr. Kelley. Good to be with you.
So do you think that the expertise and direct community ties for
private lenders working with the SBA for the 7(a) loan program is
a successful initiative, a successful partnership?
Mr. KELLEY. For $370,000 loans, which is the average loan size
for owner-occupied real estate and business acquisitions, which is
three-quarters of the loans originated each year, yes, absolutely.
The 10-year amortization for business acquisitions, there is not a
better product.
Mr. MEUSER. But you actually think SBA is better off doing
many of those loans on its own?
Mr. KELLEY. I think that we need to exhaust all distribution
channels across the full spectrum of borrower need.
Mr. MEUSER. The EIDL loan had such fraud and PPP had such
minimal fraud. You are a private sector guy. Why in the world
would you want the SBA that is understaffed. People throughout
Pennsylvania anyway are working real hard, doing a decent job
with what they have available to them, they do not have the tools
to do it a high level of excellence, and you are saying that you want
to take on the direct lending? That sounds crazy to me.
Mr. KELLEY. Well, I would point you to the State of North Da-
kota, which has had a public bank for over 102 years. The Kansas
City Fed recognizes that it has the highest consumer and business
borrower deposit density amongst——
Mr. MEUSER. I completely disagree. Completely disagree. That
does not make any sense. Look at the EIDL funding and the PPP.
Mr. KELLEY. There is a public bank——
Mr. MEUSER. I will reclaim my time. Also, the idea that you are
spending millions of dollars as Mr. Williams just brought up for cli-
mate change? Well, have you walked through a few small busi-
nesses lately?
Mr. KELLEY. Yes.
Mr. MEUSER. All right. They have got a lot of issues taking
place.
Mr. KELLEY. Yes.
Mr. MEUSER. Okay? And access to capital is a real important
one. And you are focused on the wrong things. I mean, why would
you be focused on voter registration? Why did you put your hand
up first when President Biden said, hey, let’s turn federal agencies
into voter registration arenas. Why would you say, hey, we have
15
got nothing else to do. We will do some voter registration for you.
Does that make sense to you?
Mr. KELLEY. Allowing people to vote, yes.
Mr. MEUSER. That is not the function of the SBA. Okay? Yeah,
it is nice if you hand out ice cream, too, but that is not what your
role is. It is absolutely remarkable and it does not make any sense
that you would not bring some focus to this important authority
that you have and advocacy. But you do not see it that way.
Mr. KELLEY. I definitely bring a focus every day to the access
to capital issues. So right now working on the full spectrum of——
Mr. MEUSER. And I can see why you are not in the private sec-
tor.
Let me ask you this.
Mr. KELLEY. I spent the bulk of my career in the private sector,
Congressman.
Mr. MEUSER. You know, well, then why would you be expand-
ing your duties while the main function is running so poorly?
Okay? EIDL loans have run out; right? You are aware of that, the
funding for EIDL loans?
Mr. KELLEY. Yes.
Mr. MEUSER. I have got a lot of businesses that were counting
on those loans. If we did not have billions, $80 billion in likely
fraud, those loans would not have run out. If they were done in
partnership with community banks knowing the customer, that
would not have happened. Because look at the PPP. So I have
small businesses in need of capital, and instead, we sent it to
fraudsters, okay, because you took it on yourself and you want to
expand that. Okay? Can you understand where I am coming from
that I have some difficult in that as this Committee has oversight
of your work?
So on to the EIDL funding. Do you have any plans for—what is
the plan for bringing some additional funding for the EIDL lenders,
for the EIDL loans?
Mr. KELLEY. So we will work with this Committee appropri-
ators and the Office of Management and Budget to properly fund
the program. With respect to the EIDL program in particular,
there is no doubt that there is going to be continued demand for
a 3.75 percent fixed rate loan with a 30-year amortization period,
but there are other options in the marketplace as you and other
Members have referenced that those borrowers are going to be able
to access. And one of the key tools for that will be the 7(a) product
for which thousands of lenders——
Mr. MEUSER. Wrong answer. I am just looking for when it is
going to be funded so these small businesses can get the loans that
they have been counting on.
Just real quick. The 504 Express Pilot program that was sup-
posed to be done December ‘22, I know you guys are busy, but
when will that be implemented? When will that finally be created
and done?
Mr. KELLEY. Shortly. So the regs will be promulgated in short
order.
Mr. MEUSER. I yield back, Madam Chair.
Chairwoman VELA´ ZQUEZ. Thank you. The gentleman yields
back.
16
We recognize the gentlelady from Pennsylvania, Ms. Houlahan,
for 5 minutes.
Ms. HOULAHAN. Thank you, Madam Chair. Just making sure
that you can hear me okay?
Chairwoman VELA´ ZQUEZ. Yes, we can.
Ms. HOULAHAN. Terrific.
And thank you, Mr. Kelley, so much for your testimony.
The SBA, my questions have to do with some inadvertent con-
sequences, unexpected, unintended consequences. The SBA esti-
mates that over 300,000 PPP borrowers have in good faith made
miscalculations. That miscalculations have been made either by the
borrowers themselves or by the lending organizations. On average,
they have ended up with excess loan amounts in errors of around
$12,403, which of course poses an unexpected and potentially crip-
pling debt for many of our borrowers despite in many cases the
loans being used and spent on what would be considered forgivable
uses. So in other words, the SBA’s current process had a simple
technological inputter error occurred could impact or would impact
some of our borrowers for years to come because of that mistake.
We really need, I believe, to deliver on our promises to those bor-
rowers that these loans can be turned into grants if funds were
spent on forgivable loans or for forgivable reasons.
So my question to you, sir, is will the SBA commit to making
good on that promise and to helping these borrowers to get full for-
giveness?
Mr. KELLEY. Yes. We will commit to working with you and your
staff and the Committee to trying to figure out the right path for-
ward for those particular forgiveness borrowers.
Ms. HOULAHAN. Excellent. I very much look forward to work-
ing with you and my staff working with you as well.
Real quick. Do you think that there is a legislative issue here or
is there something else that we can understand going on here?
Mr. KELLEY. I would defer to take this offline because while I
am a lawyer, I am not a particularly good one and I do not want
to speak out of turn on the authorizing statute.
Ms. HOULAHAN. Okay. I look forward to that conversation.
