Taking on More Risk: Examining the SBA's Changes to the 7(A) Lending Program Part I
Summary
The printed record of a House Committee on Small Business hearing on May 10, 2023, Small Business Committee Document Number 118-011, on the SBA's changes to the 7(a) lending program, with Chairman Roger Williams presiding and Patrick Kelley, Associate Administrator of the Office of Capital Access, as the witness. Williams objects to the new rules' changes to underwriting standards and to the reversal of the moratorium on licensing new Small Business Lending Companies. Ranking Member Nydia Velazquez says the SBA approved over 30,000 7(a) loans totaling more than $14.6 billion so far in FY23 and voices concern about new licenses going to fintechs. Kelley testifies that the SBA reviewed 41.9 million PPP and COVID EIDL applications and that 20 lenders do 50 percent of 7(a) lending. The appendix holds answers to questions from Williams, Bean and Chu.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING
PROGRAM PART I
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 10, 2023
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-011
Available via the GPO Website: www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
52-168 WASHINGTON : 2023
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MORGAN MCGARVEY, Kentucky
MARIE GLUESENKAMP PEREZ, Washington
HILLARY SCHOLTEN, Michigan
SHRI THANEDAR, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
Ben Johnson, Majority Staff Director
Melissa Jung, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Roger Williams.............................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESS
Hon. Patrick Kelly, Associate Administrator, United States Small
Business Administration, Washington, DC........................ 4
APPENDIX
Prepared Statement:
Hon. Patrick Kelly, Associate Administrator, United States
Small Business Administration, Washington, DC.............. 31
Questions and Answers for the Record:
Questions from Hon. Williams and Answers from Hon. Kelly..... 34
Questions from Hon. Bean and Answers from Hon. Kelly......... 45
Questions from Hon. Chu and Answers from Hon. Kelly.......... 50
Additional Material for the Record:
None.
TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING
PROGRAM PART I
----------
WEDNESDAY, MAY 10, 2023
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building, Hon. Roger Williams
[chairman of the Committee] presiding.
Present: Representatives Williams, Luetkemeyer, Stauber,
Meuser, Salazar, Ellzey, Molinaro, Alford, Crane, Bean, LaLota,
Velazquez, Golden, Phillips, McGarvey, Gluesenkamp, Perez,
Scholten, Chu, Davids, and Pappas.
Chairman WILLIAMS. Good morning, everyone. I now call the
Committee on Small Business to order.
Without objection, the Chair is authorized to declare a
recess of the Committee at any time.
The committee is here today to hear testimony from Mr.
Patrick Kelley, the U.S. Small Business Administration's
associate administrator of the Office of Capital Access. Thank
you for being here today, sir.
And now I recognize myself for my opening statement.
I want to welcome everybody here today to today's hearing
which will focus on the much-needed oversight of the Small
Business Administration and their proposed changes to the 7(a)
loan program. The SBA administers several programs to support
small business that encourage lenders to provide loans to main
street who might not otherwise be able to obtain financing.
Their flagship 7(a) loan program offers government guaranteed
loans to eligible small businesses for short- and long-term
capital needs.
The SBA is in the process of finalizing two rules that will
represent the most significant changes to the program in
decades. Well, there are many more troubling aspects of these
rules. The most problematic in my opinion are the changes to
the underwriting standards while simultaneously allowing more
fintech companies to become 7(a) lenders. The SBA is throwing
away the nine prospective elements of underwriting that lenders
have been using for decades to determine if a borrower is
eligible for a government-backed loan. Instead, lenders will
now be able to use whatever lending criteria they see fit
considering that taxpayers will go and be the ones on the hook
if a significant portion of those loans go bad. We should not
be loosening the criteria for lenders to give loans.
Additionally, these rules reverse the moratorium on
licensing new Small Business Lending Companies, better known as
SBLCs. The moratorium was initially put in place in the 1980s
because the SBA recognized that they were not capable of being
the primary federal regulator of these entities. Given the
unacceptable levels of fraud that occurred in the SBA's
pandemic programs, I have serious concerns that the agency is
not up to the task of taking on more responsibility.
I am not alone in raising these concerns about the SBA's
capabilities. Last month, when the SBA's Inspector General
testified before this Committee, he noted the significant
challenges that the agency will face in managing the increased
loan volume going forward as well as the significant shortages
of staff within the department charged with overseeing SBLCs.
There are serious concerns that these changes to the
program will be detrimental to taxpayers and small businesses
alike. If more loans start to default, the fees to the program
are going to have to be raised, or the agency will come to
Congress to ask for more taxpayer dollars to make up for the
shortcomings. The policy noticed released late last night which
lays out implementation for just one of the final rules is not
sufficient and does not satisfy our concerns.
This is an extremely important hearing as we in Congress
discuss what the future of this program will look like, and
what we must do legislatively to ensure the programmatic
integrity of the 7(a) program in the future. I want to thank
you all again for being here with us today and I am looking
forward to today's conversation.
And with that, I yield to our distinguished Ranking Member
from New York, Ms. Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding this
important hearing.
The Small Business Administration's 7(a) program is the
agency's flagship lending initiative. Under the 7(a) program,
SBA guarantees significant portions of loans encouraging
lenders to extend credit to small businesses that might not
typically be able to obtain financing. So far in FY23, the SBA
has approved over 30,000 loans totaling more than $14.6 billion
proving just how integral the 7(a) program is to our nation's
entrepreneurial ecosystem.
7(a) loans strengthen local communities, create jobs, and
move our economy forward. Given the critical nature of the 7(a)
program, this committee must carefully consider and vet any
significant changes. Last month, SBA issued two final
rulemakings that have substantial implications for the 7(a)
program. The affiliation rule loosens lending criteria, updates
loan conditions, and eliminates various affiliation standards.
While the second rule on SBLCs ends the SBA's longstanding
moratorium on licensing new SBLCs. In the final rule, SBA
states that it can license and supervise three new SBLCs and it
is speculated that some, if not all, of these new licenses will
be granted to fintech companies.
SBA instituted these rules to address persistent gaps in
access to capital as part of the Biden administration's broader
economic agenda.
Increasing access to capital for underserved entrepreneurs
has been and will remain a priority for me as the top democrat
on this committee. However, I am apprehensive about the SBA's
decision to remove many of the longstanding guardrails and
program requirements on loan criteria and affiliation standards
that have served the 7(a) program well while also lifting its
moratorium on the licensing of new SBLCs.
I am especially concerned by the possibility of new SBLC
licenses being granted to non-federally regulated fintechs with
no experience in 7(a) program lending.
Researchers have highlighted that fintechs facilitated most
of the significant fraud associated with the Paycheck
Protection Program. I appreciate SBA taking this situation
seriously and the steps the agency has taken thus far to hold
the blatant actors responsible for their actions.
With that said, we will be doing a disservice to American
small business owners by moving forward with changes that
weaken and destabilize a highly successful program that has
helped millions of entrepreneurs. The last thing we want is for
unintended consequences of sweeping changes by rulemaking
without detailing accompanying SOPs to harm the future of this
program which is an essential tool for many small business
owners and entrepreneurs.
On the matter of SOPs, I remain concerned about policy
changes being released later at night to everyone's surprise.
As many of us on this dais have indicated, it is alarming that
major programmatic changes can come on a whim, no matter the
administration. These continued changes to the incredibly
important details are the reason we are taking our time to
truly understand the impact they will have.
As SBA moves forward with these rule changes, this
committee must ensure that they are responsibly implemented and
do not negatively impact the 7(a) program and individual
borrowers. Ensuring that businesses owned by women, people of
color, and underserved groups is an important goal that I share
with Administrator Guzman.
I look forward to hearing from Mr. Kelley on the steps SBA
is taking to ensure these rules do not risk the integrity of
the 7(a) program.
I remain committed to filling the gaps in the market in a
bipartisan and thoughtful way. The Small Business Committees in
the House and the Senate have proven that we can work together
to make a difference for our main street businesses.
Whether during a global crisis or hard fought SBIR
reauthorization, we have always come together to put politics
aside and do right by our nation's job creators. I look forward
to doing just that again and working with the SBA and my
committee colleagues in both the House and the Senate to find a
solution.
Thank you, and I yield back.
Chairman WILLIAMS. Thank you very much.
And I will now introduce our witness.
It is my privilege today to introduce our witness, Mr.
Patrick Kelley. Mr. Kelley is the associate administrator for
the Office of Capital Access at the Small Business
Administration. At the SBA, Mr. Kelley leads the agency's
Office of Capital Access and has been leading the charge for
the rules change we speak of. Mr. Kelley is a graduate of
Colgate University and Boston College Law School. In a previous
stint at the SBA, Mr. Kelley served as deputy chief of staff,
deputy association administrator, and senior advisor at the
agency and also worked at the U.S. Department of Commerce. In
between his time at the SBA, Mr. Kelley served as the executive
vice president for channel partnerships at Live Oak Bank where
he primarily worked for the bank's corporate strategy and
development team.
Mr. Kelley, I want to thank you for joining the Committee
today and I am looking forward to today's important
conversation.
So with that I now recognize Mr. Kelley for his 5-minute
opening remarks.
