Oversight of the U.S. Small Business Administration and Review of the President's Fiscal Year 2024 Budget Proposal
Summary
The printed record of a March 22, 2023 hearing of the Senate Committee on Small Business and Entrepreneurship, S. Hrg. 118-88, on oversight of the SBA and the President's Fiscal Year 2024 budget proposal, with SBA Administrator Isabella Casillas Guzman as the witness. Chairman Benjamin L. Cardin's opening statement describes his reauthorization bill, including making the Community Advantage Loan Program permanent. Ranking Member Joni Ernst's opening statement cites a suspected $5.4 billion in loans made using stolen Social Security numbers and says $754 billion, or 92 percent of all PPP loans, had been forgiven. She also objects to proposed SBA lending rules and to the budget request for the Community Navigators Program. The appendix lists letters, reports and Guzman's responses to questions for the record.
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[Senate Hearing 118-88]
[From the U.S. Government Publishing Office]
S. Hrg. 118-88
OVERSIGHT OF THE U.S. SMALL BUSINESS ADMINISTRATION AND REVIEW OF THE
PRESIDENT'S FISCAL YEAR 2024 BUDGET PROPOSAL
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
OF THE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MARCH 22, 2023
__________
Printed for the use of the Committee on Small Business and
Entrepreneurship
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
53-224 WASHINGTON : 2024
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED EIGHTEENTH CONGRESS
----------
BENJAMIN L. CARDIN, Maryland, Chairman
JONI ERNST, Iowa, Ranking Member
MARIA CANTWELL, Washington MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho
EDWARD J. MARKEY, Massachusetts RAND PAUL, Kentucky
CORY A. BOOKER, New Jersey TIM SCOTT, South Carolina
CHRISTOPHER A. COONS, Delaware TODD YOUNG, Indiana
MAZIE K. HIRONO, Hawaii JOHN KENNEDY, Louisiana
TAMMY DUCKWORTH, Illinois JOSH HAWLEY, Missouri
JACKY ROSEN, Nevada TED BUDD, North Carolina
JOHN W. HICKENLOOPER, Colorado
Sean Moore, Democratic Staff Director
Meredith West, Republican Staff Director
C O N T E N T S
----------
MARCH 22, 2023
Opening Statements
Page
Benjamin L. Cardin, Chairman, U.S. Senator from Maryland......... 1
Joni Ernst, Ranking Member, U.S. Senator from Iowa............... 3
Witness
The Honorable Isabella Casillas Guzman, Administrator, U.S. Small
Business Administration,....................................... 5
Prepared Statement........................................... 8
Additional Letters/Statements for the Record
Chairman Cardin and Ranking Member Ernst
Letter dated March 6, 2023................................... 32
U.S. Small Business Administration
Response to Letter from Chairman Cardin and Ranking Member
Ernst, dated March 20, 2023................................ 36
U.S. Department of Justice, Civil Rights Division
Report ``The Compelling Interest to Remedy the Effects of
Discrimination in Federal Contracting: A Survey of Recent
Evidence''................................................. 57
Financial Technology Association
Statement dated March 22, 2023............................... 116
Minority Business Development Agency, U.S. Department of Commerce
Report dated February 7, 2022................................ 120
National Association of Federally-Insured Credit Unions
Letter dated March 22, 2023.................................. 141
SCORE
Statement dated April 5, 2023................................ 143
Ultima Services Corporation vs. U.S. Department of Agriculture
Report of Defendant's Expert, dated February 4, 2022,
corrected April 22, 2022................................... 146
Questions for the Record
The Honorable Isabella Casillas Guzman
Responses to questions submitted by Chairman Cardin, Ranking
Member Ernst, Senators Shaheen, Hirono, Hickenlooper, Risch
and Young.................................................. 369
OVERSIGHT OF THE U.S. SMALL BUSINESS ADMINISTRATION AND REVIEW OF THE
PRESIDENT'S FISCAL YEAR 2024 BUDGET PROPOSAL
----------
WEDNESDAY, MARCH 22, 2023
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The committee met, pursuant to notice, at 3:00 p.m., in
Room 428-A, Russell Senate Office Building, Hon. Benjamin
Cardin, Chairman of the Committee, presiding.
Present: Senators Cardin [presiding], Cantwell, Shaheen,
Markey, Booker, Coons, Hirono, Duckworth, Rosen, Hickenlooper,
Ernst, Risch, Young, Hawley, and Budd.
OPENING STATEMENT OF SENATOR CARDIN
Chairman Cardin. The Committee will come to order. I want
to welcome Administrator Guzman to our Committee and thank her
for joining us once again.
It is hard to believe but next Monday will mark the 3 years
to the date that the CARES Act was signed into law. It has
arguably been the hardest time to be a small business owner in
the modern history of our nation. However, it is so encouraging
to sit here today with the sense that we can and will do more
to help small business owners.
I say ``we'' because of the bipartisanship that
characterizes this Committee and because it was Members of
Congress from both sides of the aisle that came together again
and again to provide extraordinary relief that saved hundreds
of thousands of businesses from disappearing.
I do not want to downplay the hardship that the pandemic
has caused for small businesses. Survival over the last 3 years
has not been easy, and even today I continue to hear about the
challenges that the pandemic left in its wake: mountainous
debt, new expectations from customers about safety and risk
prevention, industries and business models completely
transformed.
I also do not want to underplay the severity of the fraud
that has come to light in some of these programs. Those who
take advantage of relief that was meant for deserving small
businesses should be prosecuted to the fullest extent of the
law. I will work with the SBA and the inspector general to
ensure that they have the resources necessary to identify those
who viewed our collective response to tragedy as an opportunity
to steal from the American taxpayer.
We are fortunately, though, to be in a position now when we
cannot only look back and take stock of how the pandemic
changed what it has meant to be a small business but also look
forward and take steps to improve the services and support that
the Federal Government, and the SBA, in particular, provide to
foster and promote small business development.
Today I feel greatly optimistic for our nation's small
businesses and for our Committee. I am delighted to be joined
by our new Ranking Member, Senator Ernst. Senator Ernst and I
share a passion for helping small businesses, and we are
committed to working together to help small businesses. We have
many shared objectives, and I am confident that working
together will yield great results for this Committee.
I am also delighted to be joined by Administrator Guzman
once again to discuss the Administration's proposed budget for
the Small Business Administration. From reading through the
President's budget it becomes clear how much he and
Administrator Guzman care about the success of small
businesses. The Administration's budget proposal reflects its
commitment to harnessing the power of government to lift up
businesses in underserved communities that have historically
been denied access to credit and opportunities to contract with
the Federal Government.
The fact is that the recent explosion we have seen in new
business registrations coming out of the pandemic is being
driven by entrepreneurs in some of our most underserved
communities, with minorities and especially minority women
driving the surge. Applications to open new businesses grew by
37 percent since 2019, and 5.4 million business applications
were filed in 2021, a record high. In 2020 and 2021, 49 percent
of new business launches were led by women, with nearly half in
2020 launched by women of color.
President Biden and Administrator Guzman understand this
and have made supporting minorities, women, and entrepreneurs
across the country, including those in rural America, one of
the highest priorities of this Administration.
I want to commend Administrator Guzman for her commitment
to expanding the reach of the SBA lending programs to
underserved communities. While we may not see eye to eye on
some of the particulars of the Administration's strategy,
including the two ambitious rulemakings unveiled late last
year, I know we share a common goal to help our country's small
businesses.