My second question is somewhat related. As the PPP program
was also rolled out, the program rule changes were actually quite
rapidly changed in some cases because of just the crisis that we
were in and making sure that we were being as expedient as pos-
sible. The elimination of the agency’s grace periods contributed to
additional errors such as improper documentation that was sub-
mitted by both borrowers and lenders again. So my question again
is does the SBA have any plans to be able to retroactively review
those kinds of cases where the program rules changes may have
also contributed to good faith errors?
Mr. KELLEY. Yes. So, it is important to note that there have
been 10.1 million out of the 11.4 million loans forgiven. Roughly
65,000 have been purchased and there are about 4,000 current ap-
peals. The appeals process is for those denials, full denials that you
are referencing. And in the case of partial denials, we do have a
reconsideration process that we make available for those bor-
rowers.
17
Ms. HOULAHAN. And is there, again, anything that I can be
helpful or this Committee can be helpful in doing to help make
sure that we, again, in the case of people who are just operating
in good faith with the rules, very flexible and very dynamically
changing understandably, is there anything that we can be doing
to be helpful there?
Mr. KELLEY. Yeah. I think you have highlighted some areas. I
am happy to work with the Committee and any Members on the
areas regarding errors and the calculation of the payroll amount.
We do see that in terms of overages as you referenced and one of
the challenges that creates for the borrower. So absolutely, I am
happy to work and try to solve this and get to the bottom. And I
think we should all feel good, and I give the Committee and obvi-
ously your colleagues in the Senate a lot of credit because we kept
the faith with borrowers and lenders. These loans were supposed
to be forgiven, and if the lender made them, they would have the
option to be forgiven. And by and large that has been executed. But
you point out an important group that might be at the margins
that we should work on.
Ms. HOULAHAN. Thank you. I appreciate it. I have very limited
time left but I would love to take for the record a question that is
always pressing on me which is the accessibility of capital to the
women-owned small businesses. The businesses that are women-
owned have loan sizes that are 41 percent lower than those that
are owned by men. Furthermore, on average, the credit score for
women-owned businesses tends to be much lower, 14 points lower.
I only have 16 seconds left and so probably no opportunity for you
to answer but would love for you from the record to be able to talk
to us about what we are doing, what your office is doing to level
that playing field and what can Congress do to be supportive of
those efforts.
And with that, Madam Chair, my time has run out and I yield
back.
Chairwoman VELA´ ZQUEZ. The gentlelady yields back.
Now we recognize the gentleman from Florida, Mr. Donalds, for
5 minutes.
Mr. DONALDS. Thank you, Madam Chair.
Mr. Kelley, thanks for coming in.
A real quick question. This is to piggyback off the final question
from Mr. Meuser dealing with the 504 Express program and when
essentially the regs were going to be written for this program. You
said shortly. What does that mean?
Mr. KELLEY. It means in the next 30 days or so in terms of
being published.
Mr. DONALDS. Okay. So in 30 days that should be out there
small businesses can take advantage of this?
Mr. KELLEY. Yes.
Mr. DONALDS. Okay. All right. I wanted to get some more clari-
fication because words have meaning here in our process.
Real quick question. So what is the impact in your view of the
rising interest rate environment on the 7(a) program, on the 504
program? Obviously, the Fed is on the move. My view, they are late
to the game. They should have done this, should have been doing
18
this earlier considering the inflationary environment. But what is
your view of the impact of rising interest rates on those programs?
Mr. KELLEY. Well, it makes the product that much more valu-
able for the small business borrower that receives it. So, for exam-
ple, you referenced 504. That is a fixed rate tool. So obviously, bor-
rowing with money today and paying back later is an advantage
with a fixed rate note. And while the rate has gone up 50 basis
points in the last couple of weeks to a point on the baseline rate,
overall, the base rate is still low historically. So the other advan-
tage of these particular products is that they allow for longer amor-
tization periods which lowers the monthly debt service associated
with the debt which means that there is less cash going to the
debt. And for companies that have to pivot, companies that are
looking for growth, owner-occupied, excuse me, business acquisition
tool in the 7(a) program for which 30 percent annually loan pro-
ceeds go to is an excellent opportunity to buy a business with little
to no money down in the particular program.
Mr. DONALDS. Let me ask you this question because you men-
tioned your private sector experience. I have to go into another
hearing. So real quick, just can you give me a quick 15 seconds on
what your private sector experience was?
Mr. KELLEY. Sure. I worked for a community bank based on
Wilmington, North Carolina that makes loans nationwide to small
businesses for about 6 years. Prior to the Obama administration,
I worked for Schulte Roth and Zabel, which is a law firm in New
York City. Worked mostly on M&A as well as structure finance.
Prior to law school, I worked for a for-profit educational company
that helped children with ages 4 to 14 with enrichment and reme-
diation. That was a retail store. I ran a P&L for that. And then
worked for Chubb Insurance Company, as well as Merrill Lynch in
the Muni-bond division in the late ‘90s.
Mr. DONALDS. Okay. So let me ask you this question. So, we
have roughly 30 million small businesses in the United States.
Capital is basically required by everybody. What is the capability
of SBA through direct lending to actually take what part of the
market share do you anticipate SBA can actually access?
Mr. KELLEY. So I would reference the previous congress-
woman’s point about women-owned borrowers and earlier ref-
erences to startups.
Mr. DONALDS. Hold on, Mr. Kelley, I have got a minute 33. If
you guys are talking about doing direct lending, of all the small
businesses that exist that are looking for capital, what percentage
of overall small businesses—you guys have had to do some analysis
on this—just what is the percentage? Ten percent of small busi-
nesses? Twenty-five percent? Thirty percent? What do you think
SBA’s real capacity is and capability?
Mr. KELLEY. So, I do not know the total capacity. What I can
say based on market demand is that the hardest challenge, and
Chairwoman Vela´zquez referenced this in her opening statement,
there has been a dearth or decline in loans particularly under
$50,000.
Mr. DONALDS. You do know why that is; right? We have shut
down community banking in the United States through Dodd-
Frank regulation. In my congressional district we had 75 commu-
19
nity banks when I was in community banking. Seventy-five. Now
we have five. It is 10 years, 15 years. From 75 to five. That is what
Washington has done.
So my question is, and again, because now I am down to 25, 28.
My question is very, very simple. If SBA was going to go out and
do direct lending, essentially create a federally controlled bank, if
you were going to out in the private markets and make your own
bank, you would have to have an understanding of what percentage
of the market you were going to be able to anticipate counting on
as customers. So what percentage of the overall market does SBA
have the capacity to actually take on as direct lending customers?
