Improving Access to Capital in Underserved Communities: The Community Advantage Program, Microloans, and Other SBA Initiatives (Senate Small Business Committee hearing, December 14, 2022)
Summary
The Senate Committee on Small Business and Entrepreneurship, chaired by Ben Cardin, met on December 14, 2022 (S. Hrg. 117–733) on the Community Advantage program, microloans and other SBA initiatives. Chairman Cardin said SBA approved over 47,000 7(a) loans totaling over $25 billion last year, 4 percent of them to Black business owners, against 20 percent of Community Advantage loans, a program that lets mission-oriented nonprofit lenders make 7(a) loans up to $350,000. The witnesses were Jon Gaines, Nick Schwellenbach of the Project on Government Oversight, Robert Villarreal and Annemarie Murphy. Schwellenbach testified that, according to one paper, fintech lenders made a larger share of their loans to Black-owned businesses than traditional lenders, but that many set on defrauding the PPP successfully used fintechs to divert money.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Cite this document
“Improving Access to Capital in Underserved Communities: The Community Advantage Program, Microloans, and Other SBA Initiatives (Senate Small Business Committee hearing, December 14, 2022).”
Original at www.govinfo.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/improving-access-to-capital-in-underserved-communities-the-community-a-b562fd88cf/
, SHA-256 31176c39817063f0af311493211992ae586c9f560fb9eca426f6e2aa259ae174.Full text
S. HRG. 117–733
IMPROVING ACCESS TO CAPITAL IN UNDER-
SERVED COMMUNITIES: THE COMMUNITY AD-
VANTAGE PROGRAM, MICROLOANS, AND
OTHER SBA INITIATIVES
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
OF THE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
DECEMBER 14, 2022
Printed for the use of the Committee on Small Business and Entrepreneurship
(
Available via the World Wide Web: http://www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
50–575 WASHINGTON : 2023
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 E:\HR\OC\A575.XXX A575
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED SEVENTEENTH CONGRESS
BENJAMIN L. CARDIN, Maryland, Chairman
RAND PAUL, Kentucky, Ranking Member
MARIA CANTWELL, Washington MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho
EDWARD J. MARKEY, Massachusetts TIM SCOTT, South Carolina
CORY A. BOOKER, New Jersey JONI ERNST, Iowa
CHRISTOPHER A. COONS, Delaware JAMES M. INHOFE, Oklahoma
MAZIE HIRONO, Hawaii TODD YOUNG, Indiana
TAMMY DUCKWORTH, Illinois JOHN KENNEDY, Louisiana
JACKY ROSEN, Nevada JOSH HAWLEY, Missouri
JOHN HICKENLOOPER, Colorado ROGER MARSHALL, Kansas
SEAN MOORE, Democratic Staff Director
WILLIAM HENDERSON, Republican Staff Director
dmwilson on DSKJM0X7X2PROD with HEARING
(II)
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 E:\HR\OC\A575.XXX A575
CONTENTS
Page
WITNESS PREPARED STATEMENTS
PANEL 1
Mr. Jon Gaines, Vice President, Business Services & Finance, Wisconsin
Women’s Business Initiative Corporation, Milwaukee, WI .............................. 6
Mr. Nick Schwellenbach, Senior Investigator, Project on Government Over-
sight, Washington, DC ......................................................................................... 23
Mr. Robert Villarreal, Chief External Affairs Officer, Momentus Capital-CDC
Small Business Finance, Chula Vista, CA ......................................................... 32
Ms. Annemarie Murphy, Executive Vice President, President of SBA Lending,
First Bank of the Lake, Greenville, SC .............................................................. 49
QUESTIONS FOR THE RECORD
Mr. Jon Gaines
Responses to questions submitted by Senators Cantwell and Rosen ........... 75
Mr. Nick Schwellenbach
Responses to questions submitted by Senators Cantwell and Inhofe .......... 87
Mr. Robert Villarreal
Responses to questions submitted by Senators Cantwell and Rosen ........... 90
Ms. Annemarie Murphy
Responses to questions submitted by Senators Cantwell and Inhofe .......... 96
ADDITIONAL STATEMENTS FOR THE RECORD
Senator Hickenlooper
Statement dated December 14, 2022 .............................................................. 102
National Association of Development Companies
Statement dated December 14, 2022 .............................................................. 104
National Association of Development Companies
Letter dated December 12, 2022 ..................................................................... 110
Mission Lenders Working Group
Statement dated December 14, 2022 .............................................................. 115
dmwilson on DSKJM0X7X2PROD with HEARING
(III)
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 E:\HR\OC\A575.XXX A575
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 E:\HR\OC\A575.XXX A575
IMPROVING ACCESS TO CAPITAL IN UNDER-
SERVED COMMUNITIES: THE COMMUNITY
ADVANTAGE PROGRAM, MICROLOANS, AND
OTHER SBA INITIATIVES
WEDNESDAY, DECEMBER 14, 2022
UNITED STATES SENATE,
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP,
Washington, DC.
The Committee met, pursuant to notice, at 2:28 p.m., in Room
428A, Russell Senate Office Building, Hon. Ben Cardin, Chairman
of the Committee, presiding.
Present: Senators Cardin, Booker, Hirono, Rosen, Ernst, Young,
Hawley, and Marshall.
OPENING STATEMENT OF CHAIRMAN CARDIN
Chairman CARDIN. The Small Business Committee will come to
order.
I just wanted to acknowledge first this will be our last hearing
of the 117th Congress, and I just really want to take this oppor-
tunity to thank the dedicated staff, both the Majority and the Re-
publican staff, on this Committee for the work that they have done.
This Committee, particularly during COVID–19 but as a legacy of
COVID–19, handled a lot of responsibilities. Its portfolio increased
dramatically, and it has one of the smallest staffs of any of the
standing committees in the United States Senate. And I just really
want to thank them for their dedication and work and the coopera-
tion that we have received from the Majority and Minority staffs
working together to get many major bills to the finish line.
I am reminded that the SBIR/STTR programs were not an easy
assignment. We have half a dozen bills that have made their way
through our Committee and are going to make their way to the
President for signature. This has been a very productive Congress
for the Small Business and Entrepreneurship Committee, and I
just really want to thank my members as well as our dedicated
staff.
We are continuing today with a very distinguished panel of wit-
nesses, and I am really pleased that Senator Marshall is stepping
in to be the Ranking Member for today’s hearing. He has been a
loyal member of this Committee, very actively engaged during the
117th Congress. So, Senator Marshall, wonderful to have you here
today.
dmwilson on DSKJM0X7X2PROD with HEARING
(1)
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\A575.XXX A575
2
Today, the Senate Small Business and Entrepreneurship Com-
mittee will consider a hearing on ‘‘Improving Access to Capital in
Underserved Communities.’’ Access to capital is the lifeblood of any
business but is especially critical to small businesses. For too long,
underserved and underbanked businesses have not had equal ac-
cess to these resources. It is an enduring problem.
While large banks approve 60 percent of the loans sought by
White small business owners, minority small businesses have a
lower rate of approval. Banks approved just 50 percent of loans
sought by the Hispanic small business owners and 29 percent of
those sought by Black owners. Inequities like these were made
worse during the pandemic, making it significantly more difficult
for minority businesses to absorb financial shocks.
According to a study by the Federal Reserve Bank of New York,
about 58 percent of Black-owned businesses were at risk of finan-
cial distress prior to the pandemic as compared to 27 percent of
White-owned businesses. This is why leveling the playing field and
improving access to capital for underserved communities is a top
priority and why I am constantly looking for ways to improve the
Small Business Administration’s lending program.
As many of you know, the 7(a) loan guarantee program is SBA’s
flagship lending program. Last year, SBA approved over 47,000
7(a) loans totaling over $25 billion. This is an enormous amount of
capital going to so many borrowers who would otherwise be unable
to access capital elsewhere.
However, of those 7(a) loans, only 4 percent went to Black busi-
ness owners and 15 percent to women business owners. Though
this is better than it has been in past years, we must do, and
should do, much better. That is why I am a proud supporter of the
Community Advantage program.
Community Advantage was created in 2011 to address the credit
gap in underserved markets. The program allows mission oriented,
nonprofit lenders to make 7(a) loans up to $350,000 focusing on
economic development for underbanked small business owners.
Compared to the regular 7(a), Black business owners received 20
percent of the Community Advantage loans and women owned
businesses, 32 percent.
Although a smaller, more targeted program, the Community Ad-
vantage program clearly does an excellent job of addressing the
credit gap and is a key tool to our mission to improve access to cap-
ital for underserved small business owners and entrepreneurs.
I have introduced legislation to make the Community Advantage
program permanent. This will provide stability to enable more
lenders to enter the program and ultimately reach more entre-
preneurs and small businesses in their communities. I am hopeful
that it will become a permanent SBA program in the next Con-
gress.
The Microloan program is another SBA initiative that reaches
various demographic groups that would otherwise not be served by
the private sector or even by the SBA’s own 7(a) program, playing
an important role in providing credit to the smallest, underbanked
small business owners and entrepreneurs.
In fiscal year 2022, 45 percent of all Microloans went to women-
dmwilson on DSKJM0X7X2PROD with HEARING
owned businesses, 14 percent to Hispanic-owned businesses, and 35
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00006 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
3
percent to Black-owned businesses. Microloan borrowers generally
have the most difficult time accessing capital elsewhere. Less than
one-third report that they would have been able to find acceptable
financing from other sources.
These lending programs are critical in addressing the existing
credit gap for minority and women small business owners in par-
ticular. I look forward to hearing from our witnesses about how we
can improve these programs and adopt innovative solutions to pro-
vide access to capital to those currently left out of the system.
This hearing will also explore two recent rule changes proposed
by the SBA. According to the SBA, the purpose of these two
changes is to bring more lenders into the market, creating more op-
portunities for small-dollar loans and reaching more underserved
communities. It is clear that lenders must do more to reach the un-
derserved small businesses. We saw too often with the PPP that
these small businesses did not have the same financial connections
and resources as larger ones did, and they were excluded from the
critical relief or had to wait a longer time in order to get their help.
It is important that we recognize these inequities in our capital
access programs and in the small business ecosystem more broadly
and, even more importantly, that we work to address them. I sup-
port the SBA’s efforts in their work to level the playing field for
small business owners and entrepreneurs.
I understand that there are many concerns about these proposed
changes, and while I fully support the objectives and the goals in
mind, I share some of these concerns. We need to ensure that we
address these inequities and better serve small business owners
without undermining important guardrails. Guardrails are essen-
tial. They protect borrowers, the lenders, and the integrity of the
programs.
We also need to think through these proposed changes and en-
sure that they will actually increase small-dollar loans and address
the credit gap without unintended consequences or harm to small
business owners we aim to help. The public comment period on the
proposed changes is now open, and I encourage everyone with
questions or concerns to make their voices heard.
I wholeheartedly agree with the SBA that we must do better in
reaching our underserved entrepreneurs. However, I also feel
strongly that we must go about this in a transparent and informed
way, and I welcome discussion about the impact of these changes.
I look forward to working with the SBA, the lenders, underserved
entrepreneurs, and the small business community, and other stake-
holders on this issue.
I want to thank our witnesses for being here today, and I look
forward to their testimony. But first, if I might, I am going to yield
to the Ranking Republican Member, Senator Marshall.
OPENING STATEMENT OF SENATOR MARSHALL
Senator MARSHALL. Well, thank you, Mr. Chairman, and let me
also add my thanks to Ranking Member Paul for giving me the
honor of sitting in this chair. And let me add my thanks, along
with yours, to the Committee staff as we close out the Congress for
dmwilson on DSKJM0X7X2PROD with HEARING
all their hard work and let me add also my thanks to the witnesses
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
4
for coming today, taking time out of your day to get here and share
your wisdom.
It is an honor to serve as Ranking Member for today’s important
hearing as we examine how the Small Business Administration can
best serve small businesses’ capital needs, especially for borrowers
in underserved communities.
Access to capital is always a top issue facing Kansas small busi-
ness owners and businesses throughout the country. After hosting
several roundtable discussions with minority-owned Kansas busi-
nesses, it is clear that our entrepreneurs have solid business ideas
and plans to grow but often lack the resources or connections they
need to get a business off the ground.
I frequently hear concerns that the SBA’s lending programs are
cumbersome for our community lenders and are filled with bureau-
cratic red tape for the borrowers, who often give up very early in
the process. Due to the high-risk status of any new venture and
this lengthy application, many banks have decided to stay on the
sidelines. Indeed, entrepreneurs need streamlined access to capital
so they can focus more on their businesses and not paperwork.
But some things must be working as SBA approved a blockbuster
number of loans in fiscal years 2021 and 2022. According to SBA’s
data, in fiscal year 2021, the 7(a) loan program administered more
than 50,000 loans for more than $36 billion of which 30 percent of
the dollars went to minority owned small businesses. In total, these
2021 numbers represent an increase of $13 billion from 2019 in ap-
proved 7(a) loans. These numbers are promising for the lending
programs, but more can be done, and I am committed to finding so-
lutions with my colleagues so we can provide more opportunities to
entrepreneurs across the nation. This is exactly what will turn our
economy around and provide more high-paying jobs for all Ameri-
cans.
However, when changing these programs, we cannot forget to
maintain strong due diligence standards while still maintaining
simplicity. As these programs are government-backed loans, it is
essential that prudent lending standards are in place to ensure tax-
payers are not footing the bill on risky loans. The 7(a) loan pro-
gram has generally operated at zero subsidy, meaning the program
administers fees to offset any loan losses.
Recently, the SBA announced two proposed rules that would
alter the underwriting and standard practices in the 7(a) and 504
programs. One rule would also lift a 40-year moratorium on how
many non-Federally regulated lenders the SBA can oversee. While
I hope this allows more access to capital, it is concerning to me
that the current administration is changing significant lending
policies without input from Congress. It is also concerning that the
SBA may not be able to adequately provide oversight and examina-
tions of these new SBA lenders through the SBA’s Office of Credit
Risk Management under these new rules.
Many have seen these rule changes as an opportunity to allow
fintech lenders into SBA’s traditional lending programs. While it is
encouraging to see the SBA is attempting to take steps to diversify
its lending pool, it is troubling they are coupling it with loosening
dmwilson on DSKJM0X7X2PROD with HEARING
program standards.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
5
Fintechs had the opportunity to participate in the Paycheck Pro-
tection Program, but recent reports have shown fintech is respon-
sible for a disproportionate amount of PPP fraud compared to more
traditional, local lenders like community banks and credit unions.
Many of the fintechs in PPP had not been subject to the Bank Se-
crecy Act and Know Your Customer compliance requirements,
which led to fraudulent PPP applications being processed. These
are major concerns that, while automation may streamline certain
processes, critical vetting and eligibility checks will be left behind
and replaced by a high-volume business model with the addition of
fintechs in lending programs.
SBA loan procedures can often be improved, but it is the key
technical assistance to borrowers that differentiates SBA lending
and ensures that the borrower is not in a predatory loan that they
will have difficulty paying back. In light of the findings on fintech
fraud in PPP, Congress needs to first examine letting fintechs into
new Federal lending programs before the SBA implements these
very significant changes. Thankfully, we will have the opportunity
to start the conversations today.
I am looking forward to hearing from our witnesses today, who
are experts on the fraud and wrongdoing in PPP loans as well as
SBA mission lenders who can speak in detail about how they help
underserved communities and the impacts these new policy
changes will have on program risk.
Again, I believe we can do both. Making the process simpler and
streamlined will bring in more lenders. Yet, we must maintain the
integrity of the programs.
Thank you. I yield back.
Chairman CARDIN. Thank you, Senator Marshall. I certainly
agree with your comments, though. We have to make sure we have
accountability, and we have to expand the opportunities to make
it easier for small businesses to access the SBA programs. So,
thank you very much for your comments.
We now look forward to hearing from our distinguished panel.
Let me introduce you, and then we will go from my left to right.
First, Jon Gaines is the Vice President of Business Services and
Finance at Wisconsin Women’s Business Initiative Corporation.
That organization has become a highly successful Microloan and
Community Advantage lender. They do great work in this area,
and I look forward to hearing from Mr. Gaines about his organiza-
tion’s experience with these programs and discussing what we can
do to make them better.
We will next hear from Nick Schwellenbach, a senior investigator
at the Project on Government Oversight. He joined POGO in Feb-
ruary of 2017 and was previous a communications director at the
U.S. Office of Special Counsel, the main Federal agency in charge
of protecting whistleblowers.
Next we have Robert Villarreal, Chief External Affairs Officer at
CDC Small Business Finance. Under his leadership, the organiza-
tion has become the nation’s largest Community Advantage lender.
CDC Business Finance also lends in my home State of Maryland.