I want to acknowledge that Senator Ernst and I sent a
letter to the Administrator on March 6th. It requested a great
deal of information. It also expressed some of our concerns
about the rules that were being proposed. On March 20th we
received a reply to that letter. I am going to make that letter
and the reply part of this record, without objection.
Chairman Cardin. I must tell you I was impressed by the
speed and thoroughness of the reply that we received from the
Small Business Administration. It is clear that you are
listening to the comments about the rules that you have
proposed, and you are willing to make adjustments in those
rules in order to deal with the legitimate concerns that have
been raised by the different stakeholders. That is very
encouraging to all of us.
And while we still may have some differences, we do not
differ on what the objective of the mission is, and that is to
open up more lending opportunities, particularly in
traditionally underserved communities, so we thank you for
that.
I must also stress the importance of ensuring that the SBA
is equipped to meet the needs of the historic number of
Americans engaged in entrepreneurship. That is why I introduced
a comprehensive reauthorization bill this past December that
sets out my priorities for the new Congress. I would
reauthorize some of SBA's most important and successful
entrepreneurial development programs, including the Small
Business Development Centers, the SBDC Program, programs for
veterans, business owners, Women's Business Centers, SCORE, and
the remarkably effective State Trade Expansion Program, STEP.
I would also make permanent the Community Advantage Loan
Program, which has shown great success getting capital to
underserved entrepreneurs. Last year I was so glad to see that
the Administration extended this program for 2 years, and
implemented necessary changes such as increasing the maximum
loan size and expanding the number of lenders that participate
in the Community Advantage Program. Now it is up to Congress to
recognize the need to make the program a permanent part of the
SBA lending toolkit.
I might acknowledge that the proposed rule, which tries to
give predictability to Community Advantage lenders moving
forward under the SBLCs, it is not inconsistent for us to make
the Community Advantage Program permanent. That is our
responsibility, and I hope we take advantage of that.
The reauthorization package also contains two initiatives
that are personally very important to me. One, the UPLIFT Act,
which would give the SBA the tools and resources to nurture the
next generation of entrepreneurs by creating a network of
incubators and accelerators on the campuses of our nation's
historically black colleges and universities, minority-serving
institutions, and community colleges. Second, the NEW START
Act, which would connect justice-impacted individuals to
entrepreneurial resources, helping to lower their rate of
unemployment.
I look forward to working with Senator Ernst to advance
these priorities so that we can help more underserved
entrepreneurs than ever before, in Maryland, in Iowa, and
across the country.
Administrator Guzman, thank you for joining us today. I
look forward to hearing your testimony and engaging in the
conversations with this Committee.
And it is now my pleasure to recognize the distinguished
Ranking Member, Senator Ernst.
OPENING STATEMENT OF SENATOR ERNST
Senator Ernst. Thank you very much, Chairman Cardin, and
thank you, Administrator Guzman, for being here today.
In addition to hearing from the SBA Administrator about the
budget request today, the Committee also voted on Mr. Dilawar
Syed's nomination to be the Deputy Administrator of the agency.
A critical commitment I received from Mr. Syed is to prioritize
fraud detection and prevention, which is among the greatest
obstacles facing the SBA.
A primary focus of the agency should be to aid in the
recovery of the more than $100 billion in fraudulent and
improper loans made through the SBA COVID relief programs.
Report after report has been released from the investigative
community indicating tremendous levels of fraud, yet the vast
majority of stolen funds remain unrecovered. These reports
include a suspected $5.4 billion in loans made using stolen
Social Security numbers, and $1.3 billion of Economic Injury
Disaster Loans to applicants with foreign IP addresses. Current
recoveries by the SBA inspector general total an estimated $9
billion, but that is just a drop in the bucket.
The design of the Paycheck Protection Program was to get
money out the door quickly and to keep employees connected to
their employer when the government forced our economy to shut
down. Fraud in ineligible firms were supposed to be flagged and
recouped on the back end through the forgiveness process, yet
the Biden administration has forgiven $754 billion, or 92
percent of all PPP loans, while ignoring the inspector
general's warnings, wiping their books clean while fraud
compounds.
In your testimony, Administrator Guzman, you state that the
SBA is referring fraud cases to the inspector general but
without specifics. We all saw President Biden say, in his State
of the Union address, that the government will go after all
COVID fraudsters. Despite that claim, the Administration has
made the decision not to pursue debt collections on roughly
$1.1 billion worth of PPP loans under $100,000, citing concerns
about equity and fairness. And folks, we all know who that is
not fair to. That is the taxpayers. Their hard-earned money
went into the pockets of potential fraudsters and bad actors,
and the SBA, under the Administrator's direction, has not
pursued these collections, even though it is required by
statute.
I am concerned the SBA is not pursuing administrative
recoveries. There is so much work to be done on recoveries
right now, and the budget priorities the President sent to
Congress do not reflect that. For instance, your budget request
to repurpose $14 million for the IG for audits and
investigations. Comparatively, you request more than twice that
amount, $30 million, for the Community Navigators Program,
which was created by the reckless spending in the strictly
partisan so-called American Rescue Plan. Community Navigators
became a woke fund, which gave money to Democrats' favored
organizations, including a diversity, equity, and inclusion
performing arts nonprofit and a fraternity.
While the Administration has written off its obligations to
recover improper COVID aid, the SBA has published several
controversial proposed rules in the SBA's lending programs. Not
only is the SBA inappropriately trying to legislate through the
regulatory process, but these changes threaten to destabilize
the agency and the taxpayers' balance sheet. In a time where we
are seeing serious inflation, bank failures, and warnings of
economic recession, I do have to ask why we are gambling with
taxpayer money.
The SBA's proposed rules loosen prudent underwriting, which
is concerning for large 7(a) loans. It may also lead to
predatory lending practices in these government-backed loans
while also opening lending programs to an unlimited number of
unregulated fintechs, the very entities responsible for COVID
relief fraud. With these new changes you are relying on the
assumption that Congress will bail out the SBA in the future.
Administrator Guzman, this is not Monopoly money. You and I
know that. And I hope that we will not continue to pass Go and
collect new appropriations for unauthorized rules, and of
course, put our taxpayers deeper into debt. The SBA needs to be
efficient and serve America's entrepreneurs. It does not need
to be making risky bets on the taxpayer's dime. I urge the
agency to reverse course on the proposed rules and shift
resources to reviewing all loans suspected of fraud by
investigators and pursue administrative recoveries.
Thank you, Mr. Chair.
Chairman Cardin. Thank you, Senator Ernst.
We will now hear from the Administrator, Administrator
Guzman. First let me thank you so much for your openness with
this Committee, your availability, and again, I appreciate very
much the prompt reply to the letter that I wrote with Senator
Ernst, and thank you for your leadership.
You may proceed.
STATEMENT OF HON. ISABELLA CASILLAS GUZMAN, ADMINISTRATOR, U.S.
SMALL BUSINESS ADMINISTRATION
Ms. Guzman. Thank you so much.
Chairman Cardin, Ranking Member Ernst, as well as the
distinguished members of the Committee, I appreciate the
opportunity to share a little bit more about the SBA, the Small
Business Administration, and the impact we have as well as the
continuous improvement that we make towards ensuring that our
small businesses and innovative startups can launch and grow
successfully.
The entrepreneurial spirit of the American people and their
trademark grit, perseverance, and agility that we know so well
have really made small businesses our nation's most important
driver of job growth, competition, and innovation. America's
entrepreneurs have not only helped to deliver an incredible
economic expansion but they are also powering a huge surge in
new businesses. In 2021 to 2022, we saw 10.5 million new
business applications across America, those people who are
starting businesses, the most that we have had in any 2-year
span on record.