Mr. KELLEY. I assume you are referencing to this Committee’s
language that was put in the Build Back Better bill with respect
to direct lending. If that is the case, in particular what that lan-
guage called for, and I think it was appropriate, was for funding
loans under $150,000. And what the language sought to do is to
create parity between the SBA’s direct loan for which the agency
has direct lending authority today and has had it historically. To
make small dollar loans for which there is a gap and there is an
efficiency challenge recognized by all——
Mr. DONALDS. The only thing I would argue is——
Chairwoman VELA´ ZQUEZ. Time has expired.
Mr. DONALDS.—I do not think the SBA really has a clue of
what its capacity really is.
Chairwoman VELA´ ZQUEZ. Time has expired.
Mr. DONALDS. That is my point.
Chairwoman VELA´ ZQUEZ. The gentleman from Minnesota, Mr.
Phillips, is recognized for 5 minutes.
Mr. PHILLIPS. Thank you, Madam Chair.
Let me first associate myself with the remarks of my colleague
from Florida relative to community banking. I agree. I do not want
to see more erosion. I want to see more propagation. I have seen
the great value they bring to our communities and share your con-
cerns.
Mr. Kelley, let me start with you and say thank you. There is
a lot you could be doing other than serving the public in this capac-
ity. The SBA in my estimation is a uniquely American institution
in supporting entrepreneurship and its ecosystem. And I am grate-
ful. We have an obligation to provide oversight and accountability,
and we all have concerns about fraud, about some of the programs,
but I want to thank you. A colleague who was so critical of the SBA
just moments ago, according to news reports, secured a million dol-
lar plus PPP loan. I want to say thank you on behalf of his enter-
prise and the hundreds of thousands that you helped save. And say
thank you most importantly on every one of those little enterprises’
behalf.
With that said, there is a lot SBA could do better. It could do bet-
ter under Republican administrations and under Democratic ad-
ministrations I think we would all agree. But let me start by just
affording you a few moments and express to us what do you think
we could do better, the SBA, you, your associates, relative to the
provision of capital to small enterprises?
Mr. KELLEY. Thank you. So, the single most important thing
that I think we can do better is build off of what worked univer-
20
sally within the PPP program for our lending intermediaries, which
is to support a simplified product that can leverage technology,
that can lower the cost of new customer acquisition, as well as the
controllable non-interest expense associated with making a loan,
and to make available the secondary market so that the guaran-
teed portion of that loan can help banks lend beyond their lending
limit for an important customer or leverage the secondary market
for liquidity and quarterly earnings.
So to do that we need to also build off of the expansion of dis-
tribution channels. So as I mentioned earlier, 600 community fi-
nancial institutions supported $30 billion more or less of PPP
loans. This is particularly important because the average loan size
across that $30 billion was roughly $40,000. That particular
amount is going to be absolutely critical when we think about the
5.4 million new startups that happened in 2021. For those new
startups, if they go to the bank that I worked for or any other
bank, they will obviously be in their first year or two of cashflow.
Typically, community banks rely on the trailing 36 months to vali-
date income from tax returns. So, as a result, there is a market ex-
ternality related to startups and it is one of the most challenging
aspects for any lender, whether you are a community financial in-
stitution or a large top four depositor institution. So, I think the
things that we can do focus on making the rules simple. I commend
the Committee across multiple programs for simplifying, for exam-
ple, some of the eligibility criteria for those programs with respect
to affiliation, criminal background checks, those things. I think we
should build off of that.
With respect to the credit criteria for PPP, it was a formula. And
so it lent itself to speed, and as a result, we saw huge participation
within the first $385 billion from community banks.
As I mentioned earlier, it is a fact that the State of North Dakota
has a public bank for the last 102 years. It lends $22 billion cur-
rently of assets alongside its community banks. And in PPP, the
largest lender, community bank lender in the State of North Da-
kota made 1,000 loans with the same amount of branches as a top
four depository institution, same state, but they only made 100
loans. So community banks are thriving as measured by the Kan-
sas City Fed in terms of consumer deposits and business deposits.
So I think that we should think about, and we mentioned it ear-
lier in the Committee, public-private partnership means both
halves of those equations. And the reason that community banks
are struggling and declining is because of the pressure that is
being put on them by the products offered by the top 25 depository
institutions which has led to a decline in their deposits and it has
made it very difficult to compete in terms of working capital op-
tions for small business borrowers that have high average daily de-
posit account numbers.
So, the opportunity to do what the——
Mr. PHILLIPS. My time is expired.
Mr. KELLEY. I am sorry. I got passionate about that.
Mr. PHILLIPS. No, and I wanted to afford you time, and I hope
we can work together with you to help realize that vision.
With that I yield back. Thank you.
Chairwoman VELA´ ZQUEZ. The gentleman yields back.
21
Now we recognize the gentleman from Wisconsin, Mr. Fitzgerald,
for 5 minutes.
Mr. FITZGERALD. Thank you, Madam Chair.
Mr. Kelley, so on July 28, 2021, SBA made changes to the PPP
forgiveness by establishing the Direct Forgiveness Portal. So there
has been discussion already amongst Committee Members on the
difference between the PPP loans that obviously were part of the
files that were controlled and initiated by local banks compared to
the SBA direct loans. So, you know, there was an experience there
that I think there was a little bit of talk about. And I get it. We
are trying to get the money out the door, get it out as quickly as
possible, and there were a couple of different avenues that that
could happen under.
But the problem I think now is that there was very little commu-
nication between the SBA and the banks and credit unions on the
forgiveness part of it. So because I am in the district in the 5th
congressional and I still hear about this now, that this is an issue
that was kind of hanging out there and had not been dealt with
directly. Do you guys still believe that what was put in place and
the due diligence or the underwriting related to that is still rel-
evant? Or should this be revisited now and include the credit
unions and the banks in this full discussion about forgiveness?
Mr. KELLEY. So I guess could you help me? I am having a hard
time. So with respect to forgiveness, so as I mentioned earlier, 10.1
million loans have been forgiven, 65,000 have sought purchase.
Currently, we have an inventory of manual reviews of roughly
40,000, of which there are a total of 4,000 that exceed the 90-day
window. Ninety percent of that number stays in inventory for less
than 15 days. Of the 4,000 over 90 days, all of them have hold code
related to eligibility issues that we are interrogating. So I am not
aware of challenges with respect to forgiveness.
