Unleashing Main Street's Potential: Examining Avenues to Capital Access
Summary
The printed record of the House Committee on Small Business hearing of January 18, 2024 on small business access to capital, Small Business Committee Document Number 118-036, with Chairman Roger Williams presiding. Williams argues that the proposed Basel III capital requirements would make banks hold more capital rather than lend it to small businesses. Ranking Member Nydia Velazquez says the SBA's Community Advantage program facilitated more than $139 million in microfinancing last year, and that community banks will not be affected by the Basel III proposal. The witnesses are the chairman of O'Leary Ventures, the founder of a gluten-free baking company, the president of the American Action Forum and the founder of Lendistry, a CDFI small business lender. The appendix includes prepared statements and material from America's Credit Unions and the FDIC on deposit insurance thresholds.
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
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[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
UNLEASHING MAIN STREET'S POTENTIAL:
EXAMINING AVENUES TO CAPITAL ACCESS
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JANUARY 18, 2024
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-036
Available via the GPO Website: www.govinfo.gov
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
CELESTE MALOY, Utah
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MARIE GLUESENKAMP PEREZ, Washington
SHRI THANEDAR, Michigan
MORGAN MCGARVEY, Kentucky
HILLARY SCHOLTEN, 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
WITNESSES
Mr. Kevin O'Leary, Chairman, O'Leary Ventures, Miami Beach, FL... 5
Ms. Jill Bommarito, Founder and Chief Executive Officer, Ethel's
Baking Company, Shelby Township, MI............................ 7
Mr. Douglas Holtz-Eakin, President, American Action Forum,
Washington, DC................................................. 8
Mr. Everett Sands, Founder & Chief Executive Officer, Lendistry,
Los Angeles, CA................................................ 10
APPENDIX
Prepared Statements:
Mr. Kevin O'Leary, Chairman, O'Leary Ventures, Miami Beach,
FL......................................................... 43
Ms. Jill Bommarito, Founder and Chief Executive Officer,
Ethel's Baking Company, Shelby Township, MI................ 45
Mr. Douglas Holtz-Eakin, President, American Action Forum,
Washington, DC............................................. 48
Mr. Everett Sands, Founder & Chief Executive Officer,
Lendistry, Los Angeles, CA................................. 59
Questions and Answers for the Record:
Questions from Hon. Velazquez to Mr. Everett Sands and
Answers from Mr. Everett Sands............................. 68
Additional Material for the Record:
America's Credit Unions...................................... 71
California Association for Micro Enterprise Opportunity
(CAMEO).................................................... 74
Chamber of Marine Commerce................................... 78
The Daily Dish............................................... 82
Engine....................................................... 83
FDIC on Deposit Insurance Thresholds......................... 86
Small Business Investor Alliance (SBIA)...................... 90
The Washington Post.......................................... 96
UNLEASHING MAIN STREET'S POTENTIAL: EXAMINING AVENUES TO CAPITAL ACCESS
----------
THURSDAY, JANUARY 18, 2024
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, Van Duyne, Mann, Ellzey, Molinaro, Alford, Crane,
Maloy, Velazquez, Landsman, McGarvey, Gluesenkamp Perez,
Scholten, Thanedar, Chu, Davids, and Pappas.
Chairman WILLIAMS. Okay, it is 10 o'clock. We are right on
time.
Before we get started I want to recognize Congressman Mann
from Kansas to lead us in the pledge and the prayer.
Mr. MANN. Thank you, Mr. Chairman.
Join with me in prayer.
Dear Lord, thank you that we get to live in the greatest
country in the history of the world. We pray for all the small
business owners and all those that are thinking about starting
a small business. Please bless their efforts. We pray that they
would be led by you, as would everyone on this Committee. And
we commit this hearing to you and your will. Thanks that we get
to all be here. In the name of Jesus, amen.
I pledge allegiance to the flag of the United States of
America. And to the Republic for which it stands, one nation
under God, indivisible, with liberty and justice for all.
Chairman WILLIAMS. I would also like to make mention that
you will periodically see some of our Members moving in and
out. We might have a moment where there is a lot of people. We
might have a moment where there is not so many people. Do not
let it worry you because we have got other hearings going on
and people have to be at those. So that is a normal process. So
make you aware of that.
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.
I now recognize myself for my opening statement.
I want to welcome all of you here today to the hearing
which will focus on finding solutions for entrepreneurs to more
easily access capital so they can grow their businesses.
I would like to start by thanking all of our witnesses for
being with us today. Thank you very much. And we know you could
be focusing on your core business operation. We greatly
appreciate your attendance and your input.
Small businesses are the backbone of our communities and
the engines of growth for our economy. Our nation's job
creators have faced many challenges over the past few years
from labor shortages to crippling inflation, yet we still
prevail. While our business owners continue to face and
overcome never-ending hurdles, as this Committee heard prior,
access to capital remains a top concern for main street.
For a business to get off the ground, small business owners
must invest their time and financial resources. For most
entrepreneurs, this means going to the bank to secure a loan.
This capital provides them with the resources needed to compete
in the marketplace and contribute to the American economy.
Unfortunately, high interest rates and tightening lending
standards are a significant barrier to growth for main street.
We know American entrepreneurs who are just starting their
journeys and have little credit history will be subjected to
sky-high interest rates under the current economic headwinds.
As interest rates remain high, the federal government
should be looking at other barriers that are making it more
expensive to lend money to main street. However, there is a
proposal making its way through the Federal Reserve System that
will do the exact opposite. And I am, of course, speaking of
the proposed Basel III capital requirements. If implemented,
this rule would require the banks to hold more of their capital
on the sidelines rather than lend it out to small businesses.
This would harm small businesses with thin credit histories.
The most of this is implemented.
Main street has been playing defense since this
administration came into office, and this rule would only serve
to make matters worse. For some businesses, they do not want to
go to a bank and take on debt. These startups may turn to
venture capital funds which invest capital in exchange for
equity in the business. This is a risky undertaking for the
venture capitalist betting on a business's success, but this
type of financial agreement helped build some of the most
successful companies we have seen in our time.
Despite these tough economic headwinds, main street still
finds its way to thrive. Just as it always does, we on this
Committee are focused on ensuring our nation's small businesses
have a fighting chance. And I am very much looking forward to
today's discussion as many are.
So with that I want to yield to our distinguished Ranking
Member from New York, Ms. Velazquez, for her opening remarks.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. I would like to
thank all of the witnesses for being here today.
As both Chair and Ranking Member of this Committee,
ensuring small businesses have access to credit and investment
opportunities has always been one of my top priorities. Under
the leadership of President Biden, small business growth has
proved resilient. Since he took office, 60 million Americans
have filed to start new businesses, the strongest stretch on
record.
While economic progress continues to be made, we must do
better, and that means ensuring all of America's small
businesses have the capital they need to succeed.
Unfortunately, data published by the Federal Reserve found that
minority-owned businesses were just as likely to apply for
credit in 2020 but Black, Asian, and Latino-owned small
businesses were less likely than White-owned businesses to
report receiving all of the credit that they sought.
When it comes to venture funding, that disparity is even
more staggering. Black and Hispanic female entrepreneurs
received less than 1 percent of all venture capital investments
in 2020.
SBA's capital access programs are critical to addressing
these disparities. For example, the SBA's Community Advantage
program has been successful at bridging this market failure,
facilitating more than $139 million in microfinancing to
underserved small businesses last year. Democrats have
developed numerous other policies and programs to facilitate
financing to women and minority-owned small businesses but this
idea has been met with continued opposition from the majority.
The majority recently passed Congressional Review Act
legislation seeking to overturn the CSBB's Section 1071 rule
which is specifically designed to ensure women and minority-
owned small businesses receive access to financing on terms
similar to those as White-owned firms. This legislation was
immediately vetoed by President Biden.
Attempts to ensure our banking system is resilient and well
capitalized and capable of supporting busineseses in both good
economic times and bad are also being met with stiff opposition
from the majority.
The proposed joint rulemaking implementing the Basel III
Endgame agreement is fully consistent with the important aim of
enhancing the ability of small businesses to access financing.
Two key points about the proposal must be made from the
outset. First, the proposed rule is just that, a proposal. It
is not final, and on several occasions, Vice Chair Barr has
reiterated his willingness to meet with interested parties and
hear feedback. Just last week on my invitation, Vice Chair Barr
met with Democrats on this Committee to discuss the proposal
and answer our questions.
Secondly, there are more than 4,500 banks in this country
and less than 40 percent of them will be directly affected by
the rule. Community banks--I repeat, community banks which do
approximately 40 percent of the nation's small business lending
will not be impacted by the proposal.
Small businesses remain the backbone of our nation's
economy, and ensuring large banks remain well capitalized so
they do not create another financial crisis is critical to
ensuring all main street small businesses have access to credit
and investment opportunity.
Thank you, and I yield back.
Chairman WILLIAMS. Thank you.
We will now introduce our witnesses. I will start by
recognizing my colleague, Representative Meuser to briefly
introduce our first witness appearing before us today.
Mr. MEUSER. Thank you, Mr. Chairman, very much.
Our first witness with us today is Mr. Kevin O'Leary, also
known as Mr. Wonderful. Many have seen him, of course, on the
very successful and long-running show Shark Tank. Mr. O'Leary
is the Chairman of O'Leary Ventures located in Miami, Florida.
Mr. O'Leary founded O'Leary Ventures in 2000 to support
startups and early-stage businesses across virtually every
sector because of the breadth of his investment portfolio. As I
understand it, much of it from Shark Tank. O'Leary Ventures has
a proprietary network that continually works to support
portfolio companies. In 2007, he joined the cast of the
Canadian TV show Dragon's Den, the international business
reality show, a precursor, of course, for U.S. Shark Tank
franchise. He is also the author of a best-selling series of
books and has spoken to future entrepreneurs at Harvard, Notre
Dame, MIT, and Waterloo, among others. Mr. O'Leary also serves
on the investment committee at Boston's prestigious 200-year-
old Hamilton Trust. Mr. O'Leary graduated from the University
of Waterloo where he received an honors bachelor's degree in
environmental studies and psychology. That is what my son is
majoring in. There is hope for him. He then went on to attend
the Ivy Business School where he earned his MBA. Mr. O'Leary,
you are known as being a very direct, truthful, and fiscally
responsible businessman. We here on this Committee want to base
our priorities on the real world. And so from all of our
witnesses, thanks for bringing the real world to our Committee.
And thank you all very much for being here.
With that, Mr. Chairman, I yield.
Chairman WILLIAMS. The gentleman yields back.
Our next witness is Ms. Jill Bommarito. Ms. Bommarito is
the founder and CEO of Ethel's Baking Co., located in St. Clair
Shores, Michigan. Ms. Bommarito founded Ethel's Baking Co. in
2011 to carry on her tradition of cooking with love but, how do
yall say it--celiac disease, a family struggle for over 30
years, often left many disappointed with recipes tailored to
exclude gluten. When she hosted her first Christmas dinner for
extended family, she made an entire gluten-free meal, the
highlight of which was the now famous Pecan Dandy Bars. Today,
along with her daughter Lily, they continue to take old-
fashioned favorites catering to a modern appetite that creates
gluten-free, non-processed food in over 1,500 stores across
North America and online. Ms. Bommarito graduated from Michigan
State University, a Spartan, with a Bachelor of Arts in
communication and economics. So thank you for joining us today
and we look forward to our conversation ahead.
Our next witness here with us today is Dr. Douglas Holtz-
Eakin. Dr. Holtz-Eakin is the president of the American Action
Forum located here in Washington, D.C. Dr. Holtz-Eakin founded
American Action Forum in 2009. Prior to that he served in a
variety of influencing policy decisions, including chief
economist of the President's Council of Economic Advisors from
2001 to 2002, which he also worked as a senior staff economist
from 1989 to 1990. From 2003 to 2005, he served as the sixth
director of the Congressional Budget Office assisting Congress
with numerous policies, including the 2003 Tax Cuts, the 2003
Medicare Prescription Drug Bill, and the 2005 push for Social
Security Reform. He was also the director of domestic and
economic policy for the John McCain Presidential Campaign and
then went on to serve as a commissioner on the congressionally
chartered Financial Crises Inquiry Commission. Dr. Holtz-Eakin
received a Bachelor of Arts in economics and mathematics from
Dennison University and then went on to receive his Ph.D. in
economics from Princeton University. Thank you for joining us
today, and we look forward to our conversation ahead.
I now recognize the Ranking Member from New York, Ms.
Velazquez, to briefly introduce our last witness appearing
before us today.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
I would like to take a moment to recognize Mr. Evertt Sands
and thank him for joining us here this morning. Mr. Sands is
the founder and CEO of Lendistry, a national CDFI small
business lender located in Los Angeles, California. Mr. Sands
has more than 20 years of experience in banking, facilitating
loans to underserved small business owners who need access to
responsible capital. Mr. Sands has shared his experience and
recommendations with Fortune, the National Urban League, the
Wall Street Journal, and Bloomberg. He is a graduate of the
University of Pennsylvania and he is an Advisory Board Member
of the Penn Institute for Urban Research. Thank you, Mr. Sands.
It is a pleasure to have you here this morning.
Chairman WILLIAMS. Thank you. And again, we appreciate all
of you being here today.