And we are already seeing our preexisting businesses as
well as these new businesses grow by leveraging opportunities
in our economy that the Biden-Harris administration is
investing in. I have seen firsthand how these small businesses
have continued to grow, hire, and retain their workforce as
well as pilot and adapt, truly trying to ensure that they can
survive the remaining supply chain challenges, inflationary
pressures, and a tight labor market. They consistently outline
that funding their businesses, that growth capital or access to
working capital, is one of their biggest challenges, especially
as we see them facing rising interest rates and tightening
credit standards. That is why helping small businesses access
affordable capital is a top priority at the SBA.
In 2022, SBA delivered more than $43 billion across our
capital programs, and finally reversed a 5-year decline in
small-dollar lending. But we continue to see large gaps in the
availability of capital, especially those dollar amounts under
$150,000. And the funding gap limits entrepreneurial growth,
especially for the smallest businesses, as well as for
minority, veteran, rural, and other historically underserved
communities.
To effectively address this market gap the SBA has to
streamline its programs, its regulations, for both loans and
investments. First and foremost, we need more competition in
the marketplace, and capacity for small business lending. That
is why we proposed expanding our distribution networks by
revitalizing the Small Business Lending Company Program. The
SBLC rule will make the Community Advantage pilot program
permanent, sustainable, and provide certainty to the over 100
nonprofit, mission-oriented lenders who have been effectively
lending to underserved in the 7(a) program.
SBA can expand the number of these mission lenders with
this rule change, serving the hardest-to-reach small businesses
through a new Community Advantage license, and will also lift
the cap on regular SBLC licenses, enabling SBA to admit new,
non-depository lenders, aligned with the agency's mission in
the 7(a) program.
Second of all, we are modernizing our loan products and
meeting our businesses where they are by cutting red tape and
complexity in our 7(a) and 504 programs. Simplicity is
critical, based on extensive feedback from our lending partners
over the past decade. We need to streamline our affiliation
rules. Those are the rules that lenders have shared are most
burdensome in our regulation.
We are also aligning with existing lender best practices on
credit underwriting, not loosening underwriting. And as we
implement we will prioritize maintaining the core integrity and
oversight of SBA's lending programs. Based on past oversight
performance within the SBA as well as existing structures and
processes that have been put in place, we can both improve our
support for underserved communities, these small-dollar loans
in particular, and strengthen the program integrity at the same
time.
Third is that we are adding a provision to help owners with
business transitions to employee ownership in particular. SBA
is finding ways for its products to help finance partial
buyouts, which could help an owner, for example, sell their
business to employees for a successful exit.
Finally, a bipartisan interest of this Committee has been
to attract more private capital to the innovative startups,
critical to our national economic competitiveness and national
defense. That is why we have proposed a rule modifying the
Small Business Investment Company, or SBIC, program with a new
accrual SBIC license, really to incentivize patient and growth
capital. We will expand investment opportunities in rural and
underserved communities by ensuring a diversified portfolio
across the nation and streamlining the licensing process to
account for operational experience. The SBA must effectively
address capital gaps so we can provide that credit and the
investment to borrowers who cannot find it elsewhere but who
are powering the economy.
At the same time, as we move forward with these updates to
our programs we continue to build on the lessons learned
through managing the large disaster response. Our COVID relief
served as important lifelines to help so many businesses,
preserve jobs, and recover quickly. But while these programs
have ended, the SBA continues to support small businesses
through ongoing loan servicing, grant reporting, PPP
forgiveness, and we will work with the appropriators and
Congress to ensure the agency has the necessary resources to
serve these businesses.
You know, we are maintaining the day one Biden-Harris
priority to combat efforts really to combat fraud in pandemic
relief. We instituted standard fraud controls to deliver funds
with not just speed but certainty, and we implemented the GAO's
recommendations to improve SBA operations to detect and
collaborate with the inspector general as well, to recover our
stolen funds, and continue to work with law enforcement
agencies.
I can report that the SBA is more strongly positioned to
combat fraud, waste, and abuse across its disaster capital and
other programs as a result of these changes. Then strengthened
position enables us to better serve the 33 million small
businesses and disaster survivors into the future.
Thank you for your time. I look forward to your questions
and diving into more details.
[The prepared statement of Ms. Guzman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Cardin. Well thank you. I agree with you
completely about the challenges we have with access to capital
from traditionally underserved communities and small businesses
that have been left behind in the past. When you look at the
7(a) and 504, the two primary programs that the SBA sponsors
the numbers are not terribly encouraging when you look at
target groups that you would want to see more representative of
their numbers in our community underrepresented in the amount
of 7(a) loans and 504 loans. So I agree with you. We need to
open up the program, and I think that is what you are intending
to do.
But one program that you have mentioned that has worked
well is the Community Advantage 7(a) program. They are smaller
loans, and the numbers there are much more encouraging as far
as reaching traditionally underserved communities. And you took
steps to extend that program and now, under a rule that you are
considering, you are going to use the SBLCs as a way of
continuing these programs beyond their current expiration date.
I really want to get a better understanding, because it
seems like the CAs are working, and what worries me is as you
transition into a new program do we maintain the strength of
the Community Advantage programs to make sure that they stay
focused on the underserved communities or do they now get lost
in this new rule that you are proposing that could cause them
to become too expensive and go toward larger loans rather than
the smaller loans?
Ms. Guzman. The Community Advantage lenders are the CDFIs,
the Community Development Financial Institutions, the CDCs, the
Community Development Corporations, who are, by mission,
oriented towards filling gaps in the marketplace with
underserved communities. Across the SBA's portfolio we serve
about 58 percent to underserved communities, and this
portfolio, in particular, has a higher index.
But what they will share with you directly is that they
have been unable to scale. We do about 500 loans within the
Community Advantage program, and just over 50,000 to 60,000
across our portfolio. They will say that not having that
permanence disincentivizes investment in expanding the program.
And so in order to really, truly put the wind behind their
sails, giving them an option to access the SBLC program--which,
in the past, Community Advantage lenders have done, because you
can get the existing 14 licenses within the SBLCs--that that
gives them more empowerment to truly raise the capital, get the
liquidity that they need to scale, and serve these underserved
businesses across the country.
And so we are hoping by establishing this option for
Community Advantage partners to get into the SBLC program they
will be able to develop scale and better serve across the
country.
Chairman Cardin. Well, we share with you the view that it
should be made permanent. We recognize that you consider that
done by your regulations. We think Congress could support this
by action. So I think we are on the same page as to trying to
get the predictability to the CA lenders.
I could talk about a lot of things in the budget that I am
very excited about and agree with completely, et cetera, but I
am going to use my time on a disappointment that is in your
budget, a couple of areas that I am surprised that you would
not have a greater priority. And one is the field offices. We
have heard from so many of our members of this Committee about
the service levels at field offices, that they need to
strengthen, and you have a flat budget in regard to the support
for the field offices. That is our outreach office. That is
where the locals can get the information they need. Small
businesses do not have the deep pockets, and the Small Business
field offices can help make that connection to the SBA
services.
So what was the rationale for level funding the field
office operations where the other programs saw some increases?
Ms. Guzman. I was proud to see, overall, our
entrepreneurial development programs increase by $14 million in
the budget, which speaks to that ecosystem locally, that small
businesses need across our resource partner networks,
obviously. But the field is a big part of that, as a gateway,
in essence, to Federal services. They market our services to
about 1 million businesses and stakeholders every year, and
obviously that is a huge impact. When we look at our budget,
though, year over year, we have seen, in essence, a decline in
our salaries and expenses, our S&E, as the increases do not
account for the year-after-year COLA, the cost-of-living
adjustments, that we have to put in. So we have been unable to
grow our staff across the field.