Mr. FITZGERALD. They are basically making the case that the
fraud detection was not significant enough in relationship to the
SBA compared to what they were already doing. So right now it
has created kind of two different categories of PPP loans that are
out there, and I think there are a lot of credit unions and banks
that are saying we simply kind of do not know where SBA is going
with all this.
Mr. KELLEY. So I am happy to take offline to better understand
the issue. My experience with lenders, and we just recently at-
tended the National Association of Guaranteed Lenders, and there
were about 800 different community banks represented. There was
not a reflection that forgiveness was having problems. With respect
to direct forgiveness specifically, we add new banks each week even
to this day. We are over 1,500 representing 2.5 million loans under
$150,000 that we are processing. And on a daily basis the Direct
Forgiveness portal is responsible for roughly 55 percent of the in-
bound intake. What remains outstanding of the 11.4 million loans
is roughly a million loans from the 2021 population for which the
10 months from the end of the forgiveness period is about to toll,
and we saw an uptick last summer at this time related to the 2020
population. But I am definitely happy to hear and will talk to any
lender that is having a challenge specifically with forgiveness to as-
sist.
22
Mr. FITZGERALD. Very good. I will follow up with you on that.
Let me just shift gears real quick. So we just introduced H.R.
7678, American Small Business Competition Act. It would increase
loan amounts under both 7(a) and the 504. I think this is especially
important as kind of the small business costs continue to rise with
the goods and services and what we are seeing kind of with the
economy right now. Have you guys looked at the 5 million and
whether or not that is a sufficient loan max in this environment
that we are operating in now as we continue to try and get the
economy in a better place than where it is currently?
Mr. KELLEY. Yes, Congressman. I am aware of the bill and the
language. And there is a continuum or spectrum of small business
capital needs that spans from the tying loans that we were ref-
erencing earlier where there is a gap and what the language of
your bill references which is, for example, specific to supply chain
financing today, small businesses that are seeking to purchase in
bulk are often facing a liquidity challenge because they need to
front the money to the suppliers. And the increase in the amounts
in order to be rank ordered by that supplier is necessary. For the
banks, that proposition is not one that they are excited about be-
cause they are lending money today in hopes of getting an invoice
at a later date. So I do think there are opportunities for us to work
together to support working capital. Largely, the 4,500 community
banks focus on residential mortgage and commercial mortgage
loans and they have stepped out of the line of credit or asset-based
lending which is the type of lending that is particularly needed
when you are financing growth and supply.
Mr. FITZGERALD. Thank you. I yield back.
Chairwoman VELA´ ZQUEZ. Thank you. The gentleman’s time
has expired.
Now we recognize the gentleman from Maine, Mr. Golden, for 5
minutes.
Mr. GOLDEN. Thank you. I quickly want to revisit something
that was brought up earlier by one of my colleagues. I believe there
was an executive order having to do with agency-side, department-
wide working on issues of voter access. And so I think some people
were talking about SBA kind of throwing their hand up and I just
do not think that is quite the case. I think it is important that peo-
ple understand that you are appropriately focused on your mission
but you do have an obligation to be responsive to executive orders.
I am sure you would agree. So totally fair for Congress to voice
opinions about perceived bad executive orders no doubt but I think
that should be appropriately targeted at the White House and
maybe as an associate administrator of your office you are just
being responsive in the way that you have to be. But somewhere
in the Cabinet there is someone I am sure who was pushing that
EO but it would not have been your office. So I just wanted to clar-
ify that for everyone out there. I agree with the sentiment of my
colleague though that your office should be focused on capital ac-
cess. I think you are doing a good job demonstrating your grasp of
the work that you do, so thanks for being with us here today.
I want to talk very locally about a constituent that I have back
home but I think that their situation is very similar to many others
around the country. So my constituent was working on an EIDL
23
application. They had been working with my office for months to
get SBA to complete a review of their application. And there were
difficulties with midstream changes to the applicant’s personnel
and then with delays at the IRS. SBA’s processes, however, also
contributed to delays. So the applicant reported to us several times
that responsibility within SBA for their materials changed fre-
quently. And it was evidenced by redundant requests for informa-
tion that they were asked to provide to a number of different SBA
employees. And these requests seemed to stem from confusion
about the applicant’s organizational structure which they were able
to clear up with certain SBA contacts only to then have confusion
reappear when they encountered new contacts at SBA. This led to
extended periods in which there was little progress made in the re-
view.
As of yesterday, neither the applicant nor my office is able to de-
termine whether their application will meet the criteria for SBA to
complete its review as laid out in SBA’s May 13th FAQ. We were
informed recently that its status in SBA’s system was I guess la-
beled as Not Interested, which is apparently being used as a hold-
ing pattern for certain applications. But it is unclear how this sta-
tus maps to the review stages laid out in the May 13th FAQ. So,
while the applicant has finally received an IRS transcript, it is not
clear whether there are remaining documentation gaps.
And given all this, including the fact that the application was
subject to processing delays by SBA and the IRS, it seems unfair
for them to miss the opportunity to at least have a full review of
their application. So I would like to work with you and your staff
to, first of all, determine whether this application is in one of the
stages that would make it eligible for a completed review; and then
second, if the application is not on track to receive a full review,
is there any way to get this on track? Or are there other ways in
which your office can help them get access to the capital that they
were looking at and that they clearly need? And of course, in a way
that will work for them, similar to the EIDL program. It obviously
had some very good loan terms that they were interested in, but
if it is not this, are there other opportunities? And I will follow up
with your staff to make sure that you get more details on the spe-
cifics here.
Could you just speak a little bit about the process for constitu-
ents like this across the country? What kind of flexibility is out
there and how long is this going to take for your office to figure
out?
Mr. KELLEY. Well, specific to the example, yes, I am happy to
take that offline and get directly into that. Broadly speaking, it is
no doubt the case that the worst thing you can do in a business
experience or a customer service experience, excuse me, is to set
the wrong expectations on the outset of the relationship. Unfortu-
nately, when the COVID EIDL program was rolled out in 2020, 3.6
million borrowers, 93 percent of the total asset portfolio, were able
to obtain $150,000 with none of the credit criteria that is normally
applied either commercially or in this public program.
So when they came back in for loan modifications which this ad-
ministrator made available, the process was by definition going to
be more arduous because we were actually underwriting the eligi-
24
bility you referenced in your remarks as well as the credit criteria.
So, it is unfortunate for sure and we have experienced it with those
borrowers. So I am happy to work offline to address the issue.