I always mention that. They do excellent work in supporting small-
dmwilson on DSKJM0X7X2PROD with HEARING
er lenders, and I look forward to hearing your testimony.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
6
And then lastly, we will hear from a person I had the privilege
of hearing from earlier last week, Annemarie Murphy, who is
President of the SBA Lending for First Bank of the Lake, where
she directs all facets of government-guaranteed lending. As part of
her current role, Ms. Murphy successfully launched a Veterans Ini-
tiative Team to target lending activities to our nation’s veterans
and tripled the volume and space within the first year. Quite a
record.
We will start with Mr. Gaines.
STATEMENT OF JON GAINES, VICE PRESIDENT, BUSINESS
SERVICES AND FINANCE, WISCONSIN WOMEN’S BUSINESS
INITIATIVE CORPORATION, MILWAUKEE, WISCONSIN
Mr. GAINES. Well, good afternoon, Chairman Cardin, Ranking
Member Paul, Dr. Marshall. My name is Jon Gaines, and I am the
VP of Finance for Wisconsin Women’s Business Initiative Corpora-
tion. We call it, internally, WWBIC.
Thank you for the opportunity to testify today as an inter-
mediary lender of the SBA loan program and on its success of
microlenders like our organization in delivering financial services
to underserved small businesses. I am pleased to testify on behalf
of WWBIC and the Friends of the SBA Microloan Program, an as-
sociation of Microloan intermediaries that advocate basically for
the program.
A brief bit about WWBIC. We are a leading, innovative, state-
wide economic development corporation birthed out of the Women’s
Economic Empowerment Movement and began operations in 1987,
providing business development services to start-ups, micro enter-
prises, and small businesses, with a primary focus on women, mi-
norities, people of low wealth and incomes, and most recently, vet-
erans and military-connected families. We open doors of oppor-
tunity by providing direct lending and access to fair and respon-
sible capital, quality and responsible lending, and one-to-one tech-
nical business assistance and coaching to increase financial
wellness.
In 2005, WWBIC entered the SBA Microloan program, and I will
talk a little bit more about that later, but we are certainly excited
about the success so far of the SBA Microloan program and cer-
tainly what it has done in terms of working with folks within our
State as well in terms of fostering economic growth.
WWBIC has about 65 employees. We have five regions across the
State of Wisconsin, and we are really excited about the work that
we do, in quality small business lending and financial training.
A little bit about the SBA program. It is the largest Federal pro-
gram exclusively targeted to support the credit needs of very, very
small businesses and self-proprietorships. Through a network of
community banks, and nonprofit intermediaries, the SBA program
provides small-dollar loans and technical assistance to small busi-
nesses that cannot—I repeat, cannot secure credit from conven-
tional lenders or other SBA based programs related to loan guaran-
tees, of which most of those borrowers are, again, ladies, low-
wealth individuals, veterans, and minority entrepreneurs.
Those entrepreneurs—the intermediaries ourselves, we then le-
dmwilson on DSKJM0X7X2PROD with HEARING
verage those funds with state, local, and other private dollars to
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
7
basically provide Microloans and business development services
and resources to small businesses. You may know, Microloan pro-
ceeds may only be used for working capital and the acquisition of
materials, supplies, furniture, fixtures, equipment, those types of
things.
Intermediary lenders participating in the SBA Microloan pro-
gram receive two streams of funding from the SBA: a direct loan
to the intermediary lender that is used to capitalize a revolving
loan fund and grant funds to help support the costs of providing
technical assistance to business borrowers.
As we said before, SBA Microloan intermediaries serve the small-
est of the smallest businesses that are out there. The program al-
lows intermediaries to make loans up to $50,000. However, the av-
erage SBA Microloan is about a little over $14,400 as of fiscal year
2020. Currently, there are about 150 active Microloan inter-
mediaries serving 49 states, the District of Columbia, and Puerto
Rico as well.
WWBIC’s SBA Microloan program effects began, again as I
noted, in 2005. Since we have been a part of the SBA Microloan
program, we have deployed a little over 940 loans totaling $20.6
million, with an average loan size in that Microloan pool of about
$22,000. So, again, very small dollars there.
The small business borrowers of our program provide tangible
benefits in the communities that we serve. Our logo at WWBIC—
I will say more our mantra—‘‘one team, one mission, one WWBIC,’’
our service approach, is we really work to listen, serve, and nurture
novice small business owners who are my neighbors and also live
in communities we call home.
I could talk about more statistics, but I would rather talk about
a couple stories if I can. I want to share a brief story about Heath-
er Varney. Heather Varney owns a company called Aeroforce Logis-
tics. It is a start-up veteran- and women-owned business located in
Milwaukee.
Heather learned to be a resourceful problem-solver and a good
communicator at an early age. While in the Marine Corps, she ex-
perienced a bad accident and was forced to change jobs due to the
injury and began focusing on sourcing aviation parts. She became
the parts-finder, if you will, for the Marine Corps and ultimately
continues adding growth by serving U.S. Government entities and
large corporations, actually, that needed additional aerospace mate-
rials and aerospace equipment while really working on her focus to
make sure she ensured working around the small business con-
tracting and utilization goals she had in place.
How did WWBIC help? We helped directly with her first loan
ever, an SBA Microloan for $50,000, which covered a portion of her
start-up costs. Her business grew very, very rapidly, and within six
months she repaid that loan and graduated to, as we call it, mov-
ing to a commercial lender, which we definitely work to extend
those parts for businesses as well.
Heather shared briefly about WWBIC. This is a quick quote:
‘‘They helped us when traditional banking could not, and they are
also very well known in the community and also help with making
connections, which again are important facets of the Microloan pro-
dmwilson on DSKJM0X7X2PROD with HEARING
gram.’’
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
8
My second example I would like to talk briefly about, Lakesha
Davis. Lakesha Davis is the owner of Lovingkindness AFH, LLC,
which again is a minority- and women-owned business in Racine,
Wisconsin. Lakesha fled a domestic violence situation and also
homelessness as well and wanted to help other folks facing similar
circumstances.
WWBIC got directly involved. We lent her less than $50,000 in
capital to start her business and provided substantial pre-loan
technical assistance, for example, helping her create her business
plan, pitching her business idea with other individuals, working to
build her confidence, working specifically to help her learn and
really use QuickBooks in her business, and certainly last, but not
least, finding mentors and connecting with other resources, which
we all know are important with any business.
Currently, Lakesha plans to scale her business to own 25 percent
of the houses in the area where she actually has her current busi-
ness and then ultimately, once that process happens, expand to
other states as well.
Lakesha shared a lot: ‘‘When I started my first business with
WWBIC, I was a big pile of mush, and that was okay. My head was
full of uncertainty, but as I followed the step-by-step instructions
you guys shared with me, things began to get a lot more clear. Not
only did I learn how business works, but I also learned self-con-
fidence, how to believe in myself, and also how to get others on
board with my ideas. WWBIC truly helped me turn my business
dream into the reality.’’
So, as we say, the Microloan program does help with putting
businesses to work.
And finishing here, there continues to be a great demand for
Microloans and raising the cap on intermediary loans, which will
allow high-performing intermediaries to secure additional resources
to assist small businesses in their communities. Waiving require-
ments for technical assistance matching will make more inter-
mediary resources available to businesses. Current law limits to 50
percent the use of TA, technical assistance, grants for pre-loan
technical assistance and the use of consultants. We urge the Com-
mittee to consider extending or making these provisions perma-
nent.
We also strongly support, again, eliminating the 50 percent
limit——
Chairman CARDIN. If you could summarize the rest of your state-
ment, we appreciate it.
Mr. GAINES. I will. In other words, thank you again for your time
today and listening to our story. And again, it is important. TA is
important; the Microloan program is important to the success of
businesses in our community but also across the nation as well.
Thank you.
[The prepared statement of Mr. Gaines follows:]
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
9
COMMITTEE HEARING
"Improving access lo capital in
underserved communities:
the Community Advantage Program, the
Micro/oan Program,
and other SBA initiatives "
Testimnn_v b_v:
Jon Gaines, Vice President Business Suvices
& Finance at the Wisconsin Women's
Entrepreneurship and Business Initiative Corporation
Wednesday, December 14th, 2:30pm ET
Financial Wellness Training •
Lending • Coaching
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 16 here 50575A.001
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
10
Written Testimony by Jon Gaines
"Improving m.:ces·s to in under served communities:
the Community 1w'vana1ge Program, Microloan Program, and other SBA iniliatives"
We,olnesda•v. Deeemher 1:/, 2022. 2:30 P.M. (ETJ
Good afternoon, my name is Jon Gaines and I work forthe Wisconsin Women's Business Initiative
Corporation also known as WWBIC. Thank you for the opportunity to testify today as an intermediary
lender to the SBA Micro loan Program, and on the success of micro lenders like our organization in
delivering financial services to underserved low-income urban~ rural, minority, veteran, and woman-
owned small businesses. I am pleased to testify on behalf ofWWFllC and the Friends of the SBA
Microloan Program, an association ofMicroloan intermediaries that advocates for the program.
For almost 13 years l have had the honor of serving as the Vice President of Business Services and
Finance for WWB!C. WWBIC has been a leading innovative statewide economic development
corporation that is ··Putting Dreams to Work'' for over 35 years by assisting micro enterprise & smaH
businesses. W\VBTC's primary focus is on women, minorities, lower-wealth individuals, and
veterans/military connected families. WWBIC opens doors of opportunity by providing direct lending and
access to fair and responsible capital; quality business training; and one-on-one technical business
assistance and coaching to increase financial wellness,
WWBIC has fiercely championed its mission by operating in five regions with over 65 staff. Offering
services statewide in Wisconsin; WWB[C channels its activities through two primary lines of business:
small business lending (ranging from $1,000 to $350,000) & technical assistance/financial training. In
over thirty-five years of impact, WWBIC has assisted over 72.000 individuals; loaned almost $100
million to small business borrowers; helped entrepreneurs create and retain over 2 l ,000 jobs; and started,
strengthened, or expanded almost 9,000 businesses.
ln 2021 alone, WWBIC served over 5,400 unduplicated clients; held a loan portfolio of approximately
$23 million with over 900 loans; and in 2020 and 2021 provided over $8.3 million of forgivable loans,
Paycheck Protection Program (PPP) and direct pass-through grants to hundreds of small business owners.
Keeping small businesses alive while allowing them to transform and leverage new ways for
sustainability and growth, WWB!C is advancing hope and opportunity to entrepreneurs.
As Vice President of Business Services & Finance, l bring over 25 years of accounting, finance, and
operations management experience. l served on the finance committee of Opportunity Finance Network,
the industry association ofCDFls, and on the board of directors of the Wisconsin Institute of Certified
Public Accountants until 2020. l was named CFO of the Year by the Milwaukee Business Journal in
2016. Prior to joining WWBIC in 2010, I was the vice president of administration and finance at
Wisconsin's largest exposition center. I earned a Bachelor of Science degree from SL Augustine's
University in Raleigh, NC. and an Executive Master's in Business Administration from the University of
Wisconsin-Milwaukee.
I continue to actively participate in our community and have extended my outreach to the community as a
member of the Greater Milwaukee chapter of the National Association of Black Accountants. I also sit on
the Wisconsin Institute of Certified Public Accountants Education Foundation and on the governance
committee of the Central City Cyberschool of Milwaukee, which serves children in and near the
Westlawn housing project.
Page 1 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 17 here 50575A.002
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
11
Written Testimony by Jon Gaines
"Improving access to capital in underserved communiries.-
,.,...,~~~""'/'/ the Community Advantage Program, the Micro!oan Program, and other SBA initialires"
h-.>•,,·'•-·"•·
Wednesday, December 1-1, 2021, 2:30 P,:H (E7)
Small Business Administration (SBA) Microloan Program History
The Small Business Administration (SBA) Microloan Program is the largest federal program exclusively
targeted to supporting the credit needs of very small businesses and sole proprietorships, Through a
network of community-based, non-profit [ntennediaries, the SB/\ Microloan program provides small-
dollar loans and technical assistan..-:e to small businesses that cannot secure credit from conventional
lenders or other SBA guaranteed loans: including many women. lo\v-wealth, veteran, and minori1y
entrepreneurs. The Intermediaries then leverage these funds with state. local, and private n.·sourccs to
provide micro!oans and other business development resources to small businesses.
The SBA Microloan Program was authorized in 1991 (PL 102-140) to provide small loans and technical
assistance (TA) to businesses that conventional lenders were and remain unahle to fimmcr for a variety
of reasons including the lack of sufficient collateral or business experience, Working through a network
of non-profit comnmnity based intermediary lenders. the SBA Micro!oan Program is able to foiance and
support new and emerging businesses in urban and rural communities and eventually move these
businesses into the economic rnainstream as bankable ventures,
Conventional banks cannot serve this profile of small businesses. Making a small business loan is time-
intensive and requires resources to undenvrite and service, especially for microloans. l\1oreover, a
hallmark of the Microloan program is the ongoing technical assistance needed to help undcrserved
entrepreneurs succeed at every step of their business's development
The Micro loan program serves small businesses that encounter difficulty in gaining access to from
conventional lenders. By serving entrepreneurs that 1..)perate start-up and neVY businesses. lack suflicient
collateral, or have limited or poor credit histories, the SBA Microloan program fills a gap in the private
market
An Urban Institute survey of SBA 7(a), 504/Ccrtified Development Company (504/CDC), Small
Business Investment Company (SB!C), and Miero!oan borrowers conducted in 2007 found that
Microloan borrowers repotied having the most difficulty in finding acceptable financing elsewhere. Less
than one-third (31 %) of Micro loan borrowers reported that they would have been able to find acceptable
financing elsewhere, compared with 35% ofSB!C borrowers, 40% of7(a) borrowers, and 48% of
504/CDC borrowers, 1
Intermediary lenders participating in the SBA Microloan Program receive two streams of funding from
the SBA: a direct SBA loan to the intenncdiary lender that is used to capitalize a revolving business loan
fund, and grant funds to help support costs associated \Vith providing technical assistance to business
borrmvers.
1
Christopher Hayes, An Assessment of the Small Business Administration's Loan and Investment Programs: Survey
of Assisted Businesses (Washington: The Urban Institute, January 2008), p, 5, at /link on next page)
b.H~www.urbaMlli'.L[~q[f_~~nt~smal!-business•·adminlstratlon-lQfil.-:MLd-lnytgrnfillt~
~
Page 2 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 18 here 50575A.003
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
12
Written Testimony by Jon Gaines
··I,11pro1·ing access to capital in underserved comrmmities:
the Communi~y Advantage Program, the Aficroloun I'rogram, anJ other ,5BA initiatives"
fVednesdt(l', December U 2022, 2:30 PJvL (ET!
Direct SBA loans to the intermediary lender carry a I 0-ycar term with a fixed interest rate based on the
five-year Treasury note and the lender must contribute a non-federal match equal to 15% of the SBA
dollars bonowed in addition to rnaintaining a loan loss reserve equal to l 5% of the lenders outstanding
sma II business loans.
Intermediary lenders arc eligible to receive SBA technical assistance Cf A) grants on an annual basis. The
amount of the TA grant is based on the number of loans made in the previous year, the lender· s
outstanding debt to SBA, and the availability of appropriated l\mds, To receive a TA grant a lender must
also comribnte a match ofnonfedcral funds equal to 25% of the TA grant
The SBA charges intermediaries an interest rate that is based on the five-year Treasury rate, adjusted to
the nearest one-eighth percent (called the Base Rate), less l .25% if the intermediary maintains an historic
portfolio ofMicroloans averaging more than $10,,000, and less 2.0'Yo if the intermediary maintains an
historic portfolio of Microloans averaging $10,000 or less. The Base Rate, after adjustment, is called the
intermediary's Cost of funds. The Intermediary's Cost of Funds is initially calculated one year from the
date of the note and is reviewed annually and adjusted as necessary (called recasting). The interest rate
cannot be less than zero.
Intermediaries are required to con1ribute not Jess than 15% ofth-c loan amount in cash from nonfedcral
sources and, as security for repayment of the loan, must provide the SBA first lien position on all notes
receivable from any mieroloans issued under the program, Unlike the SBA's 7(a) and 504/CDC loan
guarantee programs, the SBA does not charge intermediaries upfront or ongoing service foes under the
Microloan program.
lntenncdiaries are required to deposit the proceeds from the SBA 1 s loans, their 15% contribution, and
payments from their Microloan borro\vcrs into a Microloan Revolving Fund. Inten11ediarics may only
withdra\v from this account funds necessary to make microloans to borrowers, repay the SBA,, and
establish and maintain a Loan Loss Reserve Fund to pay any shortage in ihe Micro loan Revolving Fund
caused by delinquencies or losses on its micro loans. They are required, until they have been in the
program for at least five years, to maintain a balance in the Loan Loss Reserve Fund equal to 15% of the
outstanding balance of the notes receivable from their Microloan borrowers.