So before recognizing the witness I would like to remind
them that their oral testimony is restricted to 5 minutes in
length. If you see the light turn red, you have got a problem,
okay, in front of you. It means your 5 minutes have concluded
and you should wrap up your testimony. And every now and then
if you go over I will remind you a little bit and so we will
keep this thing moving.
So with that being said I now recognize Mr. O'Leary for his
5-minute opening remarks.
STATEMENTS OF KEVIN O'LEARY, CHAIRMAN, O'LEARY VENTURES; JILL
BOMMARITO, FOUNDER AND CHIEF EXECUTIVE OFFICER, ETHEL'S BAKING
COMPANY; DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION FORUM;
AND EVERETT SANDS, FOUNDER & CHIEF EXECUTIVE OFFICER, LENDISTRY
STATEMENT OF KEVIN O'LEARY, CHAIRMAN, O'LEARY VENTURES
Mr. O'LEARY. Thank you, Chairman Williams, Ranking Member
Velazquez, and Members of the Committee, thank you for giving
me time to testify about the state of small business in
American.
I am the Chairman of O'Shares, an ETF indexing firm and
Chairman of O'Leary Ventures management, a private equity and
venture investment firm. As an investor, I support
entrepreneurs at every stage of their journeys. I have dozens
of family-run businesses in our investment portfolios.
My definition of a small business is a private firm, often
family owned, that employs between 5 and 500 people. These hard
working men and women that basically account for 60 percent of
job creation in America. There is no denying they are the
backbone of the economy.
For decades, the US economy has enjoyed historically low
interest rates. Access to capital at a low cost is always the
key for funding receivables, capital expenditures, and making
payroll. For small businesses in America, the majority of these
services were provided by the network of over 4,000 regional
banks. Almost a year ago, the network began to falter. Silicon
Valley Bank and Signature Bank failed, and First Republic Bank
was bailed out by taxpayers and then sold off to J.P. Morgan.
This occurred while the Federal Reserve was raising rates at an
unprecedented pace from almost 0 to the current 5.5 percent
terminal rate. Regional banks immediately faced heightened
scrutiny of their balance sheets and liquidity ratios and now
bank policies are under review by their regulators. The
predictable reaction was for the banks to tighten their loan
books. This was immediately felt by hundreds of thousands of
small business owners in every sector and geography in America.
Not only did their rates increase, but regional bank liquidity
dried up too. In many cases they now have to make use of the
private shadow banking market at rates of 16 to 22 percent.
At the same time, federal programs like the PPP had ended
and the Employee Retention Credit payments were suspended by
the IRS in Q4 of 2023. To date they have not resumed and the
whole ERC program is currently scheduled to end on April 15th
of 2025 or even sooner.
Unfortunately, the majority of small business owners have
no idea if they qualify for any of the programs inside of the
Inflation Reduction Act (IRA), The CHIPS Act and Science Act,
obviously, and Infrastructure Act. Small businesses do not have
the resources to retain lobbyists, legal and financial advisors
that interpret the acts and manage the application process. If
small businesses in America are responsible for 60 percent of
domestic jobs, why are these acts not written to spend 60 cents
of every dollar on them, especially when their traditional
sources of funding and government support programs have ended
or been suspended. Instead, it looks to the market like the
IRA, CHIPS and Infrastructure Acts were written specifically
for S&P 500 companies that have no trouble accessing capital,
yet only create 40 percent of jobs, many of these in foreign
subsidiaries.
I would like to suggest some recommendations to the
committee.
One, create a payroll protection program to protect
noninterest paying payroll accounts in regional and community
banks during the inevitable consolidation of over 4,000
regionals down to a market stable number. I first heard of this
idea from Senator Hagarty and think it would be helpful.
Two, work with the numerous agencies that are implementing
both the IRA, CHIPS, and Infrastructure Acts to ensure small
businesses receive the fair share of these programs. Form a bi-
partisan council that advocates for small business in America
that is always at the table when new policy is being
considered. This would ensure that new government programs and
laws are actually supporting small businesses and job creation
in America.
Thank you very much.
Chairman WILLIAMS. Thank you. And I now recognize Ms.
Bommarito for her 5-minute opening remarks.
STATEMENT OF JILL BOMMARITO, FOUNDER AND CEO, ETHEL'S BAKING
CO.
Ms. BOMMARITO. Thank you. Chairman Williams, Vice Chairman
Luetkemeyer, Ranking Member Velazquez, Committee Members and
guests, good morning.
My name is Jill Bommarito, and I am the founder and CEO of
Ethel's Baking Company located in Metro Detroit. We are a
leading wholesale gluten-free bakery specializing in dessert
bars and cookies sold in grocery and specialty stores in 49
states. I am also an alumna of the Goldman Sachs 10,000 Small
Businesses program.
It is an honor to be here today, and I appreciate your
invitation and your attention to how a lack of access to
capital is a barrier for small business growth.
Ethel's Baking Company now has annual revenue of $5 million
and 26 full-time employees. I started my business in 2011 in a
church kitchen with a $10,000 loan from my mom.
I quickly learned that accessing capital through
traditional lending institutions was impossible without 2 years
of profitability to show. That barrier led me to borrow from
friends and family, as well as from our personal savings and
401k to grow the business growth. In fact, I was not able to
secure my first business loan for over 5 years after I started
the company.
We continued to grow and needed additional working capital
but a second barrier arose. I learned that traditional lenders
are also reluctant to lend to business that are growing
quickly. Fast growth equals risk.
For small business owners, this feels contrary to the
American Dream. Creating jobs, taking on the risks of starting
something new is important but we are not treated as important.
In 2019, with distribution expanding, Ethel's had reached
capacity. The only way to access the capital needed to expand
was to sell equity in my company. This allowed me to build out
our new 20,000 square foot facility manufacturing space to meet
demand and also allowed me to have access to working capital
and start that next level relationship with banking.
We continue to grow our customer base and receive purchase
orders from large retailers like Costco, Target, Whole Foods,
and more. This requires more capital.
When small business owners like me cannot access a loan, we
are faced with three choices. We deplete personal and
retirement savings. We have the option for utilizing high-
interest loans and credit cards, non-traditional lenders, and
predatory lenders that exploit small businesses. Or sell equity
to raise capital.
My relationship with our lender is strong, but the fact is
that businesses like mine, growing quickly and in the food
sector, are deemed risky. This has led me to sell additional
equity.
Here is the truth. My ability to access capital for my
business is my top concern every single day. That is true for
every small business.
It is troubling that the Federal Reserve is considering a
rule, the Basel III Endgame, that would further restrict access
to capital for small businesses. If enacted, this rule would
not only cut off many small businesses from accessing the
capital that they need to grow, but it will push small business
owners to predatory lenders because they will have no other
choice. I come from a family of entrepreneurs , and I have seen
firsthand the consequences of predatory lending. It is simply
unconscionable.
From my perspective, I respectfully offer two things this
Committee and Congress could do to help small businesses like
mine:
First, oppose the Basel III Endgame. I would like to extend
my appreciation to Chairman Williams for expressing concerns
about Basel III in a letter to the Federal Reserve. I would
also like to thank Subcommittee Chair Meuser and Ranking Member
Landsman, for leading a bipartisan letter about the proposal's
negative impact on small business lending. I have joined over
3,000 small business owners from the 10,000 Small Business
Voices community who signed our letter to the Federal Reserve
expressing our concerns about the impact of the Basel III
Endgame.
And second, modernize the SBA through reauthorization. As
you know, the SBA has not been reauthorized by Congress in over
20 years. Small businesses would benefit from an agency that is
as nimble and can work at the speed that we work today. Through
Congressional reauthorization, the SBA could be charged with
solving these capital barriers that currently exist.
Thank you for your time, and I will gladly answer any
questions
Chairman WILLIAMS. Thank you very much.
I now recognize Mr. Holtz-Eakin for his 5 minute opening
remarks.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION
FORUM
Mr. HOLTZ-EAKIN. Chairman Williams, Ranking Member
Velazquez, Members of the Committee. Thank you for the
privilege of being here today to discuss access to capital and
headwinds to growth in the small business community.
I want to make three brief points and then I look forward
to answering your questions.
At the moment there are really two near-term threats to
access to capital. The first which has been mentioned already
is the economic environment in which small businesses are
operating, an environment characterized by tight credit
conditions, high interest rates, and the prospect of slow
economic growth over the interim. This runs the risk of both a
recession and limited access to capital because of the high
interest rates.
The thing that I would note about the economic conditions
that I think is most troubling is that there is a very
unbalanced growth pattern going on in the U.S. economy. We have
seen some high topline economic growth numbers but they are
driven entirely by households. Business investment in the 3rd
quarter was dead flat. It looks to be repeated in the 4th
quarter. That is the issue of small businesses not investing,
not having any access to capital. And every post-war recession
pandemic was led by a downturn in business investments. So that
outlook is very important and one of real concern to me.
How long the Fed remains tight is a real issue. To give you
some sense of it, the core PCE price index inflation peaked at
5.6 percent. It is now at 3.2 So that is 2/3 of the way to the
2 percent target and that took almost 2 full years. So the
notion that somehow credit conditions will ease quickly I think
is far from guaranteed.
That puts an emphasis on policy to provide access to
capital. And here I think the real near-term threat is the
regulatory burden being placed on businesses, and especially
small businesses.
As I note in my written testimony, the Biden administration
is imposing a regulatory burden from finalized regulations that
averages about $150 billion a year so far for each year in
office. That is 50 percent higher than any previous
administration and well above typical administration burdens of
$40 to $20 billion a year. That is simply an enormous headwind
to growth and access to capital. That is across all agencies.
The particular regulatory issue that this one raised so far is
the Basel III Endgame. This is a proposed rule which is unique
in that it provides no quantitative estimates or justification,
no benefits when we know there will be large costs to raising
capital standards by 20 to 30 percent. It would be in the
regulators' interest to demonstrate quantitatively the impacts
on the economy and in particular the small business community
but we have not seen anything like that. So hopefully, the
final rule will look a lot better than the proposed rule.
In survey evidence of the small business community, the
proposed rule is really quite frightening. Sixty-seven percent
of respondents said that if it finalized they would halt their
expansion. Forty-two percent said they would be considering
layoffs. And some 21 percent contemplating closing their
businesses as a result. So this is a rule that has enormous
impacts on the economy.
Going forward and over the longer term, I think the biggest
policy uncertainty comes from the federal budget. The federal
budget, according to the Congressional Budget Office will have
$20 trillion of deficits over the next 10 years and there is
simply no question that that kind of demand for capital by the
federal government is going to impede the private sector's
ability to get that capital and the most easily crowded out
will be the small businesses. And so that cannot hold.
Even more important is how it gets resolved. One way to
resolve that problem is to rely extensively on tax increases,
in particular, the 2017 act will sunset in almost its entirety
at the end of 2025. To simply take away the pro-growth aspects
of that act in particular or taxes in general as a way of
solving our budget deficits is not going to be a good solution.
It is going to hurt the small business community dramatically.
A better solution would be to rein in the growth of the large
entitlement spending programs that are driving those deficits.
Keep the tax burden as low and efficient as possible and
provide a growth environment in which the small business
community can prosper while putting the federal fiscal house in
order.
There are many problems facing the economy. Those are the
three I think that are most important for this Committee right
now. I thank you for the chance to be here.
Chairman WILLIAMS. Thank you very much.
I now recognize Mr. Sands for his 5-minute opening remarks.
STATEMENT OF EVERETT SANDS, FOUNDER AND CEO, LENDISTRY
Mr. SANDS. Committee Chairman Williams, Ranking Member
Velazquez, Vice Chairman Luetkemeyer, distinguished Members of
the Committee, thank you for your interest in my first-hand
knowledge.
My name is Everett K. Sands. I am honored to be invited
back to offer testimony before this Committee. I have over 20
years of experience in lending at community banks. One of the
largest national banks and founder and CEO of the only fintech
community development financial institution, Lendistry, which
has taken 1.7 million applications since our history.
My message today is that main street businesses that power
our economy need small dollar loans to grow to the next level,
and right now you have an army of CDFIs that stand ready to
support them.
My written testimony outlines in detail the demand for
smaller loans and that CDFIs, including Lendistry, have proven
themselves to be the most effective capital deployers to
underserved communities as a percentage of loans originated.
Yet, we work with one hand tied behind our backs due to the
hurdles that made sense when they were first enacted and no
longer fit today's financial landscape.
In order to do our part to unleash main street, we need you
to unleash us.
My first recommendation is to fix the state-by-state
licensing model that prevents CDFIs from efficiently serving
small businesses on a nationwide footprint. The current state-
by-state licensing requirement for CDFIs not only limits how
quickly capital can be distributed but also how effective the
CDFI designation can be as a force to deploying responsible
capital and lower loan amounts.
Applying a universal licensing model similar to residential
lending, nationwide mortgage licensing system will bring about
three clear benefits.
One, CDFI's can move faster to deploy capital when it is
needed.
Two, CDIs can easily attain the risk management benefits of
geographical distribution.
And three, more lenders will be motivated to attain a CDFI
designation which would significantly increase the supply of
capital provided on responsible terms and through market forces
make predatory lending businesses less economically viable.
My second recommendation is to increase the access to
Federal Home Loan Bank and grant access to the Federal Reserve
Bank for CDFIs. The elements that go into determining a loan's
interest rate are broken down simply in my written testimony.
