Taking on More Risk: Examining the SBA's Changes to the 7(A) Lending Program Part II
Summary
The record of a May 17, 2023 hearing of the House Committee on Small Business, Taking on More Risk: Examining the SBA's Changes to the 7(A) Lending Program Part II, Small Business Committee Document Number 118-013, with Chairman Roger Williams presiding. Witnesses lead the National Association of Government Guaranteed Lenders, Multifunding LLC, Bank of Charles Town and SomerCor. Chairman Williams says the changes add risk to the taxpayer-backed portfolio and weaken the credit elsewhere test, and describes a letter asking Administrator Guzman to name a permanent head of the Office of Capital Access first. Ranking Member Nydia Velazquez cites over $9.2 billion in 504 program lending last year. The NAGGL witness testifies that the SBA is removing underwriting guardrails while adding nonfederally regulated lenders. The Committee adjourned at 11:55 a.m.
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[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING
PROGRAM PART II
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 17, 2023
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-013
Available via the GPO Website: www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
52-170 WASHINGTON : 2024
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MORGAN MCGARVEY, Kentucky
MARIE GLUESENKAMP PEREZ, Washington
HILLARY SCHOLTEN, Michigan
SHRI THANEDAR, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
Ben Johnson, Majority Staff Director
Melissa Jung, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Roger Williams.............................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Mr. Tony Wilkinson, President and Chief Executive Officer,
National Association of Government Guaranteed Lenders (NAGGL),
Frisco, TX..................................................... 5
Mr. Ami Kassar, Founder and Chief Executive Officer, Multifunding
LLC, Ambler, PA................................................ 7
Ms. Alice Frazier, President and Chief Executive Officer, Bank of
Charles Town, Charles Town, WV................................. 8
Mr. Manuel Flores, President and Chief Executive Officer,
SomerCor, Chicago,IL........................................... 10
APPENDIX
Prepared Statements:
Mr. Tony Wilkinson, President and Chief Executive Officer,
National Association of Government Guaranteed Lenders
(NAGGL), Frisco, TX........................................ 38
Mr. Ami Kassar, Founder and Chief Executive Officer,
Multifunding LLC, Ambler, PA............................... 53
Ms. Alice Frazier, President and Chief Executive Officer,
Bank of Charles Town, Charles Town, WV..................... 60
Mr. Manuel Flores, President and Chief Executive Officer,
SomerCor, Chicago, IL...................................... 64
Question and Answer for the Record:
Question from Hon. Velazquez to Mr. Flores and Answer from
Mr. Flores................................................. 74
Additional Material for the Record:
American Bankers Association................................. 77
California Association for Micro Enterprise Opportunity
(CAMEO).................................................... 82
Credit Union National Association (CUNA)..................... 105
National Association of Development Companies (NADCO)........ 107
National Association of Federally-Insured Credit Unions
(NAFCU).................................................... 134
TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING
PROGRAM PART II
----------
WEDNESDAY, MAY 17, 2023
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:03 a.m., in Room
2360, Rayburn House Office Building, Hon. Roger Williams
[chairman of the Committee] presiding.
Present: Representatives Williams, Luetkemeyer, Stauber,
Meuser. Van Duyne, Molinaro, Alford, Crane, Bean, Velazquez,
Landsman, McGarvey, Gluesenkamp Perez, Scholten, Thanedar, Chu,
and Davids.
Chairman WILLIAMS. I now call the Committee on Small
Business to order.
Without objection, the Chair is authorized to declare a
recess of the Committee at any time.
The Committee is here today to hear testimony about
proposed changes to the 7(a) loan program and how it will
affect lenders and borrowers.
Thank you all, again, for being here to testify today. I
now recognize myself for my opening statement.
I want to welcome you all again into today's hearing, which
will focus on the Small Business Administration changes to the
7(a) loan program. At last week's full Committee hearing on
this vital issue with the SBA, many of our questions went
unanswered. So I hope today we can serve as a constructive
conversation on how these changes add unnecessary risk and
threaten the 7(a) Program's long-term integrity.
Just 1 day after our hearing last week, Associate
Administrator Patrick Kelly, who testified before us, was
dismissed from the agency. While the circumstances around his
departure are still not clear, there are two logical
suggestions.
First, his contempt for the basic congressional oversight
was apparent, and the SBA did not think his behavior was
appropriate for the agency. Or second, he submitted his
resignation months ago and the SBA decided to send someone to
testify on these major rule changes knowing that he could be
parting ways with the agency shortly after. Kind of a lame-duck
witness. Whichever scenario is accurate, both of these are
extremely concerning as we do our congressional due diligence
over these new rules.
Members of this Committee on both sides of the aisle still
have unanswered questions regarding these changes and are
concerned that the SBA is continuing to move forward without
the leadership in place to help make these transitions as
smooth as possible.
This concern is not only bipartisan here on this Committee,
but also is shared by our colleagues in the Senate. Yesterday,
I, along with Ranking Member Velazquez, Chairman Cardin, and
Ranking Member Ernst joined a pen letter together to
Administrator Guzman saying it is our collective belief that,
at the very least, it is best to find a new permanent head of
the Office of Capital Access before we begin these changes and
before they go into effect.
Finalizing the proposed rule represents the most
significant changes to the program in decades, and I hope that
we will be able to have a productive discussion about how the
changes to the lending criteria will add more risk to the
taxpayer-backed loan portfolio and how these changes will
weaken the credit elsewhere test and take the SBA away from
being the lender of last resort.
In addition, I hope to discuss SBA's capabilities as a
regulator and if they are properly equipped to take on this
increased responsibility, and also if the proper guardrails
have been installed since the agency let billions of taxpayer
dollars be stolen from the pandemic loan programs.
For decades, the 7(a) program has been operating on a
bipartisan basis to help business get off the ground with their
capital needs. Unfortunately, I am afraid that these changes
will lead to a greater default rate that will rely on the
program to continue to be subsidized by Congress in order to
remain in existence.
I am not alone in raising these concerns. The SBA's
Inspector General himself testified before this Committee and
noted that there are significant challenges that the agency
will face in managing the increased loan volume going forward
as well as the significant shortages of staff within the
department that oversees this program. So we can not allow the
SBA to get these rules wrong.
I will once again call on the Biden administration to slow
down until we can properly determine how these changes will
work in practice. And without objection, I would like to submit
statements for the record from ABA, QNA, and NAFCU regarding
these rule changes.
I want to thank you all again for being here with us today,
and I am looking forward to a more constructive conversation
today.
And with that, I will yield to our distinguished Ranking
Member from New York, Ms. Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman, for bringing us
back together on this important topic.
I would like to start by entering into the record the fact
that money from taxpayers was stolen because the Trump
administration didn't put in place the guardrails that were
needed in order to protect taxpayers' money. I want to be fair
in terms of that qualification.
In just one week, there have been quite a few developments,
so I look forward to our discussion. As we have already
detailed, the SBA issued two final rulemakings that have
substantial implications for critical lending programs. Not
only do the rules make significant modifications, the interplay
between them and the programs to which they apply are vast and
complicated. Not every program will be impacted in the same
ways.
Last week, much of our hearing focused on the 7(a) program
and rightly so because it is the agency's flagship initiative,
providing nearly $15 billion in loans to small firms all over
the nation.
Today, I am hoping to hear what these rules mean for
another program, the 504 CDC loan guaranty program, which is
administered through nonprofit CDCs. The 504 program provides
long-term fixed rate financing for major assets such as land,
buildings, and equipment.
Through a 100 percent SBA guaranty venture, the CDC
provides up to 40 percent of financing, while a third-party
lender provides at least 50 percent, leaving the applicant with
at least 10 percent of the financing. Last year, the 504
program delivered over $9.2 billion in capital access, and so
far this year, it is needing $4 billion.
As one of our own Members has stated in previous hearings,
the 504 program can be slow and complicated, making it right
for an improved streamline process. The affiliation rule helps
bring some improvements that I welcome by the industry and
borrowers alike.
The disparity between the rulemaking's application to the
SBA lending programs highlights just why this committee is
taking a deep dive into these policy changes. It is incumbent
upon us to look at every aspect of what the details truly mean
and their potential consequences, good or bad. SBA instituted
these rules to address persistent gaps in access to capital as
part of the Biden administration's broader economic agenda.
As I have continuously stated, increasing access to capital
for underserved entrepreneurs remains my top priority, but I
would be remiss in my obligation to borrowers and program
integrity if I didn't do my due diligence. And that is why we
are here again today--to listen to the industry stakeholders
and understand their views of the rules on the programs they
participate in.
Ensuring the businesses owned by women, people of color,
and underserved groups have the resources needed to succeed is
an important goal, and I look forward to hearing another
perspective of SBA's actions. I remain committed to filling the
gaps in the market in a bipartisan and thoughtful way and
pledge to work with SBA stakeholders and my colleagues on the
House and Senate Committees to find a solution.
Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Thank you, Ranking Member Velazquez.
And I will now introduce our witnesses.
I will now introduce our witnesses. And it is my pleasure
and privilege to introduce our first witness, Mr. Tony
Wilkinson.
Mr. Wilkinson has served as the president and CEO of the
National Association of Government Guaranteed Lenders in
Frisco, Texas for more than 30 years. And prior to joining
NAGGL, Mr. Wilkinson spent 13 years with the Stillwater
National Bank as senior vice president and was responsible for
the bank's SBA lending activities. Mr. Wilkinson is a graduate
of Oklahoma State University, home of the cowboys, right?
And, Mr. Wilkinson, thank you for being here today. We look
forward to the conversation ahead.
I now recognize--Meuser is not here, and he was going to
introduce you, Mr. Kassar. So I am going to do it in a Texas
way, okay? All right.
Our next witness is Mr. Ami Kassar. Mr. Kassar is the
founder and CEO of MultiFunding LLC located in Ambler,
Pennsylvania. Mr. Kassar has dedicated the last two decades of
his career to ensuring that businessowners and entrepreneurs
get the best possible financing to grow their businesses. He
knows far too well the impact that poor financing choices have
on the ability for a small business to grow.
In his work as a public speaker and as a founder and CEO of
MultiFunding LLC, Mr. Kassar has helped thousands of business-
owners and entrepreneurs structure their debt to optimize
growth and in turn help to create tens of thousands of jobs.
Mr. Kassar is a graduate of Brandeis University and the
University of Southern California where he received his
master's in business administration.
Mr. Kassar, thank you for being here today, and we look
forward to the conversation ahead.
Next, our next witness is Alice Frazier. Ms. Frazier serves
as president and CEO of Bank of Charles Town in Charles Town,
West Virginia. She also has recently been appointed to the
board of directors of the Federal Reserve Bank of Richmond.
Including her current position with BCT, Ms. Frazier has
over 32 years of local banking experience, including with
Cardinal Financial Corporation as executive vice president and
chief operating officer, BB&T as senior vice president in
Loudoun County, and Middleburg Financial Corporation as chief
financial officer and chief operating officer, which is where
Ms. Frazier began her banking career. Prior to that, she worked
for 4 years in public accounting with a national and regional
firm.
Ms. Frazier is a graduate of Stonier. Is that how you say
it? Stonier Graduate School of Banking and Radford University.
Ms. Frazier, thank you for being here today, and we look
forward to the conversation ahead with you.
And I now recognize the Ranking Member from New York, Ms.
Velazquez, to briefly introduce our last witness appearing
before us today.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
It is my pleasure today to welcome back to our committee
Mr. Manny Flores, President and Chief Executive Officer of
SomerCor, an SBA Certified Development Company located in
Chicago, Illinois.
In addition to making 504 loans, SomerCor is an active
lender in the SBA Community Advantage Pilot Program and a
Member of the National Association of Development Companies, or
NADCO.