After five years, !fthe intermediary's average annual loss rate during the preceding five years is less than
15% and no other factors exist that may impair the intermediary\:; ability to repay its obligations to the
SBA~ the SBA Administrator may reduce the required balance in the intermediary's Loan Loss Reserve
Fund to the intermediary's average annual loss rate during the preceding five years. but not less than 10%
of the portfolio, Intermediaries are required to maintain their Loan Loss Reserve Fund until they have
repaid all obligations owed to the SBA,
Page 3 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 19 here 50575A.004
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
13
Written Testimony by Jon Gaines
•• Improving access to capital in undersen ed communitie,v:
1
the Communiry Adrnntage Pmgram, the Microloan Program, and other SBA inilialives"
Wednesday, December /.1, 2022, 2:311 P.lvf. (ET)
Small Business Administration (SBA) Microlending Impact
Intennediaries serve the smallest of small businesses. While the program allows intermediaries to make
loans up to $50,000, the average SBA Microloan was $14,435 in FY 2020. Currently. there are some 150
active Microloan intenncdiaries, serving 49 states, the District ofColumhia, and Puerto Rico.'.:!
In FY 2021, intcn11cdiaries made 4514 loans to small businesses, totaling more than $74. 7 million. Of
this amount, oYer tv..,o-thirds went to minority entrepreneurs. Existing businesses accounted for 63~·'o of
the loans made, over 48 percent \Vent to wmnen-o\vned businesses and almost 37 percent to startups.
This linancing led to the creation of7,500 jobs and the retention of an additional l 0,000 jobs.
Through FY 202 l, intermediary lenders have used SBA Microloan funds to originate more than $1.39
billion in loans to small businesses that have created 130,000 jobs and retained over 200,000 jobs since
the pro_grarn's inecption in 1992. Of this total, more than $260 million suppo1ted rural businesses and
more than $470 million to went to minority entrepreneurs. An additional $61.4 million has been lent to
veteran entrepreneurs, and more than $440 million has been !ent to more than 43,000 woman-owned
businesses:' Despite intermediaries serving '"at risk" small busine:.ses, the SBA Micro loan program has a
historical cumulative default rate of less than 2 percent.
l'he SBA Microloan program is an important tool to ensure that the full spectrum of small businesses and
entrepreneurs have access to the capital and technical assistance needed for business survival and growth.
Historically, it has cost $1,700 per job suppo11ed by the program. Microloan proceeds may be used only
for working capital and acquisition of materials, supplics 1 furniture. fixtures, and equipment.
For over 17 years, the Wisconsin Women's Business Initiative Corporation (WWBIC) has been at the
table as one of the 150 active Microloan intern1ediaries, serving the State of Wisconsin offering SBA
Micro!oans. WWBIC has been a leading innovative statewide economic development corporation that is
• Putting Dreams to \Vork" for O\-'er 35 years by assisting micro enterprise & small businesses.
1
Wisconsin Women's Business Initiative Corporation (WWBIC) History
WWB!C was born oui of the women's economic cmpowern1ent and microlending movement. A group of
concerned community leaders started \V\VBIC in response to the Women's Business Ownership Act of
1988, as a nonprofit organi:t.ation serving women entrepreneurs. Initially as a Small Business
Administration (SBA) \\/omen's Business Center (\VBC) and Microlender. many emerging entrepreneurs
came to WWBIC with similar needs. To meet the calling, in 1994 WWBJC launched business training
programming and expanded the target market to include low-wealth and minority entrepreneurs.
ln 1998, WWB!C became Wisconsin's first nonprofit certified and funded Community Development
Financial lnstitution (CDF]) and has since been continuously certified and fonded by the U .S, Department
2 Nationwide Loan Report Data provided by SBA staff to the Friends of the SBA Micro loan Program on March 5,
2020.
3
Ibid.
Page 4 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 20 here 50575A.005
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
14
Written Testimony by ,Ion Gaines
"Improving access to capital in underserved communities:
the Communizy Advantage Program, the Aficroloan Program, and other SBA initiatives"
Wednesday, December 1./, 2022, 2:30 P.M (ET)
of the Treasury. In 1999, the Financial Capability (now known as Financial Wellness) initiative was
launched because so many of the micro business clients experienced credit issues compounded by the
blending of personal and business finances. The creation ofan asset-building component that offers
individuals a structured program in which 4 to I dollars are matched to double their savings, allowing
them to make a first-time home purchase. open a business, pay for college, or pay down debt.
The smallest and most fragile businesses, who would not even qualify for WWBIC financing, access
capital through K!V A, an on line crowdfunding platfonn making 0% interest loans up to $15,000 to micro
business owners. WWBIC serves as a KIVA Trustee, vetting micro cntTepreneurs and helping them
qualify· for crowdfunding through a web-based global platform. KlV A borrowers reflect the target
markets of women, minorities, and lower wealth individuals. WWBIC and the City of Milwaukee
launched KIVA@WWBIC City of Milwaukee in February of 2015. In 2018, WWB!C launched
K!VA@WWBIC City of Madison and in 2019, KIVA@WWB!C City of West Allis. In Octoberof2022,
KIV A(flj SE was launched to create opportunities for clients in the Racine, Kenosha, & Beloit area.
WWB!C leads the nation in matched KIV A loans.
In 2018, WWB!C opened the N011heast Women's Business Center in Appleton. Also in 2018, WWB!C
received a highly competitive mulli-ycar grant to host the Veterans Bnsiness Outreach Center
(VBOC@WWBlC) serving veterans and military family members in Wisconsin, lllinois, and Minnesota.
ln 2020, WWBJC achieved aligned growth and furthered rural expansion through a $750,000 multi-year
grant from the SBA to open a nev,1 Southwest Women's Business Center in La Crosse. \V\VBIC"s
currently has five SBA Women's Business Centers which serve Grnater Milwaukee, South Central
Wisconsin, Southwest \Visconsin, Northeast Wisconsin. and Southeast Wisconsin.
WWBJC has received national accolades for accomplishments including the Small Business
Administration Jody C. Raskind Mission Lender of the Year Award and the prestigious SBA National
Women's Business Center Service Excellence Award. The SBA has named WWBJC the national
Wisconsin Microlender of the Year every year since 2002; and recognizes WWB!C as one of the largest
SBA Community Advantage Lenders in the U.S.
Since 2012, WWBlC has been rated by Aeris, the nationally recognized information service for
community investors. WWBIC is one of I 0% of all Community Development Financial Institutions
(CDFls) to be Aeris-rated. Aeris provides comprehensive, third-party assessments ofCDFls' loan funds,
financial strength, performance, and impact. \\/\VBIC's current Aeris Rating is A-*** which represents an
upgrade over our previous rating, reflecting organizational improvements that were initiated as a result of
our previous rating. WWBJC is confident that our ongoing collaboration with Aeris will continue to
accelerate achievement of our strategic business plan priorities and positive economic impact
Wisconsin Women's Business Initiative Corporation (WWBIC) Case of Need
Microbusiness can provide an economic lifeline for underserved communities and W\VBfC's
programming can offer new hope for rural entrepreneurs, particularly women. lower wealth individuals,
and people of color. Too many Americans have been denied the opportunity to become small business
Page 5 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 21 here 50575A.006
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
15
Written Testimony by Jon Gaines
"Improving access to capital in undcrserved communities:
the Community nu rnnu,.cc Program, the Micro/oan Program, and other SBA initiatives"
We,clnesda•v. December 14, 2022, 2:30 P.M (E'[J
owners because they lacked the required capital to do so. Traditional banking institutions reported a year-
over~year decline in small business lending with the end of the Paycheck Protection Program even while
credit usage by small businesses remained stahle and demand for new credit increased during the same
time period. Banks also tightened their credit standards for small businesses) especially for new business
owners. 4
According to the most recent data by the Federal Reserve, the average loan amount for a new small
business loan from a traditional bank is $593,000. 5 Requests for capital below this amount are often
ignored by traditional banks and lenders, with CD Fis and SBA Microloan and Community Advantage
lenders covering this gap up to $350,000; meaning a gap of $243,000 potential exists.
Microlcnders offor businesses assistance, which a bank both cannot afford and cannot offer because of
lender iiability. In fact, most Micro loan requests come from businesses who either cannot get bank
financing or cannot get bank financing without the paiticipation of a Microlender. Finally, many banks
support the Microloan program because it leads to stronger businesses that will ultimately become
bankable customers.
The decrease in small business financing to low-income business owners highlight a need for nonbank
financial institutions like WWB!C with flexible underwriting, low fees or no fees, low and fixed interest
rates and development services. \V\VBJC's Target Markets experience significant economic distress of
poverty, income, and unemployment. These challenges prevent access to traditional financing, as clients
often have few assets, poor credit ratings, and may lack social connections to vvc.althier potential
investors.
WWB!C serves an mTay of clients from those that are thinking about starling a business to those with
established, successful businesses who are in need of additional financing to grow their businesses.
WWB!C offers an assortment of training opportunities to suit entrepreneurs at any level. Most loan clients
come looking for financing, but frequently their success is attributable to the combination of financing
and technical assistance. WWB!C focuses on providing a holistic approach for fair and responsible capital
by offering: business training; pre & post business technical assistance; and access to financial products
(business lending).
Wisconsin Women's Business Initiative Corporation (WWBIC) Holistic Approach
Business Training
WWBJC is a leader and innovator in entrepreneur business training. WWB!C offers trainings to promote
financial acumen and in starting. sustaining, and growing a business for entrepreneurs at various levels.
Information and registration are listed on website and sessions are offered in English and Spanish.
Entrepreneurship training topics include financial management, technology. operations, marketing, and
other aspects of successfol operation. Trainings are offered throughout the state through \V\VBIC's
4
Srnall Business Lending ,Survey, Kansas City fed, October 2022
5
Survey o_(Terms [!_(Business Lending, Federal Reserve System, 20 ! 7
Page 6 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 22 here 50575A.007
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
16
Written Testimony by Jon Gaines
·'Improving access to capital in underserved communities:
the Community Advantage Program, rhe Micro/oan Program, and other SBA iniliatives"
Wednesday, December 14, 2022. 2:30 P.M (ET)
network of five regional offices offering a hybrid approach to ensure access to all. Solid business
planning. persona! money management, strong management skills, and access to markets are vital for
both individual and business success.
Pre & Post Business Technical Assistance
W\VBiC's extremely pro-active model for providing technical assistance to loan clients mitigates the risk
of lending to unhankable borrowers. Prior to receiving a loan. clients receive one-on-one counseling~
which can include evaluating or creating a business plan and understanding financial and operational
constraints. SBA microlendcrs also receive accounting, human resource management, and information on
research in their industry. WWBIC provides pre-loan technical assistance through group training sessions
as well as one-on-one consultations.
A WWB!C "Small Business Consultant" staff member is assigned to each loan client immediately upon
loan closure and begins providing post-loan technical assistance that continues during the life of the loan.
up to ten years. Clients also have access to W\VBIC's Initiate Porlal to access online technical assistance
24/7. WWBIC offers credit counseling and credit repair to help individuals qualify for a small business
loan. In addition, the small business consultants leverage the local community expe1iise of more than 400
volunteers in profossional fields (including banking, law, and accounting) who work one-on-one as
coaches and mentors to WWB!C clients. To best help the borrower better market their business and be
successful. WWB!C can even work with a client who is having financial and/or repayment difficulty.
Business Lending
WWBIC~s access to capital initiatives provide a continuum of options to best meet business borrower
needs, ranging from $1.000 to $350.000. WWBIC's programs include very small loans through a
collaboration with Kiva. microloans up to $50,000. lines of credit, and larger loans up to $350,000
many of which have an SBA Community Advantage guarantee. There is also a piloted a nano-grant
program and small equity investments for defined businesses. In addition to managing its own portfOiio,
\VWBIC also supports a small number of other entities with the underwriting and management of their
microloan activities.
Both \V\VBlC's business and micro loans can be used for starting or expanding a business, purchase of or
repair of machinery or equipment, furniture and fixtures, inventory, supplies and working capital. The
targc1ed and typical profile of a WWBIC micro loan clientf is low or moderate income. has experienced
persona! financial setbacks~ credit history issues, is financially insecure, may be working a low-wage job
with no oppo,tunity for advancement. and is at a point in life where starling a business may be the best of
few options. These smaller, riskier loans are often under-secured and require a high level of business
technical assistance in order to be sustainable.
WWB!C offers lines of credit to more established clients to supplement their term loans to address cash
flow management needs. The two most common barriers for our lo\v~income clients are lack of basic
financial acumen and lack of a formal business plan. We have extensive programming around these
topics. Approximately half' of our pre-loan clients need individual counseling or one-on-one business and
Page 7 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 23 here 50575A.008
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
17
Written Testimony by Jon Gaines
1m1m1v1nv access to capital in underserved communities:
('ommuni(V Aa1w1rm1!!.e Program, the Aficro/oan Program, and other SRA initiatives''
December J.I 2022, 2:30 P.M {El)
technical assistance to become loan ready, A personal relationship encourages timely repayments to us
and other creditors.
The rate for both Micro and Business loans ranges from 8-10% (with some special limited fonds at
2%,) Fees range from $500 for micro loans to $1,500 for business loans; SBA Community Advantage
loans require up to a 2.5% packaging fee for a $350,000 loan. flexibility features include
collateralization requirements, smaller down payments & lo\¼er equity contributions than hanks require.
WWBJC underwrites on projected business cash flows & debt service ccwerage (not simply collateral &
credit score) character, & ability to repay the debt. WWBIC lends to low credit scorers in special
circumstances like medical debt or divorce, & to those at least 18 months past bankruptt:y discharge if
low score or bankruptcy was not due to credit abuse, More than 50% ofWWBIC loans finance stm1ups in
higher-risk sectors (restaurants, retail,jewelry stores, building trades & childcare,)
Financial Capability
WWB!C was an early adopter of the personal financial capability training now widely promoted by banks
and organizations. WWBlC was named a ''Lcgai.:y Award·' recipient in the 2014 Governor's
Financial Literacy Awards, WWBIC offers a multi-part Make Your Money Talk classroom education
series covering personal financ1.::s. Graduates ,vho income-qualify can open matched savings account to
save for one or more of select assets: first-time home purchase, starting or expanding a business, vehicle
expenses, debt repayment, or returning to school for post-secondary education. One-on-one financial
educational counseling helps clients create and maintain personal budgets. Through the \~/\VBlC -led
Wisconsin Saves public awareness campaign. participants save money that might otherwise go to check
cashing firms and payday lenders.
Veterans Programming
WWBIC has always provided suppo,1 to veterans and military-connected families since its inception,
However, in 2018 \V\VBIC expanded these services through a five-year commitment from the SBA 's
Veterans Business Outreach Center (VBOC) progra1n. Outreach, training, veteran-focused loans and
technical assistance are provided on military bases and in community locations throughout a three~state
area·-·· Wisconsin, Minnesota, Illinois.
Wisconsin Women's Business Initiative Corporation (WWB!Cj's historv with Federallv funded
programs
Small Business Administration (SBA) Programs Currently Administered
Microlender -" Technical Assistance (TA) and microloans up to $50K, (2005 Present)
• PRIME- Training and technical assistance (TA) to disadvantaged entrepreneurs. (2002 -
Present),
• Community Advantage Lender-·- Loans ranging from $SOK - $350K to small businesses who
cannot obtain traditional financing. (2015 - Present)
• Office of\Vomen's Business (hvnership- Workshops/training, 1 I counseling an<l capital to
Page 8 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 24 here 50575A.009
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
18
Written Testimony by Jon Gaines
"Improving access lo capital in underserved communities:
ihe Communily Advantage Prow·am, /he Microloan Program, and olher SBA initiarives"
Wednesday, December 14. 2022, 2:30 I'.M (ET)
female entrepreneurs and small business owners. (2004 Present)
• Office of Women ·s Business Ownership CARES Act - Training/counseling, TA, and
loans/access to capital to help businesses rncovcr from the COV!D-19 pandemic. (2020 - 2021)
Veterans Business Outreach Center - Outreach, training, veteran-focused loans and
technical assistance (2015-Present).
Additional Federal Programs Currently Administered
U.S. Department of Treasury: CDFI Fund Grants and Loans-Technical assistance, 1: l
counseling and access to capital up to $1 million (2002- Present).
U.S. Depa,tment of Treasury: CDFl CORE Rapid Response A loan fund to assist small
businesses with training, counseling, and technical assistance impacted by the COVID-19
pandemic (2021 Present].