And so as a result, feeling the consequences across the
agency, not within just the field offices but everywhere where
we touch directly to small businesses, for example, through our
Capital Access, that has tremendous customer service and works
directly with small businesses.
So obviously we want to continue to see our resources
expand and be able to better support and reach more businesses
every day in the field, as well as across our programs. So I
look forward to continuing to work with you and the
appropriators to see if we can continue to support
entrepreneurial development through the SBA.
Chairman Cardin. And we will work together. I just point
out you will find, from the members of this Committee, we have
a lot of confidence in our field offices, and we recognize that
they are stressed. With all the new opportunities that are
being given through the COVID programs, et cetera, there is
even greater need in the field.
Senator Ernst.
Senator Ernst. Yes. I will yield my time to Senator Risch
for the time being, so he can get back to his other committee.
Senator Risch. Thank you very much. I appreciate that. I
want to make a short statement, and then I will have some
questions for the record. So thank you so much.
First of all, thank you to both of you for holding this
important oversight hearing. Access to capital is one of the
most significant hurdles facing small businesses as they start
and grow, especially in our current economic environment. We
all know that.
With that said I am concerned that new rules put forth by
the SBA could jeopardize the 7(a) program's integrity. Although
the SBA believes these rules will increase access to capital in
underserved communities, I am concerned it will do just the
opposite. The new rules would allow new unsupervised entities
like fintechs into the program, weakening underwriting
requirements, erode affiliation standards, and much more.
I have a number of questions about this and I will submit
that for the record. But I do have one question I will ask Ms.
Guzman now, and that is, the SBA is proposing to cut millions
in funding for the Small Business Development Centers, who are
essential to maintaining the strength of small businesses in
Idaho and across the country. I wonder if you could explain to
us what prompted that? What was crossing your mind when you
thought about reducing that funding that has been so important
to us?
Ms. Guzman. Thank you so much for the question. Again, I
would reiterate that the budget for entrepreneurial development
did increase overall by $14 million, and we continue to invest
in and expand our programs for veterans specific support around
contracting and [inaudible] as well as for expanding our
network through [inaudible].
Senator Risch. So are you taking the money away from the
Small Business Development Centers for these other programs? Is
that what you are telling us?
Ms. Guzman. Overall, we are working to increase and enhance
the entrepreneurial ecosystem overall. The SBDCs, we just
celebrated SBDC Day, are an important part of that network.
Senator Risch. It was not much of a celebration when they
found out they were getting their budget cut.
Ms. Guzman. They reach about 300,000 businesses every year,
and during the pandemic actually increasingly working in
collaboration and partnership across our networks, which is a
great thing for our small businesses. We are encouraged by that
and we will continue to look towards working with the
appropriators----
Senator Risch. What does better than the SBDCs as far as
promoting small businesses? You are taking this money and
putting it somewhere else. Where is that somewhere else that
does better than the SBDCs?
Ms. Guzman. Across all of our entrepreneurial development
programs----
Senator Risch. That is not an answer. That is just saying
you are taking it out and throwing it to the wind.
Specifically, where is that money going instead of the SBDCs?
Ms. Guzman. The entrepreneurial development includes our
Women's Business Centers, our Veterans Business Outreach
Centers, as well as our SCORE partners, the SBDCs, of course,
specific services around contracting and capital access, so
that we can get in and provide technical assistance to get
contract ready, financial ready. All of it is advisory
services, free advisory services to American small businesses,
and that is the really key part of what the SBDCs deliver, as
well as all of our great grantees across those programs.
Senator Risch. Well, I am going to have to look at the rest
of the budget, but I have got to tell you, I am deeply
disappointed that that cut has been made and the money is being
spread somewhere else. And we are going to try to reverse that,
unless you can show me where those dollars will be doing better
than the SBDCs.
Thank you, Mr. Chairman. I appreciate that.
Chairman Cardin. Senator Risch, I share those concerns. I
think the SBDC program, as well as the field offices, play a
critical role on outreach to the small businesses that do not
have the resources to figure these things out. The other
entrepreneurial partners are very important. Do not get me
wrong.
By the way, the SCORE program and the STEP program were
also reduced in the budget, which I have some questions about
as well. But I do think that the SBDCs are critically
important, so I share those concerns.
Senator Risch. Well, Mr. Chairman, I concur with you 100
percent, and it is possible she has got a better place for the
money. But I want to hear it, not just saying, well, we are
going to put it out and spread it amongst these. I mean, it
does not make sense when we have such a successful program.
There is nobody saying that this program is not successful. So
I really object to taking it away from them and putting it
somewhere else. If she can make a case, which she has not here,
then maybe I will go along with it and agree that we should
take the money away from the SBDCs and put it to a place where
it will make----
Chairman Cardin. Discussion to continue. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman, and Administrator
Guzman, thank you for being here.
I am sure you will not be surprised to hear that I share
the concerns that both the Chairman and Senator Risch have
expressed not only about the SBDCs but about the district
offices. The last 3 years have been really critical in New
Hampshire for our small businesses, as you know, and many of
them have survived through COVID only because of the work of
the SBA and our district offices.
And as a member of both this Committee and the
Appropriations Committee, I am concerned about proposal that I
think the SBA is working on that would limit staffing and
funding to our district offices. It appears that resources are
being consolidated in the central office.
And as I am sure you remember, I asked you about this issue
last April, and the omnibus budget in December directed the SBA
to report details on district office staffing and funding
levels for the last 5 years. Do you expect that we will get
that report on district-level staffing in the near future?
Ms. Guzman. Yes, Senator. That report is being finalized
now, so I expect it by this week, so potentially tomorrow or by
the end of the week, for sure.
Senator Shaheen. Great. And is there anything that you can
share with us today about what our district offices can expect
in terms of resources for the next year?
Ms. Guzman. Well again, we will work with the appropriators
and hopefully see an increase that reflects a potential for
growing our staff. What I will share, and the field often
references themselves as the tip of the spear, and they are,
and provide a critical function, but I want to make sure that
it is clear that I need to balance the entire priorities of the
SBA with the limited resources that we have. The rest of that
spear is the products that we deliver, the certifications that
businesses count on to do business with the Federal Government,
as well as the capital access programs and the disaster
programs.
So all of that is really critical work, and the field has
been an incredible customer service arm that is on the ground
with small businesses, and that is highly valued. But as we
look towards trying to go beyond our reach at the SBA, as we
did with PPP, go beyond this million marketed to within the
field and the 300,000 reached within the SBDCs or the couple
hundred thousand with SCORE, et cetera, all those numbers, we
want to go beyond. We know that businesses were not connected
to the SBA, because we saw that in the first 2 weeks of PPP.
And so we are trying to evolve and make sure that we are
meeting their needs into the future so that it is more
inclusive.
Senator Shaheen. And I certainly support that. In New
Hampshire, however, it is the district office that makes that
connection to small businesses. They are not connected to the
SBA without that service that is provided by the district
office, or the SBDCs, and again, I share Senator Risch's
concern.
Last year, the New Hampshire SBDC advised more than 1,400
clients, up from less than 900 in 2019, and the SBA has
requested a 14 percent cut to SBDC funding for 2024. That works
out to a cut of $105,000 in New Hampshire, even though they are
advising 60 percent more clients. I think that is untenable.
And the last time the SBDCs received this little funding was in
2016, so it is really a major cut to their budget. And again,
you have commented on where you think that money should go, but
I share the view that those other programs are not going to
provide the same kind of service that is currently being
provided by the SBDC in New Hampshire. So I am sure we will
continue to have this discussion in this Committee and at the
Appropriations Committee.