But to get right to the point, the cheaper the capital is for
CDFIs, the more savings are passed down to borrowers in the
form of lower interest rates. Interest received on small loans
simply does not add up to enough to keep the CDFIs in business
or innovate. So if a CDFI does not have low-cost sources of
liquidity and has not received adequate capital, lending
capital from banks, it has to make the decision to either
leverage high-cost capital resulting in higher rates for
borrowers or just not provide small loans at all.
Allowing access to CDFIs to the FRB and FHLB would again
have three main benefits.
One, additional sources of liquidity, which means CDFIs
could provide more loans to underserved communities.
Two, access to lower cost of funding will immediately
decrease the interest rate CDFIs provide to their customers.
And three, as Mr. O'Leary said, private lending capital has
decreased pretty significantly and the government needs CDFIs
to keep the playing field both responsible and equitable.
The third recommendation is to form a taskforce to analyze
programs on an ongoing basis and implement adjustments to make
sure they remain catalytic and responsive. As evidenced by PPP,
SSBCI and the many programs implemented to provide pandemic
relief, our government can rise to the occasion to deploy
assistance and save small businesses. From the capital
deployer's perspective, government support is best when it is
catalytic to help new industries, like renewable energy, thrive
and innovate, and responsive. Capital deployment should be
considerate of current market conditions like inflation.
Programs should also be built with processes in place for
accountability and reporting and adjusting based on those
findings. This means that though a great deal of money is
pushed towards states to support small businesses via programs,
there is no system in place to make sure programs continue to
fit market conditions or to measure their effectiveness in
relation to their missions. Instead of adjusting current
programs to keep them effective, we create new programs.
In closing, Congress has taken great strides in recent
years to increase access to capital for borrowers and remove
roadblocks from most of our effective lenders. For mission-led
lenders, part of the Endgame is disruptive and predatory firms
by offering accessible, responsible alternatives. In my
experience, knowledge, as well as innovation are most powerful
when execution. It is my hope that with the information
gathered in this room from myself and my fellow witnesses swift
action will follow. Only then can main street's potential truly
be unleashed.
Thank you for your time.
Chairman WILLIAMS. Thank you very much.
I now recognize myself for 5 minutes.
Ms. Bommarito, it is inspiring to hear the story of how you
grew your business from a kitchen in a church to currently
shipping your products to 49 states across the country. I want
to congratulate you on this incredible accomplishment and hope
you are proud of what you have built.
Ms. BOMMARITO. Thank you.
Chairman WILLIAMS. You mentioned in your testimony that you
were not able to get your first business loan until 2016 when
you used a building you purchased the prior year as collateral.
Since this time your capital needs have changed as you have
indicated since your business has grown.
So my question is for the other entrepreneurs that might be
listening to this hearing can you talk about how your capital
needs have changed through the lifecycle of your business?
Ms. BOMMARITO. Thank you, Chairman Williams.
Yes, they have. When we started you need basically money to
be able to build your inventory and cover your receivables. As
you grow that grows exponentially and will continue to do that.
With that you are also seen as a higher risk as you are
growing. Anything over 10 percent is considered risky from what
I have been told from banks. And you know small businesses
often do grow more than 10 percent a year. It is the large
organizations that are happy with the 2 percent or a 5 percent
increase in profits in growth. And it changes over time. It
will continue to change. We need to have the access at the
local level from our community banks in order to grow our
businesses.
Chairman WILLIAMS. Thank you.
Now, many young people were first exposed to
entrepreneurship through a TV show called Shark Tank. It is
hard to watch that show and not think about using your own
background and strengths to create a product that solves a
unique problem in the marketplace. However, having an idea
might be the easiest part of someone's entrepreneurship
journey. There is a lot of work to turn an idea into a business
plan and then to successfully execute it. I believe Congress
could help many of these small businesses by simply making it
easier to access federal dollars, and the government is one of
the largest customers in the world and we should allow small
businesses to understand and compete for the funds without the
need for an entire legal department.
So Mr. O'Leary, you have a lot of experience advising small
businesses. So when you see Congress pass some of these bills,
how do you advise small businesses if they want to compete for
the incentives? And how do you believe they have a fair shot?
Mr. O'LEARY. I think many of these bills were authored
without, in my view, without any consideration of small
business. They obviously, in my view, were built for companies
that came here to Washington, could afford lobbyists, talked
about sectoral needs like infrastructure, spending, or CHIPS
Act for giant behemoth companies that make these semiconductors
and, you know, obviously when these were crafted there was
nobody at the table for small business. I read these acts. I
look for where small business is considered. I do not see a
single line. I am sorry. That is just the way it is. And my job
is to be an advocate for these men and women of which there are
millions in America, every small business is going to be a big
business if it is successful one day. Every behemoth started
small but today we have tilted our support. When we write these
acts, why is 60 cents on the dollar not given to small
business? Because those are the next generation of companies
that will create the jobs and keep a competitive economy. A
global competitive economy.
My job here in Washington, I am spending a lot more time,
is going up and down the halls banging a gong saying what about
my guys? I do not get this. Where is our piece of this? There
is none. And so I think that is bad policy. I think there is
every reason to ask why we are not being considered.
On top of that, and you brought this up in your question, I
thank you for it, the regulatory environment, when you pile on
the federal regulations onto state regulations have made it so
difficult to start a business in the first place.
And again, to be candid, I do not invest in California or
New York or Massachusetts anymore. I cannot do business there.
It is not my fault. I put my money into North Dakota, West
Virginia, Florida, Texas, where the path of least resistance is
found. And that is okay. The competition of states. But if this
is not obvious to people that you can actually regulate
yourself out of business, check out California. Thank you.
Chairman WILLIAMS. Thank you very much.
And for the time that I have remaining, real quickly, as
officials of the U.S. Federal Reserve are considering possible
adjustments to the Basel III proposal, Mr. Holtz-Eakin, do you
have any insight on its cost-benefit analysis?
Mr. HOLTZ-EAKIN. They have displayed no public cost-benefit
analysis, and I think it would be important in the final rule
to have that analysis included.
Chairman WILLIAMS. All right. I now recognize the Ranking
Member for 5 minutes of questions.
Ms. VELAZQUEZ. Yes. Thank you, Mr. Chairman.
Mr. Sands, the Paycheck Protection Program highlighted
racial disparities in banking. As a national CDFI, can you
explain how Lendistry is trying to bridge this gap and provide
access to credit to small businesses in underserved
communities?
Mr. SANDS. Yes. Thank you for the question.
As CDFIs, we have a responsibility really and it breaks
down into three things. The first is providing access to
capital to all underserved, undercapitalized businesses. That
is what we do.
The second thing is to be able to take in data and
basically prove that the small businesses have the ability to
pay back. It is a perceived risk that minorities are not able
to pay and so we do our best to work on that.
Ms. VELAZQUEZ. Can you explain how SBA programs, like the
7(a) and Community Advantage programs, have helped your
organization bridge this gap?
Mr. SANDS. Yeah. As you heard, even from the small business
today, it is hard when they are in the beginning stages. And so
programs like SBA, SSBCI, allow us to bridge that gap by taking
additional risk and those guarantees effectively help us to
take that risk and then prove that they can pay back and grow.
Ms. VELAZQUEZ. There have been several attempts to
permanently authorize the Community Advantage Program but those
attempts have proven unsuccessful. How will permanently
authorizing this program facilitate more lending to small
businesses?
Mr. SANDS. So authorizing Community Advantage is important,
and permanently authorizing it is something that must be done.
What we need to consider also is that the lenders look very
much like their small businesses. Microlending program,
Community Advantage are for the smaller lenders. CA SBLC is for
the medium lenders. And SBLC is for the larger lenders. I would
ask us to think about that as we move forward.
Ms. VELAZQUEZ. Thank you. I understand Lendistry recently
decided to seek an SBAC license from the SBA and that decision
was predicated at least in part by the passage of the Inflation
Reduction Act (IRA) and the equity financing incentives it
provides. Can you provide us with a little more perspective on
that decision? Do you think the incentives provided in the IRA
will increase venture funding to small businesses more
generally?
Mr. SANDS. Absolutely. I mean, it is unfortunate that
sometimes you have to be surgical in terms of looking at these
bills as Mr. O'Leary mentioned but one of the benefits of IRA
was that it does allow for the SBIC program to be expanded.
Lendistry is always looking for patient capital. We are always
looking for ways that we could lend to underserved businesses
and that need is growing and larger loan amounts are required
in this day and age, especially to participate in programs like
what we are trying to do with renewable energy, et cetera.
Ms. VELAZQUEZ. Thank you.
Ms. Bommarito, the government guarantee provided by the SBA
in the 7(a), the 504, and the other capital access programs
enables lenders to offer more affordable loans with more
advantageous repayment terms than they otherwise would. Would
that help small businesses better overcome many of the economic
pressures we are discussing here this morning? Have you
utilized any of the programs that I mentioned?
Ms. BOMMARITO. Thank you very much for that question. And
yes, my first loan was an SBA loan. But if I can be very frank,
I started conversations when I started the company over 12
years ago. Every single bank I have been in front of has not
wanted to do an SBA loan because of the paperwork, the time it
takes, and have pushed me to do a non-SBA in every
circumstance. So I pushed and pushed and pushed and they had to
end up doing the SBA loan and I am so thankful that we were
able to do that. But I do believe that----
Ms. VELAZQUEZ. Okay, my question is if you have ever
utilized.
Ms. BOMMARITO. Thank you.
Ms. VELAZQUEZ. Some of the programs will provide better
terms.
Mr. Holtz-Eakin, this is the rule, the Basel III Endgame.
You just stated here that the rule is more than 300 pages and
more than 50 plus pages have an economic analysis, the Fed's
analysis. For you to come here and state that the rule was
written without any economic analysis is not true. I invite you
if you have not read it to read it and then we can discuss
whether or not you might find that that is insufficient but to
state that it has not done an economic analysis is not correct.
And then the banks, the Basel III impact over banks over
100--I still have, oh, I am over. Most of the changes
associated on the rule are related to market trading, not
credit risk.
Chairman WILLIAMS. Time is up.
Ms. VELAZQUEZ. I yield back, Mr. Chairman.
Chairman WILLIAMS. Thank you.
I now recognize Representative Luetkemeyer from the great
state of Missouri for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
You have got a great panel today. Congratulations on
putting this together.
Mr. Holtz-Eakin, let me start with you. In testimony before
the Banking Committee, which I sit on, and Ms. Velazquez does
as well, Vice Chairman Barr, whose proposal is basically this
Basel proposal, has responded to the question from me
personally, have you had an economic analysis of this said no.
So I think your answer is correct. I do not know where she is
getting her information from but even the Fed Vice Chair of
regulation who proposed the rule said there is no economic
analysis which is horrible from the standpoint of proposing
rules and understanding the effect on this economy.
It reminds me of the old debate about Cecil--if you want to
go there.
But anyway, Mr. Holtz-Eakin, this Basel rule, proposal in
my mind, is a disaster from the standpoint we have just come
through the COVID situation and our banks performed admirably.
Had a hiccup this spring but that was our own fault not because
of the economy. So I would just like your opinion on this rule
as a former banker and a former regulator. When they say that
this is only going to affect the top group of banks, these
things roll downhill. Even your community banks at some point,
the regulators are going to sort of wink and nod and say this
is a really good idea. You need to be implementing this.
What is your thought process on this rule and its effects
on capital access to small business?
Mr. HOLTZ-EAKIN. So the financial markets are by definition
interconnected. And so to impose these capital requirements, I
suppose you would say like the operations risk, my discontent
with the proposed rule is there is no quantification of how
large is operations risk. There is no quantification of the
benefits to holding particular amounts of capital against
operations risks. It is just hold this and we will assign it to
operations risk. I think they could do a better job in
defending the proposal.
Costs are costs. That is not going to be confined to
operations. They are going to have to raise the revenue to
cover those costs. That means all credit will get more
expensive. This is going to get embedded across those banks'
pricing structures. And the smaller banks often by and large
are banks for funding needs of various maturities and it will
spill over to the smaller banks. You cannot isolate it in just
the largest banks.
They also extended it beyond what Basel III required them
to affect regional banks in ways that I did not understand. And
do not address Silicon Valley or Signature or any of the things
that went on. And so this is an implementation of Basel III
that does not hue to the necessary implementation. It has a lot
of new, undocumented capital requirements that are costly but
without demonstrated benefits, and it will affect the entire
financial sector.
Mr. LUETKEMEYER. Thank you for that. And I appreciate your
comment with regards to about $150 billion worth of new rules
and regulations of cost compliance each year. That is a huge
driver of inflation when you add that as a cost that has to be
embedded into the price of the product or services, especially
a small business.
Mr. O'Leary, thank you for being here. Great to see you
again.
This morning I saw an article that said there is about $8.8
trillion in CDs and money market funds that is available and
probably going to shift to the equities market as a result of
interest rates coming down. That is both wonderful and not so
hot at the same time. It is a two-edge sword. It is a bad deal
from the standpoint that a lot of those dollars are there for
the banks to be able to loan money to small businesses. If
those flow out that means they have fewer dollars to invest.
But it is also a good deal from the standpoint there may be
some more venture capital dollars available for small business.