Mr. Flores first joined SomerCor as a Board Member in 2016
and was appointed to his current role in 2018. Prior to
SomerCor, he held elected office as a Chicago city
Councilmember and served as Director and Acting Secretary of
the Illinois Department of Financial and Professional
Regulation.
We are glad to have you with us today. Welcome.
I yield back.
Chairman WILLIAMS. Thank you, Ranking Member Velazquez.
And we appreciate all of you, again, being here today.
Now, before I recognize the witnesses, I would like to
remind all of you that your oral testimony is restricted to 5
minutes in length. If you see the light turn red in front of
you, it means your 5 minutes have concluded, and you should
wrap up your testimony. And if you don't wrap it up, I will
beat on the gavel, and you will get the idea, okay?
So with that, I now recognize Mr. Wilkinson for his 5-
minute opening remarks.
STATEMENTS OF TONY WILKINSON, PRESIDENT & CEO, NAGGL; AMI
KASSAR, FOUNDER & CEO, MULTIFUNDING LLC; ALICE FRAZIER,
PRESIDENT & CEO, BANK OF CHARLES TOWN; AND MANUEL FLORES,
PRESIDENT & CEO, SOMERCOR
STATEMENT OF TONY WILKINSON
Mr. WILKINSON. Thank you, Mr. Chairman, Ranking Member
Velazquez, and Members of the Committee.
Let me start by saying, Mr. Chairman, I agree with your
opening statement. In the 36 years I have been NAGGL's CEO, I
have never seen changes more sweeping and potentially damaging.
SBA is removing long-standing underwriting guardrails that
have assured prudent lending in the 7(a) program, while
simultaneously adding an unlimited number of nonfederally
regulated lenders. Worse, SBA will serve as primary regulator
for these new entities, a role that it is not equipped for.
SBA's stated intent for these changes is laudable, increase
access to capital for underserved markets, and streamline
processes. The lending industry wholeheartedly supports those
goals, but the recent rules do not achieve what SBA is setting
out to do.
And the biggest change between the proposed and final
rules, SBA removed any mention of underserved markets from the
regulatory language. SBA's data shows that in fiscal year 2022
more than 75 percent of all loans are estimated to be small-
dollar loans, 68 percent of all loans going to underserved
markets, far exceeding SBA's 43 percent goal, and nearly one-
third of all loans going to minority-owned businesses. There is
always room for progress, but these numbers don't show the
market failure that SBA has described.
First, on underwriting, the rules remove guidelines that
ensure lender behavior and portfolio performance stay at an
acceptable level. SBA has described the new standard as ``do
what you do'', leaving it up to lenders to determine what is
prudent. I fear that removing these guardrails creates a race
to the bottom in credit quality.
Today's 7(a) loans are not funded by taxpayer dollars
because current loss rates assure that the borrower and lender
fees cover the cost of loans. Removing the underwriting
guardrails mean that losses could increase, and Congress either
will have to raise fees on borrowers and lenders or provide an
appropriation; otherwise, this program shuts down. A lose-lose.
After throwing out the rule book, SBA is telling the new,
nonfederally-regulated lenders--presumably fintech--that they
can do whatever they think is prudent. SBA said in 2021 rules
that it could not be the primary regulator for more lenders
because it will lack the oversight capability and cited an
increased risk to the agency.
Just 22 months and later and with no evidence of changed
capacity, SBA has reversed itself. And despite SBA's assertion
that it will add just three additional regular SBLC licenses,
the truth is, it is just three for now. The rule doesn't have
any limits. And SBA is also adding mission lenders currently
participating in the Community Advantage Pilot Program as
SBLCs, which is more than 100 entities.
The capacity and resources of SBA's oversight functions
both fall short. Funding has been stagnant for nearly 10 years.
There is a failure to even meet current oversight requirements,
and the IG identified staff vacancies of 40 percent, just to
name a few concerns.
But even with more resources, SBA still lacks the
regulatory framework necessary to oversee lenders on an
enterprise risk level. This is made worse because the final
rule removed the restriction that limited SBLCs to only making
SBA loans, increasing the oversight burden significantly.
Currently, SBA does not regulate for Bank Secrecy Act or
Know Your Customer or even the most basic consumer protections.
And the rules go even further. SBA now allows a business to
qualify as small, even if it is controlled by a large business.
It will be the large business, not the small, that will be the
primary beneficiary of an SBA loan.
SBA also drastically altered the credit elsewhere to
nothing more than a check-the-box exercise, inviting fraud like
we saw in PPP. And now SBA allows borrowers with significant
personal wealth to qualify for loans, flying in the face of the
statutory mandate to only give a 7(a) loan to borrowers who
could not get credit elsewhere.
Finally, politicizing SBA decisions should concern
everyone. Under the affiliation rule, the SBA administrator can
now reverse a loan denial. This change allows politics to seep
into determining SBA loans. And the biggest concern, the harm
to borrowers, particularly the underserved, who would be faced
with higher fees, the possibility of receiving loans they
cannot repay, and lenders who have no federal regulator that
ensures consumer protections.
This Treasury Department, Mr. Clyburn, House Oversight
Committee, the IG community, and more all point out significant
concerns with the concepts and the underlying rules, yet SBA
has not heeded any warnings. Lenders are not concerned about
competition, nor is this about being anti-fintech, but SBA is
not inviting fintech into the program we all know and trust.
SBA is inviting fintech into a very changed program devoid of
guardrails.
I am profoundly opposed to imprudent changes that could
harm underserved markets and damage the 7(a) loan program.
Participating in a government program requires responsible
stewardship, especially when the current portfolio is nearly
$107 billion in outstanding principal balances with the
government liable for roughly 75 percent of that. Congress
should require strong guardrails when the federal government is
the backstop.
While SBA could change course, I see little evidence it
will, especially when it has repeatedly ignored congressional
and industry concerns. I implore you to legislatively act
because the future of this program might very well depend on
Congress reversing these rules. Otherwise, the program that
fuels mainstream America will be in jeopardy and our most
vulnerable small businesses harmed. Thank you.
Chairman WILLIAMS. Thank you. Right on time. I appreciate
that.
Next, I will recognize Mr. Kassar for his 5-minute opening
remarks.
STATEMENT OF AMI KASSAR
Mr. KASSAR. Thank you for the honor of testifying today to
share my thoughts on the changes to the SBA program that deeply
concern me.
My name is Ami Kassar, and I am the founder and CEO of
MultiFunding LLC, a loan brokerage and consultancy company
based in the suburbs of Philadelphia. Since 2010, my team and I
have heard the stories of thousands of entrepreneurs over the
years. In our work, we strongly recommend the SBA 7(a) program
and have helped borrowers receive nearly $400 million of 7(a)
loans nationwide.
There are three primary points I want to leave you with
today. First, traditional SBA 7(a) lending has few similarities
to the EIDL program or the Restaurant Revitalization Fund that
we heard about last week.
Secondly, when entrepreneurs take loans without a clear
path to pay them back, there can be devastating consequences
for both the lenders and the entrepreneurs. All of the proposed
SBA changes will make it much easier to get a loan, leaving
many to take loans before they are ready for them.
And finally, if you make wholesale changes to the SBA 7(a)
program all at once, it will be impossible to understand the
impact of each change.
Let's begin with comparing the 7(a) program to the EIDL
program and Restaurant Revitalization Fund, which was a common
thread of testimony in front of this Committee last week.
The Restaurant Revitalization Fund was a grant program. It
did not issue loans, and recipients did not have to repay the
grants. Therefore, comparing this program to the 7(a) program
is nonsensical to me. The EIDL program is a story that requires
unpacking.
First, 378 billion was lent to 3.9 million small businesses
without proof of economic injury. The repayment data has barely
started to come in. That said, I suspect we will learn a lot
from EIDL loans about what happens when you lend money to
businessowners who don't have a clear plan to pay it back. And
this is what I fear will happen if we simplify SBA lending.
In this spirit, I want to share a story with you. One night
during the pandemic, I was asked to teach a virtual SBA class
for a female entrepreneurship group at an African American
church in Philadelphia. About a dozen women who were trying to
get side hustles off the ground attended.
As the session began, I quickly realized that the last
thing these entrepreneurs needed was a loan. You see, like many
entrepreneurs, they thought they needed more money to get
started than they did. But in every case, there were far less
expensive ways to get their concept off the ground than they
thought.
One woman wanted to start a business baking desserts for
restaurants that didn't offer them. She was convinced she
needed to borrow $50,000 to open a kitchen. She had yet to
consider that she could prove her concept by baking in her home
kitchen or renting a kitchen during off-hours at a local
restaurant to get started.
But here is the thing. If an unregulated fintech lender
offered these budding entrepreneurs an SBA loan that will land
in their bank accounts in a few days, every one of these
entrepreneurs would jump on the opportunity. Is that what we
want for the SBA program?
In today's world, borrowers write business plans, build
projections, and make business cases for their needs. They have
to have their books in order. Now, the SBA wants to throw much
of this out of the window. It is a recipe for disaster and will
lead to much higher delinquencies, in my opinion. And a
delinquent debt to the United States Government is not a good
mark on a budding entrepreneur's resume.
I am all for change, but you take significant risk if you
make too much change too quickly. Broadening access to capital
is a worthy goal. But now the SBA proposes changing too much,
too soon in an uncontrolled environment. If all these changes
go forward as it looks like they will, I predict we will return
to this room in 2 years to try to explain the growing default
rates. And the problem will be we won't be able to understand
the root causes because of all the vast changes being made all
at once.
I remember some important lessons from science class in
high school. If you are going to try and experiment, test one
variable at a time. You cannot read the results if you try
everything at once. The checks and balances of the SBA system
can be exceedingly frustrating, but they help borrowers and
lenders in the long run.
We are in the business of issuing loans insured by the U.S.
taxpayer. This is not a responsibility we take lightly. With
these simultaneous changes, we risk blowing up a long-standing
healthy program, like the SBA, that positively impacts our
economy.
I implore Congress to slow down the SBA train that has
already left the station and create a more cautious path for
the SBA in the future. Let's evolve and grow and try new things
but in a measured and thoughtful way. Thank you very much.
Chairman WILLIAMS. Thank you. Good job on the timing.
And now, I would like to recognize Ms. Frazier for her 5-
minute opening remarks.
STATEMENT OF ALICE FRAZIER
Ms. FRAZIER. Chairman Williams, and Ranking Member
Velazquez, and Members of the Committee, I am Alice Frazier,
president and CEO of Bank of Charles Town, a $790 million
community bank serving the markets of West Virginia, Maryland,
and Virginia.
I testify today on behalf of the Independent Community
Bankers of America where I am Chair of the Bank Operations
Committee and a Member of the Board.
My bank has been an SBA lender for over 40 years, and I am
proud to say that more than half of the SBA loans over the past
18 months were made to minorities or women borrowers. And we
share with this Committee the goal of preserving and protecting
the integrity of the SBA 7(a) program, while continuing to make
prudent loans to smaller and underserved businesses.
The new SBA rules, which were rushed through the process
without any input from Congress or industry, will undermine
this critical goal. And we recommend the agency hit the pause
button, convene a working group of existing SBA lenders to
determine how we can better align the program with the SBA
mission of reaching the smallest businesses and entrepreneurs.
Current lenders know where the challenges lie and should be
given the opportunity to craft a program that works better. We
believe the SBA's new small business lending company rule,
which would admit nonbank financial technology companies or
fintechs to the 7(a) program, is a serious threat to its
integrity.
And moreover, the new affiliation rule and revisions to the
SOP appear to be specifically designed to accommodate nonbank
fintechs. Online-only lending can never be a substitute for on-
the-ground community bank lending. The business model of a
nonbank fintech that snap approval and rejection of a loan and
quick disbursement of funds is often not in the borrower's best
interest.