Chairwoman VELA´ ZQUEZ. The gentleman’s time has expired.
Now we recognize the gentleman from New York, Mr. Garbarino,
for 5 minutes.
Mr. GARBARINO. Thank you, Madam Chair. Mr. Kelley, thank
you very much for being here today.
I wanted to follow up a little bit, build off of actually what the
previous Member was asking.
So your office oversaw the COVID EIDL program; correct?
Mr. KELLEY. Yes.
Mr. GARBARINO. The application process?
Mr. KELLEY. Our office took over the program in July of 2021.
Yes.
Mr. GARBARINO. And so if something moved from the pending
status to I think your office you used something internally, obli-
gated. That means if the loan was obligated that means it was ei-
ther going to be funded or was being funded. Who determined, is
that your staff or your office that determines if something hit the
obligated status?
Mr. KELLEY. Yes.
Mr. GARBARINO. so when you announced, or your office an-
nounced, or SBA announced that the EIDL money was done, there
was no more, if something was not in obligated status at that
point, did that mean they could not get any money? There was no
more money available for them; right?
Mr. KELLEY. At that particular moment on May 5th, yes. How-
ever, as I referenced earlier in my testimony, there were around
61,000 workable files across people seeking appeals to a previous
decline, reconsiderations of a previous decline, and then loan modi-
fication increases. And we were able to process all of those that
were eligible to be approved and be obligated funds. And we have
notified those customers directly from the loan officer and then the
folks that are obligated have the right at their discretion to close
the loan. And they will have sufficient time, 180 days or more to
execute that.
Mr. GARBARINO. So they might not have been obligated but
they were appealing it or there was reconsideration. Were there
any applications that were not being appealed or reconsidered with
their new applications that were not obligated that have since be-
come obligated? Like could anything happen through a congres-
sional inquiry or something that would have moved something that
was not obligated on that date to obligate it if it was not a recon-
sideration?
Mr. KELLEY. Yes. So from the period of time from May 5th,
May 6th, up until May 16th, your office perhaps and certainly oth-
ers, have made us aware of folks who were in the statuses that
your question refers to. And we have dispositioned each of those in-
stances. And so that might lead to an approval in being obligated.
It also can lead to another decline for the reasons that they were
previously declined. For example, reconsideration. It is important
to note that reconsiderations for the 24-month period, 8 out of 10
times that someone seeks a reconsideration, they are declined. So
25
it is also important to note that because of the delta between what
was required for the 3.6 million loans originated in 2020 versus the
roughly 300,000 plus originated in 2021 that required tax income
verification, that those folks from 2020 seeking a loan increase
were denied the increase they were seeking 50 percent of the time.
So it is absolutely the case that the experience has been frus-
trating. But as I mentioned to the previous Member’s question,
when you set a different set of program expectations and 93 per-
cent of the loans are originated under different expectations, that
is, of course, going to create that scenario.
Mr. GARBARINO. Okay. So nothing can be reconsidered now. If
an application by May 5th, they were not obligated, everything was
pretty much denied; correct?
Mr. KELLEY. Yeah. I think——
Mr. GARBARINO. Well, and the reason I am asking is I have a
couple constituents that had applications in. They were not obli-
gated. They never had an original determination. They were now
denied because the funding was out but they were sent a letter
asking if they would like a reconsideration. So there is no extra
money for reconsideration of loans that were denied; correct?
Mr. KELLEY. There can be money through cancelations but it is
more likely the case that the limiting factor for a particular bor-
rower seeking an increase at this late stage, and keep in mind that
increases have been available for 14 months.
Mr. GARBARINO. But if they were denied, and I am almost out
of time, but people are getting reconsideration requests but the pro-
gram is closed now.
Mr. KELLEY. Yes.
Mr. GARBARINO. So I think there is a disconnect there and it
is really confusing a lot of my constituents.
Mr. KELLEY. The challenge is going to be from the date that
they signed the note they cannot seek an increase beyond 24
months.
Mr. GARBARINO. Okay. Thank you.
Chairwoman VELA´ ZQUEZ. The gentleman yields back.
Ms. Chu, the gentlelady from California is recognized for 5 min-
utes.
Ms. CHU. Yes, Associate Administrator Kelley, I am feeling the
distress that some small businesses are experiencing in getting
shut out of COVID EIDL funding due to agency errors or delays
outside of their control.
A couple of examples from my district. A small business owner
in my district applied for a COVID EIDL loan increase well before
the May 6th deadline but because the IRS did not send the SBA
the required tax transcripts in time, the application was not consid-
ered complete and will be rejected.
Another small business owner in my district applied for a loan
increase more than 2 weeks before the deadline but experienced a
technical issue with the SBA’s online portal. They immediately no-
tified SBA and called the agency every day to see if the issue had
been resolved but they still have not heard back about the status
of their application and are concerned that they will not receive
funding.
26
These are just two of the examples but I am sure that there are
thousands more small businesses in similar situations.
How is the SBA going to make all the small businesses like this
who had a lag in response from the IRS or who were not able to
submit their completed application due to your own agency’s er-
rors? Is it possible to extend the deadline for these particular busi-
nesses?
Mr. KELLEY. What I would recommend, so what I would say to
all the Committee Members, and I would recommend in this case
that we address each individual issue. What I have found since
July when I took over this program is that there is a lot of detail
with each individual inquiry.
With respect to taxes, I agree that we as a nation should
prioritize helping the IRS with the 4506T Modernization. There is
a bill that was passed for the IRS to make available through API
income verification that would not only help us administer these
programs but it would be a tremendous tool for the commercial
lenders and it would directly impact small business borrowers be-
cause they would be able to get a faster quote at a lower rate be-
cause of the verification of the income. One of the lessons coming
out of the Great Recession and the Residential Mortgage Meltdown
was stated income loans, or so-called liar loans create challenges.
It is absolutely the case that borrowers who could get a loan in
2020 with no income verification and are having issues with their
2019 tax filing are frustrated. It is important to note that the larg-
est single request that we deal with from Members or directly
through our field offices relates to a disagreement over amended
tax filings. This is to say that there was a reported income that jus-
tified a lower increase request that the agency did approve and the
borrower is seeking reconsideration of that by amending their tax
filing. And coincidentally demonstrating that they are now eligible
for an increase over and above what they had previously filed. It
is important to understand that we are all dealing with a balance
of speed and certainty here with the speed to get the emergency
relief out and the certainty that we all want and this Committee
has prioritized in the Economic Aid Act with respect to safety and
soundness and mitigating fraud, waste, and abuse.