• U.S. Department of Agriculture: Rural Microentrepreneur Assistant Program Provides loans
and grants to Microenterprisc Development Organizations. Helps microenterprisc startup and
growth through a revolving fund with training and technical assistance to microloan bmTowers
and micro entrepreneurs (20 l Oto Present).
• U.S. Department of Agriculture: Rural Development Business Grants -Technical assistance and
training for small rural businesses with has fewer than 50 new workers and less than$ I million
in gross revenue (20 l 5 to present).
• U.S. DHHS: Office of Community Services - Community Economic Development - Projects
aimed at business development opportunities and creating employment for individuals with low-
wealth located in geographic areas with a demonstrated need for the proposed project. (2015-
Present)
• U.S DH!!S: Assets for Independence Financial Assistance Award Enable disadvantaged
families to build assets through training, technical assistance, and Individual Development
Accounts (2015 - 2020)
Wisconsin Women's Business Initiative Corporation (WWBIC) as an SBA Community Advantage
and Micro Lender
WWBIC participates in the SBA Community Advantage Program for SBA 7(a) loans of up to
$350.000. The SBA offers an 85% guarantee on loans up to $l50,000 and a 75% guarantee on loans
greater than $150,000. The program mitigates credit risk and allows WWB!C to lend to higher risk
borrowers and reduce Loan Loss Reserve expenses.
The 7(a) Community Advantage (CA) program was created in 201 l to expand access to SBA-guaranteed
loans. The SBA encourages lenders to deliver technical assistance with CA loans whenever possible but
does not compensate lenders for the cost of providing TA. WWB!C provides TA as a holistic approach to
allow for the business to succeed. CA lenders have to deliver at least 60% of the CA loans to businesses
in 'undcrscrved markets," currently defined as: Empowerment Zones and Enterprise Communities.
HUBZones, Low-to-Moderate Income communities (LMI). Opportunity Zones, rural areas, startups, and
vetcran-ovvned businesses.
Page 9 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 25 here 50575A.010
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
19
Written Testimony by Jon Gaines
·' Improving access to capital in underserved communities:
the Community Aarvamc,f!.e ProJ!.ram, the Microloan and other SBA initiatives
we•,mpw,op Decemher 14, 2022, P,l,;f (ET)
Since WWBIC's deployment of the SBA CA program in 20 l 5, WWBIC originated 285 loans at $21.3
million, of that l 55 have been paid in foll at $7, 7 million with 19 being charged off at$ l .2 million. Since
2015, WWBIC has closed a total of 44 loans greater than $100,000.
WWBIC's SBA Microloan program began in 2005. Since the program launched, WWB!Cs loan team
has deployed 941 microloans for at $20.6 million, with an average loan size of$21,891.60, The pandemic
altered the scope ofmicrolending with immediate relief for small businesses through grants and
forgivable loans. ln 2018 (pre-pandemic), WWBIC deployed $1.4 million dollars in SBA Microloan
funding and $980,000 was deployed in 20 I 9. Pre-pandemic an average SBA Microloan was $27,000. In
2020 during the onset of the pandemic, there was $372,000 in SBA microloans, $656,125 in 202 l, and
$530,000 in 2022 deployed. WWBIC has served on average, 63% of SBA Microloan clients as female;
46% low to moderate income, and 26% minorities.
Through the SBA Microloan program, WWBJC has been able to provide pre/post loan technical
assistance to these entrepreneurs and business o\vners. The pre loan TA includes topics such as business
plan, financial prC>jection, budgeting, business formation, licenses and permits while the post loan TA
will focus one on one counseling on business operations/ expansion to business owners after receiving
the micro loans. The pre/post TA is critical to ensure a long-term success/minimize loss for entrepreneurs
and microenterprises/small businesses.
Wisconsin Women's Business Initiative Corporation (WWBIC) Microlending Impact
The small business borrowers of this program provide tangible benefits for their communities. It is one
thing for me to read the statistics and tell you what we do, but it is truly an honor to now share ·who" we
serve. I hear daily through our team meetings and clients I have had the honor of talking vvith: that
micro lending offers clients low interest rates, achievable loan amounts, community-based lending,
technical assistance, and support through the process to achieve their dreams. We are one team, one
mission, one WWBJC where we are there to listen, serve, and nurture novice small business owners who
are my neighbors and live in the communities we call home.
Aeroforce Logistics- Statt-up, Veteran, and Woman Owned Business (Milwaukee, Wisconsin)
Heather Varney learned to be a resourceful problem solver and a good communicator at an early age.
While in the Marine Corps, she experienced a bad accident, which had a galvanizing effect. She decided
that iflhere was something she wanted to do, she was going to do it regardless of what got in the way.
Forced to change jobs in the Marine Corps due to her injury, Heather learned a new side of aviation: the
parts side. She developed a passion for being the "parts finder" for the Marine Corps and every job alter
that, finding great joy when helping others. Aeroforce Logistics exists to provide solutions to ensure U.S.
Government (USG) entities or large-business concerns obtain needed aerospace materials and equipment
in a mission-focused and cost-effective manner \vhile achieving small business subcontracting and
utilization goals, WWBIC was able to assist Aeroforce Logistics by providing its first business loan of
$50,000 through the SBA Microloan. The money assisted Heather with some of the business start-up
costs. and within six months, the loan was paid off as Aeroforce grew and "graduated'' to a commercial
Page 10 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 26 here 50575A.011
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
20
Written Testimony by Jon Gaines
"Improving access to capital in underserved communities:
the Community Advantage Proxrwn. the Microloan Program. and other SBA initialives ..
Wednesday, December l { 2022. 2:30 P.M. (ET)
lender.''WWB!C helped us when traditional banking couldn't. They are also very well known in the
community and help with making connections," explained Heather Varney.
_lQYin.gkindness J\FH LLC - Woman & Minoritv Owned Business (Racine, "Wisconsin)
After fleeing domestic violence arnJ successfully moving from l1omclessness to hometnvnership, l,akesha
Davis \\anted to ht'\p others on a similar journey. She wanted to provide them with an experience
difforcnt from the tnmsi1ional ct!nters she spent time in, ·with a loan from \V\VBIC Lakesha
founded I ,ovi11gkindncss AFH I ,LC ti.) creme a place of refuge for those seeking hdp from a desperate
situation, Today Lovingkindness is a transitional, shared living home aimed at reducing homelessness and
addressing a lack of affi:mJab!e housing, It offers safe, affordable co-living housing that is fully furnished
,vilh all utilities paid. In addition to a loan of under $50.000, WWB!C also prm ided a series or classes
that helped Lakesha create a business plan, pitch her business with confidence. letffn Quickbooks. develop
relationships with mentflrs and ct•nsultants, and connect \vith other resources. She plans to scale her
business to OV\11 25 pcrl.'.cnt of the homes within a five-block radius or its current location, and then to
expand to other stales;. --\~/hen l started my first class \vith \\/\VBIC. I ,vas a big pik of rnush .and that ,vas
ola). My head was full of uncc-rrnint:, hut as I fr)Uo\.vcd the st-cp~hy-stcp instructions things begin to get
l:karcr_" said Lakc:-;ha. ·'1':Dt on!) did i learn hcnY husincs:-. \\ork:., ! al:-i.o lcarntd sdf---ccmfo. h:llcc. I learned
bov,,, to believe in myself and get others on board with my idea. If you are St!rious about becoming ft
business O\\-ner \ 1/\VB1C is the \\HY toµ_(,. They hayi: truly tmned my busint::::-.s dream int(i real it)."
Antigua Latin Inspired Kitchen-·· Woman & Minority Owned Bus_incss (West Allis, Wisconsin)
Citla!i Mendieta-Ramos gre\v up with the delectable aroma of simmering spices at her dad's restaurant
Rey Sol. on Milwaukee's South Side. It became her dream to raise her family the same way. With
\V\VBIC's assistance, she \Vas able to open the doors to her mvn tine dining establishment Antigua Latin
Inspired Kitchen which opened in the heart of West Allis in 2006. Antigua started as a cafc offering
breakfast and lunch. Now 16 years later. it has evolved to a full-service resiaurant and full-service offsite
caterer. 1n addition, they offer hand-on cooking classes and arc developing a line of food products to sell
wholesale. In the fall of 2018, Antigua relocated to a bigger facility to help keep up with the growth of
catering services. ln 2022, Citlali have grown their catering side of their business and have a product line
of frozen food offerings. "I could not have opened my restaurant without WWB!C. WWBIC's assistance
with marketing and developing my business plan gave rne the tools to gro\.V this business'' says Citla!i
Mendieta-Ramos.
Appropriations and Program Financing
The Micro loan program received a Congressional appropriation of $6 million for loan credit subsidies to
support up to $110 million in Micro loans in FY2022. In addition, the appropriations for Microloan
Technical Assistance totaled $37 million. These grants are awarded to selected Microloan intermediaries
to provide Microloan botTowers and prospective borrowers \Vith marketing, management. and technical
training assistance.
The SBA FY 23 budget for the Microloan program includes $6 million in budget authority, YVhich
supports$ l l 0 million in loans to intermediaries and $41 million in technical assistance grants.
Page 11 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 27 here 50575A.012
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
21
Written Testimony by Jon Gaines
"Improving access Jo in underserved communities:
the Community AdvanlaJ;e Program, Micro/oan and other SBA initiatives"
,Vednesday, December /.I, 2022, P.?vf /ET)
The Coronavirus Pandemic continues to disrupt the work of on entrepreneurs and small businesses. Not
only must they contend with supply issues, but new factors -higher interest rates and tightening credit
present emerging challenges. More than ever, SBA Microloans are an important source of patient capita!
for small businesses. For that reason, we supported:
ln April 2021, the House passed H.R. 1502. the !vficroloan improvement Ac, o/'2021. This legislation
makes a number of improvements to the Microh)an program, including:
(I) Interest Rates for lntennediaries
Changes the definition of small loans from $7,500 to$ I 0,000. Intermediaries with loans
averaging the small loan rate qualify for SBA Micro loans with an interest rate of 2 percentage
points below !he Treasury rate.
(2) Lines ofS:r.~it
- Authorizing the use of microloans for lines of credit.
(3) Extended Repavment Tenns
- Modifies loan terms to a maximum of7 years for loans of$10 1 000 or less1 and to a maximum of
IO years for loans that are greater than $ l 0,000.
{4) Credit Reporting
credit reporting process is established to ensure intermediaries are able to provide the major
credit reporting agencies with information about borrowers relevant to credit reporting, such as
the borrower's payment activity on the loan.
(5lm.trnJ.,,
Eliminates the I /55 rule and simply leaves in place the existing ceiling of 300 intermediaries
able to be funded. Under current law, SBA may only make available the lesser of$800,000 or
of the amount appropriated for microloans for the first t,vo quarters of the fiscal year. This
creates an administrative bottleneck fOr the agen.cy and a paperwork problem for intermediaries,
In order to continue to address the needs of underutilized states, the amendment reserves 15
percent of the appropriation for the first tv,;o quart1¢rs oft he fiscal year for those states.
Other Recommendations
P.L. ! !6-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act(Division N,
Title IH of the Consolidated Appropriations Act of202 I), among other provisions, \Vaived the Micro loan
Technical Assistance program's rnatching requirement in FY 2021 and !imitations on the pre-loan
technical assistance and consulting and increased the Microloan intermediaries' lnan amount
after their first year of participation in the program from $6 million to $10 million in FY 2021. The
aggregate loan amount was reset to million on October L
There continues to be great demand for Microloans and raising the cap on intermediary loans will allow
high-performing intermediaries to secure additional resources to assist small businesses in their
communities. Waiving requirements for technical assistance matching will make more intermediary
resources available to businesses, Current law limits to 50% the use of technical assistance grants for pre-
Page 12 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 28 here 50575A.013
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
22
Written Testimony by Jon Gaines
lo in underserved communities:
:ificroloan and other SBA initiatives,,
PM, (ET)
loan technical assistance and the use of consultants. We urge the Committee to consider extending or
making these provisions permanent.
\Ve strongly support eliminating the 50% limit In the almost 30 years the SBA Microloan Program has
been in existence, the program has grmvn to 150 active intenncdiary lenders that have made more than$
l billion in loans to more than 85,500 small businesses across America. One of the chief reasons for the
success of the program is the technical assistance provided by intermediaries. The \-Vaivcr provided in FY
2021 allowed intermediaries more flexibility in hO\v - and ,vhen we support our borrov-. ers and \\11..Wk to
1
ensure their success, Intermediaries contend that the 50/50 limit is a burden and seems arbitraiy relative
the realities and needs regarding pre~loan and post-loan TA, Curr~ntly, every hour of TA must be
bucketed and tracked by quarter.
Underwriting a new borrower is a critical part of the micro loan program. Our experience is that pre-loan
technical assistance is the most important factor in successful !ending. Businesses that come through our
door receive assistance with their business plan, financial bookkeeping, and their overall
operations, This sort of technical assistance is invaluable to both borrowers and WWBJC a lender),
Thank you for your time today and for hearing our sto1y as well as those \.vho our story is all about. The
voices ,ve need to hear like Heather, Lakesha, and Citlali. Those I am proud to call my neighbors and my
community members, Please join us we continue "Putting Dreams to \:Vork:'.
Page 13 of 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 29 here 50575A.014
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
23
Chairman CARDIN. Mr. Gaines, thank you for your testimony.
Mr. Schwellenbach.
STATEMENT OF NICK SCHWELLENBACH, SENIOR INVESTI-
GATOR, PROJECT ON GOVERNMENT OVERSIGHT, WASH-
INGTON, D.C.
Mr. SCHWELLENBACH. Chairman Cardin, Ranking Member Mar-
shall, and other Senators on the Committee, Senator Ernst, thank
you for inviting me today to discuss the role of financial technology
companies, also known as fintech companies, and fraud in the Pay-
check Protection Program during today’s hearing on underserved
communities and their access to capital.
At the Project on Government Oversight, or POGO, I have inves-
tigated fraud and potential fraud in the PPP for over two years,
but before I say more, research has shown fintech lenders and as-
sociated companies did much to help underserved communities ac-
cess PPP loans. According to one paper, fintech lenders made a
larger share of their loans to Black-owned businesses compared to
traditional lenders.
POGO does not currently have a position on proposed rules from
the SBA, one of which would give fintech lenders opportunities to
participate in agency lending programs beyond the PPP. But as a
general proposition, it may benefit historically disadvantaged and
underbanked communities if nontraditional lenders, such as
fintechs, can participate.
But at the same time, fintech companies did not always facilitate
lending to those the PPP was intended to serve. Many set on de-
frauding the program successfully used fintechs to divert money.
The SBA must have sufficient safeguards to ensure fintechs and
other lenders do not enable high rates of fraud. Fraud can reduce
the amount of funding available for legitimate businesses seeking
access to capital.
All that said, fraud concerns should not stop the government
from trying to access the very real equity issues that impede un-
derserved communities’ access to capital.
Now let me talk more about the fraud work that I and others
have done looking at fintechs. In October, 2020, POGO highlighted
that a disproportionate number of PPP loans that the Justice De-
partment had alleged were fraudulent were processed by fintech
lenders. Specifically, we identified 97 PPP loans that were allegedly
fraudulently obtained up until that point in time—this is late
2020—and many cases have been brought since then.
About half of those approved loans involved seven fintech compa-
nies and banks working closely with fintechs. Those seven proc-
essed disproportionately fewer PPP loans even though their loans
were disproportionately among those that the DOJ was alleging
were fraudulent.
POGO’s work was also informed by a whistleblower inside a
fintech lending company, who I cannot divulge their identity, who
told us that her company did not have ‘‘much incentive to do over-
sight’’ because the funds were coming from the government, the
rules governing the PPP were lax, and each loan processed bene-
fitted lenders who collected a fee. In short, they did not have any
dmwilson on DSKJM0X7X2PROD with HEARING
skin in the game. It was not their money, it was the government’s,
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
24
and there were a lot of financial incentives to process many loans
quickly.
In addition to POGO’s work, University of Texas researchers ear-
lier this year found that PPP loans processed by fintech lenders
were much more likely to be accompanied by suspicious indicators
than loans processed by traditional banks and credit unions. There
are some notable exceptions, though. The UT researchers found
that PPP loans processed by some fintech lenders actually had par-
ticularly low rates of potential fraud.
So this points to varying underwriting practices by fintechs and
other lenders participating in the PPP. Some fintechs appear to
have engaged in rigorous underwriting practices, resulting in lower
potential fraud rates, while others did not.
Why the wide variance? That is because of the lax rules gov-
erning the program, such as relying on loan applicants’ self certifi-
cation and a lot of confusion about what the program’s require-
ments entailed, including compliance with the Bank Secretary Act
and Know Your Customer requirements.