STATEMENT OF THE HONORABLE PATRICK KELLEY, ASSOCIATE
ADMINISTRATOR, UNITED STATES SMALL BUSINESS ADMINISTRATION
Mr. KELLEY. Chairman Williams, Ranking Member Velazquez,
Members of the committee, it is a pleasure to be here on behalf
of President Biden, Vice President Harris, and Administrator
Guzman. As Chairman Williams noted, I have been the associate
administrator for the Office of Capital Access since March 1,
2021. During that time I have been responsible for the CARES
Act programs, as well as the Restaurant Revitalization Program
which was a part of the American Rescue Plan, and then also in
July of 2021, I took over responsibility for originations for
the disaster loan programs. Historically the Office of Capital
Access has overseen the post-close servicing of those assets.
With respect to the core programs that have been
highlighted by the Ranking Member's statement, as well as the
Chairman's statement, I also oversee the 7(a) loan program, the
504 program, the SBA Microloan program, and the Surety Bond
program.
Since March 1, 2021, under Biden-Harris and when
Administrator Guzman came on board at the latter part of March,
we have focused like a laser on the outstanding issues that we
inherited with respect to fraud, waste, and abuse associated
with the Paycheck Protection Program, as well as the COVID EIDL
program. During the 2-year period that I have overseen these
programs, we have reviewed close to 42 million, 41.9 million
applications across those programs. We have approved across
those programs 21 million applications for close to $1.2
trillion. We have identified $6.7 million suspicious loans. We
have done that through automatic screenings, as well as data
analytics or supervised learning tools that the GAO and the
Inspector General have highlighted are best practice with
respect to identifying suspicious activity.
There have been close to 3.8 human-led reviews which have
resulted in referrals to the Office of the Inspector General,
and we estimate that a million loans that were disbursed across
the PPP program and the COVID EIDL program represent $41
billion of total fraud undisbursed. The estimated number of
fraud prevented is north of $100 billion. And there was $500
billion that was never allowed to move forward as an
application through the automated screening.
In the coming days, Administrator Guzman will be releasing
a white paper report detailing all this, as well as the
detailed steps, the automated screening, the supervised
learning model that we deployed, as well as the human-led
reviews and the referrals to the Office of the Inspector
General.
President Biden's budget lays out a request for $100
million for the Office of the Inspector General as a result of
this. They currently have processed 776 indictments. They have
testified before this Committee to be working on 500 open case
files, but certainly, the numbers that we have referred, that
the SBA has referred to the Office of the Inspector General,
the so-called bad guys that we believe they should go after
need resources.
With respect to the lessons learned from this and how we
will handle the issues and concerns that were highlighted by
Chairman Williams and Ranking Member Velazquez's opening
remarks, we will be moving forward as we did for phase three of
the Paycheck Protection Program and as we did for the
Restaurant Revitalization Program with a regulatory compliance
and fraud framework pre etran authorization and that process
will validate not only know your customer or fraud issues like
OFAC and other issues but it will also identify alerts and
flags with respect to eligibility.
The core of eligibility is a for-profit company domiciled
in the U.S., an operating company considered small by SBA size
requirements with no character issues and legal resident
status. All of those indicators were vetted in the Restaurant
Revitalization Program and it is important to understand that
we did not need to make the tradeoff in 2020 between speed and
certainty. We were able to stand up a program in 30 days post-
passage, disburse $28.6 billion to 101,000 restaurant and
related entities, and we were able to do that with certainty
that there would not be fraud or ineligible folks.
So I look forward to taking questions and I appreciate the
opportunity to address any concerns. Thank you.
Chairman WILLIAMS. Thank you.
We will now move to the Member questions under the 5-minute
rule. We need direct answers, not long answers if you would do
that for us, please.
Mr. KELLEY. Yes.
Chairman WILLIAMS. I recognize myself for 5 minutes.
Last week, the White House put out their Small Business
scorecard that states the SBA saw a record volume of lending in
Fiscal Year 2022. This includes $43 billion in capital approved
for small businesses across SBA products and an increase in
small loans under $150,000 in the SBA 7(a) loan program.
Now, this is the opposite of everything that the SBA has
been saying to justify these rule changes and different than
what you told our staffs regarding the need to bring more
lenders into the program.
So my first question, Mr. Kelley, so who is not being
truthful, the SBA or the White House?
Mr. KELLEY. Neither is not being truthful. What we have
stated is that over a 5-year period there is a 40 percent, or
50 percent decline in the number of loans and dollars lent
under $150,000. So what we are reporting in those numbers is a
year over year increase. So since the Biden-Harris
administration took over, and as Ranking Member Velazquez
referenced prioritize making small dollar loans an issue, we
have seen improvements in year over year. There is still a
stark decline in the access of capital for the loans under
$150,000.
Chairman WILLIAMS. So the SBA's Office of Inspector General
has found that many nondepository lenders in the 7(a) program
were subject to limited oversight until a default occurs and
identified significant issues within the agency relating to
lender oversight. The Inspector General also noted a failure of
the SBA to conduct regularly scheduled examinations over high-
risk lenders. In short, the OIG has reported on many issues
that questions the agency's ability to be a regulator. And I
share these serious same concerns.
Last night, the SBA released the policy notice for just one
of the final rules to lenders that will help implement these
new rules. It appears that for loans under $500,000, the agency
removed almost all underwriting criteria and lenders are
allowed to give out loans however they see fit to anybody. In
carving out smaller loans from any standard underwriting
requirement is one of the worst ways to mitigate risk and will
increase the changes of predatory lending on small businesses
and taxpayers. So the agency is bringing on more lenders and
diminishing underwriting standards at a time when the agency is
already failing to conduct all the necessary oversight over the
risk lenders. You do not need to be bigger; you need to be
smaller. And this is a recipe for disaster.
So Mr. Kelley, what percentage of the current loan
portfolio is under $500,000? And how will the SBA monitor the
many different underwriting models that will be used by the
lenders since you took away the uniform standard?
Mr. KELLEY. So, two things. First, the reports you
reference from the Office of the Inspector General reference
high-risk lenders based on a quarterly rank order that the
agency and the Office of Credit Risk Management does to all of
its assets. We rank each outstanding loan as high risk, medium
risk, and low risk, and then based on the percentage of a
lender's portfolio, we schedule supervised oversight as a
result. That report does not single out a type of lender. It
speaks to all lenders. And the overwhelming majority of lenders
that the IG has reviewed in its sample set are, in fact,
regulated entities, banks and credit unions. So that is number
one.
Number two, with respect to the underwriting standards,
since 2004, and under a Republican Congress and under President
Bush, the program SBA Express, has existed. And for 20 out of
23 years, when you compare a term loan originated by those
lenders under that program versus a term loan with a standard
7(a) referencing the nine criteria that previously enumerated
in the reg, the term loans with the standard consistent with
your similarly sized non-SBA policy has outperformed in terms
of default rate and loss rate.
So what I would say to Chairman Williams, and I think we
can all agree, is that letting the marketplace lenders and
removing red tape has demonstrated in that program which was
originally a pilot program that a Republican administration
started. In addition, a Republican administration expanded that
exact same criteria to Patriot Express for veteran-owned loans
and Community Express to attack the very same problem that was
identified under Bush which is the dearth of small dollar loans
going to sole proprietors. The rough order of magnitude of
loans under 50,000 in terms of units is somewhere between 40 to
45 percent annually, and 60 percent of those units have been
originated in the SBA Express program because that standard
allows the lenders to follow their credit and collateral
policies and it has performed better.
Chairman WILLIAMS. Okay. In a letter my Senate colleagues
sent you, you stated that the SBA has the same standards as all
the other federal regulators including the Bank Secrecy Act and
the other Know your Customer anti-money laundering
requirements. Now, I have been told this simply is not true. So
I would like you to set very quickly the record straight. Can
you confirm that the SBA does, in fact, require all SBLCs to
comply with the FPSA and KYC regulations, and where can I go to
see the guidance that you gave to lenders on how to comply with
these requirements?
Mr. KELLEY. You can go to the SOP and the letter clearly
states that all lenders participating, and it should be noted,
and you noted it in your opening remarks, Chairman, that while
there has been a moratorium for 40 years, those SBLC licenses
could always be purchased by any type of lender. And in fact,
61 times were purchased and approved. And there has not been an
issue with the Committee in that 40 years regarding those 61
transfers.
With respect to the oversight----
Chairman WILLIAMS. Our time is----
Mr. KELLEY.--of those entities, it is exactly the same
across all entity type.
Chairman WILLIAMS. Thank you.
I now recognize the Ranking Member for 5 minutes of
questions.
Ms. VELAZQUEZ. Thank you, Mr. Kelley, for being here today.
The rules are set to go into effect within the next week;
correct?
Mr. KELLEY. That is correct.
Ms. VELAZQUEZ. Yet, the SBA did not release any information
about the implementation of either of these two rules until
late last night and SOPs still have not been published. Can you
explain why the SBA has waited so long to release any guidance
when it knew the rules were going into effect this week?
Mr. KELLEY. Yes. So as has been noted by Ranking Member
Velazquez and Chairman Williams, I have participated in the
Obama administration. I also, as Chairman Williams noted,
participated for a large SBA lender for 6 years in the private
sector. There is nothing about the implementation with respect
to the posting of procedural notices that precede SOP
publication post rules becoming final. As you know, we are in
the 30-day window before the rules become final. We wanted to
get the procedural notice out before the rule becomes final. We
achieved that and the SOPs will follow. The language that is
reflected in those procedural notices will be reflected in the
SOP.
Ms. VELAZQUEZ. Okay. When do you expect the SOP to be
published?
Mr. KELLEY. I think it will be published, if not today,
this week.
Ms. VELAZQUEZ. When you went to the Senate you stated that
it will be released on May 3.