Ms. CHU. Well, what about the situation with the portal not
being functional? That is the SBA’s error.
Mr. KELLEY. So by definition, there were 9,000 reconsideration
requests that were pending on May 6th and there were 4 million
outstanding loans. So there are, in fact, thousands literally of folks
who are frustrated with the process at any one time. But the scale
and magnitude of the volume that we are dealing with, which is
to say we have been approving roughly 40,000 to 50,000 loans a
day since July on the order of magnitude of a half a billion to a
billion dollars in some cases means that by definition there will be
larger numbers across the board. Our call center response time is
less than 42 seconds to pick up the phone. The longest wait time
recorded since September is 17 minutes. And the average disposi-
tion time is 7 minutes. So, there is opportunity to interact with a
human and to dispose of these. And I am happy to work with your
Member and the individual borrower offline to try to get to hope-
fully a positive outcome.
27
Chairwoman VELA´ ZQUEZ. The gentlelady’s time has expired.
Now we recognize the gentlelady from New York, Ms. Tenney, for
5 minutes.
Ms. TENNEY. Thank you, Chairwoman Vela´zquez and, also,
Ranking Member Luetkemeyer, my Vice Ranking Member next to
me, Mr. Williams, another small business owner, and thank you,
Mr. Kelley, for being here today.
I know you are going to understand this completely because you
are a Colgate graduate. Over the past few decades, too many of our
communities have been left behind by manufacturers. Many of the
businesses moved to China. You know that as a person who lived
in Hamilton, New York, for a few years of your life. My mom’s
hometown. This has been really exacerbated by the reality that
capital today is really hard to get, and we are relying on SBA,
many of our businesses. A lot of the money tends to be focused on
big city hubs, so Boston, New York, San Francisco. And yet, it is
disproportionately not going to areas like Hamilton and rural Up-
state New York that I represent that have capital-intensive busi-
nesses in the manufacturing sector that have long-term profit hori-
zons but it takes a lot more capital to get them up and running
but they have longer term prospects. And also, more job opportuni-
ties for people in these communities, especially everyday Ameri-
cans.
And I introduced a bill called the American Innovation and Man-
ufacturing Act, and that was to address this imbalance. I think
there is a place where small business could be really helpful in
this. It would provide flexible financing. We have also great people
in the audience here today who are working on providing private
lending options to our SBA, through SBA, and also to our small
business community.
But my first question to you is right now we have got this situa-
tion where the PPP and the COVID programs are going to take
about a decade to close out, but the SBA and the congressional
Democrats are pushing to create new programs for them to direct
new lending. And I know you have been tackling questions all
morning on this. So even though that is happening, with the SBA’s
current tissues managing the fraud and difficult loan cases and the
PPP and EIDL programs, number one, why should we trust the
agency to continue to take on new types of programs that are more
diverse and why do you not see a need to move to the private sector
using partners like community banks and others to help our under-
served in rural communities? I know there is a lot there but if we
could address, we are creating all these new programs. Why are we
not going and using these private sector type lenders and institu-
tions who are really going to enhance the SBA’s role and take a
lot of that away from sort of a larger bureaucracy that you are de-
scribing today has been very difficult to manage?
Mr. KELLEY. So first I would say that you are absolutely right
that the choices made in 2020 with respect to the safety and sound-
ness measures for PPP and COVID EIDL created or increased the
likelihood of the challenges that are highlighted in the audit re-
ports that reflect that. What is also true is you would be hard
pressed prior to that to find an IG or GAO audit report discussing
either natural disaster lending or the core 7(a), and 504 programs
28
with respect to fraud, waste, and abuse. So it is absolutely the case
that these extraordinary programs that met an extraordinary
plague are outliers. So I believe you should feel very confident in
the agency’s ability to administer programs without fraud, waste,
and abuse, because we have demonstrated that for the bulk of the
agency’s history with the exception being the choices made in 2020.
Secondly——
Ms. TENNEY. Okay, quickly, because I want to ask one more
question.
Mr. KELLEY. Sure. Secondly, with respect to your working cap-
ital situation, I completely agree. The Chairwoman, in one of the
versions that this Committee voted out with respect to direct ven-
ture, and one of the programs that is highlighted in the president’s
budget goes directly to helping third-party lenders, private lenders,
provide working capital solutions through certified development
corporations for the type of asset-based financing that you are look-
ing for, specifically for manufacturing. So I would love to work with
your staff and the Committee more on that.
Ms. TENNEY. Thank you. The last question I have is when the
Paycheck Protection Program was created by the CARES Act, reau-
thorized in December of 2020, we applied affiliation rules prohib-
iting SBA from issuing and forgiving PPP loans to entities with
more than 500 employees across their affiliates. And it only ex-
cluded hotels and restaurants. However, we have since learned
with various witnesses before this Committee that the SBA and
your office have since forgiven illicit loans from 34 Planned Parent-
hood affiliates totaling over $65 million. Considering Planned Par-
enthood has more than 16,000 employees, well beyond the 500 em-
ployee threshold, what was the reasoning behind illicitly forgiving
these loans?
Chairwoman VELA´ ZQUEZ. Time has expired.
Ms. TENNEY. I would be happy to take that offline or in person
if possible.
Chairwoman VELA´ ZQUEZ. The gentlelady from California, Ms.
Kim, is recognized.
Ms. TENNEY. Can I get that question answered offline?
Ms. YOUNG KIM. Hello?
Chairwoman VELA´ ZQUEZ. Yes, I can hear you. I can hear you.
Give me a second, please. Mr. Kelley, would you provide a writ-
ten response to the gentlelady’s question from New York?
Mr. KELLEY. Sure.
Chairwoman VELA´ ZQUEZ. The gentlelady from California is
recognized for 5 minutes.
Ms. YOUNG KIM. Thank you. Thank you very much, Chair-
woman and Ranking Member Luetkemeyer for holding this hear-
ing. And I want to thank our witness.
Mr. Kelley, I really want to thank you for being with us today.
I echo many of the issues my colleagues have raised today, and
I am concerned that the administration is moving away from SBA’s
core mission which is to help small businesses prosper and protect
their interests in order to preserve free, competitive enterprise. But
instead, the administration and SBA should be focusing and using
existing resources to operate more efficiently and improve its re-
sponsiveness to small businesses and entrepeneurs.