Given that some fintechs are not associated with high rates of
fraud, it does not appear that there is an inherent flaw within
fintechs as a group, but it appears that the government did not do
enough to ensure that all nontraditional lenders and all lenders
participating in the PPP had sufficient anti-fraud controls either in
house or through their service providers.
Earlier this month, the House Select Subcommittee on the
Coronavirus Crisis issued a report that I urge the Committee to re-
view that examined fintechs and their role in fraud in the PPP.
If the PPP goes forward with its proposal, it has an opportunity
to learn lessons from 2020. Unlike those chaotic days, the govern-
ment can take deliberate steps now to get this right or get a better
balance before the next big disaster strikes. The SBA should be
commended for seeking ways to expand access to capital, but the
Committee should also exercise its oversight to ensure that there
are not high rates of fraud.
I have included more details and considerations in my written
testimony, and I am happy to take any questions you have.
[The prepared statement of Mr. Schwellenbach follows:]
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
25
PROJECT ON GOVERNMENT OVERSIGHT
Testimony of Nick Schwellenbach, Seniur Inve,!lligator, Project On Government Ovenight
before the Vnih.•d States Senate Committee on Small Business and Entrepreneunhip
on ••Improving Access to Capital in Undcrservcd Communities: The Community
Advantage Program~ .'.\:Utroloans, and other SBA Initiatives"
December 14, 2022
Chainnan Cardin, Ranking Member PauL un<l mcmhcrs of the Committee. thank you for inviting
me today w discuss the role of financial technology ("fintcch'') companies and t'rawJ in the
Paycheck Protection Program (PPP) within the conk'xt of today"s hearing on underservcd
communities and their access to capital. I work as a senior investigator at the nonprofit Project
On Government Oversight, or POGO, I have imrestigatcd fraud and potential fraud in the
Paycheck Protection Program for 1..wer two years and have \\Titkn several reports detailing my
findings. 1
Founded in 1981. POGO is a nonpmiisan independent watchdog that inYestigatcs and cxposL·~
waste. corruption. abuse ofpmveL and when the government fails to serve the public or silences
those who rt!po1i wrongdoing. Vlc champion reforms to achieve a more cffcctivt:. t.'thkaL and
accountable Jt:deral government that safrguards constitutional principl~s.
Before- I sav more. I should be clear that research has shcwrn fintech lenders and associated
companies ~did much to help undcrscrved communities ac\.'Css PPP loans. 2 ·'Fintcch lenders made
1
Nick Sclmel!enbach. Neil Gordon, Stan Moulton, and Leslie Ciarvcy, ·Th;,; Grear Pandemic Swindle: hxls
tei.;hnl•logy. but even traditional hank:-; have long hud a robu~t onllnc presence. and
financial technology is ,vkkl) uti!i/cd. ln lhc conkxt of Ihis discus:sion, fin tech inc!ud<:s kndcr:, that thi: Sinull
Business Administration officially de,ignatcd all PaJcheck Protection Program ••fintech" lender::.; banJ..s originating
PPP loans that were c!o~dy as:sociah.'d \\ ith finkdl scr\ ict' prnvitkr:s to procc~s PPP loan applica1im1~: and tho:,!!
fintech '.,,ervice provider'.,,, Othi.:r, have ::.imilarly usi:d broader formula1ion,. For instHnCo. "Fintcch lenders: All
kndt•rs officially designakd us;; 'ilH:h h; i-ht' [Small Bu,;incs<; Administration]. \\\c farther indud~• online knders who
originate primarily for ur via tintcch partner:, or platforms. on line knJcr.~ foundcd since 2005, and online lcmkr:,
that rctdvcd venture capital (VC) investm~nt." Sabrina T. Howdl et a!., National Bureau of b::onun1k Research.
Li:nd.:r Automation and Rudal !Jisparirft::_\ m Crdit Accvss. Working, Paper 29364 (October 202!; Revised
Sovcmbcr 2011), Jl) of the PDF. !_;Hr::< _\.\.1-\ \.\ .n_t,~,:·_nr.:,_ -;\_~tcr_n f'i_t,.,;,·\\1ii_kingy,1,pc!>: w,!1J3M __ \\ 2':!.;-\~4,pdf: i\ rei.:cnt
House select subcommittol! on the cororn,-.,iru'.\ cri,is examin,;'.\ fintcch:, a:'.I both lender'.> themsclvc:, and as lender
:,crvicc providers (LSPs). ·•Fintcch::,,, acting a::. both lenders and LSP:,, became prominent in the PPP. By the end ,._if
202L the va~t majority of Lhe lar)!.e~t PPP lender:,, by both value and volume (nine out often). -.,,,.ere fintcchs or
fintech~partnered lcnder1:· Staff of llou>:>t' Committee on (her1ight am! Rel'onn. Select Subc0nrn1ittrc on ihc
Coronavirn~ Crisis. l !7th Cong .. ·'/Vi.' ,,frf .Vol th!! Fraud I\,!i~·u" I!ow Fintechs Fa1.:ilitated Fraud in the l',1vchcck
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 34 here 50575A.015
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
26
a larger share of their loans to Bk1ck-owned businesses compared to traditional lenders:'
according to a paper publish~d by the National Bureau of Economic Research. 3 Another pap~r
studying the PPP published b, the National Bureau of Economic Research found that "finTech
is disprop01iionatdy used in ZIP codes with fe\ver bank branches, lower incomes. and a larger
minority share of the population. '"4
POGO does not currently have a pcrnition on proposed rules from the Small Business
Administration (SBA), one of"hich would give fintoch lenders opportunities to participate in
the agency's lending programs beyond the PPP. :i But as a general proposition, it may benefit
historically disadvantaged an<l underhankcd communities if nontraditional lenders. including
fintcch companies. can participate in SBA lending programs.
At the same time, fintcch companies did not always facilitate lending to those the Paycheck
Protection Program was intended to serve. 0 Many set on defrauding the program successfolly
utilized fintcchs to divert money.
The SBA must have sufTicient safeguards to ensure fintech companies~ and other lenders·--- do
4
not enable high rates or fraud. In discretionary programs like the PPP. where funds arc fixed by
appropriation, fraud reduces the amount of federal funding available for legitimate businesses
seeking access to capital. There is up to an estimated $100 billion in PPP fraud.' If that federal
l'rot~c!imi Prow-am (Committee Print 20:22), 17.
~;<:Dft11)<1Viru;;)HlU~<.'.Ji:.{1V :i;itc'.'I ·t.knlOL'rat-:,.~onll)a.\- [11.1:s.hom~- filc~:2022. 12.0 i 'y]OI {{W,. '" C!20I·:inl¢~lis'-(j?0!~nc.
ii ita1cd{1 f'-201 ·r:aud• •-?Q.iq 1~!,::!JH!J!-c'.) n~QPm,chi;ck~ ..1.0Protcc~i.on~·,2qPr9grap1 0 .QSl.f.
~ llowdl ot aL, "Lender Automation and Racial Disparitic5 io Cn.•dit Ai.:ccss," 51 of the PDF [:,ee note 2).
4
lsil Erel and Jack l,iehersohn. National Bureau of Economic Re;,earch, Do~.Y Fi11tech S11h,tit1<te j(>r Banks?
Eridcncejrom the f'r~1-d1t'c* Prouxtion Proxrar,.,, Working Paper 276~9 (August 2020, Revis~d D~cernber 2020), 2
of PDF, ht1P..,\; __:~\.'te:::Lnh.;.1:~1!~:il).)J.,;n1 'Jl.l~~ '_\).9r:k1l~_P..9.IJ.g-2:\~ n.659..\\)10.~9..J.Xlf.
~ Small Bu5ines:, Lending Comp:my {SBLC) Moratorium Rti5cistion nnd Removal of the Requirement for a Loan
Aurhorl1.ation. 87 Fed. Reg. (proposed November 7, 2022),
hlto'-: \\v,,\.~.feder~!n~~til\ ·documcnts'2012: 11 ·07 20:?.1+23:'iQ7,\m1,1.!l-husint"~!'.-!cndh1~'01nr;my--sbk:.-
J.11.\o!E!.l\lJiJ!Dl:!:';;,'t,;.!11.;-;.i\~.'-!~.c10~!:Ii;;.!11.Q'O:.'cl_l_:.~)(:~li.1;-J;;Q1!Jt~.lH:!¢.Q.t.:.fot:..4-l11;!fl•
"The PPP \4·a, meant for most legitimate sml'lll bu,ine.s~e, active before Fcbrual)' l '.t 1020. but certaiu markets were
supposed to be priorities. '"lt is the sens~ of tho Senate that the Admini:.trator ,hou!d issue guidanco to knden and
agents to ensure that the processing and dis.hursement of covtrcd loan, prioritiLc:, .~mall busine5~ concerns and
s;nlitics in undcrserved and rural markets, including veterans and menihcrs of the military community, small
business cone.ems owned and controlled by socially and economically di~advantng~d individual~ (as defined in
section 8(d)(3)(C)), women, und businesses in oporation for less than 1 year~:• Cornnaviru, Aid. Relief, and
Economic SecuritJ Act of 2020. Pub. Law ! !6-136. ! 34, Stat 293 (2020), ~Jtp;s:·i~:~\-~,S~,1nj,;J,,::~t,£__QV_.bjJ!'._lJ§_tb:
C\111.EU"C~~ .h~lllS\'.-b.ill. .' ·~~. tC\t.
• !'he SBA ·5 Office of lnspti.:tor Gcn~rol has found broader shortcomings when it t:omcs to the e.gc·ncy·s over,!ght
of lender~ l'lnd supporting entities, At:cording to its Octobt!r 2022 roport on the SBA 'stop challenge.-s, "Our pre-...·ious
audit5 haw found SBA h;u not adequatcly rccogni.L\:d or managed :::i~nificant lender wealnesso!s.'· In additon.
"Previous OlG audi1s hayc tho shown that SOA did not effectively identif) and trtck third~part~ agi::nt involvement
in it!! 7(a) and 50-l- loan portfolio,. Tracking wch agent5 is crucial in managing the portfollos hecawse many knders
rely on the services offee-ba1ed and other third~pa1ty a~ents to help originate, close, 5ervice. and liquidate SBA
loans:· Small Bu~incs.s Administration Oflice of ln!:pcctor General, J"op Jfonax~ml'11I and Pcrfonnar,c(' ( '/wl!cm:,1:e.t
FacinK the S1110/1 Busin~ss ,'1Wf1inistrarior1 in Fisnil J"eur J0:!3, Reprn123-0l (2022). 28 of PDF.
b..t!.Q;.~\~OY 'sitcs, defaqlt Jil~s 12022- l 0 -'SBA '°(!20OKi½2{L~or("'o2Q2l:!2.LJW~J.
• Andrew Keiper. Pe1ry Chiaramonte and Diwid Spunt. "COVID~!Q rdioffrau<l lcd to billion~ in taxpayer~funded
Paycheck Protection Program loans lost," Fox Business. Mav 9, 2022, hH~ww.foxbu~inc~~.. corn:ItQlitic~:'cods;l~
rt'\Jrf-ih1ud-pp.Q::.hll!i01E::tt-:.nnver-fund,:U;:i)a\chcck:Qrnkctioi1-11rq_~.ra.nJ~Loan5,
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 35 here 50575A.016
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
27
estimate is correct 1hat would mean $1 out of every $8 in the PPP. or 12.5%, was lost - more
than high-end estimates of Medicare fraud. 9
The SBA's Office oC Inspector General wrote earlier this year that the fraud levels in the PPP are
"unprecedented."'" Indeed,just last week, the SBA suspended major fintech companies from
further work with the ugency as pa11 of its efforts ''to address the fraud and weak controls that
were so prevalent at the onset of the PPP.'' 11
But fraud concerns should not stop the government from trying to address the very real equity
issues that impede underserved communities· access to capita.I.
Fintech and PPP Fraud
In October 2020, POGO and Bloomberg News•- independently and within hours of each other
~- highlighted that a disproportionate number of PPP loans that the Justice Department alleged
were obtained through fraud had heen processed by fintcch lenders. 1~
Using court records and Small Business Administration data, POGO was able to identify the
lenders for 97 PPP lmms that were allegedly fraudulently obtained. Ofthose 97 loans, we found
that 48 - nearly half of the approved loans involved in these alleged schemes - were obtained
via one of seven fintech companies. and banks ,vorking closely with those fintech companies.
Those seven fi.ntcch companies and associated banks processed 13% of the 5.2 million PPP loans
that were issued up to that point in time. 13
POGO's work was also informed by a whistlcblower at a lintech lending company who told us
that their company did not have "much incentive to do oversight" because the funds were
coming from the government, the rules governing the PPP were lax. and each PPP loan
processed benefited lenders. \:Vho collected a foe. 1•1
9
Jon Greenberg. ·'Medicare fraud rate is 8 to 10 percent, says Roskam oflllinoi~," PolitiFact, June !7, 2013,
htws: ':,.\.~,.,~ p-0!it i fact.c11m tfact(h.:rb 20 IJ j!,U}:filde1~n.!skarn ,r~~rnskai:n-sav,-m~dicarc-f1:aud-ratc--8- IO·
0
=·
10
Small Businou Administration Office of ln5poctor Gonon1I. SBA ·s /lancDing '!.f Pohmlial{v Fra11d1,frn1 Paycl,11d
I'rot~ction Prograw1 Loans, Report 22-13 (2022), 5 of the PDF, h_!JDs.:/ v,ww_.9v~~r.5i!.dlLl:OYisites,deJaul_t/filc,,·o~:-
r~Q.0.11S'S~,'\ ,'SI}~ -OIG-R,;p0rt-.12- I3 ,Qdf.
11
Small Business Admini1tnttion, ·'U.S. Smitll Business Administration Statement on the House Select
Subcommittee on the Coronavirns Crisis Repo1t Concerning_ Fraud in the Paycheck Protection Program,''
December 8. 2022, h.1.U2:i.: '·wv. w.~btl.;!O\, article· 202:::idcc ·()8 'us-smal!-hu1inc1.s-administration-~tatcmcnt-homl'.'•
sc 1e_ct-~ubco111 f_n ittce-coro\1~ y iru~-c rls b~ n::por\.
12
Ryan Summers and Nick Schwel!enbach, ·'Lamborghini,, Strip Club5, Bagu, Companie5, and Lies: The First 56
Paycheck Protection Fraud Case-s." Project On Go¥cmment 0Ycrsiiht. October 8. 2020.
h . U . Q ~ t i o n i ~ 0 : 1 0 : ' l O/lan)boqj1jn ls-str.lP:-club;i::i){)~com1WJJcs-and-lic;:;.: Michelle F. Davis,
--ppp Scammer8 Made Fintech Companie, Their Lender, of Choice," Bloomberg, Octobor 7, 2020,
hllJ)r':v-. W',1..bloombi;:r.c_.cqrn.rnc~·s/articlc~O~'.>-~cammer!'l-tt!led-1intcch-coJIUJilllics•t~out~
fraud.
l'"S~mmen m1d Schwellenbach, .. Lamborghinis, Strip Club!, Bogus Companies, and Lies'· [see note l lj.
H-Summen and Schwellcnbach, ··tamborghinis, Strip Club,, Bogus Companies, and Lies" fscc note ! lJ.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 36 here 50575A.017
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
28
Additional reporting, studies, and investigations have added to the picture over the last t,vo
years. 15
Researchers at the University of Texas at Austin found that PPP loans processed by iintech
lenders were generally more likely to be accompanied by suspicious indicators than loans
processed by traditional banks and credit unions. However, there are some exceptions. The
University of Texas researchers found that PPP loans processed by three well-established fintech
lenders - Capital One, Square, and Intuit - had pa11icularly low rates of indicators of potential
fraud. 16
The variance in fraud rates point:, to varying undcrv.Titing practices by fintech and other lenders
participating in the PPP. 17 Some fintech lenders appear to have engaged in more rigorous
underwriting practices, including conducting due diligence on prospective clients and complying
with Know Your Customer mles, which resulted in lower potential fraud ratcs. 18 The wide
variance in practices was enabled by lax rules governing 1he PPP program, which relied on loan
applicant:,' self-certification rather than verifying the accuracy ofdm:umentation and tax
infonnation applicants provided in support of their loan requests. 19 As the Government
Accountability Office wrote in June 2020, "to streamline the process, SBA required minimal
1
' Meghan Bobrowsky and Ben Wieder, "Quickie lender Kabba3e doled out billion, in PPP loans. A number of
borrowers raised red flag,s," Miami Herald. September 10, 2020,
lll:tQ.: 'web.arch.ivc.orl!,\~ ch'202-0 l 03016t)Q05 1l1ta;i,~: ':www .miam ihcrald.corn,:n.cw~ 1~tq.te:floridn.'arik,le245 :'i9903 5.ht
1J1!;.. Dare~ Willis and Lydia DcPilli~, "Hundreds of PPP Loans Went to Fake Farms in Abio.urd Places," ProP11blica.