Mr. KELLEY. Yes.
Ms. VELAZQUEZ. Why did you not release it on May 3?
Mr. KELLEY. Chairman Velazquez, could I----
Ms. VELAZQUEZ. Ranking Member. Soon to be Chairwoman.
Mr. KELLEY. Sorry, sorry, I apologize. Sorry. Sorry,
Chairman Williams. Sorry. Apologies. Apologies. I gave you a
promotion there.
So, I, too, would like a promotion. I would like to be able
to deliver timelines----
Ms. VELAZQUEZ. Okay. My question then is, you know, you say
May 3. It did not happen. How is the SBA expecting lenders to
comply with the rule without the SOP?
Mr. KELLEY. So as a person that worked for the nation's
number one SBA lender by dollars lent in the private sector,
when rules were changed, so, for example, in 2018, 2017, rules
were promulgated by the Trump administration. The order of
operations that we are following is exactly consistent and
prior----
Ms. VELAZQUEZ. That does not make it right.
Mr. KELLEY. Well, it makes it necessary in terms of there
is an order of the way that APA and our procedures call for in
terms of you pass the rule, the rule becomes final, you cannot
operate until the rule has become final. If you want to give
the guidance before the rule becomes final, which we have done,
and then you do not want to proceed or create confusion that
lenders can operate before the rules become final.
Ms. VELAZQUEZ. Have you considered delaying the rules in
order to give lenders and borrowers more time?
Mr. KELLEY. No, because the changes in the rules,
specifically the underwriting criteria, all remove red tape and
bureaucracy that banks and credit unions in my 13 years of
being exposed to this have asked for repeatedly and routinely
over every year.
Ms. VELAZQUEZ. Okay. The final rule changed the definition
of an SBLC from what was proposed in the rule. The proposed
rule stated that an SBLC was ``only to make loans pursuant to
the 7(a) and Microloan program.'' But in the final rule, SBA
deleted the word ``only.'' By removing the word ``only,'' was
the intent to allow SBLCs to begin making non-SBA loans?
Mr. KELLEY. Well, today, all of our lenders make non-SBA
loans. We are responsible for overseeing the loans that they
make within our program. And as the IG has highlighted in its
Management Challenges Report, the key areas that we are
responsible for oversight are eligibility and reasonable
reassurance of repayment. And so, we are responsible for
overseeing that.
I cannot speak to the exact clause that you are talking
about but the intent has always been an SBLC----
Ms. VELAZQUEZ. Right here. Right here. Small business
lending companies. It is a nondepository lending institution
that is SBA licensed and is authorized by SBA to--and what was
proposed in the proposed rule, in the draft, only to make loans
pursuant to section. The word ``only'' was deleted.
My question to you is, if SBLCs were to begin issuing both
SBA-backed loans and non-SBA loans, are you concerned that
these lenders will prioritize their private issuances over
their SBA portfolio defeating our goal to increase access to
capital for the smaller loans?
Mr. KELLEY. Yes. So, and feel free to engage with lenders
on this point. But one of the things that happens today is non-
bank lenders or competitors make loans that are subordinate to
senior debt or SBA loans today. So it is the case today that
small business owners seeking working capital seek out
additional capital if they can get it.
With respect to the issue that you are speaking to, we
dealt with this issue, for example, in the Community Advantage
Program where a community advantage lender, a CDFI, was
originating loans on an interim basis and then refi-ing them
into the Community Advantage loan program.
Ms. VELAZQUEZ. What I do not understand is why did you make
the deletion? Why did you delete ``only''?
Mr. KELLEY. Yes. I am happy to follow up with your staff.
Ms. VELAZQUEZ. Okay.
Mr. KELLEY. Because while I a lawyer----
Ms. VELAZQUEZ. My time has expired.
Mr. KELLEY.--I have to take a look at the actual citations
that you are citing. Yeah.
Chairman WILLIAMS. All right. Thank you.
I now recognize the Members for 5 minutes.
And I first recognize Mr. Luetkemeyer from Missouri for 5
minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Welcome, Mr. Kelley.
When you opened your remarks you said you are here
representing the president and vice president of the United
States. Have you spoken to them recently?
Mr. KELLEY. No. I am a political appointee and so I work at
the pleasure of the----
Mr. LUETKEMEYER. But you are representing them you said.
Mr. KELLEY. Of course.
Mr. LUETKEMEYER. Okay. Do you talk to the White House
administration at all about----
Mr. KELLEY. Yes. Yes.
Mr. LUETKEMEYER.--the programs?
Do you know if Ms. Guzman ever talks to the White House?
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. Does she talk to the president?
Mr. KELLEY. Yes. She was with the president Monday, last
Monday.
Mr. LUETKEMEYER. Well, that is a first because I can tell
you we have asked that question multiple times of her in this
Committee and we never got an answer from her. That may be the
first time she has ever met with him as far as we know.
Mr. KELLEY. It was a publicly attended event in the Rose
Garden----
Mr. LUETKEMEYER. Was it about small business issues?
Mr. KELLEY. It was for National Small Business Week. Yes.
Mr. LUETKEMEYER. Okay.
Mr. KELLEY. And it was celebrating the nation's small
businesses.
Mr. LUETKEMEYER. Well, I hope she talked about some of
these programs and how they are----
Mr. KELLEY. She did.
Mr. LUETKEMEYER.--negative affecting the small business
community because that to me is what needs to be done.
Okay, Mr. Kelley, how many people are at the SBA?
Mr. KELLEY. I think----
Mr. LUETKEMEYER. In the office here in D.C.?
Mr. KELLEY. In the office here in D.C.? I am not sure what
the total head count for the agency is I think something around
2,000-plus. And then it goes up and down.
Mr. LUETKEMEYER. How many people are in your department?
Let's put it that way.
Mr. KELLEY. So there are 300 FTE in the historically
defined Office of Capital Access. We----
Mr. LUETKEMEYER. Okay. How many people showed up for work
today?
Mr. KELLEY. All of them.
Mr. LUETKEMEYER. In this building, in your SBA building,
how many of them showed up today?
Mr. KELLEY. I do not have a head count of who showed up
physically today. As you know----
Mr. LUETKEMEYER. Are they all required to show up to work
every day?
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. I am not talking about off campus being
qualified work. I am talking about physically being in your
office.
Mr. KELLEY. They are complying with what they have been
asked to do.
Mr. LUETKEMEYER. That is not what I asked. I am sorry; that
is not what I asked.
Mr. KELLEY. I understand that but that is how I am
answering your question.
Mr. LUETKEMEYER. I asked a question of whether they are
actually showing up in the office that you work in----
Mr. KELLEY. Yes. I understand----
Mr. LUETKEMEYER.--every day.
Mr. KELLEY. I understand your question. And civil servants
are complying with what they are asked to do. They serve----
Mr. LUETKEMEYER. No, you are not answering my question.
Mr. KELLEY.--on behalf of the public and they are
responsible to comply with what they are asked----
Mr. LUETKEMEYER. Okay. So they are not showing up at your
office is what you are saying because----
Mr. KELLEY. They are doing their job as they were required
by their position descriptions and as their supervisors----
Mr. LUETKEMEYER. Okay. So you are telling me that they are
not which that goes to the point----
Mr. KELLEY. Well, it is no different than any of the
private sector entities that are doing exactly the same thing.
Mr. LUETKEMEYER. I am not talking about the private sector,
Mr. Kelley. I am talking about your office that you are in
charge of. The people are not showing up personally to sit at a
desk in your office building to do their work. You are allowing
them to do it from home which that is fine if you want to do
that but the next question is whenever you have, well, in 2019,
the inspector general claimed that the Office of Credit Risk
Management failed to perform effective oversight over the OCRM,
only conducted 108 of its planned 358 reviews of high-risk
lenders. COVID-19 only exasperated this issue as oversight
staffing levels decreased by an additional 38 percent. Despite
this, the SBA has lifted the SBLC moratorium allowing for more
nondepository entities who are purely regulated by the SBA
rather than federal regulators to enter the market. So it goes
to the point that the inspector general said you need more
oversight and you have less people to do it and they are not
even at the office to do it themselves. This is a problem. It
is a big problem.
So, you know, I guess the rational is how do you expect to
get anything done whenever you do not have anybody in your
office?
Mr. KELLEY. Well, judging by the fact that the agency
supported $1.2 of lending and grant activity over a 2-year
period where the entire agency was teleworking, I think we have
demonstrated that we will do our jobs.
Mr. LUETKEMEYER. Well, thanks to the banks and credit
unions that were able to put that all out, which goes back to
the point I was wanting to make here a little bit ago. You
talked about I think $1.2 billion that went out the door which
was great. And you talked about one million applications I
think it was, $41 billion in fraud.
Mr. KELLEY. Yep.
Mr. LUETKEMEYER. What percentage of that is EIDL versus
PPP?
Mr. KELLEY. It is roughly 45-55 PPP to COVID EIDL. So, for
$46 billion we paid the lenders to----
Mr. LUETKEMEYER. Okay. So the EIDL program----
Mr. KELLEY.--instances of fraud.
Mr. LUETKEMEYER. The EIDL program was roughly $400 billion
and they had about $20 billion worth of fraud. And then the PPP
program was about $800 billion and they had about less than $20
billion in fraud.
Mr. KELLEY. Or we paid the lenders $46 billion in servicing
fees for a 4 percent fraud rate.
Mr. LUETKEMEYER. So it goes to the point though that the
PPP program was highly successful and most of the fraud,
according to the IG report, was in the fintech fraud.