29
According to a recent report by the Office of Inspector General
found that for some loans totaling $66.4 billion, SBA did not meet
the 90-day statutory requirement to remit forgiveness payments to
lenders. Additionally, the report states SBA did not meet the 90-
day requirement for over 98 percent of loans over $2 million.
So Mr. Kelley, why is the SBA failing to meet the 90-day statu-
tory requirement?
Mr. KELLEY. It is not any longer. The report that you are citing
references the forgiveness applications over $2 million that were
outstanding as of March of 2021 when I took over the office. At
that time there was a population of about 60,000 loans that had
not been processed in a timely manner. The previous administra-
tion did not begin forgiveness review of manual reviews until No-
vember of 2020 despite the forgiveness portal opening August 10th
of 2020. From March of 2021——
Ms. YOUNG KIM. Just talk to me about the plan that you are
working on and how would it help?
Mr. KELLEY. I am sorry; I did not——
Ms. YOUNG KIM. Or how is SBA meeting the 90-day require-
ment right now?
Mr. KELLEY. We are meeting the 90-day requirement. In fact,
we are actually exceeding the 90-day requirement. Of the current
workable inventory with respect to manual reviews of which there
are roughly 40,000 at any one time, 90 plus percent of those will
be turned in less than 15 days. There is a population of 4,000 that
have exceeded 90 days due to hold codes related to fraud, waste,
and abuse that we are interrogating which reflects that.
I would also be happy to talk to any of your constituent lenders
that participate in the PPP program that have any outstanding
issues with any loan greater than 90 days.
Ms. YOUNG KIM. Well, it seems that we have a clear case study
on the effectiveness and efficiency of the successful public-private
partnership versus direct lending. On one hand, the EIDL program
disbursed loans on an average of 49 days during the early days of
the pandemic, and they had almost $85 billion of potentially fraud-
ulent activity. On the other hand, the PPP as a public-private part-
nership took an average 7 days to disburse loans and had approxi-
mately $4.6 billion in potentially illegal behavior.
So Mr. Kelley, based on these numbers, in your opinion, which
model did a better job at disbursing loans in a timely manner while
protecting against fraud?
Mr. KELLEY. So I think both programs as measured by the
audit report deserve a lot of improvement based on choices that
were made in 2020. Each program is different. The objectives, for
example, within the PPP program were to originate a forgivable
note where the lender was held harmless, was not required to
verify the payroll amount. And as I mentioned earlier, by and large
lend the loan to an existing customer versus an uber credit not
available elsewhere disaster loan which was a critical lifeline for
the population that was widely reported in 2020 as not being able
to access PPP due to being underbanked and underrepresented
across the banking footprint.
Second, with respect to the number that you all are aggregating
with respect to the IG reports for COVID EIDL, the lion’s share of
30
the use case that makes up that number refers to the sole propri-
etors, including employee numbers, on their applications for the ad-
vance, which was distributed in 2020. And not having a requisite
EIN number.
The IG has classified that not technically as fraud per se but as
being ineligible. And their justification is the absence of EIN, which
is a requirement for a sole proprietor declaring employees?
Chairwoman VELA´ ZQUEZ. Time has expired.
The gentleman from Minnesota, Mr. Stauber, is recognized for 5
minutes.
Mr. STAUBER. Thank you, Madam Chair. Thank you, Ranking
Member Luetkemeyer, for holding this meeting.
Associate Administrator Kelley, I appreciate you being here
today.
In your testimony, you mentioned that 5.4 million Americans
filed an application for a new business in 2021. You also state that
as the SBA transitions its focus from pandemic to its core mission,
the agency has never had more startups to support.
Would you say that adding $201 billion in additional regulatory
cost and over $130 million in new compliance hours for small busi-
nesses as the Biden Administration has ambivalently done or sup-
port actions for these 5.4 million new startups?
Mr. KELLEY. I think the regulations that you are referencing
are appropriate for the industries that they are overseeing. And we
have seen time and time again that if we do not have the proper
rules of the road, it is the small businesses that actually are dis-
advantaged because the major corporations are able to use their
vast resources to a comparative advantage. So I agree with you
that 5.4 million small businesses absolutely need fairness across
the board. And obviously, Administrator Guzman is, you know,
their voice.
Mr. STAUBER. So would you agree that $201 billion of addi-
tional regulatory costs for small businesses is not wise?
Mr. KELLEY. I agree that you are citing an aggregation of the
PRA citations in the Notice and Comment Rulemaking for which
the public will have an opportunity to weigh in on those rules. I
am also in agreement that for specific industries we need to have
fair rules of the road so that there is a competitive landscape for
small businesses to compete.
Mr. STAUBER. You certainly want a competitive landscape in
adding—these are the Biden administration’s own numbers—add-
ing $201 billion of additional regulatory costs is unacceptable as we
look at COVID through our rearview mirror.
From the budget proposal, it is clear that the SBA administrator
is looking to promote her own goals and initiatives rather than deal
with the follow-up pandemic. The pandemic may be over but the
responsibilities of this agency certainly are not. EIDL loan pay-
ments are going to begin soon. More fraud than we already know
to exist is going to bubble up. Innocent people are going to get hurt.
This leads me to my next question. How is this agency managing
its resources? Are you directing money away from incomplete tasks
for the administrator’s wish list initiatives? Because according to
your budget justification, the SBA seems to think it is more pru-
dent to use taxpayer dollars to pay off environmentalists but help
31
small businesses that are facing skyrocketing inflation, a labor
shortage, and a continued supply chain crisis.
Mr. KELLEY. I am sorry, I did not catch the end of your ques-
tion.
Mr. STAUBER. How is the agency managing its resources? Ad-
ministrator’s wish list, it seems like the administrator is putting a
wish list forward. I want to know your budget justification. The
SBA seems to think it is more prudent to use taxpayer dollars to
pay off environmentalists and help small businesses that are facing
skyrocketing inflation, labor shortages and a continuing supply
chain crisis.
Mr. KELLEY. So, I am not aware of the budget paying off envi-
ronmentalists. What I am aware of is the increase in the frequency
and the aperture of natural disasters nationwide and in the terri-
tories. And what is absolutely paramount, as you heard me answer
to that Chairwoman earlier and promise, we need to make sure
that there is never an instance where someone cannot receive nat-
ural disaster lending either on the consumer side to make up for
a delta between their property insurance and what the true phys-
ical damage is to their home, and for the small business’s working
capital. We are focused on providing lending and capital for
growth. Growth is as important now as ever and fixed rate prod-
ucts are obviously a unique opportunity leveraging the 7(a) and the
504 program.