We have a client who had previously obtained two quickly-
disbursed fintech loans of less than $30,000 each. The fintech
provided no counseling on how to put that money to good use. In
fact, he was overpaying himself, resulting in losses each year.
He won a Navy contract, but couldn't find a lender because of
his losses. And we worked with him to help him understand what
lenders look for in reviewing a credit application. And
ultimately, we were able to secure for him a $150,000 SBA loan.
You see, the community bank model is really quite
different. We partner with our small business borrowers and are
vested in the long-term growth and success. The reality is that
once the loan is funded, that relationship has really only just
begun. We provide practical, real-world business counseling and
networking opportunities, particularly for start-ups, in a way
that can never be matched by an online-only lender.
The best thing for an underserved borrower is to work with
a lender that is committed to their success. A small African
American 8(a) government contractor applied to us for a
$150,000 loan. She had recently won a couple contracts, but her
low credit score made it impossible for us to approve her loan
application at that time. And rather than just turn her away,
we worked with her for over a year and a half to increase her
credit score and then celebrated when we were able to give her
an SBA loan. I cannot imagine a nonbank fintech lender standing
by a loan applicant for a year and a half.
We are committed to working with this Committee and the SBA
to ensure the 7(a) program is reaching the smallest underserved
borrowers. But I also think we should appreciate what the
program is already achieving. For example, according to the
SBA's own data, 68 percent of the loans in fiscal year 2022
were made to underserved borrowers. This far exceeds the
agency's target of 43 percent. And also in fiscal year 2022,
one in three 7(a) loans were to minority-owned businesses.
I fully expect nonbank fintech loans to have a higher
default rate and higher incidents of fraud, similar to the
results of the Paycheck Protection Program. The cost associated
with more defaults and fraud will drive fees higher and make
the program more costly and less accessible.
We urge this Committee to exercise robust oversight on the
7(a) program with the goal of safeguarding its integrity. Thank
you, again, for this opportunity to share my perspective, and I
am happy to answer any questions you may have.
Chairman WILLIAMS. Thank you very much, Ms. Frazier. Good
job.
I now recognize the witness, Mr. Flores, for his 5-minute
opening remarks.
STATEMENT OF MANUEL FLORES
Mr. FLORES. Chairman Williams, Ranking Member Velazquez,
and distinguished Members of the Committee, thank you for
having me today.
My name is Manuel Flores, and I am the president and CEO of
SomerCor, a Certified Development Company based in Chicago,
Illinois, a Member of the National Association of Development
Companies. I am honored to represent the CDC industry to
discuss rule changes affecting the lending programs at the
Small Business Administration.
CDCs are nonprofit organizations certified by the SBA who
meet our economic development mission through the delivery of
the SBA's premier economic development program, the 504 loan
program, as well as the 7(a) Community Advantage Pilot Program,
the microloan program, and other federal and state initiatives.
My comments today will focus particularly on the
affiliation and lending criteria as it relates to the 504
program. The 504 loan program is a prime example of the
successful public-private partnership with a loan structure
that pairs the CDC--which provides up to 40 percent of the
financing for an eligible project through 100 percent SBA-
backed venture--with a banking partner, typically, which
provides 50 percent of the financing, thus requiring only a 10
percent down payment from the small business borrower.
The program finances commercial real estate, including
construction costs and equipment, with terms of 10, 20, and 25
years at a fixed below-market interest rate. An important
cornerstone and differentiator of the 504 loan program is its
economic development mission. To be eligible for a 504 loan,
the project must create jobs or meet a public policy or
community development goal.
The result is a zero-subsidy program that has served more
than 175,000 small businesses, provided more than $100 billion
into ventures, and leveraged private sector financing for an
estimated total investment of more than $250 billion in local
economic development, all at no cost to the taxpayers.
In addition, the 504 programs have a collective performance
of a 0.5 percent charge-off rate over the last decade. This is
in part a result of the multi-stop underwriting and approval
process that includes loan review by the CDC, a third-party
lender, and the SBA. Combine the extensive oversight of CDCs by
the SBA with the underwriting and approval process of the 504
program, and it becomes clear why it performs so well.
Unfortunately, despite some of the program's successes, the
504 program can be weighed down by a complex approval process
that can adversely affect the borrower. The CDC lending
industry has advocated for regulatory changes to create
efficiencies in the approval process for over a decade,
including many of the adjustments to affiliation and
underwriting included in the recent final rule.
Now, NADCO largely supports the intent of these changes,
which will provide CDCs the flexibility to be reasonable while
continuing to use prudent underwriting practices that focus on
ensuring repayment ability.
As you consider congressional action in response to these
rules, I offer the following recommendations. First, there are
several lending programs that the SBA impacted by these rules
who operate differently, and a one-size-fits-all approach is
not the best way to expand small business lending. It is
important to continue differentiating the programs and
approaching their implementation through this lens.
Second, while Congress continues to weigh the rules and
their impact, the CDC lending industry and our banking partners
need time and open communication with the SBA to understand
these changes. Trainings, open dialogue, and a collaborative
approach is integral for industry participants to understand
and adapt to the rule changes without fear of being penalized.
Finally, I would like to also draw attention to a program
change initiated by Congress, but for which the SBA has not yet
published a final rule. The Economic Aid Act enacted in 2020
made integral changes to the 504 Debt Refinance Program. It is
critical the SBA remove administrative barriers that restrict
borrower access to the program and release a final rule as soon
as possible.
These changes made in the Economic Aid Act are particularly
important in the current interest rate environment where the
lower fixed rate of the 504 program can provide enormous cost
savings to small businesses.
The CDC lending industry cares deeply about maintaining our
role as a trusted partner for small business success. We will
continue to focus on our collaboration and communication with
the SBA and Congress to meet our collective goal of making
lending programs like the 504 easier, faster, and more secure
in support of a strong small business ecosystem nationwide.
I appreciate the opportunity to testify this morning. I
look forward to answering any questions.
Chairman WILLIAMS. Thank you very much. Good job.
Plagiarism is an evil thing.
Mr. FLORES. I was inspired, Chairman.
Chairman WILLIAMS. Well, I thank all of you. Good job.
And we will move now to the Member questions under the 5-
minute rule, and I recognize myself for 5 minutes.
Mr. Wilkinson, given your extensive experience with the SBA
programs, I wanted to start off by asking you to quickly
clarify a few statements that former SBA official Patrick Kelly
made at our hearing last week.
He said that the changes to the 7(a) lending program are
not terribly new but would simply put the program in line with
the SBA's Express loan program.
So, Mr. Wilkinson, can you describe why this comparison by
the SBA is not accurate?
Mr. WILKINSON. Until recently, the SBA Express program has
been limited to $350,000 in size. The expansion of doing what
you do up to a $5 million loan size is a vastly different
approach.
I would also add that we would have a little bit of a
concern about the loss rate that has been seen in the Express
portfolio. It has got a 50 percent guaranty, so you would
intuitively think you would have a lower loss rate, and that
has not been the case. It is running about two times the loss
rate that the regular 7(a) program is.
Chairman WILLIAMS. Okay. He also claimed that as part of
their oversight of small business lending companies, they give
lenders guidance on how they should be compliant with the Bank
Secrecy Act and other anti-money laundering laws.
So have any of your Members received guidance on how to
fulfill these requirements from the SBA?
Mr. WILKINSON. No.
Chairman WILLIAMS. Okay. And finally, Mr. Wilkinson, can
you clarify what would need to happen to keep the program
operational if loan defaults were drastically increased?
Mr. WILKINSON. Well, we are hopeful that this Committee
will address that through legislation, putting back in the
guardrails that have been there for decades to make sure that
the underwriting guidelines stay in place and we keep lenders
between the lines.
Chairman WILLIAMS. Don't try to fix what is not broken.
Mr. WILKINSON. Correct.
Chairman WILLIAMS. Thank you for those answers.
I also sit on the Financial Services Committee, as several
of us do here, and for the last few weeks, we have been
discussing the recent wave of bank failures.
So, Mr. Kassar, can you describe the similarities you see
with the fall of Silicon Valley Bank to what the SBA is
attempting to do by increasing access to capital to small
businesses that might not be ready for prime time? And you have
talked about that.
Mr. KASSAR. I have seen a lot of term sheets from Silicon
Valley Bank over the years. And for the life of me, I don't
understand how they make the loans that they do. I don't know
other lenders who could match them.
So a loose credit culture, I believe, is part of what the
problem was, that cultural program at Silicon Valley Bank, and
I am concerned that a loose credit culture at the SBA will lead
us sadly to think about SBA and SVB in the same sentence in a
couple years if we completely loosen so many of the guardrails.
Chairman WILLIAMS. All right.
Now, yesterday, the Ranking Member and I sent a letter
along with Chairman Cardin and Ranking Member Ernst in the
Senate to the SBA asking for them to pause on attempting or
implementing these rules until a full-time head of the Office
of Capital Access is installed.
Ms. Frazier, you touched on that. But do you think this
would be a good idea given the expected--unexpected departure
of the former associated Members who sat in that seat last
week? And can you describe outstanding questions you still have
about the new rules?
Ms. FRAZIER. Thank you. Well, given that the new rules were
rushed and just recently put out, many of us as lenders are
still trying to absorb what is in them and how would they be
affected. So the pause--not only a pause would be necessary,
but I think also gathering existing lenders together that have
experience with the current SBA rules and reflect upon what
could be changed to make it simpler, but maintain prudent
lending standards.
And I would also recommend not only the pause, but should
the changes go into--any changes go into effect, give it time
for the current lenders to process and absorb them and see the
impact before we allow any more small businesses lending
companies into the program.
Chairman WILLIAMS. Thank you very much.
I now recognize the Ranking Member for 5 minutes of
questions.
Ms. Velazquez.
Ms. VELAZQUEZ. Yes.
Mr. Flores, your testimony demonstrated it is important to
differentiate the 504 and the 7(a) loan programs, which are
both impacted by the rules we are discussing today, and you
yourself stated that in your opening statement.
The 504 loan program is an economic development program
with job creation goals. Can you walk us through the 504
underwriting process and why you believe the changes in the
affiliation rule will benefit 504 loan borrowers?
Mr. FLORES. So, Ranking Member Velazquez, thank you for
your question. Thank you for your question.
The 504 loan underwriting process is unique because it
includes three different parties and multilayers of
underwriting and examination, all with a goal of ensuring
borrower solvency.
So you have the Certified Development Company with staff
who has expertise in underwriting also governed by policies and
procedures, risk weighting, and concentration tracking, all
which have to meet SBA requirements, which also includes
independent loan review by a loan committee as well as the
board.
In addition to the CDC, you have a lending partner,
typically a bank, that will also have to follow its own loan
procedures, safety and soundness, prudent lending. I need not
remind this Committee here that banks are also regulated by
banking regulators. I was a former banking regulator for State-
chartered institutions. And then you also have the SBA that
also reviews the loans for the purposes of, again, underwriting
and then also eligibility requirements.
Ms. VELAZQUEZ. I have a lot of questions, so please be
brief.
Mr. FLORES. Oh, apologies.
So a very thorough process, Ranking Member.
Ms. VELAZQUEZ. Okay. Thank you.
As lenders, borrowers, and even those of us here in
Congress try to get up to speed on the details of these two
rules on the SOP, I understand mistakes will be made.
What has your interaction with the SBA been like? Have they
tried to explain the details of the rules to your organization
in order to help you comply?
Mr. FLORES. So a lot of the changes that we are seeing,
frankly, have come from years of communication with the SBA in
engagement with the CDC industry. And just as recently as last
week, we had a number of meetings with the SBA leadership and
other Members to reflect upon some of the changes.
That being said, I do believe, Ranking Member Velazquez,
that it is prudent that the SBA continue to gauge the industry.