Mr. KELLEY. That is not what the IG report----
Mr. LUETKEMEYER. Mr. Ware was sitting in that seat about a
month ago.
Mr. KELLEY. He did not say that. He did not say that.
Mr. LUETKEMEYER. And that is what he said. So it is hard
for you to dispute that, sir.
Mr. KELLEY. It is easy to dispute----
Mr. LUETKEMEYER. So the problem is that you are trying to
make up your own set of facts----
Mr. KELLEY. I am not.
Mr. LUETKEMEYER.--which are not verified by the Inspector
General Report.
So, again, whenever you go back to the compliance of KYC,
BSA, how do you get the fintech companies to be able to comply
with that? Because this is where the problem is. This is where,
and now you are expanding to the fintech companies. It really
begs the question of do you know what the hell you are doing?
Because it is putting the fox in charge of the hen house again.
You are allowing the very people who are the problem children
to be involved in the program and continue to do things without
any oversight. This is crazy.
Mr. KELLEY. It is not. And as I mentioned in my opening
statement, and as we demonstrated in the Restaurant
Revitalization Program as well as Phase 3 of PPP, we have and
will place in front of etran authorization our fraud----
Mr. LUETKEMEYER. Were those sort of oversight principles in
place during the PPP program?
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. And they were not adhered to and this is
why the fraud----
Mr. KELLEY. They were not in place during 2020 under the
Trump administration. They were in place under the Biden-Harris
administration.
Chairman WILLIAMS. Time is expired.
Mr. LUETKEMEYER. So we put fraud controls----
Chairman WILLIAMS. Your time has expired.
I now recognize Mr. McGarvey from Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman.
Mr. Kelley, thank you for being here today and for
providing insight of the SBA's intentions with these proposed
rules. I know a lot of small businesses would not be where they
are today without the SBA's support including from the 7(a)
program. It is critical that we have 7(a) remain an effective
program so that small businesses have this, particularly
minority-owned businesses, businesses that would struggle
without access to capital.
Under the affiliation rule, the SBA is eliminating
standardized underwriting requirements for loan issuance and
replacing them with a system that considers lending criteria
like a borrower's credit score and history and their business's
earnings and cashflow. Under the policy noticed that were
released late last night and kind of surprised everybody here
on the Committee, the SBA is now clarifying that loans over
$500,000 still have some semblance of underwriting
requirements.
It still seems that the SBA is requiring the bare minimum
of prudent lending standards even though the procedural notice
from last night indicates underwriting standards applied to
larger loans. Can you explain to us why some mandatory
underwriting requirements were left untouched and if this could
have the potential to affect the SBA's ability to protect small
businesses from inappropriate loans and the 7(a) program from
significant loan losses?
Mr. KELLEY. Yes. So as I mentioned in my opening statement,
the criteria for underwriting and collateral for loans under
$500,000 has been used historically since 2004 and before that
in a pilot program. So we can look at the default and loss rate
history for, and incidentally, 5 out of 10, in some cases 6 out
of 10 loans, each fiscal year from 2004 to 2023, were
originated with that criteria. So we have performed subsidy
calculations and managed to zero subsidy in nearly all of those
years with the exception of the Great Recession and a few
exceptions during the Trump administration to zero subsidy. So
we do not have to guess whether or not that criteria works or
what its impact will be because we can look at the last 23
years of its performance.
Mr. MCGARVEY. I appreciate that but at the same time as it
is removing standard underwriting requirements, the SBA is
lifting the SBLC moratorium. And I think potentially that is
opening the program to non-federally regulated lenders through
the SBLC rule. So, do you think the combination of these two
rules could create a loan evaluation environment where
federally regulated lenders that have stricter requirements
will be forced to compete with non-federally regulated lenders
not subject to the same underwriting requirements?
Mr. KELLEY. No, because the 2004 SBA Express pilot program
was created with advisory under the Bush administration with
banks, for banks. And it is the banks that have historically
used that. So the top 25 depository institutions have credit
score loans in the SBA Express program, the Community Express
program, the Patriot Express program for years. Credit scoring
is used by every bank on the consumer side and it is used to a
varying degree, depending on loan size, in the commercial
sector. This is not a new development. You heard Deputy
Inspector Sheldon Shoemaker in the Senate hearing speak to that
fact towards the end of the hearing. It is in the transcript
where he reflects on the fact that financial technology,
including credit scoring, is used by banks and credit unions
today. It is the banks and credit unions who have made up the
majority of our lending year in, year out, will continue to do
so, and they are the ones that have sought out the changes that
we have put in the SOP. Now, as depository institutions, do
they want additional competition from nonbank lenders? No, they
do not. But in terms of the actual eligibility and underwriting
criteria, these are changes they have asked. The National
Association of Development Corporations, which represents the
504 CDCs of which there are over 200 in the country, have been
working on eligibility issues since 2011 in the Obama
administration where they called for the elimination of the
personal resource test, as well as the affiliation rule change
that we have made final.
So these are things that have long been understood as
necessary to remove red tape and bureaucracy to get small
dollars out of the loan. It impacts not just the size of the
loan but it impacts every gap in the marketplace. So, for
example, in rural America there is a dearth of construction
financing. There is a dearth of loans to businesses with no
collateral. All of these issues are why this program exists,
and why lenders are looking to make the core product more cost-
effective.
Mr. MCGARVEY. I appreciate that. And obviously, you know,
for our small businesses we want to have less red tape and
bureaucracy that we can have access to capital in our small
businesses. But this is still a piecemeal approach of
regulatory and procedural changes often that do not have enough
guardrails in them. They often come at the last minute. Do you
think that the SBA is risking confusing lenders and borrowers
about the actual rules by which they are expected to comply?
Mr. KELLEY. No, because the rules that are reflected in
those procedural notices exist today and what is piecemeal is
their application. What has made the agency, so what has made
lending for SBA hard is you have to hire a nerd like me to
figure out all of the different variations within the SOP. What
this administrator has done is said you do not have to hire a
nerd like Patrick Kelley.
Chairman WILLIAMS. Time is up.
Mr. KELLEY. You can harmonize the rules to optimize the
outcome.
Chairman WILLIAMS. I now recognize Mr. Meuser from the
great state of Pennsylvania for 5 minutes.
Mr. MEUSER. Thank you, Mr. Chairman.
Mr. Kelley, earlier when Mr. Luetkemeyer was asking you
about the number of employees in the office you dodged, you hid
the answer. That is a big difference in the private sector. If
you ask that question to a private sector company and I ask
them often they will say, yeah, 50 percent of our customer
works remotely, 50 percent tech service works remotely. You
would not answer the question. You were embarrassed by it. And
you----
Mr. KELLEY. I said, I said, no, sir. I said----
Mr. MEUSER. There is no question. I take back my time.
Mr. KELLEY.--100 percent, I said 100 percent, no, sir----
Mr. MEUSER. Repeatedly today, you know, something, you
might do what you want in your bureau. We have oversight here
and you are going to follow the rules of this Committee.
The SBA has the 7(a) rules, have caused great concern among
both Republicans and Democrats. Mostly everyone I speak to
feels that you are hell bent on rushing these rules without any
concern for Democrats and Republicans, ignoring the final rule.
Why is that?
Mr. KELLEY. It is not the case.
Mr. MEUSER. We believe it is based upon the facts of the
situation and the fact that you are just blowing off any
recommendation or question. But you just state that is not the
case and that is that?
Mr. KELLEY. Would you like me to elaborate?
Mr. MEUSER. Well, by moving the program, the 7(a) portfolio
towards a more subjective underwriting method for loans under
$500,000, how does that protect taxpayers from losses, the OIG
has concerns, and you have actually used language, maybe not
you, to do what they do for loans under $500,000, which is 75
percent of all the 7(a) loans, how does that instill confidence
in us?
Mr. KELLEY. The standard that you are speaking to
consistent with similar size non-SBA loans and the euphemism
that was explained at a bank trade association conference, do
what you do, has been around for over 2 decades and is
reflected in every budget that has been passed since then with
respect to the subsidy calculation. So, lenders came, banks,
credit unions, came to the SBA and said back in the 2000s under
the Bush administration there is too much red tape associated
with small dollar loans, loans at that time under $350,000, and
then this body raised the threshold for Express from $350,000
to $500,000. That standard has been in existence. The lenders
know this. I understand that they are upset about three
additional non-depository institutions potentially becoming SBA
SBLCs and they have equated that with fintech and that is why
we are discussing the concerns, which are legitimate. Safety
and soundness is terribly important.
I have been a part of the agency's creation of the Office
of Credit Risk Management since 2010. I was involved with the
regs that were put forward to create the Paris framework----
Mr. MEUSER. Thank you.
Mr. KELLEY.--the smart framework.
Mr. MEUSER. ON April 20th, we sent you a letter. Chairman
Williams, Vice Chair Luetkemeyer, Chairwoman Van Duyne, myself,
about the ability of SBA to be able to handle this, these new
responsibilities related to the concerns of IG Ware. It was
April 20th, 3 weeks ago, basically. You have never responded.
Any reason you did not respond or can we expect a response
sometime in the future?
Mr. KELLEY. Yes, you can expect a response.
Mr. MEUSER. Okay. Any time? Can you tell me when?
Mr. KELLEY. In short order. The process goes through an
agency clearance process.
Mr. MEUSER. Okay. April 12th, press release, the SBA stated
that these new rules will utilize modern technology to make
lender oversight and borrower protection stronger. Can you tell
us what the technology is to make borrower protection stronger?