The last thing I will say is that I believe that this country at this
point is truly served by this administrator give her experience, not
just in the Biden administration but being on the ground when the
pandemic was unfolding in a similar position for the State of Cali-
fornia, which is the sixth largest economy.
So I believe that she understands and has a full grasp of the
issues and concerns that you have highlighted.
Mr. STAUBER. I expect as the associate administrator you
would make those statements about our administrator.
Madam Chair, how much time do I have left?
Chairwoman VELA´ ZQUEZ. Your time has expired, sir.
Mr. STAUBER. I apologize and I yield back, Madam Chair.
Chairwoman VELA´ ZQUEZ. The gentleman yields back and now
we recognize the gentlelady from Texas, Ms. Van Duyne, for 5 min-
utes.
Ms. VAN DUYNE. Thank you, Madam Chair, and to the Rank-
ing Member for holding this hearing today. And thank you, Admin-
istrator Kelley, for appearing before us.
This hearing comes at a precarious time for small businesses.
Over the past few years they have battled and emerged from the
pandemic that permanently forced many small businesses to close
their doors. Yet, at this moment, small employers are the least op-
timistic about their future business conditions than they have been
in almost 50 years. And how can you blame them? 8.3 percent an-
nual inflation is ripping through the economy without signs of stop-
ping. Every business you talk to cannot find people to hire, and
supply chains are still in turmoil. There is no doubt that this ad-
ministration’s fiscal policies have played a hand in overstimulating
the economy.
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The San Francisco Fed found their fiscal support and countered
for over a third of the recent rise in inflation. Fortunately, this Ad-
ministration’s response has been much of the same rhetoric. The
president tweeted that the key to bringing inflation was ‘‘making
sure that the wealthiest corporations pay their fair share.’’ And yet,
his new press secretary could not even defend that statement.
In an environment that leaves business owners looking for ways
to cut costs, this president still has on his mind increasing taxes.
That will be devastating for small businesses.
On this Committee, we have established that tax increases would
directly and indirectly impact small employers. But lucky for us,
the key to a thriving small business economy and a lower inflation
environment lies with less government interference and spending.
And let’s be clear. We are nowhere near finished with the over-
sight of COVID relief. The Washington Post just put out a story
about close to $163 billion in unemployment fraud. And combine
that with the staggering amount of fraud in small business pro-
grams, we are nearly a quarter of a trillion in waste. Imagine what
we could do with that money. Maybe we could actually deal with
the rapidly approaching expiration dates of Medicare and Social Se-
curity Trust Funds.
The message to the American people should be clear. The federal
government will not spend any new money while we work to get
back the billions of dollars in improper payments.
Mr. Kelley, I have just a couple of questions. Is the SBA and the
Office of Capital Access expecting or planning for a recession in the
U.S. economy?
Mr. KELLEY. We are not expecting anything related to that.
What we are doing every single day is providing credit not avail-
able elsewhere. So our——
Ms. VAN DUYNE. Okay. So you are taking no steps at all to
plan for a recession?
Mr. KELLEY. Our program with respect to its CORE products
is actually a product that will work very well for small businesses
and lenders regardless of the economic——
Ms. VAN DUYNE. Oh, that is wonderful, so but are you saying
that you are not taking any steps to prepare for a recession?
Mr. KELLEY. No, I am saying that we have loan products that
we administer——
Ms. VAN DUYNE. So you are taking steps to prepare for a reces-
sion?
Mr. KELLEY. I think I have answered the question which is I
am saying——
Ms. VAN DUYNE. It is a yes or a not. Are you not or you are?
Mr. KELLEY. We are administering a program that provides
loan products——
Ms. VAN DUYNE. So is it a yes or a no?
Mr. KELLEY. That we are providing loan products, it is a yes.
Ms. VAN DUYNE. That you are preparing or not preparing for
a recession?
Mr. KELLEY. We are not currently preparing for a recession. No.
Ms. VAN DUYNE. Okay. So would you agree that the overall
economic situation does impact lending cycles? And whether small
business owners may seek out SBA loans versus a private lender?
33
Mr. KELLEY. I am sorry; could you repeat the question?
Ms. VAN DUYNE. Would you agree that the overall economic
situation impacts lending cycles?
Mr. KELLEY. Yes.
Ms. VAN DUYNE. And whether or not small business owners
can seek out SBA loans versus a private lender?
Mr. KELLEY. Yes. But what happens in a recessionary environ-
ment is that the SBA loan products are actually in greater demand.
And so——
Ms. VAN DUYNE. Okay, so good to know. So as I am sure you
are aware, many financial institutions are starting to anticipate
and price in a higher risk of a recession. So I am interested in why
private lenders are adjusting to this economy at a higher risk of
a recession but the SBA is not thinking about it.
Mr. KELLEY. It is not that we are not thinking about it. Our
core products depend on those lending intermediaries that you just
referenced. And the core product actually benefits them in the
counter cyclical environment. So what I am saying to you is that
the particular program that I administer has loan products that
are most useful in countercyclical environments. So whether I am
in a——
Ms. VAN DUYNE. Okay. I have got to yield back my time be-
cause I have only got 17 more seconds.
As you talk with small business owners I am curious, what is a
bigger concern for them, climate change or inflation?
Mr. KELLEY. I think that anything that impacts their business
is a concern. And both of those——
Ms. VAN DUYNE. But you think they are more concerned with
climate change right now or inflation?
Mr. KELLEY. I think with respect to the references to climate
change within the specific budget it is in reference to natural disas-
ters that have eviscerated their small business. So I believe——
Ms. VAN DUYNE. Okay. I yield back my time. Thank you very
much.
Chairwoman VELA´ ZQUEZ. Time has expired.
Thank you, Mr. Kelley, for appearing before us today. The work
that you and your staff do is fundamental to the success of our
main street communities.
We are committed to working together to enhance OCA’s pro-
gram, remove barriers to accessing capital, and support entre-
preneurs as they continue to lead our recovery.
Without objection, Members have 5 legislative days to submit
statements and supporting materials for the record. If there is no
further business to come before the Committee, without objection,
we are adjourned. Thank you.
[Whereupon, at 11:53 a.m., the committee was adjourned.]
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