I agree with the notion of openness, transparency, and
collaboration in making sure that all of the stakeholders
understand the changes so that we can do our jobs in helping
small businesses access these amazing programs.
Ms. VELAZQUEZ. Thank you. Thank you.
Mr. Wilkinson, I am sure you are aware I have been
advocating for more small-dollar loans, those from 50- to
150,000. There has been a decline, about a 50 percent decline
in those type of loans.
My question is, why is it that lenders are not making these
loans?
Mr. WILKINSON. Well, I think from where we sit, you know,
50 percent of our loan approvals by number of loans are
$150,000 or less. So those are small-dollar loans.
In any given year, based on economics or lender business
models, those numbers changes. They fluctuate. And if you go
back 5 years, we had a couple of major SBA Express lenders exit
the program, so you saw a decline in small-dollar loans at that
point in time.
But if you go look today, you'll see our small-dollar loans
are coming back up. I think the fee waivers are playing an
important role.
Ms. VELAZQUEZ. We have issues with the data, right, that is
coming to us from SBA itself.
What would you say to those that say that this is simply
about market competition? How do you respond to that?
Mr. WILKINSON. It couldn't be further from the truth. Banks
can enter this program today, leave tomorrow. We get banks
entering all the time.
Ms. VELAZQUEZ. In terms of myself as Ranking Member of this
committee and as Chair of this committee for 30 years now, I
have been advocating for the smaller of the small businesses.
And for those small loans from 50- to 150,000, the truth of the
matter is that there is a decline. I want to make this effort a
reality to get loans to underserved businesses who need it the
most.
My question is, how can we achieve this goal using the
rules as a framework?
Mr. WILKINSON. Well, first of all, I was starting down the
path of--the fee waivers are working right now. We are seeing
an uptick in small-dollar loans. We are seeing an increase in
$150,000 and under. We are running ahead of last year's pace
by--goodness, we are 25 percent ahead of last year's pace on
loans of $150,000 and under. So we are making progress.
We could expand the microloan lender network because they
are specifically focused on loans of $50,000 and under, and
they add the technical assistance component. And then perhaps
if we gave lenders some credit in their PARRiS reviews if they
did a specific percentage of loans under 150,000.
Ms. VELAZQUEZ. Thank you.
I yield back.
Chairman WILLIAMS. Thank you very much.
Next, I now recognize Mr. Luetkemeyer from the great State
of Missouri for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Welcome to the panelists.
Mr. Wilkinson, let me start with you this morning. I have
got in front of me this morning a copy of the Federal Register
which publishes rules and regulations that are promulgated by
different agencies.
The particular pages I have in front of me are with regards
to the Small Business Administration, and they say--and I
quote, the SBLCs are nondepository lending institutions
authorized by SBA only to make loans pursuant to section 7(a)
of the Small Business Act and loans to intermediaries and SBA's
microloan program, which says only those kind of loans.
But then it says later on that SBA agrees with the previous
paragraph, which mentions that they are going to do away with
that, and it says, we will revise the paragraph by removing the
word ``only'' to make it clear that SBLCs and Community
Advantage SBLCs may participate in other lines of business in
addition to 7(a) lending or making loans to intermediaries.
Mr. Wilkinson, what is the impact of that?
Mr. WILKINSON. Well, I have huge concerns about that
because this change--as you note, there is now nothing in the
regulation to prohibit an SBLC from making other types of loans
or engaging in other business products.
More importantly, this change significantly would add to
the SBA's oversight burden, since when it is evaluating
institutional safety and soundness, they would now have to be
up to speed on all the other related lines.
Mr. LUETKEMEYER. What is the mission of an SBLC?
Mr. WILKINSON. Mission of an SBLC?
Mr. LUETKEMEYER. Yeah.
Mr. WILKINSON. Well, currently, the SBLCs are standalone
separate corporations that only do 7(a) loans.
Mr. LUETKEMEYER. Okay. So what they are going to do is they
are going to make these mini-banks. Is that where we are going
to be? Is that another way to frame it?
Mr. WILKINSON. That is another way to frame it.
Mr. LUETKEMEYER. So, Ms. Frazier, you are a banker. Do you
like this competition? Having the SBA be the new bank lender in
your community for small businesses, when they are supposed to
be the lender of last resort, and now they are your main
competition. How do you think about that?
Ms. FRAZIER. I don't think very highly of it, quite
frankly.
As I testified before, when the direct lending was being
proposed from that perspective--is that what you miss and what
many--what many of us are saying here is the relationship and
the coaching and the counseling many of these borrowers need in
this process--and they need the education towards their
financials--and to create an online process that scored, and
the decision is made against a few metrics or factors, you
don't achieve what I believe is what everyone desires as a
successful entrepreneurship and business.
So I am not excited about that kind of competition, only
because I think it diminishes really what the SBA is trying to
achieve.
Mr. LUETKEMEYER. Well, it would seem to me that what would
happen is you will turn somebody down because they are not
creditworthy or they have got a problem, and they are going to
run across to an SBLC who now has no criteria.
Last week, we talked about this with Mr. Kelly. And they
don't have Know Your Customer stuff. We don't have all these
other things in place that, during the PPP program, really
differentiated between the banks and the fintechs and how they
were able to get the funds out the door and be able to do this.
We found that the fintechs were basically the problem
children with the PPP program with the way that they did not do
the oversight that they really needed to do with regards to
their customers.
So it looks to me like we have got a real problem with
direct lending here, especially when at the SBA--when the EIDL
program was fraught with fraud. And so now we are going to make
them a direct lender in multiple areas.
Ms. FRAZIER. Right. Not a good thing because the
relationship isn't long-standing. It is, package up a
portfolio, sell it, service it, and you miss the opportunity to
really develop business and help with economic success.
Mr. LUETKEMEYER. Mr. Kassar, would you like to elaborate a
little bit on that? I think you said a minute ago something
about loose credit culture. This, to me, is our whole problem.
It is that SBA does not know how to do direct lending. It
is proven by the programs that they have, the losses they have
sustained. They don't do their due diligence on underwriting.
And now, suddenly, they want to expand those programs and be in
direct competition with the banks who we already know do it
right. And so now, it looks to me like we are going to wind up
putting a big burden on the taxpayers to underwrite this whole
situation.
Would you like to comment on that?
Mr. KASSAR. Absolutely. In addition to the prior point you
are making, if these new SBLCs can do any other kinds of loans,
if for whatever reason a borrower does not qualify for an SBA
loan, they can quickly move the mover to a high-interest, very
expensive loan that many--not all, but many of these fintechs
are doing that creates a high-speed debt treadmill, which is--
--
Mr. LUETKEMEYER. One more quick question.
Where are the SBLCs going to get their funds to loan? If
they are going to expand their loan program, where do they get
the money for that?
Mr. KASSAR. They might get them from private lines from
banks.
Mr. LUETKEMEYER. I yield back. Thank you, Mr. Chairman.
Chairman WILLIAMS. Next, I now recognize Mr. McGarvey from
the great State of Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman.
Thank you all for being here today and talking about this
incredibly important issue.
Last Congress, after an extensive investigation into the
Paycheck Protection Program, the House's Subcommittee on the
Coronavirus Crisis found that fintech and other nondepository
institutions failed to establish systems that would stop
obvious and preventable fraud and profited off of processing
fees for each loan they completed, leaving little incentive to
find the fraud.
The Subcommittee issued a report in December recommending
that, quote, any plans by SBA to again open 7(a) to fintechs
and other unregulated, nondepository institutions must be
accompanied by a well-defined, more rigorous, and better-
resourced initial review process, and that such entities should
be subject to continuous monitoring to confirm their adherence
to SBA rules.
Mr. Wilkinson, you talked a little bit about this in your
opening statement. I just want to go a little bit more in depth
with you on it.
Do you feel that the rule changes proposed by the SBA are
just that: Well-defined, more rigorous, and provide a better-
resourced initial review process?
Mr. WILKINSON. No, they're not. They are devoid of any
guardrails. SBA lacks the capacity to be the prudential
regulator for the new SBLCs. So, no, I disagree that they have
done a good job here.
Mr. MCGARVEY. What do you think should be happening?
Mr. WILKINSON. Well, there is a whole long list. First of
all, many of the guardrails should remain in place.
I would tell you that when the fintech group came to lobby
us, they asked for higher interest rates. They asked for the
ability to charge higher fees. They got that. It is in the new
SOP. They asked for the ability--and I am sorry. Mr.
Luetkemeyer just left--they asked for the ability to sell 100
percent of the loan, not just the guaranteed piece.
So there is a program underway at SBA to allow fintechs to
sell a significant portion of the loan. That is where they are
going to get their funding. And they asked for us to help them
get rid of the credit elsewhere test. And at that point in
time, we knew we were not going to be on the same page with
these folks. So the fintech groups that are trying to get in
right now have a vastly different idea of what this program
should look like than we do.
Mr. MCGARVEY. And tell me, what is the practical effect of
that, to people looking for SBA loans?
Mr. WILKINSON. Well, I suspect that there will be more
folks that will get the loans, many of whom probably shouldn't.
It is going to be down to an algorithm that is done online.
And the practical effect for us sitting in this room is you
are going to see significant increases in loss rates, which is
going to put an upward pressure on the cost of the program. And
we will all be right back in here talking about how we are
going to raise fees on borrowers and lenders, or are we going
to be able to come up with an appropriation, with the
discussion being--you are doing riskier lending. Why should you
guys appropriate money? And that is going to be a hard one to
defend.
But rest assured, losses are going to significantly
increase with these rule changes.
Mr. MCGARVEY. I appreciate your input and insight into
that.
And obviously one of the things I am concerned about--you
have heard Ranking Member Velazquez talk about this--is making
sure that people who need these loans, particularly the
smallest of the small businesses, the people who are
underserved, the people who have not had access to capital get
that type of access to capital.
It is clear that fraud was an issue with the fintechs. So
we have established that. I don't think you are seeing a debate
in this Committee. But we also know they did reach more women
and minorities than traditional lenders did.
So, Mr. Flores, what changes do you think are out there
that you would propose to current rules to allow for lenders to
serve more diverse and underserved populations while also
protecting borrowers?
Mr. FLORES. You know, that is what makes the Certified
Development Company network very unique, is that we are about
economic development. So our charge is to make sure that not
only are we informing and educating the public about small
business lending, but in particular, also providing technical
assistance and partnership with other organizations.
And our mission is to make sure that we not only promote
the SBA lending programs, but that we do it in a way where the
borrower is able to actually derive the whole benefit of that
loan.
So a lot of work goes into engagement and communication,
and it is done in partnership with the Small Business
Administration and individual CDCs, other economic development
organizations.
I just--again, I would hearken back to the comments that I
made as a former banking regulator as well, is that the Small
Business Administration working with the industry is critical
in making sure that we are able to track the performance of
these programs objectively and also to not lose sight that, at
the end of the day, while we may have deep concerns about, you
know, whether or not the new guidelines may impact certain
types of loans, that we not forget about the need--the gap that
exists with regard to access to capital for minority-owned
businesses and rural-based enterprises.
We have small businesses that need this access to capital,
and I think we can balance both prudence with increased access
to groups that have been historically left behind in terms of
access to capital.
Mr. MCGARVEY. Thank you very much. I would love to ask more
questions. I appreciate the conversation that we are having
here today. But I am out of time.
So, Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you very much.
I now recognize Ms. Van Duyne from the great State of Texas
for 5 minutes.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman, and thank
you for holding this important hearing highlighting how this
proposed rule change will be detrimental to small businesses
across the country and will lead to an increased risk to the
American taxpayer.
Just 4 weeks ago, we had the SBA Inspector General in this
room, where he shared the same concern we are hearing today. It
is clear that the SBA is in no position to take on additional
responsibilities.