Mr. KELLEY. Yes. So, the way that Bank Secrecy Act laws are
complied with today is the use of third party databases where
you take a unique identifier from each applicant. So in our
case we are dealing with TIN, tax ID number for business,
applicant, and then owners of 20 percent or more, or in banking
vernacular, beneficial owners. We run that against databases to
create alerts and flags across 19 different screening
categories which traverse eligibility. I mentioned the
eligibility criteria earlier. And also, run them against lists
like OFAC and other fraud issues. So for the first time in the
agency's history, and what is highlighted in the IG's report is
that delegated lenders have historically not had anything pre-
approved prior to obtaining etran authorization. So, under this
administrator we are instituting this not just in our CARES Act
programs but in the general business loan programs, including
7(a) and 504.
Mr. MEUSER. When I was revenue secretary in Pennsylvania we
implemented something similar. Do you know how much it costs?
And is it ready and when will it be ready to be implemented?
Mr. KELLEY. Yes. The great aspect of this from a cost
perspective, and this is something we should all celebrate, is
that the oversight fees beginning in 2017 can be charged to all
the lenders and are on a pro rata basis. And we are able to use
other contract vehicles based on a performance base to
institute the technology.
Mr. MEUSER. Thank you.
Chairman WILLIAMS. Time is up.
Mr. MEUSER. Thank you.
Chairman WILLIAMS. Thank you.
Next, I recognize Ms. Chu from the great state of
California for 5 minutes.
Ms. CHU. Associate Administrator Kelley, I want to thank
you and Administrator Guzman for partnering with me to provide
a disaster declaration for my community of Monterey Park,
California, in the aftermath of the tragic mass shooting in
January that took the lives of 11 people. The eligibility for
these disaster loans will truly help our small businesses
surrounding that shooting site tremendously. So, thank you for
that.
I also want to thank you and the administrator for your
focus on increasing lending in underserved communities and your
4-year partnership in making the new Community Advantage SBLC
program as effective as possible for lenders and small
businesses.
I was pleased to see in SBA's recent notice on May 1st that
the Community Advantage SBLC will, indeed, be required to make
60 percent of the loans in underserved markets, as in the
current Community Advantage program. I also want to thank you
for clarifying in the notice what loan loss reserve
requirements these lenders will face and for modeling these
requirements after legislation that I introduced last Congress.
These loan loss reserve requirements will ensure that these
small, nonprofit lenders who have been making Community
Advantage loans for more than 5 years will have greater
flexibility and more capital to do even more lending.
However, the May 1st notice does not address the capital
requirements and oversight fees that the new Community
Advantage SBLCs can expect. The current Community Advantage
pilot program lenders do not have capital requirements which is
important because these are small, nonprofit lenders with far
less cash on hand than larger financial institutions like
banks. Regular SBLCs currently have a capital requirement of $5
million which would be extremely prohibitive if applied to
these mission lenders.
Additionally, the regular SBLCs face much higher oversight
fees than current CA pilot program lenders, and would again be
cost prohibitive if applied to the new Community Advantage
SBLCs. The lack of clarity on these questions is especially
concerning because the final rule goes into effect on Friday.
We have heard that a standard operating procedure is
forthcoming and will cover these details, but can you confirm
that the upcoming SOP will clarify that the oversight fees and
capitalization requirements within the Community Advantage SBLC
program are to remain unchanged from what Community Advantage
pilot program lenders currently face?
Mr. KELLEY. Yes. And with respect to capital requirements,
as you mentioned, there is a capital requirement threshold for
for-profit SBLCs. The capital requirement for the Community
Advantage pilot program had historically been applied not on a
balance sheet but on a per loan basis because of the issues
that you highlight for the nonprofit lenders. It has
historically been 10 percent based on your bill and Chairman
Cardin's bill. And working with the community, the threshold
has been established at 5 percent with a sliding scale for
trialing portfolio performance that is good over 36 months to
come down. So, there is no ambiguity. The capital requirement
has always been applied through the loan loss reserve on the
individual loan in the Community Advantage program. That is
what the procedural notice lays out.
For the entire pilot program, Community Advantage lenders,
like all lenders--SBLC, credit unions, banks, CDCs, all
lenders--are subject to oversight and oversight is charged on a
pro rata basis. So the reason that the Community Advantage
lenders do not pay as much oversight as for example, Live Oak
Bank would have paid, is because in 12 years, together, all 100
plus entities have originated 7,000 loans over a billion
dollars. Whereas, for example, Live Oak does close to $2
billion in 1 fiscal year.
So what will continue is on a pro rata basis we will apply
oversight to all lenders.
Ms. CHU. Well, the most important question is will that be
in the SOP?
Mr. KELLEY. Yes. It is in the SOP today. That is how
Community Advantage lender oversight has been applied. I know
there has been confusion created in the marketplace by a single
voice but I can assure you they have always been charged a pro
rata basis and will continue. And that is true for all lenders.
Ms. CHU. And then the high fees. There was a question of
the other SBLC lenders having high fees and then the Community
Advantage program lenders cannot hardly afford them.
Mr. KELLEY. So I am not sure what that references but let
me see if I can just clarify.
So, fees charged to borrowers are universally applied
across all lenders and interest rates are capped and universal
to all Members. So that was true. What historically was true in
Community Advantage pilot----
Chairman WILLIAMS. Time is up.
Mr. KELLEY. Sorry.
Chairman WILLIAMS. Time is up.
Mr. KELLEY. Okay.
Chairman WILLIAMS. Next, I now recognize Mr. Stauber from
Minnesota for 5 minutes.
Mr. STAUBER. Thank you, Mr. Chair.
As a former small business owner, I understand how
important it is for small businesses to have access to
affordable credit without loan programs that enable our small
businesses. They will not be able to grow, support jobs, and
help countless Americans achieve that American dream.
The Small Business Administration's, including the 7(a)
loan program had been a huge success in my opinion and an
important tool to small businesses across our great nation.
Like many of my colleagues here today, however, I am
troubled by the rules that were finalized last month by the
Biden administration addressing the 7(a) program. While I
support allowing flexibility for our small businesses and
lending institutions, we must ensure the necessary guardrails
are place to protect this program.
I have heard from 7(a) lenders and businesses in my
district, including community banks and local credit unions
that are worried that these rules will jeopardize the future of
the 7(a) program.
Mr. Kelley, annually, about how many investigations or
reviews did the SBA conduct into high-risk lenders?
Mr. KELLEY. I think it is in the order of magnitude,
depending on the fiscal year of $300,000, $400,000.
Mr. STAUBER. Okay. The SBA's inspector general reported
that the SBA failed to conduct 108 of the 358 planned review of
high risk lenders in the Fiscal Year 2020. That is a third of
the high-risk lenders that the SBA missed.
Under the new rules, the SBA will be lifting the moratorium
on new licenses and grants for small business lending
companies.
With the lifting of this moratorium, what do you estimate
will be the increase in new loan activity?
Mr. KELLEY. So I do want to clarify something that has been
mentioned regarding the IG report. What the IG report speaks to
is that is levels of supervisory review on site, offsite. And
so what it references is that those reviews were conducted.
They were just conducted at a different level of review in
terms of procedure. So I just want to clarify that.
The second thing that I want to speak to with respect to
the estimate, so the estimate was included in the proposed rule
and the final rule. And so at cruise altitude, typically SBLCs
contribute about 450 loans per fiscal year. For example, we
have three SBLCs today that are in the top 10 of SBA lending.
And as I have mentioned, these licenses have changed hands over
the last 40 years 61 times. And the agency has been responsible
for approving who becomes an SBLC. So, we review their safety
and soundness, their portfolio of performance. And if we do not
want to grant a license, we have the discretion not to do so.
Mr. STAUBER. Do you think the SBA has the capacity right
now to do the oversight?
Mr. KELLEY. Yes.
Mr. STAUBER. Okay. Do you think lenders and financial
institutions need to have proper regulator oversight in order
to protect consumers, yes or no?
Mr. KELLEY. Yes.
Mr. STAUBER. Do you believe the Small Business
Administration has the capacity, expertise, or bandwidth to be
the sole regulator of any financial institution?
Mr. KELLEY. Yes. And what I would like to clarify on that
point because it is important, the use case for what we oversee
is loan assets. And it is a simpler use case to stand in than
it is for OCC or FDIC because, for example, with FDIC or OCC,
they have first order problems that they need to address. Let's
say the loan portfolio, commercial estate is underperforming.
They have second order of concerns, which is the depositors. So
if a bank goes under, are we going to honor deposits?
Then they have third order, which is the impact of that in
the local marketplace. We have shown throughout the SBA's
history that if a lender comes and goes and dissolves, we can
transfer the book of assets to another SBA lender and it does
not create the disruption or the need for intervention on the
part of the federal government. So those loan portfolios can be
transferred. They are conforming assets, which means they are
easy to underwrite from a diligence perspective. We have a rank
order of the quality of the credit profile on a quarterly
basis. And as a result, a willing buyer will take that asset
portfolio.
So if we decide that someone is not participating in
lending as we do on a quarterly basis through the Loan
Oversight Committee, we can remove their delegated authority.
Mr. STAUBER. Okay.
Mr. KELLEY. The director of OCRM can suspend them at her
complete discretion for up to 2 years pending an investigation.
And we can ultimately debar the lender from participation.
Mr. STAUBER. Thank you for that explanation.