Would you give me your opinion on that, please?
Mr. O'LEARY. First of all, the assumption that interest
rates are going down, I am not so sure. As we all know, the Fed
mandate is 2 percent inflation. Not 2-1/2, not 3, not 3.2. I
assume, they will stay the course at 5.5 terminal rate until
they actually see 2 percent in sight which is nowhere near in
sight for a whole bunch of infrastructure reasons. In addition
to a lot of new capital coming, fresh capital, I call it
helicopter money from infrastructure, CHIPS, and science, and
from IRA. That is inflationary. I know we called it the
Inflation Reduction Act. Any time you print money it is
inflationary, period. There is no other way to interpret it.
And so I think that is the pressure. It is sucking and
blowing at the same time. A bit of a problem. But it has been 2
generations of people that have never seen money in a bank or
in a short-term CD or short-term Treasury, make over 5 percent.
And now they have seen it for the first time. the market gives
you 7 to 9 percent over a long period of time. And so some
portion of that money is going to stay exactly where it is
because the typical portfolio pre-pandemic was kind of 60
percent equity, 40 percent fixed income, of which now Treasury
is very attractive.
So I would agree with you. There is going to be some
pressure in terms of keeping that capital in a form that banks
can lend it out.
But I have to speak to this Basel III issue from a
different perspective. It is bad policy and here is why. Today,
our banks, the money center banks compete with New York,
Zurich, and Abu Dabi. Those are the other----
Chairman WILLIAMS. The gentleman's time is up.
Mr. O'LEARY. Sorry.
Mr. LUETKEMEYER. Thank you. My time is up.
Chairman WILLIAMS. I now recognize Representative Pappas
from the great state of New Hampshire for 5 minutes.
Mr. PAPPAS. Thank you very much, Mr. Chairman. I thank our
panel for their comments here today as we think about some of
the barriers our small business faces in accessing capital and
some of the threats on the horizon, too.
Mr. Sands, if I could start with you. As you know, rural
small business and entrepreneurs have long faced undue barriers
with respect to accessing capital. According to a 2021 SCORE
report, 40 percent of rural small business owners have trouble
accessing capital. Most end up using their personal savings as
we heard about earlier in terms of finding that funding source
to be able to grow and thrive.
The Expanding Access to Capital for Rural Jobs Act is a
bill that I helped introduce last year. It would expand the
office of the Advocate for Small Business Capital Formation to
include Rural small businesses and help ensure that their
concerns and priorities are heard by SBA. I am wondering if you
have other thoughts about this specific sector, rural small
businesses, what we can do to improve access to capital for
those main street businesses that we know are underserved and
face struggle in terms of finding the capital they need.
Mr. SANDS. Thank you for the question.
I think ultimately, what it comes down to is the deployers
of capital are missing in states like New Hampshire. And so I
think there needs to be some investment in terms of trying to
bring more responsible capital deployers not only to New
Hampshire but also to all rural areas and think about programs
that can support bringing those capital deployers to the state.
Likewise, I also mentioned about the state-by-state licensing.
If you take someone like us at Lendistry who are in California
and we are trying to go into New Hampshire, there are actually
barriers for us being able to lend in your state.
Mr. PAPPAS. Thanks for that. I am wondering if you wanted
to add anything to the discussion around Basel III. We know
that this would impact banks with over $100 billion in assets
specifically but this is a very significant and complex
regulatory proposal. There are a lot of concerns. I hear them
from my main street business sector, my lending community, that
it could have potential downstream impacts in terms of access
to capital. So we know that banks and CDFIs like you do more
than 40 percent of the small business lending. What would you
expect the impact would be in terms of your organization's
lending capacity if this program is implemented? And do you
share some of the concerns that have been voiced today?
Mr. SANDS. Yeah. I think we all want prudent banking, and
we all want banks to have the right amount of equity in order
to function. Likewise, we do not want at risk any of your
deposits. That being said, we should recognize that we are in
an inflationary environment. We should recognize that the rule
is a proposal but it is not ready for the current environment
that we are in today. So my actual recommendation would be to
postpone Basel III as it stands today because as others have
indicated, it will start at the top banks. It will then trickle
down into community banks. It will then trickle down into
community development financial institutions. And afterwards it
would then obviously go to small businesses.
Mr. PAPPAS. Well, I appreciate those comments.
Ms. Bommarito, if I could turn to you. And thanks very much
for talking a little bit about your business history. We know
that in addition to capital, the most precious resource you
have is your time. So being here and giving voice to these
concerns is really very much appreciate and something we hear
from folks in our own districts.
You mentioned SBA reauthorization, the need to take a look
at this. Can you be more specific in terms of some of the thing
that this Committee should consider as we look at either a
wholesale reauthorization or pieces of SBA that need to be
modernized to meet the needs of businesses like yours?
Ms. BOMMARITO. Absolutely. And thank you for this question.
As a small business, when I started, you do not feel you
matter. And we cannot singly. We need a centralized
organization, the SBA, that represents us so that we can have
that voice together. And the modernization by reauthorization
is so important and it allows us to have more communication, to
be able to utilize the system in a way that we are used to
working with technology, to be able to understand these bills
in a better way, and to be able to find out how we can access
them. Because as it stands today, I do not have the time to
even begin to read through those and find a way to be
successful, take advantage of that for our business, and to be
able to grow in a better way.
Mr. PAPPAS. Well, thanks for that. We certainly hope to
continue to hear the voices of our main street small businesses
as we move forward on this Committee. Thank you for all of your
comments, and I yield back my time.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Stauber from the great state
of Minnesota, for 5 minutes.
Mr. STAUBER. Thank you, Mr. Chair, and Ranking Member
Velazquez for holding this hearing.
You know, my home state of Minnesota has a rich history of
entrepreneurship. These businesses are the cornerstone of our
economy. And having been a business owner for 31 years it was
tough at times. Yet, for all their efforts, the grit and
determination, too many small businesses struggle to access the
capital they need to survive. Small businesses have struggled
under this administration, whether it is rising inflation due
to Bidenomics, supply chain issues, or workforce shortages,
they should not have the additional struggles due to lack of
access to capital which translates to lost opportunities,
unfulfilled potential, and ultimately missed contributions to
our economy. Even alternative methods to funding such as
venture capital are feeling the pressures of Bidenomics.
Mr. O'Leary, despite what the Biden administration claims,
inflation remains high and it has recently started to tick up
again. How has inflation impacted venture capital lending?
Mr. O'LEARY. Dramatically. In the last 24 months, it has
seen a 39 percent decline in funding. And so the typical VC
firm today is not worried about new deals. They are trying to
determine in their portfolios which ones should survive and
which ones they are going to let die. It is extremely difficult
to raise capital for any company today from the traditional VC
model as a result of this rapid change. It is almost
unprecedented to go from zero to 5.5 percent terminal rate and
not expect it to be like a jolt through the economy and now you
are starting to really see it. And so there are some methods by
which equity crowd funding, which is part of the CARES Act from
way back that is actually working. I think over 308 million
were raised last year using that. And that is a different form
of financing. But that is a drop in the bucket compared to the
billions required to fund growth through venture capital.
I would go as far to say right now venture capital is dead
and it is just waiting to see what the outcome is on these
changes to the bigger bank environment. Because remember, they
partner with a lot of other capital, too.
Mr. STAUBER. And that was, my next question is what
differences are you seeing in the VCs from entrepreneurs that
are trying to pitch their business?
Mr. O'LEARY. Well, if you are a startup you are in trouble.
If you are just in your first round you are in trouble. If you
have already got a VC backing you for a first, second, maybe AB
round, they are going to look at you closely to decide if you
are one of the ones that are going to survive. You have a
chance. But if you miss that window, which was basically 36
months ago, this is a very difficult time. And probably the
best measure of this is the Shark Tank index. You should see
the deals we are getting now because they cannot get money
anywhere else. That is what happens.
Mr. STAUBER. Right. Right. Right. Thank you, Mr. O'Leary.
You know, as small business run into issues with access to
capital, Basel III, it has already been mentioned, you know, it
sounds reasonable until you realize the consequences of it
which will squeeze access to critical financing for the
businesses that drive our communities.
Mr. Holtz-Eakin, raising capital requirements will likely
create barriers to growth. How could the Fed modify a Basel III
source workable to help small businesses?
Mr. HOLTZ-EAKIN. I think the first and most important
observation is that the banks are well enough capitalized at
present so the Fed's stress test, they have been demonstrated
to be well capitalized. The scenarios they can put through
could be modified. So the overall need for capital has not been
demonstrated by the Fed. If they want to tailor the capital
charges they should be taking things off and adding the new
risk charges. That is probably the biggest sort of framework
that they could follow in doing the Basel III.
And I do not see the benefit to extending it to the smaller
banks, the regional banks. There is nothing in Basel III that
addresses the difficulties that presented First Republic,
Signature, Silicon Valley. Those are different phenomenon.
Mr. STAUBER. Thank you.
And then we heard that this adminsitratino has placed $150
billion of additional regulations on small businesses. Is that
a good thing, Mr. O'Leary?
Mr. O'LEARY. No. That is insane.
Mr. STAUBER. Ms. Bommarito?
Ms. BOMMARITO. Anything that creates more paperwork for us
and more money is detrimental.
Mr. STAUBER. Mr. Holtz-Eakin, putting additional $150
billion on small businesses a year, is that a good or bad
thing?
Mr. HOLTZ-EAKIN. It is a real headwind to growth. And it is
unprecedented in previous administrations.
Mr. STAUBER. Mr. Sands?
Mr. SANDS. I would concur. The number is just too large
considering where we are at in a macroeconomic environment.
Mr. STAUBER. Yeah. And I would say, too, we are hearing, in
this Committee we are hearing small business men and women come
before us all the time and talk about the regulations. It is
stifling the growth for their company and we can change that
with a different administration. I yield back.
Chairman WILLIAMS. I now recognize Representative McGarvey
from the great state of Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman. I appreciate
everybody being here today, and particularly talking about an
issue that obviously this Committee cares about a lot, which is
access to capital for our small business owners.
One thing we have not hit a lot on today which I want to
touch on is also the lack of access and the disparity in access
to capital for minority and women-owned small businesses in
this country. The data demonstrates this gap without question.
I can also tell you from going around my district in
Louisville, Kentucky, and talking to many successful
entrepreneurs that women-owned businesses, that Black-owned
businesses, other minority small businesses, it confirms it.
They have trouble getting access to the capital they need to
keep their businesses going and growing.
So I am glad to have that opportunity to discuss some of
the SBA's critical programs. Some of their successful
initiatives even, like 7(a), like 504, like the Community
Advantage programs, as well as get into the Fed's Basel III
proposal.
So you know, Mr. O'Leary said something; he does not see
enough legislation and things talking about getting money to
small businesses. I just want to put in a plug for a bill I
have introduced that would create a position within the SBA
that specifically is targeted toward getting money to small
businesses, particularly our minority-owned small businesses
because we do need to make sure that capital is flowing and we
need to be intentional in our policy decisions about it.
Mr. Sands, your institution, 60 percent of your loans are
with minority and women-owned borrowers. So I know that
Lendistry would not be directly affected by the Basel proposal
but I have heard concerns at home that changes to capital
requirements could change the relationship between the banks
targeted by the rules and the smaller financial institutions
they do business with and invest in. Do you foresee your
relationship with the larger banks or the relationships of your
peers at community banks and MDIs changing as a result of the
Basel proposal, and are you concerned that large banks will
reorient away from institutions like yours and partner with
CDFIs less often?
Mr. SANDS. Yeah. I mean, one of the reasons why I mentioned
that maybe we should postpone it is because I do think that
there should be a step back in saying how can we leverage rules
like CRA reform and other rules so that we can make sure that
the CDFIs and small businesses are not necessarily affected.
But there is always the potential that the larger institutions
will stop lending to us and as a result of obviously the ratio,
the financial ratios they will have to succumb to. Most of them
are extremely prudent, and so therefore, whatever the rule
passes they are going to try to be even more efficient in terms
of that.
Mr. MCGARVEY. I guess part of what the Basel proposal is is
assigning a higher risk weight to the small or medium
businesses that are not publicly traded than they would to a
publicly traded one. What do you think? Do you think that the
small businesses are more risky than the larger, more publicly
traded ones when you are talking about providing capital from a
lending institution?
Mr. SANDS. No. I think that the answer is that as long as
we leverage data and we look at the information that is within
those loans, there is a perceived risk out there. But
leveraging that data using the credit enhancements of SBA,
SSBCI, et cetera, we have been able to prove that that risk is
not actually a reality.
Mr. MCGARVEY. So you do not think this would put an
unnecessary burden on private businesses trying to access
capital?
Mr. SANDS. I think there is always the potential that it
does. Depending on how the banks react, they are going to swing
the pendulum completely to the right and they are going to be
over conservative. I do not necessarily think that there is
$150 billion in terms of additional regulation. I think what we
are using extremes here. I think banks have an opportunity to
be more efficient. I think that they have an opportunity to
raise equity appropriately and they have an opportunity to make
sure that they protect all of our depositors which is the U.S.
citizen.
Mr. MCGARVEY. The last question I will go to Mr. Holtz-
Eakin. You have argued that increased capital requirements
result in either, (1) the banks making fewer loans to smaller
businesses, or (2) that the loans they do make become more
expensive. Obviously, something we are concerned about as a
Small Business Committee.