From allowing fraud to run rampant in pandemic relief
programs to this unprecedented weakening of lending standards
in the 7(a) lending program, I am deeply worried by the Small
Business Administration's pattern of incompetence and seemingly
disdain for taxpayers.
One major concern with this rule is the change to credit
available elsewhere, which requires that a lender look
elsewhere for credit before looking at the SBA for funding. As
for this proposed rule, SBA eliminated the requirement of
providing the reason and is instead moving towards a loan
volume over loan quality.
So, Mr. Wilkinson, I appreciate you being here, and I
appreciate the testimony that you have provided so far in your
answers to a number of questions. But I am the Co-chair of the
Congressional Franchise Caucus, and I am particularly concerned
by the impact of this rule on our franchised small businesses,
which are a vital part of our economy, especially in North
Texas.
Seeing as the SBA is going to stop publicizing the
franchising directory that allowed lenders to quickly reference
whether an entity qualifies for an SBA loan, are you concerned
that this will make lenders more hesitant to lend to
franchisees?
Mr. WILKINSON. It absolutely will. And you are correct that
the Franchise Directory is no longer being maintained on the
SBA website. We instructed our lenders to download the latest
list of approved franchisors the day before they discontinued
it so lenders could still review--go back to that Directory to
see who would still be eligible.
But correct. There is going to be a lot of lenders who are
going to be very hesitant based on the new rules to engage in
franchise financing.
Ms. VAN DUYNE. I appreciate that.
In the recently-issued SOP, which takes effect on August 1,
SBA revised the requirements regarding what a lender has to do
to prove that the loan complies with what the statute requires,
which says a borrower can't get a 7(a) loan if they can obtain
credit elsewhere.
Mr. Wilkinson, what did SBA change about credit elsewhere,
and why do we need to know about these changes? What do we need
to know about these changes?
Mr. WILKINSON. Two important changes.
First of all, every time you make an SBA loan today, you
have to have a narrative in the credit file to specifically say
why that borrower cannot obtain credit elsewhere. It has got to
be detailed out.
The rule change has been made, in my opinion, to benefit
the fintech group, who wants a computer-driven algorithm low-
touch program, so they have made this a check-the-box exercise.
So all you have to do is, as the lender, is check a box, and it
is done.
Secondly, they have changed the personal resources test.
Beforehand, if a borrower had significant personal wealth, that
would be a source of funds that we would say had to be tapped
first before borrowing through a SBA loan. That has been
changed. So personal wealth is no longer an issue. So, yeah,
rich people can get 7(a) loans.
Ms. VAN DUYNE. I appreciate you saying that.
Mr. Kassar, you had mentioned earlier that not everybody
who applies for a loan needs a loan.
If we are going to turn to basically just checking a box
now, do you think that the SBA or that these fintech lenders
are going to able to provide the same type of quality of
service that you can by walking through everybody who applies
for a loan, whether or not they need it, the level that they
need it, and whether they can pay it back?
Mr. KASSAR. Absolutely not. Remember that SBA lending, it
is a work of passion, often more art than science. So it is
underserved or served borrowers across the spectrum.
The first thing you have to really ask them and understand
is, what is this money for? What do you want to do with it?
What is your plan? How do you propose to make more money with
this loan than it is going to cost you to service?
Ms. VAN DUYNE. So you are saying you don't treat everybody
the same?
Mr. KASSAR. I am not saying you don't treat everyone the
same. What I am saying is that you have to have a thoughtful
conversation with a borrower to begin to understand what is the
root of their ask. Do they have a good reason for not needing
this money? And if they don't, you have to counsel them to take
some time and do some planning and some thinking, and then come
back to the table when they are ready.
Ms. VAN DUYNE. So you think that the personalized service
is of a greater value than just checking the box----
Mr. KASSAR. 100,000 percent.
Ms. VAN DUYNE. Do you think that actually helps people not
have to borrow beyond their means?
Mr. KASSAR. 100,000 percent.
Ms. VAN DUYNE. Do you think that actually helps them to be
better small businessowners?
Mr. KASSAR. 100,000 percent. If you borrow too much money
too quickly or without a plan, you get into trouble.
Ms. VAN DUYNE. And do you think that the SBA is actually
providing that with this change in service?
Mr. KASSAR. Absolutely not. They are trying to streamline
it and make it quick, fast, and automated.
Ms. VAN DUYNE. I appreciate that.
I have one quick question. During my Oversight hearing with
IG Weir, Mr. Weir shared his concerns with self-certification,
and now the SBA is moving forward with self-certification for
the credit elsewhere test.
Mr. Wilkinson, how do you think this effect will--how do
you think this will affect lender behavior?
Mr. WILKINSON. Well, it is going to make it much easier for
fraud to enter the program.
I think--we are instructing our lenders to--when SBA says
``do what you do'', we are telling them do what you should do
because there is going to be a point in time in the future----
Chairman WILLIAMS. Time is up.
Ms. VAN DUYNE. All right. Thank you very much.
I yield back.
Chairman WILLIAMS. I now recognize Ms. Gluesenkamp Perez
from the great State of Washington for 5 minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Mr. Chair. Mr. Flores,
thank you for being with us today. I know this is a hearing
nominally on the 7(a) program, but I want to first address the
504 lending program.
So before I came to Congress, I actually own a small
business and got a 504 loan. It took me a year to do. It was
about the size of a phonebook. I know you share of my goal of
creating efficiencies in the 504 program to streamline the
process for small businessowners. The affiliation rules changes
the underwriting criteria for both the 7(a) and 504.
So am I correct to say that there are multiple layers of
underwriting and examination of the 502 program?
Mr. FLORES. So, Congresswoman, if you recall from the
process, you were dealing with a certified development company,
a third party lender, and also the SBA. The SBA actually had to
review all the work that was done and then ultimately decide
whether or not it was a worthy loan. So there are multilayers
just by virtue of the structure of the program, which is very
unique. And, again, I want to reenforce the differentiates--the
504, it is a differentiator between the 7(a).
But beyond that, as you recall, and I do want to reference,
you know, you referred to just the process that there are
certain complexities built in that we believe that with some of
these changes, it will make it easier for that borrower to
access this amazing program without, again, compromising any
level of integrity or oversight over the loan program.
Again, we want to make prudent loans. It is everyone's best
interest to make sure that the 504 loan program continues to
succeed as it has and to provide greater access to capital for
small businesses.
Ms. GLUESENKAMP PEREZ. So how exactly do the affiliation
rule reforms fit into the multiple layers of the 504 program
approval process and streamline it for small businesses?
Mr. FLORES. So a couple of things. I reference one
particular story where you had relatives who were given the
opportunity to own a couple of the restaurants--actually, the
father started. Ultimately, then, a couple of the siblings
wanted to move forward on a particular project, and the third
sibling did not want to share particular financials that were
required under the SOP.
And it ultimately led to a particular situation where the
project couldn't go forward because one of the siblings did
not--who was not involved in this other new venture wanted to
put forth financials.
Ultimately, the family got together and cooperated. But,
again, that was a situation where you had this very unique
complex process that didn't really apply to that particular
situation. It almost deprived that family from being able to
access the 504 loan.
With regards to franchises, again, one of the challenges
that a lot of franchisees have to manage is getting--showing,
demonstrating that the franchise is not going to have some
level of ownership in the particular business going forward.
So now where you have that removal, there is no issue with
regards to control. Now, it makes it easier for that small
business to move forward if it is a franchisee.
So the whole notion here is to make sure that we are
providing guardrails, but guardrails that apply to what is
really happening with regards to the small business needing the
capital for their particular business need and moving forward.
Again, I would say that the process in place with CDC
working in partnership with a third party lender and the SBA,
you have layers of oversight to protect the integrity of the
program.
Ms. GLUESENKAMP PEREZ. Thank you. Mr. Wilkinson, it is go
to see you again. Could you speak to how the 7(a) programs
structures differ from the 504 program?
Mr. WILKINSON. So our structure is a guarantee program. So
the lender makes the loan with a percentage of that loan
guaranteed by the SBA. But the lender actually funds the entire
loan.
Ms. GLUESENKAMP PEREZ. So is it safe to say that the
reforms that benefit one SBA program may not work for another
SBA program?
Mr. WILKINSON. They may not.
Ms. GLUESENKAMP PEREZ. Yeah, and thank you for that
insight. I agree that we should not being painting these with
an overly broad brush. In this last minute, I would love to
hear some insight on what we can do to streamline the 504 and
make sure that those dollars are getting to small
businessowners that need it. Ms. Frazier, if you have thoughts
on that.
Ms. FRAZIER. Thank you. I think the reference to the
phonebook is quite adequate. And I think it is overwhelming at
times from borrowers who are maybe not as sophisticated and
have borrowed money for commercial real estate and their
property before.
So I think anything we can do to help streamline but not
lose prudent underwriting standards in the process would be
helpful. Even the documentation, getting that down to something
that folks can absorb and understand, and it is simplified, and
I think those types of things would be helpful from the
process.
Ms. GLUESENKAMP PEREZ. Thank you. Mr. Chair, I yield back.
Chairman WILLIAMS. Thank you very much. I now recognize Mr.
Bean from Florida, the great state of Florida for 5 minutes.
Mr. BEAN. Thank you very much, Mr. Chairman. Good morning
to you. Good morning, Small Business Committee. Good morning,
panelists, we are glad to have you here. I have only been here
22 weeks. I am a new guy, 22 weeks, and I have discovered that
this place is crazy town. It is crazy town. Because only in
crazy town can a government agency come and have an abysmal
record of losing taxpayer money, and then come and say, Hey, we
want more money, and we want to ease the standards of giving it
away more frequently.
Yesterday, in crazy town, I was on a committee and spent 4
hours listening why it is a great thing that we would give away
taxpayer moneys in the form of student loans; why that is a
great thing. And then even finding out--and this was in crazy
town--a big sizable part of those student loans didn't even go
for tuition, they want for trips and cars and stereos. How
about that? But that is what happened in crazy town.
So and as a former banker--I know there is some bankers up
there--it is just unfathomable that we would ever forgive a
loan after the person agreed this is the terms of the agreement
without even trying back. So it is a toss-up for the panelists.
Are we in crazy town? Who wants to answer that question? Are we
in crazy town? Is this crazy town?
Mr. WILKINSON. I would love to take that question.
Mr. BEAN. Jump in, my friend. Welcome to crazy town.
Mr. WILKINSON. Well, thank you for that question. I would
tell you that over the last several decades that I have been
involved with this program, we have taken steps as we have seen
lender behavior--and borrower behavior as well--to put
guardrails in place at SBA to make sure that this program
operates on a sound basis. We view this as a three-legged stool
with the lenders, the borrowers, and the federal government
representing the taxpayer. We need it to work for all three of
us.
And so I would say over the last, especially the last two
decades, you can go look at our performance, and it has been
really, really good. In the last probably five fiscal years,
our charge-off rates have been running under a half a percent.
I think it is a very well-managed program. It is working for
the taxpayer, it is working for the borrower, and it is working
for the lender.
So I think in this being particular case, the 7(a) program,
as the Chairman said, it is not broken. It is working just
fine.
Mr. BEAN. So to make these moves, we wouldn't be going to
crazy town? Is that your testimony today before we are going to
crazy town making these changes?
Mr. WILKINSON. I believe these changes will lead to
significantly higher losses in the 7(a) program.
Mr. BEAN. Very good. Mr. Kassar, you have been sitting
there. I want you to jump in. I want you to jump in because it
used to matter, criteria used to matter. And I made loans
myself a small bank in northeast Florida. And it used to
matter, could the customer pay us back? That was the number one
question my boss and my committee--can they pay us back? That
was important. I had to answer that. But it seems the SBA is
less concerned about getting paid back, but is that what they
do in crazy town? Mr. Kassar, welcome.