May 18, 2021, !l!.l,VX.~~,\L~PHhli.c_tl.:Q.t:i.:'!'!rti£.k.W.:.la1Jm.
1,;, John M, Griffin, Samuel Kruger, and Pratcel,;, Mahajan. "Did FinTech Lenders Facilitate PPP Fraud?" Journal of
Finatu.:il. (Forthcoming; Revised August 15. 2022). 12,
lnt~:•~@)crSS.!.rn.com:~mn~sac0<l:Y:K)6395.
17 Undern•riting involves ftjgesslng and verifyin& identitiea ,md income and flnunce;,: using officinl documentation.
"The SBA 's Interim Final Rule li!lt5 four octions a lender must take when underwritin& PPP loan:11: ( I) conflrm
receipt of borrower certifications contained in the PPP borrower application form: (2) confirm receipt of infom1atlon
demonstrating that a borrower had employee, for "''hom the borro\"'er paid salaries and payroll taxe, on or around
February 15. 2020: (3) confirm the dollar amount of average monthly payroll coio.ts (Or the preceding calemlar yeur
by re•riewing the payroll documentation submitted with the borrower·, application: and (4) follow applicable BSA
requirements,·· Robert L Carothers and Graham H. Ryan, "Litigation and Regulatory Risks to Banks from Pa)ched.
Protection Program." National Law Revh,w, May 21. 2020. ht~Q?:'l'\.Y':'•W J)atla~\r~vi.cw .q;1m.1~rt\deflit~~tion-and:.
regulator\. -risb-to-ban k\~R'rshCfk.-:J.)rotcct.J:Qll.:..Ql:0.:,:nlm .
11
Thi:-; may be due to varyini interpretations by lendors of \\hat the Bank Secrecy Act requirements entailed. As the
GAO 1tatod in a footnote: "Bocau,o of tho limited loan undorwritina, lenden ,md SBA havu less information from
applicants to detect error, or fraud. For standard loans under SBA '11 7(a) program, bon-owen have to provide
documentation that includes a completed application, personal and bu,ine1s financial statements, and income tax.
returns. However, the initial interiw,Jlnai ruJ,·.\, requirem~nt that lmckrsfi:Jlfow applic"bit' Bank Secrecy Act
requireme11ts muy n.>quire lemkrs to collect at!ditio11a/ ident/h1ing ir1lormatio11j1'l:ir11 horrowers before '1pprol'in,f!, a
PflP loan. (The Bank Secrecy Act and it~ implementing regulations generally require financial institution:-;,
including hanks, to collect and retain various records of cuio.tomer transactions. vorif) customer,' identities. maintain
1
anti-money hmndcring compli•nco programs. and roport 5m1plciou, transactions.)." [Empha,is added) Govemm{.'nt
Accountabilily Office, COVID-/9: OppornmitieJ to Improve Fttt.leral R~spm1sf' umt R,cov~ry Ejf'ortJ, GA0-20-625
(2020). 47 of tho PDF. b~);L~Q.J,filLM~J,t~:IQ::<il~f
19
·'In 91 % of tho reviewed cases applicants created, forged. or altered io.upportini documentation (e.g., fRS fonm,
payroll information, and bank ,tatements). ln 1001/• of cases, applicants misrepre!onted !'elf-certification, on their
PPP application," Pandemic Re,ponse AcciJuntability Committee, Small Business .-idminfa'tration Paych,cA
Protection Prof1ram Phase III Control.\', January 21. 2022. 11 of the PDF,
http~.:: ..,~•\\'\~',9.V<.;rji!.!hJ,l!tlY./sitc.s'..tkfavlt,:Jll.~-~ioi~:t;,:fRAC.'SBAFrout.K:.Q.m.ro!sf:'1/.1al.O~Ja11.~.. l.. pc!f.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 37 here 50575A.018
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
29
loan underv..Titing from lenders limited to actions such as confirming receipt of borrower
certifications and supp01ting payroll documentation -- leaving the program more susceptible to
20
fraudulent applications."
Earlier this month. the House Select Subcommittee on the Coronavirus Crisis issued a report on
the role offintcchs in PPP fraud. The repon stated that "Congress and the SBA should consider
carefully \Vhether unregulated businesses such as fintechs. many of which are not subject lo the
same regulations as financial institutions, should be permitted to play a leading role in future
federal li!:nding progrums.'' 21 I urge this Committee and the SBA to review that report as it
contains troubling details about the practices of some of the major fintech players that
pai1icipated in the PPP.
The SBA's Role in Evaluating Fintech Lenders
Given that some fintechs are not associated with high rates of potential PPP fraud. it seems
unlikely that there is some inherent flaw ·within the finkch model 1hat makes these lenders more
susceptible to abuse. Rather, evidence suggests that the government did not do enough to cnsun.·
that nontraditional lend~rs participating in the PPP had suftkient anti-fraud controls in place,
If the SBA goes forward with its proposal to broaden participation in its lending programs
beyond traditional lenders, it has an opportunity to learn lessons from 2020. Unlike the chaotic
days in March and April 2020. no\V is a time when Congress and the SBA can take deliberate
steps to get this right hcf"orc the next big disaster strikes.
ln the spring of 2020, ftntech industry groups successfully lobbied the government to allow their
participation in the Paycheck Protection Program. 22 The SBA issued interim rules governing the
PPP on J\.pril 2, 2020 -the day before the program began accepting loan applications.
There were good reasons for expanding participation: ln the spring of 2020, when ratl.!s of
unemployment were s~yrockcting, sp!!:cd was of the essence Expanding participation to more
lenders meant rnore loans could be processed more quickly, and funds could potentially be
disbursed more equitably,
The Coronavirus Aid. Relict: and Economic Security Act (CARES Act) gave the federal
government, specifically the Treasury secretary in consultation with SBA, the authority to open
participation in th~ PPP to "Additional Lenders," and gave them the authority to issue
··regulations and guidancc.'•,u
21
i Government Accountability Offo.:e, COVID~l9: Oppommities to improve Federal Response and Recovery
£/}<m.Y, 4i of the PDF fsee note l 7l
21
Staff of Hou1e Committee on Oversight and Refomi, Select Subcommittee on the-Coronavirus Crisis. 117th
Cong .. "We Arc Not the Fraud Police:· 9 [see note 2].
n Staff of House Committee on Ove1'5ight and Reform, Se!l.'ct Subcommittee on the Coronavirus Crisis, l !7th
Con~!;,, ·'·Wo Arc Not the Fraud Police," 14-15 l,ce note 2l
1
~ A~ dirt'cted by the CARES Act, the Treasury secrL'tlill)' in consultation with 1he SBA administrator and the head or
the farm Credit Administration were re:o1ponsible for ietting crltcrla to approve lenders that were not federally
in~ured depository instit11tions or credit unions, or fann cn.:dit system imtitutions. !5 lJ.S,C. § 9008 (2020).
hH\)~ ·us~_9dc.hopsr:.J:_Q_,,:·viyv,, ),hJm)'.1_path • ip_1:ellm (1,tit!c l 5 '..ch~_er_l liL&$diti:Qfl.:tlf<lhn,
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 38 here 50575A.019
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
30
The criteria established by the Treasury Department and SBA required that participating lenders
comply with the Bank Secrecy Act an anti-money laundering law that mandates lender~ conduct
due diligence and comply \Yith Knm\' Your Customer (KYC) rules.
As the then-SBA administrator made clear in a press release issued on April 2, 2020. lenders
\vould be "'using their own systems ,md processes to make these loans. ,-:~..i
Those systems and processes varied. The SBA told the Pandemic RGsponse Accountability
Committee that "the more rigorously that PPP lenders applied KYC requirements. the more
likely that individual 1mm fraud issues, like identity theft, would be identified. " 2~
But some lenders and their lending partners did not apply those requirements rigorously - and
thus enabled Craud. 21i
Some Key Questions and Considerations
The case studies providt:d by the House report also highlight some of the limitat!Ons of the
SBA's approach to PPP loan distribution. For example, the agency did not collect and share
information ,..vhcn lenders rejected PPP loan applications. According to the Pandemic Response
Accountahility Committee, the collection ond distribution of such data could have reduced
"instances of applicants· 'shopping' for weaker internal controls among !enders. This approach
may have allowed lenders with less sophisticated fraud detection controls to leverage the more
effective controls of other SBA Jenders.'' 27
As the SBA considers the role of tintcch companies in future initiafrves, there is much to be
learned by rcviev,,ing the role of fintechs in PPP program fraud. Rc\.,isiting the guidelines
provided to these lenders and dctennining ho\',· they might be strengthened to prevent future
fraud is the first step to ensuring that the agency ls best prepared to increase access to capital in
undcrscrvcd communities in a way tlmt is both effective and sustainable.
We recommend the following questions as part of such a rcvie\v:
• Did the Treasury Department and the SBA craft sufficient anti-fraud criteria for fintech
lenders that wanted to participate in the Paycheck Protection Program?
2•1 Small Business Administration. "With $349 Billion in Emergency Small I3u~int3~ Capital Cleared, SHA and
Treasury Begin linpreccdl".nteJ Publii.:-Prlvate Mobi!Lr.ation Elfort to Dbtributo: funds:· April 2, 2020.
l:'!Jlir,,.~~~:Y:..~~_;:i~\!]-~Ufl.::.illJall~b~£.wilifil:c!c,ired-~b.;t:1rca5;1L!)::D..uiu.:
1t11ill:<:c~•ct~,~~1 C\i:Q!J.h li£•pri . ,. at~-0,
~~ Pandemic Rc:'lpon:'le Accountability Committee, S,nall BuJine.f,'> .1d,,1inistration P1.~vd1eck. Protection Progrm11
Phase ff! Co11troi.r. 9 of the PDF [see note 18].
1~ The fintcch Womply has even asserted these rtqnircments did not apply to it. Staff of House Committee on
Over:'light and Reform. Selcd Subcommittee on the Coronasirus Cri:'lis, "We Arc Not the Fraud Police:' 62 l,ee
note 2j.
27 Pandemic Re11ponse Accountability Committee, Small Business Administration I'ay..check Proret·rion I'rogram
Phase lff Control.s, 14 of the PDF lo11;e note !81.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 39 here 50575A.020
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
31
Hmv did Treasury and SBA evaluate these fintech lenders against the established criteria?
How would SBA 's requirements for Small Business Lending Companies authorized
under the SBA 's proposed rule <liffor from the criteria for participating lenders i11 thc
PPP?
• How would the SBA's r~quirernents for Small Business Lending Companies authorized
under the SBA' s proposed rule compare to the regulatory requirements that apply to
traditional depository institutions?
• Is compliance ,vith the SBA 's requirements sufficient to prevent high rates of fraud?
• Do the SBA's requircrncnts apply to thir<l-part:y service providers v:orking for lenders?
• Does the SBA have sufficient resources and authorities to assess whether entities comply
vvith its requirements both initially and through continual monitoring?
• f--low can the SBA ensure that its participating lenders can equitably and in a timely way
provide access to capital to customers they have never before done business with whik
rigorously complying with Know Your Customer requirements?
Are there investments in loan application and verification systems that the govt':rnment
should pursue before the next disaster strikes that 'Would lmver frau<l risks while enabling
widespread and speedy lending to historically underserved and underb1mkcd
communitii:s?
The SBA should be commended for access to capital through its lending
but the -committee should authority to ensure the is
prudent steps to reduce high fraud rates and ensure funds are not div\!rtcd
commtmities they are meant to serve.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 40 here 50575A.021
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
32
Chairman CARDIN. Thank you very much for your testimony.
Mr. Villarreal.
STATEMENT OF ROBERT VILLARREAL, CHIEF EXTERNAL AF-
FAIRS OFFICER, MOMENTUS CAPITAL—CDC SMALL BUSI-
NESS FINANCE, CHULA VISTA, CALIFORNIA
Mr. VILLARREAL. Thank you, Chairman Cardin, Ranking Member
Paul, Senator Marshall, Senator Ernst. I am honored to testify be-
fore you today on behalf of Momentus Capital—CDC Small Busi-
ness Finance as well as the Mission Lenders Working Group. I
want to thank the Committee for convening this hearing and for
the opportunity to discuss how we can work together to ensure un-
derestimated communities can access the capital and support they
need to thrive.
CDC Small Business Finance is part of the Momentus Capital
Family of organizations, a mission-driven financial services firm
which provides a continuum of social knowledge and financial cap-
ital. We are proud of our track record and in 44 years have deliv-
ered over $22 billion in capital under commercial real estate and
small business lending, supporting 240,000 jobs.
I am here also representing, as I mentioned, the Mission Lenders
Working Group, which advocates and provides a voice for SBA
Community Advantage lenders, a program I am here to talk about
today. The SBA Community Advantage Pilot Program, or CA, as
we call it, was launched in February of 2011, and for the first time
SBA’s flagship 7(a) program expanded the points of access that
small business owners had for getting loans from mission-focused
financial institutions with experience lending in economically un-
derestimated markets.
Now there are a number of requirements Community Advantage
lenders must follow, and in the 11-year history of the program
there has been a number of changes. Most recently, the SBA
worked with the mission lenders in revising the Community Ad-
vantage Participant Guide, our standard operating procedure—our
SOP—which included increasing the maximum loan amount from
$250,000 to $350,000 and streamlining lending requirements. We
thank and applaud SBA, particularly the current leadership, for
making these improvements to the program, and they have made
a difference.
Now overall, in the 11-year history of the program, since 2011,
there has been a billion dollars of lending under Community Ad-
vantage, helping 7,000 small businesses. Our organization, CDC
Small Business Finance, has done 1,200 of those loans for $178
million and, yes, Senator, about a dozen for about $1.2 million in
the great state of Maryland.
More important, one of the successes of Community Advantage
has been its reach into the Black and Latino small business com-
munity. As the Senator mentioned, in 2022, 20 percent of Commu-
nity Advantage loans went to Black entrepreneurs as opposed to
about 4 to 7 percent on the traditional 7(a), and for Latino entre-
preneurs it was 16 percent under Community Advantage versus 10
percent under the regular 7(a) lending.
For start-ups, Community Advantage lends almost three times
dmwilson on DSKJM0X7X2PROD with HEARING
more than the traditional 7(a), and that is the engine of the Amer-
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
33
ican economy. So we are really financing those new small busi-
nesses and those start-ups under Community Advantage.
That is why I am happy and I am here to thank Chairman
Cardin for the introduction of the Community Advantage Loan Pro-
gram Permanency Act of 2022. This legislation not only seeks to
codify and strengthen the Community Advantage loan program; it
also recognizes the need to institutionalize mission lending as part
of SBA’s overall mission to aid, counsel, assist, and protect the in-
terest of America’s small business concerns.
While the bill creates permanency for the Community Advantage
program, it also expands the program to cover both economically
and socially disadvantaged small businesses. As I mentioned be-
fore, the great work we have done in reaching Black and Latino
small businesses, that was not even a target market. Senator
Cardin’s bill makes that a target market, and we think that and
other key provisions will really allow Community Advantage lend-
ers to drive deep into communities that are underserved and un-
derestimated.
Senator Cardin, Congresswoman Chu, who have been a strong
advocate of Community Advantage, both understand that Commu-
nity Advantage is a critical SBA program enabling small-dollar
lending that is intentionally targeted to small businesses in under-
served communities, and we thank them for their leadership and
encourage members of this Committee to support the bill.
In my last minute, I do want to make at least one comment on
the SBA’s proposed rule on small business lending companies. As
mentioned, this rule is going to lift, or proposes to lift, the 40-year
moratorium and add more than the 14 current small business lend-
ing companies, or SBLCs, and the SBA is doing this per the pro-
posed rule to drive deeper and to reach capital market gaps. We
applaud them for that. We want more capital to small businesses
in underserved communities and rural communities.
They plan to do this by introducing two new types of SBLCs, or
at least one new type, and then opening it up. One is a mission
SBLC, and that will allow a Community Advantage lender, like
ourselves, to now become an SBLC. They also propose to allow, at
the start, three new for-profit SBLCs.
Now in the proposal, they are stating that the mission SBLCs
will have a lot of requirements to make sure we reach underserved
communities. Remember, these are organizations that already have
been doing this for decades and for years.
On the other hand, for the new for-profit SBLCs, there are no—
I think the mention was guardrails. There are no guardrails for
these new SBLCs. So we urge the SBA to really take a look at this,
and if they really want to reach the underserved and to make this
work, there needs to be some stronger guidelines ensuring that
these new SBLCs reach the underserved communities that are
identified.