Mr. HOLTZ-EAKIN. Right.
Mr. MCGARVEY. Last spring in this Committee, we heard from
a professor at NYU, Kathryn Judge, that higher capital
requirements actually lead to more lending. When a bank has
more capital it lends more. This is borne out in the data when
you look at the data between the years 2013 and 2019 after
Dodd-Frank. Two economists made the same point last week I saw
in the Washington Post. So this is not a gotcha question. It is
a sincere question. Why do you think that information is wrong?
And is that a correlation or is it more causal?
Mr. HOLTZ-EAKIN. I think it is a correlation. And if you
compare 2013 and 2019, you are comparing the entire economic
and financial environment in 2013 with 2019. A lot of things
going on there. My statement is about hold everything else
constant, change Basel III in isolation. What happens if you do
not change anything else to generate better lending
opportunities and you just make it more expensive? The banks
are either going to cut down on their risk or they are going to
raise their return. And so they will cut people off or they
will charge more.
Mr. MCGARVEY. Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Now I recognize Representative Meuser
from the great state of Pennsylvania for 5 minutes.
Mr. MEUSER. Thank you, Mr. Chairman. Thank you to all our
witness. This is an excellent exchange. We really appreciate
it.
So I spent over 20 years helping grow a small business into
a large business and that is why I am very happy to be on this
Committee so we can advocate as well as, in fact, lobby for
small businesses to the best of our abilities. From taxes,
regulations, inflation, workforce shortages, what occurred with
COVID in many states, shutdowns, access to capital, all
challenges far more for small businesses as I think we all
agree than for the larger businesses. And with some of these
new ideas of restrictions on access to capital we have data
that shows only 20 percent of small businesses feel they have
adequate access to capital that does not keep them from being
able to sleep at night. And yet, we have this Basel III
proposal that clearly we are talking about.
You know, the United States very simply has been a place,
the most competitive place to grow a business. We are a country
of entrepreneurs . That is what grew our country. In fact, 45
percent larger economic growth from 1945 to 2000 than the EU
because we are an entrepreneurial country. But since 2000, it
has been equivalent to the EU because of largely regulations
and added taxes and such.
So Mr. O'Leary, I want to bring up, you brought up the
Payroll Protection idea.
Mr. Chairman, for the record, Representative Luetkemeyer
and I wrote a letter to FDIC Chair Gruenberg on this exactly,
the TAG program, which would raise the Payroll Protection up to
a million dollars from the 250. So I want to let you know we
are working on that, and actually, Mr. Luetkemeyer has a billon
that as well that we will pursue if we cannot get the FDIC to
strongly consider it.
But let's talk about Basel III right now, Mr. O'Leary. From
Brian Moynihan to Jamie Dimon, all big names but certainly to
Ms. Bommarito and most small businesses, and everyone here on
the panel feel that the Basel III will restrict. And clearly,
when 20 to 30 percent of the large banks' reserves need to be
increased, businesses are going to go to smaller banks,
community banks. They will have more customers, more requests
for loans, but that will limit the loans to small businesses.
It is not so much the community banks are going to be hurt by
it. It is the small businesses that will be hurt by it. So, Mr.
O'Leary, if you would expand upon that.
Mr. O'LEARY. Yeah. I think everybody has an opinion about
this. Mine is let's look at the loan book itself. If Basel III
was implemented as it stands, unchanged, it would shrink loan
books in America in my view between 500 billion to 800 billion
in the first year. But that is not the worst part of this bill
or this idea or this policy. It is the competition between
money centers. So let's do a use case. Right now every state
wants its own AI data center. Those projects are $1.2 billion.
And you have to go get capital for that. And after the
Ukrainian War everybody figured out, wait a second, where is my
data? Well, let's make it domestic. Let's make sure we know
where it is and it is protected. So those projects are popping
up all over the states and all over the world.
Now, if you have to fund 1.2 billion, you have to go to a
money center bank to get some portion of that in debt and then
look to the markets for equity. If we implemented this, we
would be less competitive than what is going on in Abu Dhabi or
in Zurich or in London. Why would we do that to ourselves? Why
not look at their regulation and say what is the level playing
field here to make sure that it is competition at its best? The
American banking system with all of its volatility has proven
over 200 years the economy that we have today, the envy of the
whole world. Why would we ever put ourselves in a situation
where we are less competitive than a bank in Abu Dhabi? Who
would do that? Why would you do that? Does that even make
sense? Is that even American? That is my question.
Mr. MEUSER. Sure. Okay. Terrific.
Quickly on taxes, the Tax Cut and Jobs Act, R&D tax credit,
bonus depreciation, small business tax cut, all will be phased
out frankly if we do not work that through and frankly have a
new administration in order to assure that we remain
competitive. How much of a hindrance would it be on small
businesses if those tax----
Mr. O'LEARY. Well, it is a horrible time to do that because
obviously the stress in the system we all have been discussing
for the last hour is showing up and manifesting itself mostly
in community and regional banks where the loan books are very
tight and there is a lot of liquidity. You are just taking away
more tools, survival tools from a small business. They need
every tool they can get and they need to be recognized in new
policy every time it is written. I say 60 cents out of every
dollar always goes to small business and that has never
happened here. Maybe we should start thinking about that.
Mr. MEUSER. Thanks.
Mr. Chairman, just quickly, Mr. Holtz-Eakin wrote an essay
on Basel III----
Chairman WILLIAMS. The gentleman's time is up.
Mr. MEUSER. I yield back.
Chairman WILLIAMS. He yields back.
I now recognize Representative Landsman from the great
state of Ohio for 5 minutes.
Mr. LANDSMAN. Thank you, Mr. Chair. And thank you for being
here with us, all four of you.
I want to start with Mr. O'Leary and Mr. Sands. Mr.
O'Leary, you talked about a small business council. And I am
hoping that you might say a few words about it. What I took
from your comments was we are investing all of these dollars
across multiple initiatives and in having a small business
council, some infrastructure with leadership mostly from the
small business world I suspect and lending partners would be
there to ensure that the policies, the investments are flowing
to small businesses as well as larger businesses. And, you
know, minority-owned businesses, too. Can you just say a word
or two about that?
And Mr. Sands talked about a taskforce, too. I am curious
about your thoughts on how that could happen and advice to us
on building that into our work but also the administration's
work.
Mr. O'LEARY. Well, first, the work at hand on existing act
is to find ways to interpret them so some of that capital can
flow to small business. Now, they do not have any
representation up here in my view.
Mr. LANDSMAN. Yeah.
Mr. O'LEARY. And they do not have the millions that you
require each year to hire advisors and lobbyists. So this is
something that I am very fortunate from my portfolio I can
afford to hire these people and I work very hard on The Hill to
get my companies their fair share if you want to call it that.
But what about the other millions of small businesses? That is
number one.
And I am very fortunate this afternoon I will be meeting
with the Secretary of Commerce to go specifically over the
CHIPS and Science Acts. I have got a bunch of analysts behind
me here coming with me. Show us where the 7 to 9 billion you
claim is available in that act for small business. I will find
a way to get it to small business. If it is there I will do it.
I would like to get the same support in the IRA and
anything to do with infrastructure. I am willing to invest in
that. But this idea of having a seat at the table on new policy
that this would not ever happen again that is the
infrastructure I am asking all of you to consider. That the
next time you write an act put me in the room.
Mr. LANDSMAN. Yeah. Thank you for----
Mr. O'LEARY. Or somebody like me.
Mr. LANDSMAN. Yeah. Thank you for that.
Mr. Sands, any additional comment? It seems like you are on
a similar trajectory.
Mr. SANDS. Yeah. I will just give you a real world example.
SSBCI is for credit enhancements, money that went to states.
Mr. LANDSMAN. Yeah.
Mr. SANDS. Several of the states are now listening to the
small business and lending community and saying maybe instead
of just a credit enhancement we will do a loan participation.
Mr. LANDSMAN. Yeah.
Mr. SANDS. The net effect is a blended rate that is taking
rates down to borrowers. We need some kind of current thinking
as we think about things like Basel and other things about how
we are going to actually implement this and hedge against
obviously inflationary pressures.
Mr. LANDSMAN. I think you are both getting at something
that I would suspect would have bipartisan support from this
Committee and hopefully something that emerges from this
conversation, that building that infrastructure with you all.
And I cannot imagine that there is going to be much
disagreement up here. And so hopefully we can come together and
work on this with all of you and others.
The same I think is true for the federal licensing
suggestion, that there has got to be more because that does cut
through some of the state regulatory issues and creates a
universal process. So I would love to work on that with my
colleagues.
Ms. Bommarito, you have participated, as you mentioned, in
the 10,000 Small Businesses work. We have a program in
Cincinnati, at Cincinnati State. I participated. The folks who
graduated have been really successful and I have gotten to
spend a lot of time with them.
Advice. I am particularly interested in this sort of
infrastructure, building out this infrastructure where small
businesses are at the table. Based on your experience, what
would you want to see?
Ms. BOMMARITO. Thank you for that question.
First, I have to say the Small Business Administration is
really important and I am really thankful. But having access to
the systems and being able to use the services and products can
be challenging. Please bring us in and let us help be part of
the solution and take our ideas as an innovation center. We
will help and we can help everyone make it a better and more
prosperous environment for us as small businesses truly.
Mr. LANDSMAN. Thank you. And I yield back.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Mann from the great state of
Kansas for 5 minutes.
Mr. MANN. Thank you, Mr. Chairman. And thank you all for
being here today.
I represent the Big 1st District of Kansas which is 60
primarily rural counties in the western and central parts of
Kansas. My district is the number one beef producing district,
the number one wheat producing district, and the number one
milo producing district in the whole country. We have 60,000
farms, ranches, feedyards, and other small businesses mostly in
the agriculture space.
The folks in my district know all too well that their
livelihoods often depend on forces outside of their control
which are droughts, floods, geopolitical advancing conflicts
can directly impact the markets that impact them. That is why
for decades, small business end users like farmers and ranchers
have used derivatives to hedge against volatility. Hedging
common risks takes volatility out of the market for them. It
also helps them manage interest rate fluctuations and input
cost increases that are vital for them to maintain their
business.
Unfortunately, the new bank capital requirements from the
Federal Reserve's Basel III Endgame--and by the way, it has
been called Basel, Basel, Basel. It seems like it is all bad,
Mr. Chairman, for the district, for the small businesses in my
district. But the Endgame proposal threatens access to critical
risk management tools for the Ag industry and the small
businesses in my district. These sweeping proposals will make
it costlier for banks to centrally clear derivatives, leaving
commodity producers with higher prices and less ability to
hedge these risks. These tools allow Ag producers more
predictability in their day-to-day operations, ultimately
showing up in prices we all pay at the grocery store. Simply
put, when banks face new capital hikes, farmers, ranchers, and
our small agribusinesses pay more to hedge that risk.
My first question would be for you, Mr. Holtz-Eakin. It
appears the federal regulators have done minimal economic
analysis on the downstream effects that these requirements will
have on our agriculture end users that are far outside of the
major urban financial centers, especially small businesses like
grain elevators and family farms. How can we better ensure the
federal regulators account for the interests of all of our
American communities, our rural Ag producers included?
Mr. HOLTZ-EAKIN. Well, first I will just note that there is
a bipartisan letter from Members of Congress to the regulators
about this issue of derivatives hedging which Mr. Meuser
signed. And I do not know if you signed. I recommend that
letter to you. It sort of spells out the problem very clearly.
The second thing I would say is I am not a lawyer so my
understanding of the Regulatory Flexibility Act is that it was
passed by Congress to make sure that all the regulators were
cognizant of the direct and indirect costs they placed on small
businesses. And it seems that with great regularity nobody pays
attention to the direct and indirect costs that people place on
small businesses. It has happened in both administrations and
both parties for a long time.
I would suggest you take a close look at the Regulatory
Flexibility Act and see where it can be tightened up to make
sure that that analysis actually gets done and that failure to
do it makes the rule nonviable. And that does not seem to be
the case right now.
Mr. MANN. I agree.
Mr. Chairman, I appreciate you often highlight on this
Committee, you know, our small businesses are also our farmers
and ranchers who feed all of us but are often left out of the
discussions and I believe are left out of the regulators when
they think about these rules and how they will be impacted.
Second question will be for you, Mr. O'Leary. What are the
biggest things you think the federal government ought to do to
support our businesses and our rural smaller communities across
this country?
Mr. O'LEARY. It is to focus on the liquidity right now at
regional community banks particularly around payroll. That
Wednesday night is crucial. So if you think about what they
draw down from the banks and have for 100 years plus is they
need capital for plant and equipment, that is longer term
loans. They need to factor their receivables. If you are
selling widgets to a big box retailer and they are paying you
in 90 days, you need that cash in 30. And obviously, payroll.
And so immediately I think the 4,000 banks will probably
consolidate down to 3,000 or something in the next 5 years.