Mr. KASSAR. Thanks for having me. Listen, one of the things
I have loved about SBA lending, being involved in it for the
last almost decade and a half is that it hasn't felt like crazy
town until now.
So to the point, we have had a balancing act, and it has
worked for all the parties involved. And it has helped tens of
thousands or hundreds of thousands of businessowners and
entrepreneurs. But it feels like crazy town when you say we are
going to throw it all up, we are going to change it all up all
at once. That feels like crazy town to me.
Mr. BEAN. And then you got to add this to the mix. After
their horrible report card, and it is just--they do it with a
smile and say, okay, we have done such a horrible job, give us
more, and let us ease the standards so we can get more taxpayer
funded programs out the door. And then, like I said, in the
committee yesterday, let's just forgive all debt. But that is
what they do in crazy town.
Mr. KASSAR. I think it is super important to note, though,
the conventional SBA 7(a) lending that has been around for
decades is not the EIDL program, we are not the PPP, we are not
the restaurant revitalization fund. And that is starting to get
a little crazy town when you are comparing them, because you
are comparing dramatically different programs. And you have to
be really careful to separate those guardrails.
Mr. BEAN. Gotcha. Typically, Ms. Alice, it would matter if
the borrower could pay us back, but we are in crazy town. So
should it matter that the borrower could pay us back, Ms.
Alice?
Ms. FRAZIER. It should always matter. And one of the things
that you know as a former banker that you are looking for some
skin in the game from the borrower as well. And that is part of
the new rules is there is no necessary reason to show any skin
of the game from that perspective. And that is part of paying
it back from that perspective. I would also say to become a
preferred lender, you have to prove yourself trustworthy and to
be trusted with what the government is allowing you to do on
their behalf. And in that point we all take that very
pridefully. And to remove these rules, it is not the same
anymore.
Mr. BEAN. Amen. Ladies and gentlemen, thank y'all so much
for coming forward. And welcome to crazy town. Mr. Chairman, I
yield back.
Mr. MEUSER. [Presiding.] The gentleman yields back. I now
recognize Ms. Scholten from Michigan for 5 minutes.
Ms. SCHOLTEN. Thank you so much, Mr. Chair. And thank you
to all of our witnesses for coming today. We truly appreciate
your testimony. I said this last week to Mr. Kelley, but, of
course, it bears repeating today, that these rules are nuanced.
And now that the SBA has finalized them, it is up to Congress
to do the necessary oversight of the SBA to make sure that they
are implemented correctly. And we do have concerns, as you have
heard today.
So my first question is for Mr. Frazier. In your testimony,
you state that the best thing for an underserved borrower is to
work with a lender that is committed to their success. I
completely agree. I have seen this first hand. I have heard
from financial institutions in my district about their concerns
regarding Fintechs that may become authorized SBA lenders under
this new finalized rule. One of the top concerns I have heard
about.
What services does your bank offer underserved borrowers
that a Fintech cannot? And what guardrails do you think the SBA
should have in place to ensure predatory lenders are not
allowed to participate in the SBA program?
Ms. FRAZIER. For our bank, I will speak for us, is we are
involved with a number of initiatives locally. Through
chambers, there are typically some programs focused on women
and minority borrowers to help educate them. We also work
closely with the NAACP organizations, et cetera. And then we
also have education programs that we hold for our, you know,
local clients and the prospects. But I don't think that I am
unique in that. I believe most of our community banks across
the nation do the same thing because we are committed to the
communities we serve overall.
And I am concerned from the Fintech perspective, it is not
about what you are doing to actually help the economics and
help the businesses grow, and help them use the money
appropriately and to get the right size loan that is
appropriate that they don't go too far into debt. And in that
situation, this is where the banker becomes more of a partner
to them than necessarily just a place to get money. And that
partnership lasts for a long time and can serve all very well.
Ms. SCHOLTEN. Okay. Thank you. I apologize for saying
``Mr.'' at the outset. Or maybe you didn't hear me.
Ms. FRAZIER. I will just let that slide.
Ms. SCHOLTEN. Good for you. I get called ``Mr.'' all the
time, actually. I don't mind. So I have a second question,
another concern that I have heard from financial institutions
in institutions in my district is changes to the underwriting
criteria the SBA is making in the affiliation rule. This is
also a topic that Mr. Kelley discussed at length last week.
Ms. Flores--I am kidding--Mr. Flores, my question is for
you. In your testimony, you express support for the intent
behind the SBA's changes to the underwriting standards. From
your perspective, how significantly do you think the
underwriting standards will change because of the affiliation
rule? How will these changes to underwriting criteria impact
the level of consistency in local evaluating and processing?
Mr. FLORES. Thank you. So from our perspective, we are
going to continue to use our prudent lending practices. We have
guidelines, we have policies and procedure that we have to vet
from our own internal loan committee board of directors as well
as the SBA. We are still going to be using the five Cs of
credit, capacity, capital, collateral, conditions, character.
And, frankly, the three, you know, there has been discussions
of moving from nine to three various credit factors.
But if you take a look at the actual SOP, the language of
the SOP. And I quote: Lenders and CDCs must use appropriate and
prudent generally acceptable commercial credit analysis,
processes, and procedures consistent with those used for their
similarly sized nonSBA guaranteed commercial loans. Lenders,
CDCs, SBAs may use the business credit score model.
When we read that, we are looking at, okay, also our
banking partner has to make sure that they are following their
rules and procedures. They can't run afoul those procedures
because they will get in trouble or banking regulator. The SBA
itself, OCRUM. We are going to have to be--we are going to be
measured and gauged by whether or not we are following our own
policies and procedures, and if we are also being prudent in
our lending.
Now, the streamlining here is to, in my opinion, and the
opinion of many in the CDC industry here is how do we make it
easier and less burdensome on the small businessowners so that
they don't have to come in with a telephone book, as it was
just described earlier, and where it frankly doesn't have to
take a whole year? Think about what happens in the real world.
You have small businesses who want to make investments. And
sometimes--and at the end of the day, time is money, and time
is opportunity. But here with the 504 program, it is not just
about what is in the best interest for that small business, it
is also about the impact that we have in creating more jobs,
bringing the local investment. So it is in everyone's best
interest to make sure that the 504 loan program gets in the
hand of the small business borrower in a shorter timeframe
responsibly. And then the benefit here is you are also seeing
more investment in our communities and greater access to
minority-owned businesses and rural-based enterprises.
Ms. SCHOLTEN. Thank you. I appreciate that testimony. I
yield back the reminder of my time. Thank you.
Mr. MEUSER. The gentlewoman yields back. I now recognize
myself for 5 minutes. I thank you all again for being here.
Chairman Williams mentioned the letter earlier that was
just sent, I believe in the last couple of days, also signed by
Ranking Member Velazquez and the Ranking Member and Chairman
from the Senate to the SBA stating that this program needs to
be needs to be delayed due to the lead person on this Patrick
Kelley no longer being with the SBA. We are all sitting here
stating, and your concern is that potentially unworthy
businesses will be receiving loans and will increase your
subsidy rate for the program, and among other things,
obviously.
So clearly this is a bipartisan understanding that they are
moving forward in real serious haste, which could have real
serious ramifications on taxpayers as well as yourselves. Is
there anything about this that you find reasonable? Is there
anything about this initiative that could work for you that you
think actually can be a positive thing? Anything at all? I am
going to ask you, Ms. Frazier.
Ms. FRAZIER. Well, certainly. Thank you for that question.
But certainly there are pieces in there that could help smooth
the process, make it easier to get credit there. But I think
taken as a whole----
Mr. MEUSER. Right.
Ms. FRAZIER.--it is too much risk.
Mr. MEUSER. Okay.
Ms. FRAZIER. And so it needs to be dissected. You need to
get--I really recommend as part of the ICBA, bring lenders in
and dissect it----
Mr. MEUSER. Right.
Ms. FRAZIER.--and pick the best parts----
Mr. MEUSER. Right.
Ms. FRAZIER.--so that we remain prudent. That we keep--safe
the monies that are put out there and do the right things for
the borrowers.
Mr. MEUSER. Good. Absolutely. Then and I am absolutely
favorable to that, and that is exactly how we should proceed.
Mr. Kassar, good to see you. Thanks for making the trip
down from Pennsylvania. I make that route quite a bit myself.
You stated that the SBA is focused on a misguided solution in
your testimony, broadening access to capital, and burdening
future generations of taxpayers with the fallout. You seem to
have some existential concerns about the 7(a) program due to
this initiative. Could you expand on that?
Mr. KASSAR. Sure, again, I think there are many elements
that could be terrific. I think there should be some role for
Fintech. It is very careful to put Fintech in one category.
Fintech is a broad industry with different players, with
different philosophies. Better use of technology in the program
at different stages is good. What is dangerous here is doing it
all at once.
Mr. MEUSER. Yeah.
Mr. KASSAR. And because--I don't know if the SBA has
produced any forecasts about what will happen to default
rates----
Mr. MEUSER. Right.
Mr. KASSAR.--as a result of these changes, and if they have
one, I don't know how they did it. So if we say we are going to
try this for this quarter, and then we will be able to measure
it, and then we will add this element next quarter, and this
element next quarter, you will start to see and understand what
is working or not. To say that the SBA program shouldn't evolve
and innovate and change or leverage technology----
Mr. MEUSER. Sure.
Mr. KASSAR.--I think is irresponsible. But to do it all at
once----
Mr. MEUSER. Right.
Mr. KASSAR.--like the big crazy science experiment----
Mr. MEUSER. Right.
Mr. KASSAR.--I think creates a lot of risk.
Mr. MEUSER. And as businesspeople and entrepreneurs, I can
understand that you all would have that sentiment.
Mr. Wilkinson, let me ask you this, the 7(a) loan program
statistics looked like for smaller dollar loans and underserved
market loans, the SBA stated that the 7(a) program does not
succeed in underserved market lending. Do you want to comment
on that? Is the 7(a) program working as effectively as it
should be right now.
Mr. WILKINSON. Well, you know, we can always do more, but
we have got just over 50 percent of our loans and loans under
$150,000, and with SBA's new definition of small-dollar loans
being at $500,000, about three-quarters of our units. That is a
significant portion of our portfolio are in small-dollar loans.
You also have to keep in mind that it is the larger
transactions that pay the cost for the smaller ones. And so we
got to have a pretty good mix of both.
Mr. MEUSER. Right. Okay. And last week the former Associate
Administrator Patrick Kelley told the committee that all the
concerns amounted to a lot of fuss that has been made about
banks being upset about three Fintech companies being included
in the program. What do you have to say about that comment.
Mr. WILKINSON. Well, we welcome in lenders to this program
all the time. We would be happy to have quality lenders who are
capitalized, who understand the rules and regulations of the
SBA program, and who are appropriately regulated.
Mr. MEUSER. Sure.
Mr. WILKINSON. What we don't want is lenders who don't know
what they are doing that aren't appropriately regulated abusing
program. But I would echo Mr. Kassar's comments about Fintech.
We have a number of Fintechs that work with our lenders today.
We have a Fintech who is a lender. They went out, and they
bought a bank. They are capitalized, they are regulated by OCC,
and they are a good corporate partner.
Mr. MEUSER. Thank you. Mr. Flores, I want to ask you
something quick. Your testimony described the 504 program as
successful public, private partnership. What did you mean by
that, and you have got one second to elaborate.
Mr. FLORES. Banks, private lenders, CDCs, SBA with a
support of Congress. That is winning calculation.
Mr. MEUSER. All right. Thank you very much. I yield back.
I now recognize Ms. Chu from California for 5 minutes.
Ms. CHU. Mr. Flores, I want to make it clear that I share
many of the concerns raised today particularly around
unregulated entities being able to make loans when there is
still questions regarding fraud and PPP. But I also want to
ensure that a response to these rules is nuanced and recognizes
the positive impact these rules will have on lending in
underserved communities.