Thank you very much, and I am happy to answer any questions.
[The prepared statement of Mr. Villarreal follows:]
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
34
Small Business Finance
Testimony of
Robert Villarreal
Chief External Affairs Officer
Momentus Capital
CDC Small Business Finance
Submitted to
Senate Committee on Small Business & Entrepreneurship
December 14, 2022
"Improving Access to Capital in Underserved Communities: The Community Advantage
Program, Microloans and other SBA Initiatives"
Chairman Cardin, Ranking Member Paul, and Members of the Committee, I am honored to
testify before you today on behalf of Momentus Capital and CDC Small Business Finance
(CDCSBF) and the Mission Lenders Working Group. I want to thank the committee for
convening this hearing to discuss improving access to capital in underserved communities.
CDCSBF is part of the Momentus Capital family of organizations. Momentus Capital is a
mission-driven financial services firm that puts all of its resources into marshaling capital to
support the vision communities have for themselves. CDCSBF is also the leading mission-
based, SBA lender in the nation. For the federal fiscal year that just ended on September
30, 2022, CDCSBF was once again the number one SBA 504 lender (dollars) and number
one Community Advantage lender for both units and dollars.
Over its 44-year history CDCSBF has provided over $22 billion in commercial real estate and
small business loans, creating/retaining over 240,000 jobs.
I am also representing the Mission Lenders Working Group (MLWG), which I am a founding
member of and which advocates and provides a voice for SBA Community Advantage
Lenders. The Mission Lenders Working Group is a national network of SBA-certified
Community Advantage (CA) non-traditional small business lenders including SBA Certified
Page I l
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 45 here 50575A.022
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
35
Development Companies (CDCs) and Treasury-certified Community Development Financial
Institutions (CDFls) located in urban and rural areas across the country. Members see their
organizations as a coalition and stewards of the SBA Community Advantage Loan Guaranty
Pilot program with a shared commitment to financing, supporting, and sustaining
underserved and underbanked small businesses.
In these written comments I will review:
• The origins and mission of the Community Advantage (CA) Pilot Program.
• The impacts and successes of the CA Program as well as some of the challenges
faced by participating CA lenders (industry-wide and from the perspective of
CDCSBF as a CA lender).
• How the Community Advantage Loan Program Permanency Act of 2022,
sponsored by Chairman Cardin, would strengthen the CA program; and
• Finally, I'd like to share some thoughts and recommendations regarding the
proposed rule released by the SBA on the Small Business Lending Companies
(SBLC)
Background on the Community Advantage (CA}Loan Guarantee Pilot: Its Origin
and Mission
The SBA Community Advantage Pilot Program was launched on February 15, 2011. For the
first time, the SBA's flagship 7(a) program expanded the points of access that small
business owners had for getting loans from mission-focused financial institutions with
experience lending to minority, women-owned, and start-up companies in economically
challenged markets along with their management and technical assistance expertise, to help
make their borrowers successful. 1 This was an acknowledgment that the lending industry
needed to do a better job in providing small-dollar loans to businesses in underserved
communities, or those businesses classified as "emerging markets."
The program's goals, per the initial Community Advantage Participant Guide issued by the
SBA, were:
" To increase access to credit for small businesses in underserved markets;
" To expand points of access to SBA 7(a) loans by engaging non-traditional mission
lenders with experience working in underserved markets;
" To provide management and technical assistance to small businesses as needed; and
• To manage portfolio risk by utilizing the underwriting knowledge of mission lenders
with successful track records lending in underserved markets.
As noted above, the critical component of the program was to expand the 7(a) program to
mission lenders. The SBA defined mission lenders as falling into one of three groups: SBA-
certified development companies (CDCs); SBA micro!enders; and Community Development
Financial Institutions (CDFis). The Administration understood that these lenders were best
positioned to meet the capital needs of the underserved business populations not being met
by traditional SBA lenders. Mission lenders have a deep knowledge of their communities,
1 SBA, "Community Advantage Pilot Program," 76 Federal Register 9627, February 18, 2011; and SBA, "SBA Announces New !nitiatlves Aimed at
lncreaslng lending In Underserved Commur@es," December 15, 2010, at h~a'r'ww.sba:gov£q::mtenJ.Ls!)i announc~~~new.,ir:iitiatjye!.~aimt"d~
m0eaw1&;.laj~erved ·comrn1.ll1ltifi http.s://portage.1ife/print/?article=-4112
Page I 2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 46 here 50575A.023
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
36
are accountable to their communities via resident representation on their board of directors,
and, as an explicit purpose and mission, assist small businesses that are located in
underserved areas or are owned by women and minority entrepreneurs.
To ensure that the underserved markets were met, SBA required that CA lenders make 60%
of their loans to a designated Target Market. The Target Markets consist of:
• Businesses located in Low-to-Moderate Income (LMI) communities
• Businesses where more than 50% of the full-time workforce is low-income or reside
in LMI census tracts
• Empowerment Zones and Enterprise Communities
• HUB Zones & Promise Zones
• New "start-up businesses (Firms less than two years in business)
• Businesses eligible for SBA Veteran's Advantage
• Business located in Opportunity Zones (added 10/1/2018)
• Rural Areas ((added 10/1/2018)
Accordingly, the CA program offers access to 7(a) guaranteed lending to these institutions,
which in turn increases access points to the 7(a) program for small firms who would
struggle to access an SB loan from a bank.
Since the launch of the program, there have been additional changes, which are highlighted
in the attachment called "SBA Community Advantage Pilot Program Timeline" (please see
attachment). Highlights include program extensions in November 2012, December 2015,
and April 2022. Throughout the first several months of 2022, SBA worked with the industry
in revising the CA Participant Guide, which included increasing the maximum loan amount
from $250,000 to $350,000 and streamlining lending requirements. We thank and applaud
SBA for making these improvements to the program.
Impacts and Successes of the community Advantage Program
Since the CA pilot launched, the SBA has approved a total of $1,050,734,400 in CA loans to
7,673 businesses with an average loan size of $139,000.
Both CA and conventional 7(a) lending fell during the pandemic as lenders shifted their
focus to processing PPP loans. In FY 2020, SBA lending started to pick up with CA lenders
continuing to target a significant portion of their lending to underserved markets. In FY
2022, 717 CA loans were approved for an average loan size of $158,995, representing an
increase in CA loan approval of 21 percent.
In FY 2022, 7(a) lenders made 47,678 loans through the program totaling over $25.6
billion, for an average loan size of $538,903. On April 27, 2022, Administrator Isabella
Guzman's testimony before the Committee mentioned the importance of small-dollar
lending, and the 7(a) program data revealed a gap in the program's coverage. For instance,
the number of 7(a) loans of $150,000 or less declined by almost 52 percent since FY 2016,
and the number of 7(a) loans of $50,000 or less declined by nearly 58 percent. In turn, the
average 7(a) loan size increased steadily since FY 2016, increasing by more than 87
percent.'
2 Memo from U.S. House of Representatives Chairwoman Nydia Velazquez on the Full Commlttee Hybrid Hearing: "SBA
Management Review: Office of Capital Access" https://smallbusiness.house.gov/uploadedfiles/05·18·22_hearing__memo.pdf
Page I 3
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 47 here 50575A.024
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
37
7(a) Lending Activity Community Advantage
.. . . , . ¼•*" ...
47.,678 $ 25,693,lllS,700
51,856 $ 36,536,756,800 82,834,100
42,302 $ 22,550,171,700 538 76,214,700
51,907 $ 23,175,Sll,OOl 947 133,813,400
60,354 $ 25,372,539,100 1,118 157,529,200
62,.30 $ 25,447,458,500 1,043 Hi',595,500
2016 64,074 $ 24,130,000,000 2016 988 $ 123,020,000
Resource: SBA 7(a) Connect Quarterly Update, October 11, 2022
The Mission Lenders Working Group analyzed the SBA's FOIA data on the 7(a) Program and
CA from FY2016-FY2022 The comparative data charts are below. While 7(a) lenders have
steadily increased their lending to minority and women-owned businesses, CA lenders
outpace lending to historically underserved communities, CA lenders particularly lend more
to Black entrepreneurs, Hispanic entrepreneurs, and women-owned and startup businesses
based on the FO!A Data for Fiscal Years 2012-2022. Of note, in the FY2020 Congressional
Budget Justification, SBA recognized that the CA program "reached significantly more
women and minorities than the traditional 7(a) loan program. 3
Over the last ten years, experienced CDCs, CDF!s, and Microlenders participating in the CA
pilot have demonstrated their expertise, skill, and capacity as lenders and their ability to
finance and support businesses that traditional lenders, including conventional 7(a) lenders,
are unable to serve. Compared to 7(a) financing, CA mission lenders have consistently and
significantly outpaced lending to Black, Hispanic, and women-owned businesses as well as
Veteran-owned businesses and start-ups.
3 U.S. Small Bus. Admin., FY2020 Congressional Budget Justification and FY2018 Annual Performance Report (2019),
Page I 4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 48 here 50575A.025
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
38
SBA Backed lending to Black-Owned Businesses -
Approved 7(a) Lending vs Approved CA Lending - FY 16-FY 22
7(a) and CA Loans to Black Busint!sses by% of Lo•n Dollars
74%
-• -•
20,~
-• _I _I _1 .I
16,~
12,<
It,
4,<
O'lr.;.
IV!b fY 17 F\' 18 FY 19 IY 20 FY21 fY 22
■ 7(a) ■ CA
7(.i) and CA Lo•ns to Black Busint!ues by% of loan Count
w ..
.I .I .I .1 .I .I .I
16,<
u,i',
g,<
4,<
0%
H16 Fr'l7 HlB FYJ9 FOO fY21 FV 12
■ 7{•) ■ U.
SBA Backed Lending to Hispanic-Owned Businesses -
Approved 7(a) Lending vs Approved CA lending -FY 16-FY 22
7(a) and CA loans to Hispanic Borrowers by'" of Loan Dollars
18.,.
■I ■I .I .I .1 .1 11
12'j(,
6';t•
O":l'-
FY 16 FH7 FY 18 FY19 FY 10 FY 11 FY 22
■ 7(a) ■ CA
7(a) and CA Loans to Hispanic Borrowers by" of Loan Count
18%
11 ■I ■I 11 ■I 11
12%
6'»
o,.
FY l& FY17 FY 18 FY19
■I FY 10 FY21 FY12
■ 7(a) ■ CA
Page I 5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 49 here 50575A.026
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
39
SBA Backed Lending to Women-Owned Businesses (>50%)
Approved 7(a) Lending vs Approved CA lending - FY 16-FY 22
7(a) and CA Loans to Women-Owned Businesses by 'Jl6 Loan Dollars
30%
■I ■I .1 .1 .1 ■I .1
20%
lO'l\
0%
Hl6 FY J7 FY18 FY19 FY 20 FY 21 FY21
■ 7!•) ■ CA
7(a) and CA Loans to Women-Owned Businesses by% Loan Co11nt
30,.
10%
20%
0% 11 11 I 11 11 11 11
FY16 fY 17 FY 18 rv 19 FY 20 FY21 FY22
■ 7(•1 ■ CA
SBA Backed Lending to Startup Businesses -
Approved ?(a) Lending vs Approved CA lending - FY 16-FY 22
7(•) and CA loans to Startups by% Loan Dollars
60%
~Slb
30"
15%
0%
FY16 FY 17 FY 18
.1 .1 .I .I
FY 19 FY 20 FY 21 FY22
■ 7{•) ■ CA
7(a) and CA Lo•ns to Startups by% Loan Count
60"
4~%
30"
ISll
0%
FY16 FY17 FY18
.1 .1 .I .1
FY19 FY20 FY 21 FY22
■ 7!•1 ■ u,
Page I 6
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 50 here 50575A.027
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
40
SBA Backed Lending to Veteran-Owned Businesses-
Approved 7(a) lending vs Approved CA lending - FY 16-FY 22
7( 1) and CA loans to Veter,1n-Owned 8usineS5es by% Loan Doll us
1l%
G,~
o" 11 .1 .1 .1 .I .1 .1
FY16 FY 17 FY 18 FY 19 FY20 FY 21 FY 22
■ 7(al ■ CA
7(al and CA l.o:ans to Veteran-Owned flusinesses by% l.oan Count
12%
6"
o,. IFY 16
11 11 11 11 ■ I 11
FY 17 FY 11! fY19 FY20 fY2l FY 22
■ 7(a) ■ CA
SBA Backed Lending to Rural Businesses 4 -
Approved 7(a) lending vs Approved CA lending FY 16-FY 22
7(a) and CA loans to Rural Businesses by% Loan Dollars
24,.
18,.
12~
691.
0% I■FY 16
11 11 I■ I■ 1. I■
rYu FY 18 FY 19 FY 20 FY 21 FV22
■ 7(a) ■ CA
7(a) and CA Loan• to Rural Businesses by% Loan Count
24}.
18%
12'.W,
63i.
OS I■FY 16
11 11 I ■ 11 11 I■
FY 1/ FY 18 FY 19 ~V20 FY 21 FY 22
■ 71•1 ■ CA
4
On October 1, 2018 the SSA expanded the underserved market definitionfor CA to include rural areas.
Page I 7
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 51 here 50575A.028
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
41
Additionally, analyzing the FO!A data from FY2016-FY2022 in a given year, the majority of
7(a) lenders make just twenty 7(a) loans or fewer.
FY 2018
• 761 lenders (51 %) made 5 7(a) loans or fewer.
• 972 lenders (65%) made 10 7(a) loans or fewer.
• 1164 lenders (78%) made 20 7(a) loans or fewer.
FY 2019
• 766 lenders (53%) made 5 7(a) loans or fewer.
" 963 lenders (67%) made 10 7(a) loans or fewer.
• 1150 lenders (80%) made 20 7(a) loans or fewer.
We share the above information to illustrate that while some in the administration have
been critical that CA lenders are doing too few loans, the data indicates that two-thirds of
7(a) lenders make less than ten loans per year. Finally, we want to remind congressional
leaders and SBA that mission-lenders were critical partners during the pandemic, in
deploying PPP loans and providing technical assistance to America's small businesses.
CDCSBF funded nearly 6,000 PPP loans on its own, for approximately $275 million. Our
median loan was approximately $20,000 and we provided thousands of hours of free
technical assistance. One small business client wrote to us:
This is the best I have been treated since I initially started this process
with the banks when it all began. I am grateful for the chance to work
with all of you. Even if there are no additional funds, at least I feel like
was seen.
At the end of the day that is what differentiates us as mission lenders; we SEE the clients
that traditional lenders overlook and under value.
CDC Small Business Finance's Impacts as a CA Lender
CDC Small Business Finance was the second approved lender in the country, following
Kentucky Highlands, when the program was launched and also had the first CA loan
approved in the program.
Since the launch of the CA pilot in 2011 CDC Small Business has been "all in" as a CA lender
and advocate for the program. Through the conclusion of the last fiscal year-end
(9/30/2022), CDCSBF had funded 1,277 CA loans for $178 million in loans to underserved
businesses. These CA loans resulted in over 4,800 jobs being created and preserved.
CDCSBF is only one of two CA lenders that has a national license, which has allowed us to
provide loans at a wider scale. While the majority of our lending has been in the state of
California, we have provided loans in 27 states and the District of Columbia. This also
includes twelve loans in Maryland for just over $1 million and 75% of these loans went to
Entrepreneurs of Color.
Being a CA lender with a national license has allowed us to reach more underserved
businesses and to collaborate with local partners, including other mission lenders, utilizing
the SBA technology called Lender Match, which connects small businesses to lenders. We
believe this is one of the better SBA programs applying the use of technology to serve small
businesses, and we applaud SBA for the program and its upgrades over the years.
Page I 8
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 52 here 50575A.029
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
42
I am also proud to report that over 38% of CDCSBF's CA loans have been to Entrepreneurs
of Color, even though this is not identified by SBA as an Underserved Target Market per the
CA pilot. Overall, 65% of CDCSBF's CA loans have gone to businesses in an SBA designated
CA Target Market (the minimum requirement is 60%), with the majority of our loans going
to enterprises that have been in business for less than two years. In fact, nearly 40% of our
CA loans are to pre-revenue businesses (pure start-ups), which is a category of businesses
that traditional financial institutions, including conventional 7(a) lenders, are reluctant to
lend to and for which we have developed a deep understanding and an ability to underwrite.
I would also note that most non-traditional financial technology companies (fintechs) do not
lend to pre-revenue start-ups, as they rely on data driven underwriting to evaluate a
borrower and start-up ventures, particularly underserved entrepreneurs, cannot provide
that data.