I also want to ask you about the State Trade Expansion
Program, the STEP program, which has really made a huge
difference in new Hampshire in terms of increasing exports.
During 2022, we saw a 14 percent increase in exports over 2021,
and I think the STEP program had a lot to do with that. There
are some questions about how we make that more flexible, more
responsive to the needs of small businesses. So can you talk
about what you might be considering in terms of how that
program can better address the concerns that the people who are
using it have?
Ms. Guzman. Well, thank you, and the STEP program supports
51 states and territories current, and we look to continue to
expand and grow that to all 56. It is a critical program. We
have been evaluating right now what a small business exporter
is. We have relied on the Department of Commerce data that
showed 267,000 businesses were exporters. But that did not
account for the true reality that small businesses are
accidental exporters as soon as they put their website online,
and those digital providers out there will tell you that a
majority of their businesses on Etsy, et cetera, are actually
exporting.
So we have done some research of our own to account for
those 2,500-and-under exports who are shipping in small batches
and found with those, along with the service providers that are
surveyed, not counted one by one, we actually have more about
1.3 million exporters. And so really trying to recognize that
digital service providers, these digital sales that are
happening on e-commerce around the world, are important. So
constantly we will update and modify the program and simplify
it so that our states can continue to get the performance that
they are getting out of the program.
Senator Shaheen. Well, I can tell you in the Appropriations
Committee I am arguing that we should fully fund that program
at its authorized level.
So thank you. Thank you, Mr. Chairman. I look forward to
the conversation.
Chairman Cardin. Senator Ernst.
Senator Ernst. Yes, thank you, and you will not be
surprised to hear that in Iowa as well we are concerned about
the SBDCs and the field offices. So I think there is a lot of
agreement from this Committee that we are concerned about the
funding there.
So, Administrator, I have been watching the news, as most
folks have, about Silicon Valley Bank and Signature Bank, and
those regional and community banks are very critical to our
small businesses and their lending. When the credit market
tightens we have historically seen a higher volume of SBA
lending. Signature Bank is one of the largest lenders in the
7(a) secondary market, and they have now ceased buying new bids
on 7(a) loans. This will make it very difficult for our lenders
to continue to have liquidity to make new loans, especially
those non-depository institutions like our small business
lending companies.
So what is the Administration doing to oversee Signature
Bank and communicate the updates with those lenders?
Ms. Guzman. Well, obviously the quick action by the
regulators to ensure that the small businesses and the
individual depositors were safe across the banking industry was
important, as banks need liquidity to do lending across the
board. You know, obviously we are tracking closely all of the
financial institutions that either hold our loans or that
participate in our securities, whether that is on our Small
Business Investment Companies or within our guarantee program.
You know, the Administration continues to take strong
action to ensure that the banking industry continues to be
supported and resilient during this time, as signaled by the
Secretary of the Treasury as well as the regulators. So the
SBA's view is that this just demonstrates further why we need
to address the capital gaps and fix our programs to better
reach and support banks who have liquidity issues right now,
and a guarantee would be perfect for their bottom line.
Right now, 4,000 of the 4,500 community banks, for example,
who serve so many communities across the nation, have not done
an SBA loan in the last 2 years. And so we need to get them
back in, simplify the program, and make sure that they can use
their prudent credit underwriting standards in order to deliver
these loans.
Senator Ernst. And this would be a prime example why strong
underwriting is really important as well. I hope that this has
been a one-off situation, but I think it is encouraging many of
those institutions to go back and relook what their practices
are. So again, I hope it is a one-off.
Administrator, recently Chairman Cardin and I sent you a
letter detailing our concerns about two of our recent proposed
rules regarding affiliation and the SBLC moratorium that could
open SBA lending programs to fraud, predatory lending
practices, and other vulnerabilities. These rules are without
congressional input or authorization, and in spite of recent
fraud levels witnessed in COVID relief programs.
So when should we expect those final rules?
Ms. Guzman. Those are still currently in process. We are
accounting for all the public comments that we received over
the 60-day period of time. And what I would share with you is
that obviously we are taking into account all the
recommendations that we have received, not only through public
comment but by continuous feedback from this Committee as well
as the advocates out there who are supporting as well as
opposing.
So we are still in process. It is beyond the regulation. We
want to make sure that all processes are in place and our
operating procedures, so that we can be ready to support or
lenders. This is about expanding access to capital with
prudent, demonstrated programs, such as the SBLC that has
already done over $14 billion over the decades that it has been
in action, as well as, of course, the SBA Express, that uses
the credit underwriting standards that we are moving towards
within this new reg change, and they have been successful. Over
20 of the last 23 years, SBA Express term loans have
outperformed against the 7(a) term loans.
So we are confident that that credit underwriting standard
that we are putting forward has data to support it. So these
are administrative regulatory changes that we think will
streamline for our banking partners, especially getting those
community banks in, as well allowing us to expand our
distribution networks.
Senator Ernst. Okay. And I know we did receive your
response. I do want to thank you as well for the letter that
was sent back to Chairman Cardin and I. You do continue to
state that PPP is the basis for removing most of the
affiliation test, and I just need to restate that Congress did
not authorize a permanent change to larger 7(a) loans for
affiliation or underwriting criteria because of COVID programs.
Further, this is yet one more example of this
Administration not letting an emergency go to waste, and
instead using the COVID crisis as justification for more of
that government spending and overreach. And I will come back to
this if we get a second round of questions here, because I do
have a little bit more than I would love to discuss on this
issue.
And I will yield. Thank you.
Chairman Cardin. Senator Rosen.
Senator Rosen. Well, thank you, Chairman Cardin, Ranking
Member Ernst for holding this hearing, and thank you
Administrator Guzman always for your vast amount of knowledge
and care for the Small Business Administration. And I am going
to give a plug for our Nevada small business district offices,
state offices. They went above and beyond during COVID, and
they just helped thousands of small businesses, and we are
really grateful, and I think we all share that concern.
But I want to move over to students who want to open up
small businesses because in my home state of Nevada, small
businesses, of course, 99 percent of business, small business,
is the economic engine of our communities, and of course,
diversity is our strength. So I want to ensure that minority
entrepreneurs and small owners have the proper resources to
thrive.
To address this I was proud to introduce the Minority
Entrepreneurship Grant Program Act with Senator Tillis last
Congress. And our bipartisan legislation would establish
minority entrepreneurship program at SBA to award grants to
MSI, minority-serving institutions, and HBCUs, the historically
Black colleges and universities, to promote and increase
opportunities for minority student business ownership and
entrepreneurship. And I am glad to see the President's budget
proposal supports funding this technical assistance to colleges
and universities to further promote entrepreneurship.
So Administrator Guzman, how would you plan to use such
funding to address the needs of aspiring young students serving
through MSIs and HBCUs?
Ms. Guzman. Thank you so much for that question, and the
Administration has focused on ensuring that we truly can
support all of our small businesses. There is a changing face
of entrepreneurship, as you have seen in your home state. Women
and people of color are starting businesses at the highest
rates, yet they do not have the same success outcomes due to
lack of capital. And so it is a critical gap, and that is what
the SBA's mission is, to fill those capital gaps. So obviously
we are committed to deploying the programs that are authorized
and ensuring that we prudently deliver the objective of
Congress to reach these businesses.
We are currently, though, setting up networks to be able to
work with MSIs. Specifically, expanding the number of MSIs
within our Women's Business Center network is example, by 3x.