At the end of the day I have two main concerns. First, the
SBA's track record in protecting against fraud, most recently
during our PPP leads me to conclude that the SBA does not have
the capacity to carry out its oversight rule over an expanded
7(a) program, let alone act as a chief regulator of any
financial institution.
Second, I am deeply concerned that local community banks
and credit unions in Northern Minnesota will have more
oversight, scrutiny, and regulation put on them than the
Silicon Valley fintech startups. We must protect the 7(a)
program. And I yield back.
Mr. PHILLIPS. Mr. Chairman, before Mr. Stauber leaves I
think we should wish him a Happy Birthday.
Chairman WILLIAMS. Well, I do not know if he wants us to or
not.
Mr. LUETKEMEYER. Mr. Chairman, I second that.
Mr. PHILLIPS. I withdraw my motion.
Mr. STAUBER. I am celebrating my 39th birthday 19 times,
Dean.
Chairman WILLIAMS. Okay. I now recognize Ms. Davids from
Kansas for 5 minutes.
Ms. DAVIDS. Thank you, Chairman. And thank you, Mr. Kelley
for joining us. I think that this has probably been one of the
more lively Small Business Committee hearings I have been in.
But it, I think, reflects how imperative oversight is as it
relates to protecting our small businesses and then, of course,
as Mr. Stauber said, the integrity of the 7(a) program.
I want to jump right into a follow up actually to some of
the questions that Mr. Stauber was asking which is around the
regulation of the lenders. Can you like share a bit about where
you believe the SBA's statutory authority comes from to examine
what would normally be the core requirements of a lending
institution or depository institution that has the variety of
assets that you were describing earlier, whether it is capital
requirements, liquidity, risk management. Can you share where
you believe the statutory authority comes from for SBA to be
able to do that?
Mr. KELLEY. Yes. Under the Trump administration there was a
law passed with the Republican Congress outlining and detailing
the role and responsibility of the Office of Credit Risk
Management located in the Office of Capital Access to do all of
those things which has historically been understood to be
authorized under our administration of the program from the
Small Business Act, section 7(a), which requires that we
determine reasonable reassurance of repayment and eligibility
for the program. So in order to determine reasonable
reassurance of repayment----
Ms. DAVIDS. I am sorry; your reasonable reassurance of
repayment is not the same thing as ensuring that you have the
ability to fully examine the allocation of assets, liquidity
requirements, and risk management overall of an entire entity
in the same way that depository institutions are.
Mr. KELLEY. So, if you are talking about asset allocation,
like long-term dated Treasuries with respect to deposits,
agreed. And that is not what we do. If you are talking about
assets generated in our program and their ability to be repaid
to the taxpayer without the guaranty being honored then we do
have the authority.
Ms. DAVIDS. Okay, so I want to, I also want to follow up on
some of the questions that Mr. McGarvey was asking because I
will give you the benefit of the doubt. I think that you were
responding to his question about lenders by talking about the
borrowers and the need to reduce red tape, both on the
borrower's side and on the lender side. Could you expand a bit
on what you mean when you talk about the reduction of red tape?
Because the request for less red tape from lenders is not the
same thing as opening up the program for additional lenders
that are not being regulated or overseen in the same way that
depository institutions are. And I just want to make sure that
I am fully understanding your response and real quick, because
I have a feeling you will use the rest of the time, when it
turns red, if you could just stop and make sure that it would
not be more appropriate to follow up with a written response to
the question you might find that the rest of the hearing will
go a little bit smoother.
Mr. KELLEY. Agreed. And I want to apologize to Mr. Meuser
for my Irish coming up, and I understand that we will be able
to answer questions as we normally do, so. I am passionate
about defending civil servants and the role that they have
played in the pandemic, so I apologize.
So, with respect to your question about lenders, so what I
am describing, and this is I guess important and I hope to
leave you all here where we are in agreement is that for time
in memorial, the subsidy calculation has incorporated the
underwriting and collateral criteria and all that we have done
is harmonize across a standard 7(a) small loan with an SBA
Express term loan, that standard that more lenders have used
historically every fiscal year. And so if the object of the
exercise is to engage, for example, the 4,500 community banks
more meaningfully. So it has been reported that 83 percent of
those same 4,500 community banks did not make a single 7(a)
loan in the 2 previous fiscal years prior to 2020 Paycheck
Protection Program. So if we want them to meaningfully be
available in their communities, we need to optimize the
responsibilities----
Ms. DAVIDS. Can I stop----
Mr. KELLEY.--the criteria that they need.
Ms. DAVIDS. Can I stop you there? I absolutely recognize
that. I just will add that some of the fintechs that we have
been talking about are not subject to all of the rules and
regulations in oversight that our community banks have been
adhering to for a very long time.
With that, I will yield back.
Chairman WILLIAMS. I now recognize Mr. Ellzey from the
great state of Texas for 5 minutes.
Mr. ELLZEY. Thank you, Mr. Chairman.
Mr. Kelley, thank you for being here. Howdy. How are you
doing? Thank you for being here.
You have got a long history of service as a civil servant,
and I understand that you want to defend the folks that you
work with. That is highly admirable, and I understand that you
went to Colgate and then BC Law. So you are an immensely
talented man. You worked at a bank and, you know, Mr. Williams
has been in business for, oh, a couple of eons, I think. But he
has been a small business man for many, many years. My
colleague from Missouri has as well been in business for a
long, long time.
I have never heard Mr. Luetkemeyer get upset before and
somehow you managed to do that. And I am not sure if I heard
the answer or not but it is kind of a proforma question that we
have been asking in all of our Committee hearings after the
declaration that the COVID catastrophe is over. How many folks
are going to work? Because it does not matter the Committee
that we are on. You look across the street at a government
building and there is generally not a whole lot of people there
and the parking lots are empty, and I think that that goes
directly to the service that the taxpayers who are paying for
these services are receiving and oftentimes it does not really
matter the agency that it is in. And you have got your rice
bowl that you are worried about and not worried about any
others. It does not matter if we ask DHS, HHS, or anybody else.
We ask how many people are at work? Because Mr. Williams cannot
run a car dealership if half of his people are not showing up.
They cannot work remotely. And I do not think people get a good
service if folks are not showing up to work.
So, when that question comes up, just understand it is not
aimed at you or anybody else but the question as the oversight
authority for all of these agencies, as the funding authority
is Congress's for all of these agencies, the simple question
is, how many people are at work? And it may be a different
answer. You are clearly a talented attorney. Maybe the question
is, what is the policy on how many people get to show up? I
will let you answer the question, but my policy is I have to
show up at work. We are not doing remote anymore. I do not
think any of the other agencies in our government should be
remote anymore because we are seeing a declination of service
to the taxpayer.
So you have the floor now. What is the policy on how many
people have to show up to work?
Mr. KELLEY. Yeah. So the policy is you have to--so I
understand that we disagree with what I am about to
characterize. But you have to show up to work. So every single
federal employee has to show up to work. As far as telework,
and telework policy, Chairman Williams mentioned that I worked
at the Department of Commerce at the U.S. Patent and Trademark
Office. That is a distributed workforce as well and has long
had a telework policy in place in processing trademarks and
patents.
We have a distributed workforce. Folks show up to district
offices, loan production centers, as well as headquarters. And
the policy today is that for each 2 week, biweekly period, you
physically need to come into the office 3 days out of that
period. And so, for example, I worked at a bank that Chairman
Williams suggested, and we did something unconventionally where
we did not have branches. Most banks have branches across the
country. We chose not to use branches which is a physical
presence in a physical footprint, to lend money. And that has
served Live Oak as a comparative advantage in terms of its cost
structure to become the nation's number one small business
lender.
So there are many different approaches to performing and
optimizing how you deliver your service and your products. And
so what I am arguing on behalf of the civil servants is that
they are working hard I can attest to you. And as has probably
been demonstrated and as you reflected, I expect that people
perform as well as myself.
Mr. ELLZEY. Well, BC Law is a good law school. It is a
simple question. It really is. Virtual presence is actually
absence. When you are a civil servant you need to be in the
office because otherwise you cannot be supervised properly. I
do not care what business it is. I know some airlines I will
call up the customer service line and I will hear dogs barking
in the back and I know they are not at work and I am not
getting good service. I think it is expected by the taxpayer
that civil servants be exempted from a private company. They
are not like a private company. A private company can do
whatever it wants. Civil servants need to be showing up for
work. So is there a percentage in your policy that says how
many people have to be at work every day? Does it exist or not?
Mr. KELLEY. One hundred percent of policy without
supervisor approval of leave of absence, you know, scheduled
vacation, sick days, et cetera, have to show up to work. And
there is a telework policy in place which I have explained the
contours of.
Mr. ELLZEY. All right.
Mr. KELLEY. And you need to comply with that.
Mr. ELLZEY. Okay. Well, I am almost out of time so I am not
going to get the answer but, you know, folks need to be showing
up in the office at work. We are seeing across the government
an inability to effectively accomplish the job on the part of
the taxpayer. But I thank you for your time and I yield back.
Chairman WILLIAMS. Thank you.
I now recognize Ms. Gluesenkamp Perez from the State of
Washington for 5 minutes.
Ms. PEREZ. Thank you, Mr. Kelley, for joining us here
today.
As a former small business owner, who successfully applied
for a 504 Loan, I know that small business owners want
streamlining when it comes to SBA programs. We do not have time
to waste reading SBA regs.
As part of the new SBA affiliation rule, the rule removes
the detailed list of factors that the SBA currently utilizes
when determining whether a loan applicant is credit worthy.