During that consolidation period there is going to be a lot of
instability in the bank that is being merged or acquired or
whatever. Right now the way the rules are it is cheaper to let
a bank fail right now because the government bails out the
bank. Then you go buy the assets. That is kind of nuts. That
should be fixed. Let the market be the market. But there is
going to be a consolidation. And I think supporting payroll
during that time would be number one. And just this regulation
right now being contemplated, they are in gridlock. They do not
know what the liquidity requirements are going to be so they do
not loan anything. I mean, it is pretty bad. I am glad you are
having these hearings. That is the right question. But this has
got to be scrutinized at the regional level now. The big guys
are having no problems at all. Plus, you are about to give them
another $2 trillion because there is none of it for small guys.
I bring that up one more time with feeling. Thank you.
Mr. MANN. Thank you. With that I yield back the balance of
my time which I do not have any more of. So thank you, Mr.
Chairman. I appreciate it.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Chu from the great state of
California for 5 minutes.
Ms. CHU. Mr. Sands, thank you for being here and for
highlighting in your testimony the persistent gaps in access to
capital faced by underserved small businesses.
Since 2011, the Community Advantage program has been very
successful in closing the gap in terms of being able to lend to
underserved communities and has been far more successful than
the SBA's traditional 7(a) loan program in that regard and has
been successful in making loans. Just last year made 791 loans
valued at $140 million. And that is why I have worked for years
to make the program permanent. I urge my Republican colleagues
on this Committee to join me as I work to introduce legislation
to make this proven program permanent once and for all.
I understand that Lendistry has participated in the
Community Advantage program in the past. Can you talk about
your experience as a Community Advantage lender and how
participating in the program allowed Lendistry to better reach
underserved small businesses? If Congress makes the program
permanent, what impact would that have on mission lenders'
ability to continue meeting underserved businesses' needs in
closing the gap and capital access?
Mr. SANDS. Thank you for the question.
So we leveraged Community Advantage, one, to be, as you
mentioned, to be able to lend to underserved communities. It
allowed us to have a program, quite frankly, that offered us a
couple things. One, the ability to scale as we build our own
internal infrastructure. Two, it gave us the ability to have
strong risk management at leveraging government programs to get
there. And then three, there was liquidity that could be
created in the SBA secondary market. Community Advantage should
be permanent. I would also encourage us to make sure that we do
not try to trade operational efficiency for permanency.
Ms. CHU. Okay. Well, I would like to ask about the
necessity for CFPB's section 1071 rule which requires financial
institutions to collect demographic information on those
applying for small business loans. There are significant gaps
in access to capital. The gaps were made particularly clear
during the Paycheck Protection program. For example, in 2021,
there was a shocking L.A. Times report showing that minority
communities in the L.A. area received far fewer PP loans than
White majority communities despite Congress's clear intent that
PPP should prioritize the underserved. Compounding that issue
was the lack of data in the program. Three-quarters of the PPP
loans issued in 2020 included no demographic information
because the initial PPP application did not ask for that. And
in fact, because of that lack of data, the L.A. Times had to
cross reference census track data to reach their conclusions. I
believe that what happened here is why we need the demographic
data transparency in small business lending that CSBB section
1071 rule provides.
So Mr. Sands, can you speak to the lessons of the PPP and
why data transparency like the kind required in section 1071 is
needed to both understand small business lending and the
disparities?
Mr. SANDS. Sure. So first of all, we use data primarily for
three things. One, it is to market and understand how we should
market and where we should market to help underserved
communities. Two, it is to decide what is the appropriate risk
management that we should be taking. Even though an SBA loan
might offer up to 75 percent that may or may not be the
appropriate amount. And then the third thing is we use it
obviously as a tool in terms of being able to, again, disrupt a
perceived risk in terms of lending to small businesses.
PPP was very interesting and the fact that it showed that
banks actually can provide the data, it does need to be in a
structured environment, and we were able to actually release
data on a weekly basis coming out of SBA's office in terms of
who the lending went to.
The other thing I will mention to this body is there is
something called the Corporate Transparency Act in which we are
trying to make sure that we understand who the small businesses
are so that we do not have issues like, obviously, financing of
terrorism. If you were to take what happened in PPP and you
take the Corporate Transparency Act, those two things could be
combined to actually execute on 1971 which does need to be
enacted.
Ms. CHU. And I want to ask you a particularly important
question about the effort needed to comply with rule 1071. We
have heard from some of the rule's opponents that financial
institutions do not have the resources to comply with the rule.
But I understand you are a CDFI with a small compliance staff
and that you were able to collect this data. Can you tell us
about your experience with it?
Mr. SANDS. Yeah. So first of all, as a former banker,
whenever you open a bank account they collect the data already.
So the data is already there. Second, I will say as an
institution that did 200,000 PPP loans, it is not as hard as it
might seem. Now, there has to be a focus on actually delivering
the results and making the data available. But it is possible.
Ms. CHU. Thank you.
Mr. SANDS. Thank you.
Chairman WILLIAMS. I now recognize Representative Ellzey
from the great state of Texas for 5 minutes.
Mr. ELLZEY. Thank you, Mr. Chairman. Thank you all for
being here.
This is a fascinating hearing. And Chairman, thank you for
doing this. As you all well know, he is a car dealer and a very
good one from the Dallas-Fort Worth area. He knows about
business so it is extremely important that we are holding these
hearings.
I think that the name Basel III Endgameis exactly the right
description of this, although their marketing might want to go
back and take a look at that. There is no regulation that this
administration will not find overseas that harms American
businesses and adopt it. That is the bottom line.
Much like Tracey, I am from a very rural district and I
come from a community banking family. The big guys can do
anything they want and get bailed out. And then the hammer of
the government comes in and treats everybody like they are the
same size nail and they hammer the same regulations into
FirstBank Southwest of Amarillo, Community National Bank of
Waxahachie as if they are the big boys. When they do these
regulations they harm people like Ms. Bommarito with her family
business. And then it sends them to somebody like Mr. O'Leary
who has made a great business and I am so glad you are here to
speak the truth the way you do. It is very enlightening, Mr.
O'Leary. But you do not want to send your business or sell a
part of your heart and soul, Ms. Bommarito, to somebody like
Mr. O'Leary. You want to access that capital in a much better
way because you are giving away, you know, you are going to
sell him your leg. You no longer have access to that leg with
your business. And he might let it die. He said it. He said it.
They have to decide if they are going to let you die or not. If
you have access to capital in a much better way you do not have
to worry about that because that is your business.
Now, there is a market for that and I am not trying to
disparage the VC community. However, small businesses, 60
percent of American business are like yours, an entrepreneurial
spirit that you named after your grandmother. You do not want
to go to VC. You want to have access to this capital that folks
like us up here who write these laws, most of the folks who
write the laws do not own a business and have never run one.
Government jobs exist to stay in business. They do not do
that by throttling back on regulations. They have to justify
their existence with more regulation.
So I am willing to bet that the cost of your bars has
probably gone up because of the cost of production because you
have to buy pecans from farmers who are having to get the
nitrogen from Ukraine. So anybody who says that a war in
Ukraine does not have a strategic impact on this country is
wrong.
So with the remainder of my 2-1/2 minutes though, because
as you said earlier, Mr. O'Leary, why would we do this to
ourselves, I am going to yield the next 2 minutes and 24
seconds to you to finish that thought about Abu Dhabi.
Mr. O'LEARY. Yeah. There is a competition in the world
today for capital. And it does not have a nationality. It looks
for the path of least resistance and it goes to the place of
greatest safety.
The unique situation of America is if you have a project,
and I referenced this earlier, like a data center which pencils
out at 11 to 15 percent return for 20 years, where are you
going to put that, in Ukraine? No. You are going to put it
somewhere in the United States where it is safe. If you can get
the permits and the regulatory environment is good and the
state taxes are competitive and you can get the customer, like
an Amazon or a Microsoft or the IRS or a government agency,
these are huge projects. And normally, you would go to the
domestic money center bank to say I have got a 1.2 billion
project here penciling out at 11 to 15. I have got lots of
interest in it. But I need a banking partner. Well, you stick
this Basel thing in here, we are not going to be talking to New
York. We are going to talking to Abu Dhabi. That is what is
going to happen. Why would you? I mean, think about that. Why
do more people not think about that? You want everybody to say
are we in a competitive football game here? That is what we
need. Every single rule in that telephone book has to be the
same rule everybody else is playing with because we are talking
about trillions of dollars here looking for returns. It has got
to be the same playbook.
And that is what regulators' job is to do. To make sure
that we do not put a ball and chain on an American money center
banks or businesses large or small. It is that simple. That is
what they really should be focusing on. Not paragraph 86(b) and
one line. As an aggregate, does this policy make us less
competitive, in addition to the fact that we are going to lose
500, 800 billion of loans. This is horrible policy. It is
horrible. There is nothing good about it.
Mr. ELLZEY. Mr. Chairman, I yield.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Alford from the great state
of Missouri.
Mr. ALFORD. Thank you, Chairman Williams, and Ranking
Member Velazquez, for holding this. This is a very important
hearing that we are having today, as is each one of these
hearings we have before the Small Business Committee because it
is really dealing with the fabric of America. And I am so glad
you are here. Thank you for coming here today.
As a previous small business owner, I know just how
important capital is. Not just to start a business but to
maintain it. I also understand that access to capital can be a
challenge, especially in districts like mine. In some parts of
our district it is a banking desert if you will.
Today, businesses are already struggling under rampant
inflation, ongoing supply chain issues, workforce shortages,
and burdensome regulations. Basel III Endgame proposal would
add additional pain to our small businesses by shrinking their
access to capital. As we have heard today, it would force banks
to increase the amount of capital that they hold by an
estimated 20 percent on average. This proposal will hurt banks.
It will force banks like the Community Bank of Raymore where I
bank to keep more money on the sidelines, shrinking capital
costs for our small businesses which are most vulnerable. These
increased costs would force banks to either lend to fewer
customers or to increase the cost of lending to businesses at a
time when small businesses need this capital, and more
importantly, as was pointed out here, they need the
relationship with the community bankers.
However, the Biden administration is more focused on
falling into line with international regulatory guidelines
rather than protecting American small businesses.
Mr. Douglas Holtz-Eakin, according to a study done by your
colleague, Dan Goldbeck, there are currently an estimate $616
billion--$616 billion in total cost of this administration's
365 proposed rules. Does the $616 billion figure include
indirect costs from regulations?
Mr. HOLTZ-EAKIN. No. Those are simply the direct costs as
measured by the circular and the OIRA at the Office of Energy
and Budget.
Mr. ALFORD. Anyway to estimate, guestimate, give us your
best figure of what those indirect costs might be.
Mr. HOLTZ-EAKIN. I will be happy to get a number back to
you, a heroic estimate of this. But I will just note that in my
written testimony I catalogued some of the studies that have
been done about the impact of these regulatory costs on the
growth environment, on the growth in the economy. That is the
indirect cost that matters the most. The bottom line and the
ability of firms to expand. And the reason I am so concerned it
at this moment is that to say you do not have access to capital
is you are constrained by your cashflow. And so certainly,
access to capital is a direct solution to that. But if you are
eating up more of your cashflow complying with regulations you
made the problem worse. If you are eating up more of your
cashflow to pay taxes because expensing is gone. You are now
depreciating capital or R&D, you made the problem worse. In
every way the environment is stacked against being able to
suvive on your cashflow.
And so I think the Committee certainly should be looking at
the Basel final rule but it needs to look at the environment in
its entirety.
Mr. ALFORD. Mr. O'Leary, in your remarks you mentioned that
large government programs like the Inflation Reduction Act and
CHIPS Act are written specifically for large companies. How can
Congress better support small businesses which employ the
majority of Americans?
Mr. O'LEARY. Yeah, 60 percent. So right now given that
those are already passed and they are effectively law, it is
helping those of us who work for small business, help us
interpret these acts in a way where we can access them because
what my role is in my portfolio company and there are many
people like me, is we have the resources to hire the
professionals, the lawyers, the accountants, and the lobbyists
even, if we could figure out how to interpret it so that we
could make these applications and guide them through the
process. I am working hard at that now. I am spending more time
in Washington than I ever have trying to figure out CHIPS and
Science, specifically, and IRA because I have, myself, a
database of 80,000 small businesses. They rely on me to come
here and find out what is going on. Then I tell them. And we
are very fortunate to do this. And then for those that can
apply, we will manage that process for them. We hire the
accountants and the lawyers. We do all that. And that has
become a huge business. And for all of the criticism of PPP, it
is a blunt instrument, but it saved so many companies. So even
if only 70 percent of it was used wisely, it really worked. The
same for the ERC program which is going to end probably next
week. But that was used widely. And I understand the criticism
and everything but it did save businesses. So now that those
are gone, give me something else to work with is what I am
asking.
Mr. ALFORD. Thank you, sir. We are out of time.
Mr. O'LEARY. Yeah.
Mr. ALFORD. I yield back, Mr. Chair.
Chairman WILLIAMS. The gentleman yields.
I now recognize Representative Gluesenkamp-Perez from
Washington for 5 minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Chairman. And thanks to
our witnesses for being here today.
Ms. Bommarito, I really appreciate you being here to speak
to the Committee as a small business owner. And I appreciated
your testimony about the difficulties you had in accessing
capital to start and expand your business.
So before coming to Congress I ran an auto repair and a
machine shop with my husband. And I have been in your shoes.