And they exist within our SBDC network as well, and we are
continuing to try to partner so that students are more informed
and ready to launch their great idea if that time comes.
And so we are committed to, as well, serving those
institutions and working in partnership with them, and we
continue to explore options. So we would be happy to provide
technical assistance on that and give you the support needed to
deliver our program.
Senator Rosen. Thank you. I appreciate that.
I want to turn now to something that Nevada has a lot of
small businesses in. It is home to nearly 100 legally operated
cannabis businesses across our state. And one of the greatest
barriers for these businesses is lack of access to capital and
resources. So I have made it my priority to ensure there is an
expansion, an SBA loan eligibility for small businesses in the
Nevada and nationwide, and in November of 2022, I introduced
the Fair Access for Cannabis Small Business Act. So that is
going to ensure that those legally operating cannabis small
businesses, they will have access to loans and programs
provided by the SBA.
So how do you think SBA can assist state legal cannabis
businesses and what else do you think Congress can do to break
down the barriers here?
Ms. Guzman. Well, currently cannabis is, of course, a
Federal Schedule 1 substance. We are not allowed to lend to any
businesses in the cannabis field. We are happy, though, to
provide technical assistance around our programs to make sure
that you receive that support from the SBA experts in terms of
the program implementation and what that would mean.
Senator Rosen. Thank you. We are going to keep working on
that.
And I am very pleased that the Ranking Member and I have
something we love to talk about, a great bill that we have done
together for childcare providers, and we want to expand that
loan eligibility for them. Because in Nevada, and, of course,
across this nation, parents of nearly 75 percent of children
under the age of 5 do not have access to a licensed childcare
provider, whether if it is because of lengthy waitlists, long
distances, high costs, things are just unaffordable.
So in many instances the annual cost of childcare is more
expensive than a year of college tuition in my state. And so
currently only for-profit childcare providers have full access
to all the SBA loan products, and so while nonprofit providers
only have access to the SBA's microloan program, and that is
capped at $50,000.
So other loan products, such as 7(a) and 504 loan programs
are just off limits, and it really is blocking access for these
nonprofit childcare providers to establish things right in the
local community, really to support our families.
So Senator Ernst and I have the Small Business Childcare
Investment Act--we are very proud of that one--to allow these
nonprofit childcare providers to take advantage of everything
the SBA has to offer.
So will you commit to working with us to be sure that we
can advance this effort to provide nonprofit childcare
providers access so that everyone has access to good quality
childcare, wherever they live?
Ms. Guzman. Yes. Most definitely, as I shared, childcare is
a priority area for us. We do boot camps for childcare
entrepreneurs and would be happy to look at expanding access to
capital across our programs and provide technical assistance to
you.
Senator Rosen. Thank you. I appreciate it.
Chairman Cardin. Senator Hickenlooper.
Senator Hickenlooper. Thank you, Mr. Chair, and
Administrator Guzman, what a delight to see you, and to follow
your success from afar. I appreciate all the hard work.
Ms. Guzman. Thank you.
Senator Hickenlooper. As you know, the recent Federal
Reserve study shows that fintech leaders, quote/unquote, ``have
a potential to create a more inclusive financial system,
allowing small businesses that were less likely to receive
credit from traditional lenders to access credit and to do so
at a lower cost,'' end quote.
How can fintechs fill gaps in the market in the SBA program
and get more dollars to traditionally underserved communities
that usually try for the first time, in many cases, to access
capital?
Ms. Guzman. Studies have shown that fintechs operate more
successfully in ZIP codes that are more banking deserts, that
they are able to fill capital gaps. Just if you look at them as
a business model they are going after the gaps that the banks
are not going after, so those small-dollar loans is where they
have made a lot of headway.
While there have been good and bad actors in the fintech
industry in the past, they have demonstrated, within our
programs, that they helped to ensure that underserved
communities were able to access critical programs at the SBA.
Senator Hickenlooper. Great. 7(a) operates to provide
capital to those who cannot otherwise access it, but also have
the ability to repay loans. In order to lower the risk to the
program and target SBLC lending to smaller businesses, would
SBA consider imposing initial caps on the loan sizes for new
SBLCs that are gradually increased as new SBLCs mature in this
program?
Ms. Guzman. The SBLC is an established program for multiple
decades, and what we are trying to do is drive in our licensing
program, our licensing component of the proposed SBLC program,
a drive towards filling market gaps, which is in the small-
dollar lending space. And what we are trying to do is
incentivize loans, especially $500,000 and under, within this
program, and then broadly across our 7(a) program. So we are
continuing to look at ways to ensure that happens through our
oversight and protections that are in place. So I am happy to
look into this further with you.
Senator Hickenlooper. Yeah, I saw that there were a number
of comment letters on the rule to remove the moratorium on
SBLC, and we look at that in a supportive way.
I thought I would ask a question also about, as a veteran
borrower of the 504 program, are there ways we could expand
that program as well? And I realize those loans generally are
smaller than the 7(a) loans and not as popular with the banks,
or certainly different kinds of lenders. But I look at
especially truly small businesses, immigrant-founded
businesses. It is a unique way they can enhance their exit when
they actually sell their business. When you own your real
estate it is a big difference, and in my case, the multiple of
free cash flow was almost double because we owned the real
estate, compared to if we were just selling that cash flow.
Ms. Guzman. The 504 program, I agree, is one of the
critical mainstays for small businesses who have to be able to
defend and stay in the location that they started in. In many
cases it gets expensive. So owning that real estate also is a
retention strategy for longevity.
We are looking at the 504 program currently, but as well, I
would say that the rule changes that we are making right now
are supported by NADCO, which is the National Association of
Development Companies, who are organized around our 504
program, to deliver this program. They will tell you that the
affiliation rule is a barrier, which focuses too much on
control and not enough on just simple ownership. So NADCO is
completely supportive as they believe that will unlock some
capital and obviously propel the 504 program further.
So I am looking forward to being able to streamline the
program, cut the red tape, and have the support of NADCO.
Senator Hickenlooper. Great. I think that is perfect, and I
think the potential, especially at some of the franchise
programs, where franchisees could be encouraged to purchase
their building as well. There are very, very few franchise
companies that do that. Some of them own the property
themselves and allow their franchisees to rent it from them.
But I am a big believer of that long-term success.
Last question, and we talk about this every time we have
been together, reauthorization. It has been 20 years. How can
we talk about reauthorization in such a way that we can
reaffirm our commitment to Main Street?
Ms. Guzman. Well, obviously the SBA celebrated its 70th
year this year, and we were focused and founded to ensure
competition and innovation exist in our economy through small
businesses. You know, SBA has evolved dramatically since it was
last reauthorized in terms of the types of programs, like STEP,
SBA Express, and some great programs that exist at the agency
today.
But we look forward to working collaboratively with the
Committee as reauthorization is considered, and based on that
ensure that the programs and services that we offer to small
businesses are supported. I can only offer my support to make
sure that that process is as effective for our small businesses
and the outcomes that they need.
Senator Hickenlooper. Great. As always, thank you for your
public service. I yield back to the chair.
Chairman Cardin. Senator Budd.
Senator Budd. Thank you, Chairman. Administrator, thank you
for being here. I appreciate your time today.
Back on February 16th, President Biden issued Executive
Order 14091, and it has to do with the opportunity for
entrepreneurs. I think that we would all agree that we should
be providing more opportunity to entrepreneurs of all
backgrounds.
But here is where the concern is, is about the true purpose
of this executive order. For example, the title of Section 3 is
``Delivering Equitable Outcomes Through Government Policies,
Programs, and Activities.'' Furthermore, the phrase ``equitable
outcomes'' is used no less than eight times throughout the
document.