For example, you testified that the affiliation and lending
criteria rule implements some welcome changes to the 504
Community Development Program. And, in fact, CDCs had
specifically asked for these changes to be applied to the 504
program after they were first applied in April of last year to
Community Advantage Lenders. As a CDC that makes both 504 and
community advantage loans, can you discuss how the changes to
the affiliation in lending criteria will help lenders like you
better fulfill your mission of reaching underserved businesses?
And, in fact, you have an example in your testimony about a
specialty food brand that you had loaned to for the property,
and then 10 years later they sought additional financing, but
they had grown and had 40 affiliates. And the burden of
providing documentation on 40 different affiliates, many with
no direct ties to the business seeking financing was too
arduous to close a loan. So how would it be different with
these rules?
Mr. FLORES. What it does is it makes it, it loosens up.
Again, not loosens it--it makes it easier in a more streamline
efficient way for us to determine whether or not the borrower
is meeting the spirit of being able to access the 504 loan
program. Knowing that we are providing some very favorable
terms to that borrower; to provide that access to capital; to
create job to make local investments. And the particular story
that you just referenced, it was sad to see here a very
successful business operator who had a dream. We provided an
SBA 504 loan. That individual continued to grow their business,
meet other unrelated investments. But because of those older
rules had to--was asked about all of these other unrelated
essentially entrepreneurial endeavors. And then now, the
individual said, you know, I just simply have no time to comply
with all these requests. I am talking away. I do not have time
in order to be able to make additional investment. And that was
a real lost opportunity.
I just want to reinforce, again, that we are talking
about--you know, that is why it is important to differentiate
between the 7(a) and the 504 loan program. And I want to make
that clear here. And that differentiation is important so that
as we are thinking through of how to apply the rules, we have
to look at them from the perspective of the difference between
the two programs.
Again, I want to also reinforce just the customer service
experience and how critical that is. If you have customers who
don't have faith in the program, they are not going to come to
the SBA for the 504 loan. They are going to say, hey, I am
going to look for a more expensive, more--a different option
because it is easier. You know, and what does that mean? It
also has a negative effect, frankly, on our lending partners.
If our lending partners or the bankers or other private lenders
believe that it is too onerous to do a 504 loan, they are not
going to help us promote the 504 loan. They are going to say to
their borrower, hey, you should do something else because it is
going to be easier and faster for you.
Ms. CHU. Mr. Flores, your testimony also urges sufficient
time and communication from SBA so that lenders could
understand and implement all the changes to the two rules. As
we know, since the final rules came out in April, the SBA has
released a number of agency notices laying out various lender
and program requirements in a piecemeal fashion. There has been
a lot of twist and turns in this. And then last week the SBA
released a 400-plus page SOP, which lenders have to review and
comply with by August 1. So that takes only 2 months away.
So do SBA lenders, particularly, smaller mission-based
lenders like CDCs, which may have fewer resources to navigate
various program changes, do they need more time from SBA to
implement these new rules? And what specific additional
resources do you need from SBA as you seek to become compliant
with these new rules.
Mr. FLORES. So as a former regulator, when I dealt with
banks and other financial service institutions that were
impacted by changes that we were making as an agency,
engagement with the industry was always part of the process. I
do give the SBA some positive remarks in terms of some of the
already engagement that they have undertaken with us. However,
I do think that we still need a continuous open dialogue. I
think we need to continue to have actual meetings, technical
assistance, and providing that a reasonable on-boarding ramp--
and not just for certified development companies, but also for
our lending partners.
Ms. CHU. Thank you. I yield back.
Mr. MEUSER. The gentlelady yields back. I now recognize Mr.
Alford from Missouri for 5 minutes.
Mr. ALFORD. Thank you, Mr. Chairman, and Ranking Member
Velazquez for holding this important hearing today. And thank
you to our witnesses for coming in today. I really appreciate
it.
One of this committee's core functions is to conduct
oversight as a small business administration. I am glad to be
hear today with my colleagues to continue that and discuss the
Biden-Harris administration SBA's disastrous rules that really
compromise the soundness of the 7(a) program and puts taxpayers
and small businesses at risk. Like many of my colleagues, I am
worried that the SBA is not able effectively regulate this
space and this activity.
As a previous small business owner, I know how important
capital is to small business, and I also understand access to
capital can be a challenge especially in districts like mine
which really has banking deserts. So let me be clear, I am not
anti-Fintech, but I am against the rules that decrease
standards and increase risks threatening the integrity of the
current system and leaving taxpayers on the hook when something
goes wrong. The SBA released procedural notices about these
rules the night before last week's hearing, the night before,
leaving us zero time to review them.
I am here to tell you today, Americans deserve better than
that. They deserve better than the fly-by-night Biden-Harris
SBA, which is why I am pleased to learn that the departure of
the SBA official chiefly responsible for these rules who is
with us last week. Mr. Kelley's blatant disrespect to this
committee and its Members last week showed a disregard for
Congress, and it showed a disregard for small businessowners.
It also underscores the importance of congressional oversight.
So and unelected bureaucrat cannot shamelessly advance an
agenda.
Now, with no one at the helm of the SBA's Office of Capital
Access, adding to the vacancy the offices already have, which
are many, the Biden-Harris administration must put a pause on
these rules and do it today.
Mr. Wilkinson, if you Google federal financial regulators,
the SBA does not show up, nor does the SBA show up in a March
2020 congressional research service report titled: Who
regulates whom, an overview of the U.S. Financial Regulatory
Framework. The SBA is not a financial regulator. But if a
Fintech only participates in a 7(a) lending program, you will
be sole federal regulator. Fintechs facilitated so much PPP
fraud as well.
Mr. Wilkinson, given your experience and perspective with
7(a), should this committee and taxpayers trust the SBA as the
sole federal regulator of Fintechs in this program, why or why
not?
Mr. WILKINSON. At this point in time, no. I am a fan of the
job, the effort, the folks in the Office of Credit Risk
Management at SBA are doing, but they are understaffed they are
under-resourced. They are 40 percent understaffed right now.
They have got so many vacancies. It will be hard for them to
catch up. I think the will is there to be a regulator, but they
are not given the resources to do so. But they also don't have
the framework to be the prudential regulator like an OCC or
FDIC. SBA is really good at looking at transactional risk,
looking at the loan, but they are not looking at the
capitalization and the interest rate risk and the other
interest bucket that will be looked at by a prudential
regulator.
Mr. ALFORD. Mr. Wilkinson, we have been told that this is a
Biden-Harris administration effort. But Joe Biden said he wants
to increase regulations for banks while at the same time this
rule removes most underwriting and prudent lending standards.
What reason is the FBA giving for saying something that
directly conflicts with the White House.
Mr. WILKINSON. That is an interesting question, because
most of the other warning signals are coming up are warning to
go slow with the addition of Fintech. Yet SBA is, I guess,
hanging their hat on the PPP program where they are saying that
Fintechs were able to reach down into more underserved markets.
But the PPP program was not a loan program; it was a grant
program. It was very--there was no underwriting to it. It was
if you made your payroll, you got your loan forgiven. End of
story. This is a vastly different program. You have got to
underwrite it to see whether the borrower can be paid and then
service it going forward. Probably not something that would be
high on the Fintech list.
Mr. ALFORD. Thank you. Mr. Frazier, I am greatly concerned
SBA is not prepared to handle this. The Inspector General
report published March 21 just a few weeks ago noted oversight
staffing levels in the Office of Credit Risk Management
decreased from 42 to 26 employees, 38 percent. This staff
reduction could affect SBA's fiscal 2023 goals for oversight
reviews which helps ensure lending compliance with program
requirements.
How do questions surrounding the SBA's competency affect
what lenders do and the small businesses that rely on these
loans?
Ms. FRAZIER. As we talked about many times already today,
there is a necessity to gain that access to capital for the
businesses in a timely fashion, but not at the risk of prudent
underwriting and not at the risk of doing things. But, however,
if their office is not appropriately staffed, it does put the
whole process into great risk.
Mr. ALFORD. Thank you. We are out of time. Again, I call on
the Biden administration to put a pause on these rules today.
Mr. Chairman, I yield back.
Mr. MEUSER. The gentleman yields back. The Chair now
recognizes Mr. Thanedar from Michigan for 5 minutes.
Mr. THANEDAR. Thank you, Chairman. According to Federal
Reserve Bank of Chicago, the small businessowners in my
district are routinely denied loans due to lower credit scores,
lack of sufficient collateral, and lacking access to banking
services.
In 2022, two out of three businessowners who sought credit
did not receive the full amount they requested. To that end, I
believe small businessowners should have access to more
responsible lenders.
My question to Mr. Flores is the SBA has spoken at length
about the need to increase lending opportunities for
underserved small businesses as the reason for these two rules.
But nowhere in either of these rules does it state a
requirement to lend to small businesses in underserved markets.
How do you guarantee that smaller loans are being made and
targeting the small businesses in the communities we are all
trying to reach? Mr. Flores.
Mr. FLORES. Thank you. Again, I reference the Certified
Development Company and its framework and its mission as an
economic development set of organizations is our commitment to
ensure access to capital, and not only to work with businesses
that had been operating for a few years and have a track
record, but also for those who are trying to get there. And so
what that means is being very proactive and engaged, working
with the small business development centers that are also part
of the SBA network--organization such as score--and also local
chambers of commerce and other units of government, locally,
that are focused on providing programs that help grow that
small business ecosystem. The Community Advantage Loan Program
is one such program, as well as others.
So, you know, a number of Certified Development Companies,
our community advantage lenders, we are committed to continuing
that program in our organization, and we believe that there is
an opportunity here to continue to grow that initiative. We are
obviously open to other ideas. And, obviously, there is a very
robust debate here and concern. And I appreciate that. I think
that there is a way for us to balance risk and at the same time
prioritize that access to capital to folks who had been
historically left out and also rural-based enterprises. There
are folks in central and southern Illinois, for instance, who
have less opportunities. How do we make sure that those
entrepreneurs aren't left behind? We think programs like the
premier advantage program can be effective.
Mr. THANEDAR. Thank you. Now, most of the fraud that
offered during the PPP loan scheme undertaken by the SBA came
from Fintech companies. I feel without strong oversight
regulations, bad actors might fraudulently take advantage of
small businessowners seeking loans.
Ms. Frazier, in your testimony you state nonbank Fintech
lending is no substitute for community bank lending. Can you
expand on the statement? What services does your bank provide
that a Fintech cannot?
Ms. FRAZIER. Well, on the basis of a Fintech is through the
web and through the internet. And, oftentimes, there may not be
even someone to speak to. Answers are given all electronically.
As noted by many of us here, you know, it is about the business
plan; it is about being able to sit with the borrower and to
speak with them about what are the plans; how do you see this
growing; what happens if you don't reach those goals; how will
you pay the loan back? And I think that those elements are
missing. And I believe, in a community bank world, that
personal relationship is there and is guiding them. And if
things go south for a business, and they do, the bank is able
to work with them to really help them through those troubled
times. And I think that is where the difference belongs.
Mr. THANEDAR. Thank you, and I yield back.
Chairman WILLIAMS. Next, I now recognize Mr. Crane from the
great state of Arizona for 5 minutes.
Mr. CRANE. Thank you, Mr. Chairman. Thank you all for
coming today. Last week I asked Mr. Patrick Kelley, I raised a
concern that these rule changes would leave taxpayers on the
hook to bail off the SBA. Along those same lines, Mr. Kassar,
you mentioned default rates to Mr. Meuser. Do you believe these
rules will lead to more or fewer defaults on government-backed
loans?