You mentioned resorting to borrowing money from friends and
family and dipping into your personal savings to fund business
growth. I, on my bookshelf at home have a book. No in-law wants
to see How to Borrow Money from Friends and Family from Nolo
Press. And so I feel that distinctly. But I will say when you
are able to pay back your family with an appropriate market
level interest rate you are building generational wealth for
you and your community and not shipping it off elsewhere. So I
think there are advantages to your position.
Here on the Small Business Committee we have oversight of
the Small Business Administration. I think it is important for
us to dig into how SBA loan programs, which are meant for
people like you and I, function or more frequently do not
function. And my husband and I actually bought the building our
shop operates out of with a 504 loan. And I have an
undergraduate degree in economics. It took me a year to
navigate and fill out that paperwork. One of the sellers like
had a heart attack during the environmental review. The whole
thing almost collapsed. Like it is burdensome. And then you
think about, you know, I do not know in your case but like if I
were doing the business on my own, right, you are running HR,
you are doing all these things that really limit your capacity
to navigate a bureaucracy. And I understand this has been a
popular line of questioning but I am wondering if you could
talk about what a more nimble program would look like. Like,
what do you see as things we should pull out or not?
Ms. BOMMARITO. Thank you for this question, Congresswoman.
And I feel your pain.
The SBA has their heart in the right place and that is a
fact. And we know that. Being able to access the documentation
and have it make sense and have it work appropriately as you
are filling it out, when you are punching in those letters, it
is challenging and it does not work the way that we are used to
working with technology today. And I would love to see an app
that goes along with this. And I would love it to interface
more seamlessly with the lending institutions. And hold them
somewhat accountable. So there are a lot of things that we
could do and do together. And I would like you to involve us,
the SBA to involve us in this process. We are entrepreneurs .
We have the ideas. We can help make it a more nimble and
interactive system. We want the SBA to be successful and
modernizing by Congress would help.
Ms. GLUESENKAMP PEREZ. Yeah. Absolutely.
You mentioned the need to reauthorize and reform the SBA. I
think we agree that both Congress needs to do a better job of
making entrepreneurs more aware of these resources but also
making the programs more accessible for actual small business
owners whose most valuable resource is your time.
So I am curious, how did you find out about the
availability of 504 loans? I mean, just the universe of
information that is available to people in your capacity. Like,
how do we enable more small businesses like us to access and
hear about them? Because that is the first step.
Ms. BOMMARITO. That is a great question. A variety of ways.
You know, the Goldman Sachs 10,000 Small Business program
brings people in together to speak to this. Local lending
institutions would come and visit me. Our local government came
and shared what lenders were highlighting SBA loans. So I do
feel like in general the business community and government
community are aware and try to make it accessible. I just think
it is a little wonky as we are going through the process.
Ms. GLUESENKAMP PEREZ. Yeah. The access information is
really concerning to me. Right? If you do not know about the
program you are not going to access it. And I think that basic
informational hurdle is immense.
I have also seen a lot of difficult like I remember there
would be these meetings at, you know, 11 a.m. on the other side
of town. Right? Like, who can leave your business at 11 a.m. on
a workday to get to this meeting? And so having actual small
business owners at the table when these structural decisions
are made I think is a critical facet you were pointing to.
And so thank you to all of our witnesses so much for
spending our time here today. And I yield back.
Chairman WILLIAMS. The gentlelady yields.
I now recognize Representative Molinaro from New York for 5
minutes.
Mr. MOLINARO. Thank you, Mr. Chairman. And thank you, Ms.
Bommarito, for giving face to the challenges that small
businesses have interfacing with not only federal regulators
and agencies but state and local.
And Mr. O'Leary, I want to get to you in a moment about the
great state of New York, or the once great state of New York.
But nevertheless, in rural communities like the ones I
represent in Upstate New York, we certainly recognize the need
to access capital is even more pronounced. Add those challenges
to already a local economy squeezed by inflation and the access
to workforce and supply chain issues and communities like ours
continue to struggle. There are as we have all acknowledged a
slew of new laws and regulations coming into place that we know
will impact community banks and smaller businesses, including
Basel III, some of the new SBA lending rules, and new CRA
rules, among others. Even Chair Jerome Powell acknowledged that
raising capital requirements also increase the cost of and
reduces access to credit. We acknowledge these things. My local
banks, community banks, are struggling to keep faith with their
mission, serving small businesses and investing in their
communities.
So Mr. Holtz-Eakin, I am going to start with you and just,
if you would, reinforce to us or for us, obviously, how to
maintain essential credit flow to small businesses. What would
you reinforce? Where would we begin in the rescinding of or
reorganization of specific regulation for small business, small
banks to access and make those capital investments?
Mr. HOLTZ-EAKIN. Well, I mean, certainly the issue of the
moment is the Basel III proposal. And they have a chance to
finalize the rule in a very different form. And one hopes that
the regulators have taken the public comments on it to heart
and we see a very different----
Mr. MOLINARO. So emphasize for the few people from Upstate
New York who are watching me right now, I want them to hear
those very specific reforms.
Mr. HOLTZ-EAKIN. They would not raise the overall level of
capital as dramatically as they propose and would not do it
right now. Remember, there are all sorts of other things
impinging. Access to capital, whether it is the restrictive
monetary policy, the slow growth in the economy, this is going
to be a tough environment to begin with. Has already been
because we have seen the end of the easy money on the credit
side. So financial conditions have tightened considerably. This
would add to that. So defer it. Make it more sensible directly
for the banks involved where you add new charges that are
legitimate and documented, reduce others that are unnecessary.
I think they can do that. And do not extend it to the regional
banks. I do not understand that. There is no need to. And your
folks would be much more dramatically impacted by that. So that
is the most important thing.
Then more generally, look at the regulatory environment and
recognize that that is something that disproportionately
impacts small businesses. And this regulatory environment is
unprecedently expensive at a time when expenses are a big
issue.
Mr. MOLINARO. I appreciate that.
Mr. O'Leary, I just, one, want to thank you not only for
participating today but emphasizing in New York State the
challenges that we have. We lead the nation in outmigration.
More people leaving the state of New York than any other state
in the nation. We shoulder the highest burden of taxation of
any people in the country. And because of it we see the
hollowing out of our communities. We could spend certainly more
than 2 minutes on that. And I thank you for highlighting those
challenges.
Your testimony today touches on the collapse of Silicon
Valley and Signature Banks and the touched conditions that
regional banks faced with rapidly rising interest rates. Of
course, we recognize the Fed messaging a decrease in interest
rates over the next year. What do you believe is necessary for
the long-term stability of our banking and venture capital
sectors? And quite simply, what behaviors from before need to
be corrected moving forward?
Mr. O'LEARY. Those three cases studies you pointed out to
in my personal opinion are examples of idiot management. So
they are unique in that respect. And they deserve to be dead.
That is how our system works. We get rid of bad managers.
But right now because of them it has tripped off a whole
scrutiny at the regional bank level of the regulatory
environment which has cascaded all the way up to Basel III. So
we are going to make these regional banks very hard to operate
profitably if this continues. That would be the first thing I
would want to fix is try to say, look, let's make sure for the
next 36 months that these banks are not in a situation of
uncertainty. Because that is what they are right now. The
reason you do not loan to this wonderful bakery is they do not
have the certainty to know what the rules are going to be. So
that has got to get cleared up. These are within our control.
And so we should implement that immediately.
I think Basel III is incredibly bad policy and the best
thing to do with bad policy is keep looking at it until
everybody agrees it is bad policy. I would keep looking at it.
It is horrible.
Mr. MOLINARO. I appreciate your subtle and reserved nature.
And with that, Mr. O'Leary, I, Mr. Chairman, yield back.
Chairman WILLIAMS. The gentleman yields.
I now recognize Representative Scholten from Michigan for 5
minutes.
Ms. SCHOLTEN. Thank you, Mr. Chair. Thank you so much to
all of our witnesses for taking the time to be here today. This
is an incredibly important hearing.
Small businesses throughout the country navigated an
economically unpredictable pandemic. And with stabilizing the
economic factors those still operating face a cautiously
optimistic future. My state of Michigan is home to nearly 1
million small businesses who employ nearly half the state. Over
80 percent of our businesses in Michigan are considered small.
Even larger share in my district, Michigan's 3rd Congressional
District. It is not an overstatement to say they truly are the
lifeblood of our economy.
Many of these businesses are owned by women, minorities,
members of the LGBTQ community, veterans who face steep hurdles
in accessing capital. Access to capital is the number one
obstacle that we continue to hear about.
My first question is for Mr. Sands. What data do regulators
use to avoid discriminatory policies? And are the tools missing
that prevent financial regulations from fully accounting for
the range of livelihoods that are impacted by the rulemaking?
Mr. SANDS. Yeah. The answer today is that you do not have
the tools. But if you look back at PPP when you did have the
tools, Congress appropriately, in a bipartisan way reacted and
made it so that more small businesses could get access to
capital.
I would like to also say that SBA just made 40 rule changes
in August. We should actually give ourselves a chance to see if
those rule changes actually work because I think they are going
to provide more access to capital for small businesses
including like the bakery here for Michigan.
Ms. SCHOLTEN. How much time would you anticipate we would
need to see if they worked?
Mr. SANDS. I think you could generally give somewhere
between 12 and 24 months to start to see. If you look at the
numbers, we had our largest lending in terms of SBA to African
Americans, Hispanic Latinos, and women as of September 30,
2023, with Hispanic Latinos and African Americans both
eclipsing $1 billion for the first time in SBA's history. So
the numbers are already headed the right way.
Ms. SCHOLTEN. Thank you.
Keeping on the theme of access to capital, again, number
one issue cited by small businesses as well as hiring talent
and growing revenue, the businesses in my state share these
concerns and these struggles along with others throughout the
country. Despite these well-known challenges, in June of last
year, applications for new businesses started to surge to the
highest levels that we have seen in 2 years. Again, cautiously
optimistic as I mentioned in my opening remarks.
For any of the witnesses or even all of you, what more can
Congress do to equip the next generation of small business
owners and entrepreneurs to take on these issues that we are
facing the 21st Century and get ahead of the challenges of
tomorrow?
Mr. SANDS. I will start. I think the first thing is
obvious, which is that we need to do better marketing of the
programs and products that are out there for small businesses.
It is quite alarming to hear that some of the small businesses
are not finding the programs or they have to go across town or
anything like that in order to get information. We live in a
digital age where Chipotle texts you if you need a burrito. So
we should be able to actually get information out about
programs pretty readily and pretty conveniently.
Ms. SCHOLTEN. I could not agree more.
Mr. HOLTZ-EAKIN. I worry most about the environment in
which they are going to have to operate and would encourage
Congress to put the fiscal house in order. The future is one in
which the federal government will increasingly consume the
capital economy with the deficits that will run. And the
resolution of those deficits is going to put an enormous
uncertainty about the business environment in which they will
operate. You can take all of that off the table by just putting
the fiscal house in order.
Ms. BOMMARITO. And I second what Mr. Sands said. But we are
talking a lot about Basel III and being an obstacle to lending
and capital. It has been historical. That has been one of our
biggest issues. Not adding anything else but also holding the
banks accountable. And there is a lot to be said about everyone
supporting small business and being in our corner. But being
accountable in all ways and being able to share that
information is really important.
Ms. SCHOLTEN. Right.
Mr. O'LEARY. I would say one of the greatest challenges for
any of the work being done here is to communicate it to the
recipients that deserve it. And most small businesses have no
idea that these programs are even available. So if you look at
the private sector how they solve that problem, they have
really gone to social media in a big way. And so to get a
bigger presence, Hi, are you a business in Michigan with 50
employees? We have a program here in the federal government and
this is how you can apply for it. That is a 15-second
commercial. That should be on Facebook, LinkedIn, X,
everything. And REMnant cable. That is how we advertise in the
private sector, and somehow that is not being done federally,
which is a mistake.
Ms. SCHOLTEN. Thank you for your very responsive and
helpful answers. I yield back.
Chairman WILLIAMS. The gentlelady yields.
I now recognize Representative Maloy from Utah for 5
minutes.
Ms. MALOY. Thank you. This has been a great hearing. It has
been really informative, and most of the things that I planned
on asking about have been very thoroughly covered so I am going
to switch gears just a little bit. Hang in here with me.
Utah is a very entrepreneurial state. We have a lot of
small businesses. A lot of people want to start up something of
their own. And we also have a lot of rural and mid-size markets
that struggle to get access to capital. And also to the kind of
resources we have just been talking about. Our universities are
doing a good job. They are working to fill that gap setting up
departments to help small businesses. But I was recently
approached by somebody in Utah about an SBIC style program
within the SBA that they think would be a good model where
larger, more successful businesses can help finance and mentor
new, smaller starting businesses. And I just want to know, I
know this is not what you are expecting, but starting with Mr.
O'Leary and work our way down, do you think there is room in
the SBA for that? And if so, what would this Committee and
Congress need to do to create the sort of regulatory
environment that would be able to make that successful?
Mr. O'LEARY. That would work if you gave a tax incentive to
do that because you are taking valuable time and resources from
a company and going into a mentorship program. What they would
obviously do is find companies they wish to acquire if they
were growing successfully in their sector. So they would
probably be, if you gave a program like that and said, look, it
is a 100 percent write off in the year that you spend it, or
whatever it is you are going to do, I would go look for
companies that I want to buy and I would invest in them and try
and mentor them up to growing and then I would acquire them. I
would use it as a tool to grow. It would work.
