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