Could you speak to the intent behind this rule?
Mr. KELLEY. Yes. So the thing I would like to clarify, too,
is affiliation is used for two purposes in underwriting alone
historically at the SBA. And in the conventional commercial
market affiliation is used solely for reasonable reassurance
and repayment. So the impact of any affiliates to cashflow.
Okay?
In our programs today, tomorrow, and forever, the impact of
an affiliate to cashflow remains and will continue to be the
responsibility of lenders to look at. With respect to
eligibility, which is a uniquely government requirement that
the business be a small business based on SBA's size
requirements, historically the agency took the position which
we believe weas a red tape bureaucratic position which is the
business needs to be independently owned and operated and it
chose to construe independently owned and independently
operated as two separate clauses as opposed to, say, a non-
severable clause like cruel and unusual punishment.
So what we are applying and what we saw work in the
Restaurant Revitalization Program and the COVID EIDL program to
a varied degree in the Paycheck Protection Program is a
standard ownership test. So you know who owned your business.
If I asked in the community who owns your business they would
tell me to see you and the buck would stop with you. What was
happening with the affiliation is that a subjective criteria of
totality of the circumstances to determine whether third party
management agreements that you entered into, you the small
business owner enter into, creates negative control deemed by a
federal government employee. So the federal government will
tell you who controls your business based on the agreements
that you have entered into with a third party.
We believe that that is wrong. And so we took the position
that independently owned and operated should be viewed like
cruel and unusual punishment as a nonseverable cause for the
purpose of determining eligibility because size standards,
meaning total number of employees for certain NAICS codes,
revenue standards for others, and in the loan program since
2010 when Ranking Member Velazquez passed the Small Business
Jobs Act, includes the alternative size standard. And we found
in both the government contracting division and in these loan
programs is that even accounting for affiliates in eligibility,
the businesses are still considered small.
So if the definition of removing red tape and bureaucracy
is to remove that, that is what we are doing. But with respect
to whether or not we will get paid back as taxpayers, the
requirement for affiliated analysis remains as it always has
been.
Ms. PEREZ. Thank you.
Mr. Kelley, if a small business owner is denied a loan they
can request reconsideration?
Mr. KELLEY. Mm-hmm.
Ms. PEREZ. The affiliation rule extends the list of people
who can consider the reconsideration request and make a final
decision to include the designated director of the Office of
Financial Assistance and the SBA Administrator. Are there
guardrails in place to ensure that these changes were not
subjected in the consideration process?
Mr. KELLEY. Yes. But I think what we should understand is
that that rule was exactly responding to public concerns on the
part of both lenders and borrowers that the process, by
requiring it go all the way to the top of the House each time
led to, you know, delays. And so this gives us the discretion
to let the folks who, you know, we have talked a great deal
about, the civil servants at work, to make those decisions
based on their experience. So you will get a faster response.
But in terms of the process, there are second look
processes. You know, to the extent that people are trying to
influence things, there is, as you all know, anonymous hotlines
for tips to the IG and so forth. And those are all, you know,
functional.
Ms. PEREZ. Sorry. So could you describe those guardrails a
little bit more in detail?
Mr. KELLEY. Yeah. So the process as outlined, so for
example, when the IG talks about its risk management challenges
for anything, it starts with are there identified roles of who
is responsible? What steps have to take place? Did those steps
take place? And was there a second look process to ensure that
there is not the discretion of a single individual. And those
processes are outlined in the SOP. The roles, the whole, and
then the second look aspects of it.
Ms. PEREZ. Okay. Thank you.
Mr. Chairman, I yield back.
Chairman WILLIAMS. Also, let me remind all Members to turn
their mics on when they need to.
I now recognize Ms. Salazar from Florida for 5 minutes.
Ms. SALAZAR. Thank you, Mr. Chairman. And good to talk to
you, Mr. Kelley. My name is Maria Salazar. I represent the City
of Miami where SBA is like the crown jewel. People really think
that this agency is really cool.
And ever since I got to the Committee 2 years ago, my first
term, I had the honor of taking Administrator Guzman to my
district. I am not sure if you are aware of that trip. I took
her to Eighth Street. She was able to see, although, small
businesses, the drycleaner's, and the flower shops. And people
that look at the SBA as the crown jewel.
You said that you are a political appointee, so that means
that you know what the private sector looks like and how it
works. And you said that you were a nerd. So nerds in the
private sector usually do well meaning that they have, they can
make a good name for themselves.
So I just want to share a couple of ideas and then ask you
three questions. We are very disappointed with the SBA. And we
are trying to figure out how we can make this agency better for
the average American small business owner. So I am going to ask
you a couple of questions and I want you to answer me as if I
were that let's say Indian American who wants to set up this
drycleaners and he needs a small little help from the SBA
because, you know, that is the American dream. And he tells
you, look, I have called 10 times. The online service does not
really work. I have uploaded my information seven times. Every
time I call I talk to somebody else and it is very difficult
for me, the Indian American wanting to set up this drycleaner's
to get to the finish line and get the money. You are telling me
and from the information we have is that now the SBA has 30
percent less personnel. When I spoke with Administrator Guzman
she told me that she was going to improve the online services,
the people, the operators, the people on the other side. That
it was going to be streamlined and that service was going to
look beautifully.
My question to you is this. Tell me one thing that you are
proud of in this last 12 months that you and Administrator
Guzman have established and instituted to help this Indian
American to get his loan so he can open up that drycleaner's in
simple terms.
Mr. KELLEY. Yes. So first, I just want for your use case
because I assume it is a constituent. That constituent should
find a different lender because we work through third-party
lending intermediaries. So if you are seeking a small business
loan in either the 7(a) or the 504 program and you are having
those issues that you have described, there are plenty of banks
and credit unions across the state of Florida, I am sure in the
city of Miami and certainly nationally, that they should go to.
Ms. SALAZAR. But sometimes they do not want to touch that
person and that person needs to go straight to the federal
government. The SBA, that is what we are there for.
Mr. KELLEY. Yes. So----
Ms. SALAZAR. So let's suppose that he does not want to be
touched because he is too small. We have to provide a good
service and we are not. So go back. So do you agree with the
fact that the agency that you are helping to run is not
providing the service that the average small business owner
believes; yes or no?
Mr. KELLEY. So are you recommending that the Office of
Capital Access and SBA take advantage of the authority we are
afforded until the Small Business Act, section 7(a) to do
direct loans as a final chance credit not available elsewhere?
Ms. SALAZAR. Sometimes that is the last resort that person
has.
Mr. KELLEY. Okay. So in order to do, so the Agency has not
done direct loans in its 7(a) program or general business----
Ms. PEREZ. But I am talking about what you are proud of is
what I am saying. What is it that you have in the last 12
months, along with Mrs. Guzman established in order to redress
some of the problems that I just mentioned which are endemic?
Mr. KELLEY. Yes. So what we would be proud of is the rules
that we have talked at great detail in this conference because
to the extent that the use case you are describing is
struggling with their bank or credit union or nondepository
lender and having that terrible experience that you described,
we want to take off the sidelines more credit unions and banks.
So, for example, credit unions are thousands of depository
institutions across this country----
Ms. SALAZAR. I am sorry I am interrupting. So you are
telling me that they are going through your online system, when
they are going through your computer system, when they are
going through your staff----
Mr. KELLEY. That is what I am trying to clarify. The way
that the program is set up, there is a waterfall under Section
7(a) of the Small Business Act which says that you should seek
a conventional loan first. If you are not able to seek credit
not available elsewhere, you can go to a participating lender
for a loan guaranty. And so we work through that lending--all
of the interactions, all of the online, the call center that
you are describing, the experience is governed by the
individual lender. If we were to use our authority for direct
lending which we have under Section 7(a)----
Chairman WILLIAMS. Your time is up.
Ms. SALAZAR. We will get back to you on that because that
is not my experience. Thank you.
Chairman WILLIAMS. I now recognize Ms. Scholten from the
great state of Michigan for 5 minutes.
Ms. SCHOLTEN. Thank you, Mr. Chair. And thank you, Mr.
Kelley. Hillary Scholten from Michigan's 3rd Congressional
District. Wonderful small businesses throughout the region.
I think that the theme of today is oversight. And the
importance of providing oversight to these nuanced rules. A lot
of my questions and concerns have been covered here today so I
am not going to repeat them but I do want to add my voice to
those saying just how critical it will be for our Committee to
continue to provide the necessary oversight. I have heard from
financial institutions again and again just how concerned they
are about the implementation of these rules.
My question for you is, the SBA has repeatedly said that
these rules will increase small dollar loans and expand access
to capital for underserved communities. Can you go more in
depth on the success of the Community Advantage Program and why
the SBA chose to create this new type of SBLC and what sort of
was the genesis there? Thank you.
Mr. KELLEY. Yeah. So, if we build off of your colleague,
Representative Salazar's example where in that case she was
describing an Indian American drycleaning small business
seeking a small dollar loan amount and being frustrated by the
third party lender's customer service experience, et cetera. We
need a wider distribution channel so that that person does not
have to rely solely on one lender. They can go to the entire
marketplace. And historically, certified development financial
institutions were not eligible to participate in the 7(a)
programs. So beginning in 2011, under the Obama administration,
we temporarily lifted the moratorium so you are allowed under
pilots to waive regulations. So we lifted the moratorium,
issued temporary licenses. And we did that to experiment for
safety and soundness reasons, but to experiment that those
lenders who were embedded in communities where, for example,
there are 1,700 banking deserts across rural and urban areas
where there is not a bank branch within a 10 mile radius but
there are CDFIs. And so the theory was if we have a diverse
array of distribution channels, using the same core product
that is ultimately beneficial to the lender and borrower. It is
beneficial to the borrower because they get a fixed rate, they
get a capped rate product and longer repayment terms with no
prepayment penalties. That longer repayment period is good for
the lender as well because it qualifies more loans. And then
the backstop of the government guaranty in the secondary market
helps them manage liquidity.