Ms. MALOY. Okay. Thank you.
Ms. BOMMARITO. Working within your community and working
collaboratively makes great sense and is very efficient working
with the organizations that we are familiar with. I do not see
a downside to it but there has to be an incentive to make
sense. And I think that it would be a great asset to the
community to be able to do that.
Ms. MALOY. Thank you.
Mr. HOLTZ-EAKIN. Put me in the O'Leary camp. There is
nothing to stop them from doing that now. And so to get them to
do some things that are not yet in their interest you are going
to have to provide some sort of financial incentive and then
you could produce the program.
Ms. MALOY. Okay. Thank you.
Mr. SANDS. I will just give two points of reference. One,
the Goldman Sachs 10,000 Small Business program which we sit as
a moderator on is something that you could use to model it
after. Second, the state of Utah has state small business
credit initiative money and a portion of that has been
allocated toward venture capital. So maybe you can use that as
your leverage to give that incentive that was already
mentioned.
Ms. MALOY. Okay. Thank you. You all answered that a lot
faster than I expected you to so I am going to ask another
question.
I am also hearing that a lot of startups cannot qualify for
loans because they do not have 3 plus years of operational
costs, the existing collateral, or strong personal credit
history. I am going to do the same thing, just run down the
panel. Are those the appropriate standards or do we need to
update those in the business world?
Mr. O'LEARY. They might have been 60 years ago but they are
not today. I mean, that is the problem. A lot of these
regulations were formed in different economies and so they
should be modified. Those are to onerous and too punitive and
they obviously are not working. They have to be changed.
Ms. MALOY. Okay. Thank you.
Ms. BOMMARITO. I second that. But I also wanted to just
share a small business survey.
Goldman Sachs's 10,000 Small Business Voices surveyed our
small businesses. And 78 percent of small businesses are just
concerned about their ability to raise capital and have access
to it. Only 29 percent said that they could afford to take out
a loan. So that is another really important piece which goes to
the point of interest rates. And 85 percent said access to
capital continues. If it tightens it is going to impact growth
of business which I will come back to being able to access it
before your 3 years in business and down the road.
Ms. MALOY. Yes. Thank you.
Mr. HOLTZ-EAKIN. So in the end this is about measuring risk
and the risk associated with the loan. And there is nothing
magic about those metrics of risk assessment. Certainly, things
have changed over time. And Mr. Sands is the business of
finding situations where the risk assessment is wrong and
helping both himself and the customer as a result. So usually
you get locked into old risk assessment metrics because
regulations require them.
Ms. MALOY. Yeah.
Mr. HOLTZ-EAKIN. And the laws require them. And so that is
the flexibility you need. To allow people to use a risk
assessment makes sense on the ground that is appropriate for
that situation.
Mr. SANDS. I would just say there is a mismatch between the
business and the lender. There are community development
financial institutions that do not require that at all.
Ms. MALOY. All right. Thank you.
I yield.
Chairman WILLIAMS. The gentlelady yields.
I now recognize Representative Crane from Arizona for 5
minutes.
Mr. CRANE. Thank you, Mr. Chairman. Thank you all for
showing up today. It is an honor to have Kevin O'Leary, AKA Mr.
Wonderful appear before the Small Business Committee today.
Back in 2014, I took my garage born, Made in the USA
company on Shark Tank with my wife, Jen, who is in the audience
today. I thought I had prepared for everything, for every
question that any Shark might ask about any given topic. One
thing that I did not prepare for was to have Kevin O'Leary make
the first offer to invest in my company, Bottle Breacher. I
guess I did not prepare for it because I believed that Kevin
O'Leary would hate my company and my product. I thought he
might say something like, ``Let's take this behind the barn and
shoot it,'' something that he often says on television. I am
honestly very grateful that he did make the offer. I am even
more happy that Jen and I accepted the offer. We learned
firsthand why he is called Mr. Wonderful. Despite the fact that
he is often portrayed as a complete hammer on television, every
entrepreneur that I know that made a deal with him absolutely
loves him and appreciate him. He works very hard to make sure
his companies are successful, and I know he talked me off many
ledges several times. Thank you, Kevin, for all you do for the
small business owners of this country.
My questions to you, sir, are less about access to capital
but as somebody who I know studies economics. My questions to
you, sir, about the dangers to our small business community and
our national economy alike because of our federal government's
lack of fiscal responsibility.
Mr. O'Leary, are you aware that we have a national debt of
about $34 trillion?
Mr. O'LEARY. Yes, I am. This issue seems to get kicked down
the road one administration after the other regardless of
party.
Mr. CRANE. Yes, sir.
Mr. O'LEARY. And it will come home to roost one day. I do
not know what that day is. But as a percentage of GDP, which I
think is the right way to look at this, it is getting
perilously high to almost post-Second World War. So this is
going to be a concern. And to the extent that you bring this
narrative up, I can see you are one of the people here on The
Hill that cares about this.
Mr. CRANE. Yep.
Mr. O'LEARY. There is not enough of you. That is the
problem.
Mr. CRANE. No, there is not, sir. And I do want to
acknowledge this is a Democrat and Republican issue. I am in
the meetings on our side all the time and there is very little
appetite to quit spending money we do not have.
And I just want to ask you, sir, when this house of cards
collapses, because it is going to collapse. This is not
sustainable. You know it. I know it. And anybody that studied
history knows that no country in the history of the world can
continue to run up deficits and debt like we are. What do you
think happens to small businesses when this finally collapses?
Mr. O'LEARY. It will not be just small businesses. When the
cost of capital gets to the point where more than half of the
government's budget is servicing interest, which is the
disaster scenario you are talking about, it wipes out every
business in America. It does not matter what size it is.
Because if there is no more working capital, basically, you
start taxing people. I mean, there are examples. There is
Britain when it decolonized the world. Their tax rates were 80
percent. They were just trying to fund everything through the
government and it really did not work. The French tried that,
too. That would be a horrible outcome for America, which is the
bastion of capitalism on earth. I am glad we are talking about
it but your job is to get half this place talking about it.
Mr. CRANE. Yeah. Absolutely.
Mr. O'LEARY. It does not matter what party they are in.
Mr. CRANE. No, you are absolutely right.
Mr. Douglas Holtz-Eakin, do you have anything to say on
this, sir?
Mr. HOLTZ-EAKIN. I have been talking about this for 20
years. I was the CBO director beginning in 2003 and there has
been nothing done to change the trajectory which is
fundamentally unsustainable and represents simply a self-
inflicted wound. And the day at which it matters is today. It
is already harming the economic environment in the United
States. Every time you take a dollar from the private sector
and put it into the best government investment you lose rate of
return. So every one of those transfers lowers the standard of
living. And we are doing that right now. It is just a little
bit each year and we do not notice. But if you add it up we are
going to have less growth in the standard of living, more
stagnation, more discontent.
Mr. CRANE. Sir, why do you think nobody up here seems to
care?
Mr. HOLTZ-EAKIN. It is someone else's problem; right? I
have got to get to the next election that is, you know, 9
months away. I am not going to talk about these hard issues. I
am going to let the next guy deal with it. And the result has
been a bipartisan failure for 20 years to stop the increase in
the debt relative to GDP. We have never seen it before where it
did not stabilize in some way. It has just gone up. It is an
unprecedented error and it is a dangerous one.
Mr. CRANE. Thank you, sir.
I yield back, Mr. Chairman.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Van Duyne from Texas for 5
minutes.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman.
When people think of access to capital, they often do not
think of the tax code. But through the Tax Cut and Jobs Act we
were able to allow businesses, especially small businesses, to
keep more of their money and incentivize reinvestment into
their business. And I have spoken with many business owners in
North Texas that have been able to significantly expand the
last few years thanks to provisions of the TCJA.
Last year, my Ways and Means Committee colleagues and I
held field hearings in cities and towns across the country to
hear directly from people and small businesses about the
challenges that they are experiencing. The overwhelming message
that we have heard is that TCJA spurred economic growth and
competitiveness. Unfortunately, these pro-growth provisions
included as part of the TCJA have already expired, including
full and immediate expensing for research and development, full
expensing of investments in new equipment, machinery, and
technology, and business interest deductibility, which makes it
easier for small businesses to access capital.
Extending these tax provisions will empower our job
creators to grow, expand their workforce, and reinvest funds in
their workers rather than using those funds to pad the coffers
of IRS bureaucrats. Without these tax provisions, we are ceding
our competitive advantage to countries like China, which is the
exact opposite of what we saw through TCJA. Restoring these
provisions would uplift American workers, strengthen the U.S.
economy, create American jobs, and help us better compete on
the global stage.
I would once again like to thank the Chairman for holding
this hearing and look forward to future hearings on this
subject later this year, particularly how private equity
provides an alternative to traditional lending avenues and
increases opportunities to access new capital investments.
Mr. Holtz-Eakin, what would happen to capital access for
small businesses if we allowed the 2017 Tax Cuts to expire?
Mr. HOLTZ-EAKIN. I think it would be a dramatic impact on
small businesses, in particular the economy in general.
Ms. VAN DUYNE. Anything more detailed than that?
Mr. HOLTZ-EAKIN. Well, those are pro-growth provisions that
incentivize investments in physical capital, innovation, and
the workforce that put it on a level playing field from a tax
prospective. You can deduct all of them. It is the right thing
to do.
The overall pace of the economy would slow. You are not
going to lend to people whose companies are not growing very
fast, so it is going to restrict it in that way. And as I
mentioned before, the small business community is very cashflow
constrained and these are about being able to invest up front
and maintain your cash flow because you get full deductibility.
It is a crucial part of the small business environment.
Ms. VAN DUYNE. So as we see interest rates and traditional
lending methods become more expensive and harder to attain,
where do you see private equity coming into play?
Mr. HOLTZ-EAKIN. I do not have a particular button I would
push but I have great confidence in the entrepreneurs who are
out there in the financial sector, whether fintechs or private
equities or any other non-bank lender to step in and provide
capital where there is a return. And making sure that the
regulatory environment supports that and does not impede it I
think is the primary objective.
Ms. VAN DUYNE. So do you think the primary objective for
businesses when they are looking in banks, when they are
looking to actually invest should be on the ROI or that should
be on what people look like, where people are located, and how
much money they make?
Mr. HOLTZ-EAKIN. I am a big fan of ROI.
Ms. VAN DUYNE. I appreciate that.
Mr. O'Leary, you have been holding back today and I would
like you to tell us what you really think. I appreciate the
work that you have done with small businesses versus large
businesses. I have been trying to introduce a number of pieces
of legislation that recognize the fact that when we add all
these regulatory burdens on to our small businesses it affects
them in ways unseen in large corporations. When we are talking
about incentives--I know that you were talking about
specifically adding incentives to small businesses--every time
we do that we seem to grow the federal government. Four hundred
seventy-five billion dollars is what we spent in 2022 on
servicing our debt alone. That is expected to go to $1.4
trillion in less than 10 years, by 2032. Every time that we add
in another program we are increasing the size and we are
increasing the scale and increasing the regulatory burden on
small businesses. Have you ever heard a small business say they
want more regulations?
Mr. O'LEARY. No. I never have. Your state, actually, is an
example of what has occurred post-pandemic on the competition
between states because what we all learned as investors was
most companies now, whether they are large or small, only get
40 percent of their staff to work in headquarters. So we
realized right away, and this has been happening very quickly,
we can move it to Texas. We can move it to Florida. We can move
it to North Dakota, West Virginia, Oklahoma, where we never
thought about doing that. And get the benefits of policy, less
regulation, more competitive tax rates, and then employ people
in any other state. I have got people working for me that were
headquartered in Florida but they work in Massachusetts. Why
they choose to do that I have no idea but we are paying our
taxes in Florida because that is where we are HQ'd. Texas was
the main beneficiary of that because they had the benefit of
the tax but also the most progressive and less obstructive
restrictions and regulations. You are the example of what
everybody has to try and copy. I mean, good for you guys. But
my job every day is to deploy capital. I go to the path of
least resistance and one of those states is Texas. So
congratulations.
Ms. VAN DUYNE. So you are saying policy matters?
Mr. O'LEARY. Well, yeah. Are you kidding? You know, you do
not have to loan as much money to small business if you reduce
the regulation. Because that is their cost. You give them
money, then you regulate it back. Like that is kind of nuts.
Just get rid of the regulations. You do not have to loan them
money in the first place.
Ms. VAN DUYNE. I appreciate it very much.
I yield back.
Chairman WILLIAMS. The gentlelady yields back.
We now will be closing out this hearing. We want to thank
the witnesses very, very much for your testimony. It was very,
very interesting and worthwhile, and more than that I think
important for both sides of the aisle to hear how the issues
facing small business, the importance of small businesses, and
the idea that we have got to provide small businesses
everything they need to be competitive, to actualy make a
profit. Because the more profits that a company makes the more
tax revenues actually come in. And so both sides of the ledger
win.
Without objection, Members have 5 legislative days to
submit additional materials and written questions for the
witnesses to the Chair which will be forwarded to the
witnesses. We ask the witnesses to please respond promptly.
If there is no further business, without objection this
Committee hearing is adjourned.
[Whereupon, at 12:07 p.m., the committee was adjourned.]
A P P E N D I X
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