Mr. KASSAR. It is hard to imagine a scenario where these
would lead to significantly higher defaults because of the
complete loosening of controls. And the danger is we won't
understand what levers created them. Because so many levers are
being pulled and changed at the same time.
Mr. CRANE. Yeah, you mentioned that a couple of minutes
ago. If that is the case, sir, who will eventually be on the
hook to bail out the SBA?
Mr. KASSAR. The taxpayers or the small businesses we will
levy heavier fees against them to continue the program.
Mr. CRANE. Mr. Frazier, how would you rate the SBA's
customer service? Is it easier to get in contact and receive
answers from them when a problem arises? Ms. Frazier, I am so
sorry. We are not playing some sick joke on you, ma'am. I
apologize.
Ms. FRAZIER. All good here.
Mr. CRANE. There are long weeks up here.
Ms. FRAZIER. I completely understand. Thank you. You know,
I believe that having the right relationships within the SBA
helps facilitate quick and easy answers, but it can be
difficult at times just given the current staffing situations.
Mr. CRANE. Thank you, ma'am. Mr. Kassar, finally, are you
concerned these rule changes could allow lenders to focus more
on maximizing their own fees by increased loan volume rather
than focusing on quality of loans given?
Mr. KASSAR. Absolutely.
Mr. CRANE. Thank you. You know, Mr. Kassar, you said a
second ago, you are talking about this crazy science experiment
if we are doing this smartly as an entrepreneur would do it, we
would take one step at a time, and then we would evaluate it.
Is that correct?
Mr. KASSAR. Yeah, though, sometimes entrepreneurs are crazy
scientist.
Mr. CRANE. That is true. We are. But I think the reason
that we take one step at a time if we are being wise and smart
and a little bit of cautious is so that we don't sink the boat.
Is that correct?
Mr. KASSAR. A hundred percent. Lending is a carefully--you
have to think very carefully. There are a lot of levers.
Mr. CRANE. You know why they don't care how many elements
we take on at one time, right?
Mr. KASSAR. I have my theories.
Mr. CRANE. Because it is not their money. It is the
American people's money. They don't care. It is obvious. That
is one of the things I have noticed since I have been up here,
they could care less. It is so easy to spend somebody else's
money. That is why this administration just put out a budget,
it was another, close $7 trillion.
And that is the thing that bothers me about this. My
colleague over here, Mr. Thanedar, we just came from Homeland
Security together, and he was talking about, hey, some of my
constituents, they don't have enough capital or collateral.
Well, maybe they don't need a loan then. Maybe they need to be
working on their business, their business plan to get to a
point where they can actually have enough capital, enough
collateral where they can actually secure a loan. Because that
is one of the things going on in this country, we live in such
an entitlement country now where it is like people don't feel
like they need to pay anything back. And who is always on the
hook for it.
Mr. KASSAR. There is another element to this program which
is part of the vicious cycle, which is many borrowers today,
particularly, underserved have opportunities on the internet to
get money in their bank in 24 to 48 hours. And it is so
enticing. Many of them come from Fintech lenders. We have to be
careful not to call Fintech all at once. And so sometimes they
will get one, and they will get another, and they will get
another, and it becomes a vicious cycle. And then they come to
us because--and it is--often it is too late to help. So some of
the issues that has to be thought about in my opinion by
Congress about serving entrepreneurs is what is happening on
the other side of the coin? Where are they getting their money
today, and often times are going to the other side because it
is simpler and faster. And that also leads to devastating
consequences.
Mr. CRANE. Well, what I will tell this panel is I represent
Arizona's Second Congressional District. It is a very rural
district. We have a lot of hardworking folks in my district.
You know, so I know that they probably don't have the same
access to capital that some of these more metropolitan
districts do. But all I will say is as a country when you are
$32 trillion in debt, there needs to be a return to fiscal
responsibility. And I just don't see that with this program. I
don't see that with these rules changes. And for that reason I
don't support it. Thank you Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you very much. I next recognize
Mr. Molinaro from the great state of New York for 5 minutes.
Mr. MOLINARO. Thank you, Mr. Chairman. Thank you all for
being here. I am happy that I was here for Mr. Crane's comments
because it does, in fact, set up what I think is ultimately the
problem. I am old enough--although I may not look it--to
remember when we were all living fat and happy and encouraging
access to capital for home purchasing to underserved
communities. A noble and important goal that led to a mortgage
crisis that we have not rebounded from since. And I couldn't
think of a less apt organization than the SBA to manage a less
restrictive and more irresponsible set of new rules. And this
is not me being political. I spent the last 12 years as a
county leader, lived through COVID and PPP, and I can
absolutely say, local chambers of commerce, local business
organizations, they all share the exact same concerns that we
are voicing today. The SBA, despite its relationships, despite
partnerships for not for profits and partners in the community
just is inadequate to do and to manage what they are proposing
in those rule changes. And so I want to start, in fact, with
the underserved populations. Because I think actually the SBA
does a reasonably good job partnering to provide access to
capital to underserved communities.
And so, Ms. Frazier, you spoke a little bit about the 7(a)
lending program demonstrates strong lending patterns already to
underserved borrowers. One in three 7(a) loans were to
minority-owned businesses. So with the SBA's complete overhaul
of the program, would you give us some idea how these rules
could negatively impact what we already do somewhat
successfully to serve those underserved populations? What is
the risk that we open with these rule changes?
Ms. FRAZIER. Thank you. And I am going to go back once
against that oftentimes another loan or a loan is not what the
borrower needs or what the new businessowner needs. Oftentimes,
they need coaching, they need counselling, they need to have a
better business plan and work through that. And I don't believe
unleashing very loose credit standards is going to be effective
to ensuring the integrity of the program, but also ensuring
economic viability for the underserved.
Mr. MOLINARO. And so despite coming from New York State,
meaning most people think it is an urban place--I represent
rural communities all throughout upstate New York, and access
to capital is a concern. And we do have difficulty, small
businesses, accessing. So your point what the SBA is doing is
eliminating all of or basically throwing out the guide rails
that would protect us in the case of fraud and abuse.
And, Mr. Wilkinson, you and I spoke yesterday. So thanks
for that conversation. To avoid what we know or to help avoid
the circumstances of fraud and abuse here, what protections or
rules should the SBA keep in order to provide the appropriate
integrity 7(a) lending? And I kind of asked this of you
yesterday. What are some of the rules that do make sense that
this should not be thrown out.
Mr. WILKINSON. Sure. There is a list of eight or nine
criteria that were in regulation that have been taken out. We
would suggest that those be put back in statutorily. But I want
to go back to the previous question and just note that year to
date we have got about 24 percent of our borrowers who do not
note on their loan application a particular race. So our loans
to minorities are most likely underreported. We probably have a
much better track record than the numbers present.
Mr. MOLINARO. So SBA doing a better job in recording,
report, and then transparency. I know Mr. Chairman believes, as
we do as a committee, the SBA should be more forthcoming with
much of its data. And, by the way, I would say out loud the SBA
should be more forthcoming in its interaction with the industry
and the development of these rules, which does lend us to some
concern and certainly frightens us.
Mr. WILKINSON. A conversation just like this before the
rules were implemented would have been very helpful.
Mr. MOLINARO. Yeah, I am concerned about the conversation
that the SBA may have had with the folks who benefit from the
rule changes before the rule changes. But I am just saying that
as a happenstance. Perhaps it may or may not have occurred.
Before I finish up, Mr. Kassar, is it a fair assessment to
say that without the appropriate regulations and clear defined
requirements, it will ultimately be extremely difficult to
determine if borrowers are acting in good faith or not? There
are bad actors. They will act badly. That is a known fact in
humanity.
Mr. KASSAR. A hundred percent.
Mr. MOLINARO. Thank you, Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you. Next, I want to recognize Mr.
Stauber from great state of Minnesota for 5 minutes.
Mr. STAUBER. Thank you very much, Mr. Chair. I want to
thank the panel for joining us today as well as for the
important role that you play in supporting our small
businesses. Like you, I have serious concerns over the
misguided 7(a) loan program rules that the Biden administration
has put forth. As I shared during last week's hearing, the 7(a)
loan program has been instrumental in helping to grow small
businesses, which I believe are the engines of innovation in
our economy. I am committed to upholding the integrity and
fiscal solemnness of this program. Information shared by the
SBA and the supplemental guidance and its final SBLC rule
indicated that the SBA only intends licences to three new
SBLCs, and that it expects these three new SBLCs to make a
total of 425 loans over the next 4 years. However, the final
SBLC rule does not contain any limit on the number of new SBLCs
that can receive a license.
Mr. Wilkinson, how many license for nonfederally regulated
lenders do you think the SBA will actually grant?
Mr. WILKINSON. Well, that is unknown. In the narrative,
they said they were only going to do three, but in the actual
regulatory language, there is no limit.
Mr. STAUBER. What do you expect these new lenders, loan
activity to be? Do you think the figures provided by the SBA
are accurate?
Mr. WILKINSON. No, sir, I do not. I think they are low by a
significant amount.
Mr. STAUBER. Thank you. Ms. Frazier, approximately, how
many financial industry regulators oversee the operations of a
community bank like the Bank of Charlestown.
Ms. FRAZIER. I actually have three. I will speak for
myself. We have the state regulator, West Virginia and the
FDIC. And then our holding company also has the Federal
Reserve. So for most community banks, two to three. As well as
aside from that, the SBA does come in and do their own
oversight and regulation of what we have done by looking at the
loans.
Mr. STAUBER. Do you believe the Small Business
Administration has supervision and regulatory expertise and
bandwidth on power of the comptroller of the currency, FDIC, or
Federal Reserve?
Ms. FRAZIER. No, I don't believe they are prepared for
that. Taking on not only just reviewing the credit files for
whether or not they agree with the SOPs, but understanding the
whole processes, controls, and the way, the company, the
capital, and the things related to any company and nonbank
Fintech would have.
Mr. STAUBER. You know, during our hearing last week, when I
pressed Mr. Kelley, he tried to explain that the SBA will have
the ability to provide the necessary supervision and oversight
to the nonfederally regulated Fintech companies that will flood
the 7(a) program under the Biden administration's new rules.
This is even as new loan activity far outpaces the unrealistic
figures the SBA has provided.
Just yesterday, I sat down with a group of small community
bankers from across northern Minnesota who shared their concern
that the SBA is not capable of overseeing these Fintech
companies in the 7(a) program, particularly given the SBA's
track with PPP. And you all know it is approaching $900 billion
in fraud and counting.
I trust my local community banks to be responsible 7(a)
lenders due in part to the layers of supervision and scrutiny
that they face from several different financial industry
regulators. They also live and work in the communities they
serve and have deeply personal relationships with the small
businesses they help grow and support.
I, unfortunately, cannot say the same of Fintech companies.
I agree with my local lenders in Minnesota and worry that the
uneven lax oversight of Fintech sector entering the 7(a)
program will put the entire program at risk. And I want to
thank the local community banks who kept us afloat during the
pandemic. Had it not been for our community banks, I believe
this nation will be in dire straits today. Thank you. Mr.
Chair, I yield back.
Chairman WILLIAMS. Thank you very much. And while we have a
minute to go, I just want to reinforce what my colleague said
about the community banks. We have talked about this, but I
compare what you all did to what our bomber plants did and our
manufacturing plants did in World War II. They turned it around
overnight and got our country going. Y'all did the same thing,
getting money injected in the economy that actually brought a
return on investment back to America. So I want to thank you
for that.
I also want to thank the witnesses, all of you today, for
being here and appearing before us. Without objection, Members
have 5 legislative days to submit additional materials and
written questions for the witnesses to the Chair, which will be
forwarded to the witnesses. So I ask the witnesses to please
respond promptly when that happens. And if there is no further
business, without objection, the committee is adjourned.
[Whereupon, at 11:55 a.m., the committee was adjourned.]
A P P E N D I X
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