So 7,000 loans have been made during that pilot for a
billion dollars, and the distribution for underserved,
including rural, HUBZone, veteran, small business, a business
startup in business less than 24 months, that criteria for
underserved has been met, you know, I think 60, 70 percent of
the time.
And incidentally, as was mentioned in the Senate hearing,
our core product, whether it is a dollar loan or a $5 million
loan over indexes in comparison to the commercial market to
that same definition of underserved but we have seen a gap for
women-owned businesses who make up a sizeable percentage of
sole proprietors and yet, a single digit percentage of loans
received through the SBA program. And it is in part because the
census shows that those businesses are overwhelmingly sole
proprietors, which means they are seeking very small dollar
amounts, loans less than $150,000. And when you talk to a
community advantage lender, you talk to a bank like JPMorgan,
Chase, TD or large banks and you ask them why is there a
disconnect? The disconnect is the cost-effectiveness of being
able to underwrite and close the loan. And so we have responded
by addressing the red tape that they have identified so that
they can make a more cost-effective offering because we
believe, and we take them at their word, that they will find
these customers in their marketplace.
Ms. SCHOLTEN. And have the results been borne out?
Mr. KELLEY. Well, yes, in terms of, so the community
advantage programs results over index in the underserved
category even in comparison to a high number. And then with
respect to minorities and women, it performs better. So, yes.
Ms. SCHOLTEN. I yield back my remaining time.
Chairman WILLIAMS. I now recognize Mr. Crane from Arizona
for 5 minutes.
Mr. CRANE. Mr. Kelley, thanks for joining us today. You
probably do not know this. I am a small business owner myself
so I definitely understand how tough it is to start a small
business, pay employees, you know, deal with an everchanging
economy. Do you know how I got my startup capital for my
business, sir? I sold my motorcycle. Yeah. One of the best
decisions I ever made.
Sir, are you aware that Pew Research shows that 20 percent
of the American people do not trust the federal government?
Mr. KELLEY. I am not.
Mr. CRANE. Okay. Well, they do not. And I think that if you
polled this cross section of our citizens today you would
probably see something similar.
Sir, are you aware, yes or no, does the American taxpayer
fund the SBA?
Mr. KELLEY. Yes.
Mr. CRANE. Okay. Does the American taxpayer--hold on. Hold
on a second. Does the American taxpayer fund your salary, sir?
Mr. KELLEY. It does.
Mr. CRANE. Okay. Mine, too, as well; right?
Mr. KELLEY. Yes.
Mr. CRANE. All right. So, sir, Mr. Kelley, who is on the
hook if these loans are defaulted on?
Mr. KELLEY. So that is what I was going to explain with my
exception. So, with respect to supporting the loan programs,
and this is a really cool thing for you and all of the folks
that might be----
Mr. CRANE. Real quick, sir. Real quick. My time is running.
Mr. KELLEY. The fees and the collection from liquidated
collateral creates a profit for the federal government that
enables us to waive fees for the borrowers and lenders and not
ask for appropriate dollars at SCORE in order to support the
7(a) and 504 programs.
Mr. CRANE. Hold on a second. All right. First of all, the
federal government does not make a profit. I think most people
here are smart enough to know that. Do you guys know how much
national debt we are in right now, anybody? Almost $32 trillion
of national debt. Okay. So this government does not make a
profit. As a matter of fact, it continues to spend money, upon
money, upon money that we do not have. It just continues to
print money that we do not have. And that is my problem here,
Mr. Kelley. This town, these administrations that make up this
town, the lobbyists, the special interests, are notorious for
being poor stewards of the American taxpayer dollars. And now
you are trying to implement changes to these loan programs to
make it easier to lend people money that we do not even have.
That is the problem. And it is for that reason, and because of
the debt, the times that we live in, in our history in this
town, in this government of showing zero fiscal responsibility
that I do not support these changes and I do not think they are
appropriate.
I yield back my time. Thank you.
Chairman WILLIAMS. Okay. I now recognize Mr. Phillips from
Minnesota for 5 minutes.
Mr. PHILLIPS. Thank you, Mr. Chairman.
Welcome, Mr. Kelley. I want to start by thanking you. I
know there are lots of things you could be doing with your life
other than this, and I want to thank you for your service.
I do a series in Minnesota called On the Job with Dean
where I visit small business and work a shift for 2 or 3 hours
and have learned a ton, the good, the bad, the ugly about the
SBA. But mostly the good as a resource, as a provider of
capital, and also mentorship. And I want to thank you for what
you do.
Just last week I was in Eden Prairie, Minnesota visiting
the Asia Mall, which is a converted big box store, an
extraordinary place. Administrator Guzman and a second
gentleman came to visit. I worked a shift as a stockboy and a
cashier and once again saw SBA loans creating a wonderful story
of success in my district.
And I also am a deep believer in shared success, in
employee ownership. And have been trying to push both this
Committee and my colleagues to look at ways where we can build
bridges to more shared ownership. Our Ranking Member has a
wonderful bill. I will be introducing one next week as well,
and I want to focus on that. I know some of the changes, at
least in the recent past, the 7(a) has only financed about five
employee ownership changes in control. I know under the
affiliation lending criteria rule now partial buyouts will be
allowed under 7(a). So if you could just speak to how you think
that might increase access to capital for employee ownership
and any comments you might have.
Mr. KELLEY. Yes. And not to pour salt in the wounds, but
the forthcoming SOP will have delegated authority for ESOP
transactions. So I did want to mention that.
So with respect to partial buyout, the reason that this was
put in here is to affect employee ownership. And historically
what is challenging about an ESOP is that it is a formal
process that requires role-based compliance. So, a fiduciary, a
designated employee to take time away from, you know, doing the
duties of a stockboy as you suggested to perform their roles to
stay in compliance with the regulations governing that.
So it works for a certain size company. It does not work
for what President Biden has characterized as the Mom and Pops
or the smallest of the small. So, what partial buyout does is
it builds off of a process that has worked well for 7(a)
lenders, which is change of ownership. A third of all SBA loans
are either full partner buyouts or full stock or asset
purchases today. This is a transaction that they do a lot of.
And so now, today, an existing ownership can dilute their
common stock ownership to their employees and the business's
cashflow can pay for that transaction. And of course, all
parties with 20 percent or more of stock in the company will
remain on the hook with an unconditional personal guaranty.
So we believe this transaction will be cost-effective. It
will be one familiar to our core lenders and they will
originate more details that way.
Mr. PHILLIPS. Okay. Are there any other structural barriers
that you think could be addressed to further increase
availability of resources for ESOPs?
Mr. KELLEY. So, we looked at ESOPs when I was lending, so I
built out a lending division prior to the last role that was
referenced and did about a half billion of lending. And we
looked at ESOP transactions. They actually have very favorable
benefits if, for example, you are a defense contractor. Okay?
So, cost plus and things like that for reimbursement. But for
the core businesses that are in your districts, the transaction
costs were too high for the seller and the time it took to
affect the transaction meant for a lender that, you know, we
needed to move on to originate more loans. And really,
everything about a lender, and this is good or bad or however
you want to look at it, is I have got to meet my quota for that
quarter and I have got to hit that bonus at the end of the
year. And so I have to move on a timely basis.
Mr. PHILLIPS. Okay. I appreciate it. A couple of quick
questions.
With turmoil in the banking sector, have you noticed any
hesitancy amongst lenders in recent weeks, months, as it
relates to 7(a)s?
Mr. KELLEY. Well, it was cited that, you know, the lending
is on track for about $14 billion today. I think there is no
question, the Fed has reported this, it is in whatever
periodically you consume each day, that there is going to be a
tightening of the credit box. Now, in SBA lending, a tightening
of the credit box normally means that this is a tool that
becomes, you know, more handy, right, for the lenders. And the
challenge, and I really want to reiterate why we are doing all
these changes. In 7(a) lending today there are 20 lenders doing
50 percent of the lending nationwide every year.
Mr. PHILLIPS. Can you say that again?
Mr. KELLEY. Twenty lenders do 50 percent of the lending.
So, a nation that has 33 million small businesses, because of
the red tape and bureaucracy that we are removing but
historically has been in place, has supported 20 lenders. And,
you know, I have called myself a nerd here so I will take
another. It needs nerds like me at the bank to comply with the
rules. So we are trying to level the playing field so that we
can get 4,400 banks and thousands of credit unions off the
sidelines into using these programs.
Mr. PHILLIPS. Thank you. My time is expired so I yield
back. Thank you, Mr. Kelley.
Chairman WILLIAMS. Okay. I would like to thank our witness
for your testimony today, for appearing before us today. I
think you see this Committee is bipartisan. We want the best
service out of the SBA that we can get.
Without objection, Members have 5 legislative days to
submit additional materials and written questions for the
witness to the Chair which will be forwarded to the witness.
I ask the witness to please respond promptly, and you have
been asked to do that today.
So if there is no further business, without objection, the
Committee is adjourned.
[Whereupon, 11:33 a.m., the committee was adjourned.]
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