Given the repeated usage of this term ``outcomes,''
Administrator, under your leadership is the SBA, is it
primarily concerned with equality of opportunity or equality of
outcome?
Ms. Guzman. Equality of opportunity. I mean, we see that
there is a great disparity in the systems and supports for our
small businesses across the board in underserved communities.
And as we work to fill gaps as the agency and ensure that all
small businesses, entrepreneurs with great ideas have the
opportunity to grow their business, commercialize it, start it,
et cetera, we want to make sure that our programs are
accessible to all of our entrepreneurs.
Senator Budd. I mean, your language is powerful. Why the
use repeatedly of ``outcome'' versus ``opportunity''? I mean,
for decades EEOC is about opportunity, not outcomes. I know it
was not random. I was just seeing if there was a philosophy
behind that.
Ms. Guzman. Well, you know, I know that if we present more
opportunities, you know, as studies have shown, when we invest
in all of our businesses they can have better outcomes. So I
think that is the connection for me, is that I know if I
deliver opportunity, if I deliver access to key programs, the
success factors that businesses need, that we can see better
outcomes for all of our businesses.
Senator Budd. I think that is critical. I mean, I like how
you addressed that, but if we are presenting more opportunities
let us talk about presenting more opportunities rather than
what it is going to get to, because that is what we do. We want
equal opportunity. So we are just paying attention to that and
seeing--we want to level the playing field of opportunity, so I
would agree with you in that.
The SBA's proposed affiliation rule tells lenders that they
no longer need to consider well-established underwriting
criteria and instead allows lenders to do what they believe is
an acceptable loan. So let us not forget that the current
underwriting criteria, it stabilized the 7(a) program, it
minimized losses to taxpayers, and kept the cost of capital to
borrowers reasonable.
So your proposed rule would, as I understand it, would
erase those standards and it would create a system where
lenders could use a taxpayer-backed portfolio to engage in
extremely risky loans. That could dramatically impact portfolio
performance, loss rates, and ultimately cost to borrowers.
This is concerning to me, and I think that it should be
concerning to the Committee. So if you would, do you believe
that lenders should consider experience and the strength of a
business when making a government-backed loan?
Ms. Guzman. Thank you so much for that question because I
do want to clarify here that we are basing the credit criteria
simplification on history. We have the SBA Express program,
which is about 45 percent of our current volume, on which zero
subsidy is based. And that portfolio has performed well. Twenty
out of the last 23 years, actually those SBA Express term loans
outperformed regular 7(a).
And so when we are deferring to credit underwriting
standards of the banks we are still holding them accountable to
that essential factor of ability to repay, first and foremost.
And so they are allowed to adopt their own credit underwriting
standards and alternative underwriting standards, which they
have been effectively performing at zero subsidy throughout the
program.
So we are using that data and that experience at the SBA to
inform this new regulatory reform that will simplify and
attract more community banks and others into the program. So
thank you for that question.
Senator Budd. Thank you. I think with 23 years of success,
as you mentioned, that we need to continue to look at things
like--and what is your opinion on looking at past earnings,
projected cash flow, future prospects of abs when making
government-backed loans? I think you alluded to that some, but
I just wanted to elucidate that and see where you stand on
that.
Ms. Guzman. A lot of our financial institutions will
leverage that data, that history. I mean, they look at the tax
documents as well as performance and ability to repay. But I
think we are deferring to the lenders with this credit
criteria, obviously, and ensuring that they can continue to
perform in the program. I think that is what we have been
hearing from our lenders for quite some time, and they have the
performance to back it up.
Senator Budd. Thank you. I appreciate you being here today.
Chairman Cardin. Thank you.
Let me ask you--we will start a second round for those that
would like to ask a question. Your budget has flat funding for
the Office of Credit Management, which surprises me. All of the
conversations we have had here about the responsibilities of
expanding opportunities for capital for small businesses, it
seems to me that puts more responsibility rather than less
responsibility on the SBA, on credit management. Can you
explain?
Ms. Guzman. Yeah. The Office of Credit Risk Management is
really critical, of course. You know, when some of these
programs were initially started using pen and paper, they were
able to leverage technology. We have a very strong team of 29
individuals, plus 7 contracts, with staffing and technology to
help us manage our portfolio. We perform quarterly reviews of
the portfolio as well as more deep dive risk reviews and
improper permit reviews, so that we can ensure that we are
holding our lenders to a high standard and are able to identify
risk and problems in the portfolio early.
So we continue to support this office, and the office has
done thorough analysis to ensure that it is resourced and able
to support the expansion of these regulatory forms through the
SBLC.
Chairman Cardin. So you have adequate resources to do that
with a flat budget?
Ms. Guzman. Yes, and we have proposed an additional 30
nonprofit Community Advantage lenders and an additional 3 non-
depository institutions on top of that. So those numbers were
based on an analysis of capacity at our Office of Credit Risk
Management.
Chairman Cardin. Let me go to a different subject and ask
for your help, and we are coordinating this with the Senate
Finance Committee. We are extremely concerned about what we
hear from small businesses in regard to compliance with the tax
laws of our country, that it is extremely difficult for small
businesses that use basically the individual tax returns to do
their taxes, that there needs to be more sensitivity to small
businesses.
We are going to try to weigh in with the Senate Finance
Committee. It is their jurisdiction but they want to work with
us on this. I would certainly welcome whatever help you could
give us in your experiences with the small businesses that you
operate with where the major needs are for reform within our
tax code, to help small businesses.
Ms. Guzman. Yes, we are happy to provide that technical
assistance. Obviously, tax returns are really critical in our
COVID relief programs as well as our ongoing programs.
Chairman Cardin. Right. I assume you have had a lot of
contact in that regard.
Ms. Guzman. Correct. Yes. And we definitely recognize that
small businesses want tax fairness, and for them that means
simplicity, easy to understand. You know, they do not have the
lawyers and accountants to hire to try to help them navigate a
complex tax system, and it is oftentimes complicated for them
to track some of these filings, and that is why you see
challenges when they go to seek capital.
So as much as we can to simplify the process for them, that
will help them access capital and help them start and grow more
effectively.
Chairman Cardin. We have had discussions during this
hearing about minority-serving institutions and HBCUs. I just
really want to applaud the efforts that have been, at least in
my state of Maryland we have gone from one Women's Business
Center to four Women's Business Centers. We have a women's
Business Center located at Bowie State University, the oldest
of our HBCUs. Morgan State university is also engaged in this.
We have a Business Innovation Center at Bowie State. We have
really engaged our minority-serving institutions in a way that
has expanded tremendous opportunity, and Maryland has been one
of the leading states in the nation on the start of minority
small businesses.
So I just think we need to just learn from those
experiences and build on those experiences, because we do reach
communities we have not traditionally reached. And I think your
Administration is doing an excellent job in that regard, and I
just really wanted to put that on the record.
The one area that I hope we will continue to work on is
returning citizens, criminal justice-impacted individuals. We
still could do a lot more, and I know there is some bipartisan
interest in our Committee to try to do that. So I welcome your
thoughts on how we can expand opportunities for justice-
impacted individuals.
Ms. Guzman. Thank you for that, and I would welcome the
opportunity to work on that. It is something that the SBA has
taken up. We addressed this directly within the Community
Advantage expansion, an extension effort that we led last year,
in ensuring that returning citizens who entrepreneurial are
able to access capital within our programs. And so we would
continue to look at how we can better support them through our
technical assistance, capital programs, and all of our support
networks.
Chairman Cardin. In many respects there are less barriers
to entrepreneurship than there is to employment, so it is an
area that we really can expand opportunity.
Senator Ernst.
Senator Ernst. Yes. Thank you, Chairman. And I want to go
back because I think the SBA Express, you have brought that up
a few times now, and you said that you have the data to justify
the underwriting through SBA Express. So if you do have that
data I would love some follow-up. My staff had sent questions
about Express several months ago and we have not yet received a
reply. So perhaps your staff could assist us with that this
week.
So going back to the proposed lending rules, you have
stated that the final rule, or will the final rule eliminate
our credit analysis, the control and management affiliation
test and character and reputation criteria for the 7(a)
program. I think Senator Budd was asking something similar to
this, but will the final rule eliminate those criteria?
Ms. Guzman. The final rule on affiliation focuses on
affiliation eligibility of control. And so I know that you had
mentioned earlier that we have referenced the PPP portfolio as
an example of removing affiliation. With the PPP it was unique
in that they removed affiliation related to control but also
impacted the size standard at the SBA as well, by allowing
location-specific analysis.
So for affiliation, obviously we are committed to making
sure that we continue to look at ownership, that our lending
partners obviously continue to look at the ability to repay,
which means that they will have to have the cash flow, the
assets with collateral that are unencumbered for them to be
able to support a loan, and an ability to access SBA lending in
particular.
So affiliation eligibility is being removed. As well, we
are going to simplify the way that banks access our program by
allowing their credit underwriting standards to be deployed. So
as long as they are able to continue to use their credit
underwriting standards, obviously we review our lenders on an
ongoing basis to make sure that they are held to a high
performance standard and not including risky loans into the
portfolio.
But yes, those are the two key areas around the affiliation
rule. And then, of course, allowing for partial buyout, so that
owners can start to exit successfully by selling part of their
business only.
Senator Ernst. Sure, and I do want to caution because I
know we do hear from, if you look at the 504 program, those
lenders do support the changes in the underwriting because it
does help streamline and provide efficiency in their program.
But we do not want to conflate the 504 program with our 7(a).
Those are completely different programs. They operate
differently and there is different levels of risk to our
taxpayers. So I do hope that that is taken into consideration.
So then, as well, if we can talk a little more about the
Small Business Lending Companies. So will that final rule put a
firm limit on those SBLCs?
Ms. Guzman. The rule itself proposed lifting the
moratorium, and so we estimated what the capacity at the SBA
would be, noting our Office of Credit Risk Management capacity
to provide oversight to review the applications and ensure
continuous oversight for that program. So with the small
business licensing companies there is not a cap imposed.
Currently there are 14 SBLCs in the program, operating. They
have changed hands about 60 times. So we have a strong system
in place and a process to approve them, but we are looking at
capacity.
Senator Ernst. And again, that raises concerns with me
because we have had that 40-year moratorium, but as we are
looking forward and we are talking about the different types of
institutions that we will be opening the door for with the new
rule, it really leads to an unlimited number of fintechs that
could come into the institution.
So I just want to raise the red flag there. I really do
believe that this needs to have congressional authorization.
With that, Senator Cardin, I will yield back.
Chairman Cardin. Senator Coons.
Senator Coons. Thank you, Chairman Cardin and Ranking
Member Ernst. Administrator, it is great to see you again.
Thank you for the opportunity to work together for another
Congress and to do more for our small businesses nationwide.
I really just had two questions I wanted to ask you about.
First, I would be interested in your overall impression of
SCORE. SCORE is a program that was originated in Wilmington,
Delaware, and from what I have heard from Delaware businesses--
I just did a small business roundtable, actually, yesterday--
has provided fairly high levels of service, at very affordable
cost. For most it is free. It has got a remarkable leverage
ratio. If I understand right, there are 10,000 volunteer
mentors nationwide, supported by a paid staff of about 50, and
last year they helped clients start more than 30,000 businesses
and create over 100,000 jobs. The client base is two-thirds
women, roughly half minority, 10 percent veteran, and about 40
percent of their volunteers are women or minorities.
I remember they had some significant problems in an OIG
report 4 years ago. My strong impression is that under new
leadership they have addressed that and there is a steady
increase in demand for their services.
I put together budgets when I was a county executive. I
understand the challenges of striking a balance. But I was
surprised to see a proposal to cut their budget by 40 percent.
Is there some problem or issue with their performance that
maybe I am not aware of, or is there a reason that SCORE was,
in some way, focused on for that significant of a cut in the
budget proposal?
Ms. Guzman. SCORE is one of our critical parts across our
entrepreneurial development programs. While we are requesting
an additional $14 million across those programs we recognize
that there are gaps in service out there and we are trying to
work with limited resources and fulfill the needs, try to
reverse some of the trends that we saw early on in the pandemic
to ensure that more businesses are able to access and learn
about the SBA.
So, you know, in terms of balancing our entrepreneurial
development priorities we are trying to do more for veterans,
more around capital access, more around government contracting,
to get firms contract ready, as well as more around navigators
to connect those underserved businesses to our incredible
network resource partners as well as our programs at the SBA.
So it is more about working within our limited resources to
expand our reach across the board.
Senator Coons. If I hear you right, there is no problem or
issue with SCORE whatsoever, valued member of the whole team.
Just had to make a choice between, if we are going to put more
in here or here we have got to take something out of here.
Ms. Guzman. That is correct. We are just trying to balance
an ecosystem within limited resources.
Senator Coons. Well, in my view it has a strong record of
cost-effectiveness, and I am likely to work to sustain its
funding and to figure out some way, on a bipartisan basis, that
we can provide additional resources along the lines that you
have also requested. We will have a number of conversations
about it. I think it is a great program and I am hoping we can
see it reauthorized in this Congress.
One other question. This just a specific individual
question from a bank president from Southern Delaware Community
Bank. His name is Jack Riddle, and they handle a fair number of
SBA loans. He reached out to me in writing and said, ``Is there
any reason that a smaller or community bank cannot be an SBA
preferred lender,'' his point being that they have
significantly more paperwork and a significantly higher
guarantee requirement than one of the major banks in our state.
And he had asked if we had ever discussed or considered a
pilot program that might allow a community bank, with proper
guardrails, for a small amount, say a loan of under half a
million, to be able to show that they are capable of being an
SBA preferred lender.
Did the question make sense?
Ms. Guzman. I believe so, yes, and I definitely welcome the
opportunity to work directly with this lender as well as other
lenders in Delaware and across the nation because we are
looking to expand those, especially community banks, to
leverage our guarantee and get capital into those small
businesses.
So, you know, I do not know the specifics of the case so I
am sorry I cannot comment further on it, but I would welcome
the opportunity to try to ensure that they can participate, at
scale, with the SBA.
Senator Coons. Thank you very much. I will forward the
letter to you and hopefully we will get him a timely response.
I appreciate your service.
Ms. Guzman. Thank you.
Senator Coons. And I appreciate, Mr. Chairman and Ranking
Member, that we had a productive business meeting and hearing
today.
Chairman Cardin. Thank you, Senator Coons.
Senator Ernst, anything further?
Senator Ernst. No, Mr. Chair. Thank you. Thank you,
Administrator.
Ms. Guzman. Thank you.
Chairman Cardin. Administrator Guzman, again thank you for
being here today, but more importantly thank you for your
leadership and your willingness to engage this Committee,
members of the Senate, as well as stakeholders on making these
important decisions.
The record of our Committee will remain open for 2 weeks
for questions for the record. We would ask, Administrator
Guzman, you respond promptly to those questions.
And there being no further business, the Committee stands
adjourned. Thank you.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
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