The Challenge for Community Advantage
CDCSBF and MLWF supported the changes introduced earlier this year to the CA Program.
We worked with the SBA to implement changes that speed loan processing and the delivery
of capital to underserved communities. Reforms included:
" Extending the pilot program for two years (to September 30, 2024)
" Removing the temporary moratorium on new CA Lender Participation Applications
• Granting delegated authority to all CA lenders
" Modification to Lending Criteria to simplify and streamline underwriting and approval
of CA applications, including authorizing the use of business credit scoring models
• Modifying regulations to provide equitable access under SBA programs and economic
opportunities to justice-involved individuals
• Increasing the maximum CA loan size from $250,000 to $350,000
• Revising fee methodology and maximum interim rate to encourage greater lender
participation in the CA Loan Program
• Revising collateral requirements to increase the speed capital being delivered to
small businesses while decreasing overall costs to the CA Lender and borrower
• Allowing revolving lines of credit to better meet the evolving capital needs of small
businesses
• Revising the requirements for hazard insurance
• Simplifying affiliation principles
These reforms were important and appreciated by the industry. In fact, since the loan size
was raised to $350,000, CDCSBF has Approved 20 loans over $250,000 for $6.4 million.
These loans will create 93 jobs and 16 of the loans were to businesses less than two years
in business. 7 have been to veterans and nearly two-thirds to other underserved
communities.
However, there is a need for continued reforms and changes to the program to increase
lending by current CA lenders and encourage new lenders into the program. First and
foremost is the extension of the program beyond the current two-year sunset of September
30, 2024. The multiple extensions of the program, over different administrations, along with
changing operating rules, have made it problematic for lenders to commit to the program.
No large for-profit financial institution would tolerate such programmatic changes, yet
mission lenders are expected to continue to reach the hardest to serve and adapt to the
changing rules, which are more restrictive than to other 7(a) lenders.
Page I 9
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 53 here 50575A.030
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
43
The SBA has also never defined or specified what success looks like in terms of acceptable
or unacceptable risks. Under the program, mission-based CA lenders were asked to serve
the hardest-to-reach markets. While there is an expectation of higher losses, that has never
been publicly defined and presented to the CA lenders. A conversation with SBA and
agreeing upon the success of the program would assist in further defining the program for
new lenders and likely increase participation.
Some additional reforms, improvements, suggestions and clarifications include:
• We believe it imperative to have SBA's full support for Congressional action to make
Community Advantage a permanent program.
• The Loan Processing Center still holds these small loans to the $350K+ standard
underwriting SOP requirements this is a burden and not necessary for the small
loan size for example
• Access to the Federal Reserve Discount Window: During PPP, SBA-approved lenders
including non-depository institution lenders, were eligible to participate in the PPPLF.
This included SBA-qualified PPP lenders, banks, credit unions, Community
Development Financial Institutions, members the Farm Credit System, and small
business lending companies licensed by the SBA. This would be an excellent option
for so many CA lenders that need access to capital for the CA program.
" Loan loss Reserve Requirements: Chairman Cardin's legislation, Community
Advantage Loan Program Permanency Act of 2022 outlines significant improvements
and clarity to the Community Advantage program. Many of the 110+ CA lenders
have been active since June 2011 and have a proven track record of managing the
Loan Loss Reserve Requirements
• Lender policy does not require Life Insurance for these small loans but the Loan
Processing Center won't accept that explanation and requires underwriting to justify
• Community Advantage lending is very story-based underwriting explaining why the
poor credit history occurred, how it is improving and why it makes sense to give
them a chance But the loan Processing Center seems to still focus on FICO score
and any event of collection account, delinquency and pushes back, regardless of
story explanation, and implies "lack of reasonable assurance of repayment"
• Projections and Breakeven - Center still expects "historical" 3 year for existing
businesses even though these are small loans
• Business Personal Property (BPP) insurance - we justify not requiring BPP on some
small loans when the use of proceeds is not for ff&E and/or Tenant improvements
and the balance sheet does not have significant assets to be replaced and in each
case we get push back to add the BPP insurance seems like it is just an
Authorization template mindset not taking into consideration the information for
each credit
• A reduction in the minimum CA program SBSS Score - from 140 to 130
" The ability for Community Advantage Lenders to provide 100% financing for all types
of use of proceeds. Meaning that for Start-ups no 10% required equity injection and
Change in Ownership no required equity injection. The rationale behind this is not
that the borrowers are unprepared to start or run a business, but rather that the
monies they have saved be left in their hands/control as available liquidity for
unforeseen events/bumps in the road
Page I 10
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 54 here 50575A.031
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
44
• CA Program Credit Elsewhere eliminate credit elsewhere test for CA lenders or at a
minimum clarify and ease the burden associated with satisfying the test. CA lenders
are already required to target underserved markets and underserved business, which
do not have access to traditional financial resources
As has been discussed above, the CA program fills a critical gap in access to financing of up
to $350,000 for entrepreneurs in underserved communities. By allowing experienced,
mission-oriented lenders to utilize the 7(a) loan guarantee, the SBA is promoting access to
the affordable capital and technical assistance that mission-based lenders like us need to
launch and expand and uplift our nation's economy.
The Community Adva11tage Loan Program Permanencv Act of2022
CDCSBF and the MLWG commend Senator Cardin (and Representative Chu's bill in the
House) for exemplifying true leadership and commitment to small businesses with the
introduction of The Community Advantage Loan Program Permanency Act of 2022,' which
seeks to codify and strengthen the Community Advantage (CA) Loan Guarantee Program.
The bill recognizes the need to institutionalize mission lending as part of the SSA's mission
to "aid, counsel, assist and protect, insofar as is possible, the interests of small business
concerns."
This bill would create permanency for the Community Advantage program, which has
operated as a pilot program since 2011, and expands the program to cover both
economically and socially disadvantaged small businesses, including those owned by women
and people of color, and requires a minimum threshold of 70% of loans made in these
target markets by CA lenders. It would also require SBA to provide technical assistance and
training to mission lenders by existing, seasoned non-profit mission lenders. We also know
that data is critical to understanding the successes and areas for improvement. The bill's
requirement of weekly reporting as well as annually to Congress on the program's
performance, including demographic data disaggregated by racial subgroups, is an essential
tool.
Furthermore, the legislation codifies the Network Partner model in order to expand the
reach and benefits of CA lending into more underserved markets without necessarily
increasing the number of CA lenders. CDCSBF has some modest experience in working with
the previous version of the partnership model (Community Advantage Associates), and the
Network Partner model as presented in the bill is an improvement on the previous model.
Additional features of the legislation include the ability to graduate a CA lender into a 7a
loan with ease when the business borrower is ready and this continues to build a pipeline
of bankable businesses in underserved markets and at the same time frees up CA lenders
capital to make new loans to unbanked businesses. The legislation further identifies that a
covered institution is not eligible to receive delegated authority from the Administration
under the program until the covered institution has approved and fully disbursed not less
than 10 loans under the program and the Administration has evaluated the ability of the
covered institution to fulfill program requirements.
We know that small businesses are the backbone of the U.S. economy, and yet many
entrepreneurs lack access to safe, responsible capital. Research from the Federal Reserve
Bank found that 62% of surveyed small firms were denied or discouraged from seeking the
financing they needed to grow or maintain their business. 5 These small firms reported low
Page I 11
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 55 here 50575A.032
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
45
credit scores and insufficient credit history as the main barriers to credit access. 6 The Small
Business Administration and its programs and partners help entrepreneurs overcome these
barriers by providing business coaching, lender referrals, and guaranteed lending programs.
Mission Lenders understand that CA is the only SBA program enabling small-dollar lending
intentionally targeted to small businesses in underserved communities, including low-to-
moderate income (LMI) areas, rural areas, veteran-owned businesses, and startups. With
the steady decline of community and small bank branches in recent years, CDFis and other
mission lenders play an important role in ensuring that small businesses are not left behind.
Without the CA program, many underserved entrepreneurs would be left unable to secure
the financing they need to create and sustain jobs and contribute to a vibrant Main Street
economy.
Granting this successful pilot program authorization under the Small Business Act will
provide lenders with the assurance needed to invest in the necessary staffing and systems
to maintain and grow their CA lending portfolios. This assurance will enable CA lenders to
bolster their CA activity just as lending to small businesses overall, and particularly to
businesses that are traditionally underserved.
comments on the SBA's Proposed Rule on Small Business Lending Companies
{SBLCs)
On November 7, 2022, the SBA issued a proposed rule 7 that if implemented would lift the
moratorium on licensing new Small Business Lending (SBLC) and would create a
of SBLC license for not-for profit, Mission-Based intended to help SBA fill
market gaps" identified by SBA.
While we share the SSA's commitment to bridging the gaps that for too long has prevented
aspiring entrepreneurs and small businesses from accessing the financing they need to
launch and sustain their enterprises, particularly businesses in underserved and
underbanked markets, we have concerns with the SBA's proposal and specifically questions
about how the SBA's proposal would increase SBA-backed lending to the underserved
communities and entrepreneurs that The Agency is looking to serve those "struggling to
obtain financing on non-predatory terms."
CDCSBF and our lending partners in the Mission Lenders Working Group (MLWG) are
committed to working with the SBA to increase SBA-backed lending to underserved markets
and increase the efficiency of SBA lending while at the same time making sure every SBA
customer is getting a loan that is "right sized, priced and structured to its business needs."
We want to make sure underbanked businesses have access to responsible financing and
are not left without options other than "the easy to access, high, priced predatory
products."
Under the Proposed Rule, the SBA would lift the moratorium on new SBLC licenses. This
would allow SBA to issue new SBLC licenses to for-profit, non-depository lenders and
the oversight costs associated with bringing on new SBLCs, the SBA would
assign 3 new additional licenses to start. The proposed rule would also create a new
type of SBLC license, a Mission-Based SBLC (Mission SBLC), for non-profit, non-depository
institutions that would be required to lend to businesses in underserved markets. The rule
!ittps://www"fedsmallbusine5s.org/medialibrary/fedsmallbusiness.LfiIB.,;l£9]1ljsbcs-no!]_employer"firms-reporLpdf
7
Small Business Lending Company Moratorium Rescission and Removal of the Requirement for a Loan Authorlzation" (RlN
3245-AH92)
Page I 12
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 56 here 50575A.033
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
46
states that an existing CA lender "in good standing" can apply for a Mission SBLC license but
the rule leaves it to the SBA's discretion to determine what constitutes a "CA lender in
"good standing." SBA also states that since Mission SBLCs are already regulated as CA
lenders, it has the capacity to regulate Mission SBLCs as they are not increasing the total
number of entities supervised.
Lifting the moratorium and adding non-mission SBLCs, on its surface, does not necessarily
improve access to mission lending for underserved communities. SBA is proposing to
impose additional requirements on Mission-Based SBLCs "to ensure that Mission-Based
SBLCs fill identified capital market gaps and provide targeted financial assistance to
underserved communities. However, while the SBA proposal is designed to address "certain
markets where there are capital market gaps"the proposal does not identify the specific
market gaps that Mission SBLCs are expected to target, and the rule does not establish a
percentage of loans to be made in a target market. Unless the SBA clearly and intentionally
identifies the underserved market gaps that it is seeking to reach there will be no way to
evaluate the success of the proposed rule. And the proposed rule would not require or even
request a new for-profit SBLC to target tending to an underserved capital market or
markets, which is contrary to SBA's stated goal and may have adverse impacts on
programmatic integrity.
Similar to the current Community Advantage program, SBA, to "ensure that Mission-Based
SBLCs fill identified capital market gaps and provide targeted financial assistance to
underserved communities," proposes to place additional restrictions, requirements and
burdens on mission SBLCs, ~ e hjstorical track r ~
JJ.ll~i:g~e.QJ;QID.JlliJ[lilJ.e:ullil.filil.JY:!Jl.\.!filS. Yet as noted above, it is proposing no restrictions
on the three new non-mission-based SBLCs. We have serious doubts and concerns that for-
profit, non-mission lenders will provide the level of outreach and service that mission
lenders provide.
We believe SBA is focused on increasing loan volume as opposed to ensuring that
businesses in underserved or undercapitalized markets get the right sized, structured, and
priced loan. Ensuring the businesses have access to capital is critical but so is ensuring
that they have access to financing that leaves them better off than they were before - and
mission lenders also understand that some businesses are not ready for a loan, even if the
Artificial Intelligence Algorithm says otherwise.
For the duration of the CA program, participating lenders have been "recommended" to
provide Technical Assistance {TA) to their clients in the program. While SBA recommends or
encourages TA, it is core to how mission-lenders operate and work with their clients. We
have provided hundreds of hours to our clients, as have other lenders in the MLWG. And
while we assume this will be a continued condition to transition from CA lender to Mission
SBLC, no such requirement is being proposed for the three new non-mission SBLCs. As
many studies have demonstrated, TA is the "secret sauce" of mission lenders, and which
provides for their clients' success and minimizes loan loss,
It is also unclear how the proposed rule will promote mission lending when so many
programmatic details are not addressed (i.e., geography, maximum loan size, target
markets, etc.). As a current CA lender that has the capacity and willingness to participate in
the full SBLC program, the rules as proposed leave too many details to be approved by SBA
personnel on a lender-by-lender basis, thus creating separate guidelines for each lender.
SBA promotes this individualized approach as flexible in order to fill specific market gaps,
yet it lacks clarity for current CA lenders evaluating the program. Further, while we have a
Page I 13
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 57 here 50575A.034
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
47
level of trust and confidence in the current leadership at SBA, current leadership will change
and the rules and requirements for the Mission-Based SBLC could change. This has been
clearly evidenced by our experience in the Community Advantage Program.
Per language in the proposed rule, we understand that based on the success of the
Paycheck Protection Program (PPP), "removing the moratorium on licensing new SBLCs and
Mission-Based SBLCs opens opportunities for more non-traditional lenders to participate in
the 7(a) Loan Program, providing additional sources of capital to America's small businesses
and targeting gaps in the credit market." However, one need only refer to the recent report
and recommendation from the report of the Select sub-committee on the Corona Virus that
should give serious pause and concern before allowing new "non-traditional lenders" into
the 7(a) program. In fact, the report recommends that congress should continue to fund
(mission) community lenders, so they can increase their capacity to directly serve
underserved communities. Moreover, the report states that Congress should consider
additional federal regulations for non-bank/non-depository lenders, such as being
considered under this proposed rule. Report Reveals Fintechs Facilitated PPP Fraud I House
Select Subcommittee on the Coronavirus Crisis.
Rather than issuing new for-profit SBLC licenses in order to expand SBA-backed lending into
underserved markets, we encourage the SBA to elevate the CA pilot and promote the work
of CA lenders
• Immediately extend the CA Pilot program for five years or more and support
Congressional efforts to codify CA, as proposed in the Community Advantage Loan
Program Permanency Act of 2022. The current extension to September 2024, is not
sufficient for a prudent mission lender to want to invest in a program with only two
years of runway
• SBA should publicly support the proposed bill which makes CA permanent
,. SBA could make further regulatory reforms to the CA program as described above.
While the changes made earlier this year were extremely helpful, additional changes
to the program will allow lenders to reach deeper into underserved markets
" Work with Congress so that CA lenders have access to grant funds to support the TA
provided to the small businesses with which it supports under the CA program. This
could include accessing the PRIME Program or changes to the SBA Microloan
Program
Finally, we take issue with the following statement made by SBA in the proposed rule:
"SBA considered leaving the regulations unchanged and relying upon
the CA Pilot Loan Program to address the needs of access to capital in
underserved markets; however, the low historic loan volume and lack
of any CA loan activity in some rural and underserved geographic areas
makes this an unviable alternative."
This statement suggests that the SBA has given up on CA - and we think that is the wrong
approach. We urge the SBA to lean into the CA pro9ram and work to strengthen it beyond
the changes made earlier this year. The Cardin bill does that. We certainly hope that the
mission SBLC is not a harbinger that the SBA is going to eliminate the CA program. We
believe that a robust CA program can exist alongside a mission SBLC program, if that is the
direction the SBA takes.
Page I 14
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 58 here 50575A.035
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014
23:57 Oct 17, 2023
Dated: October 2022
Jkt 050575
s
PO 00000
Frm 00052
Fmt 6633
48
Sfmt 6602
E:\HR\OC\A575.XXX
A575
This t]meline was developed by the Mission Lenders Working Group {MLWG} Staff in October 2022. l!lt((·l!l
....,,.. ,:"f•
MLWG is a coatit!on of SBA-certified Community Advantage (CA) lenders from across the country with a
shared commitment to tinancing, supporting, and sustaining underserved underbanked smaH &._.,,
businesses. For more info check our the MLWG website at misslonlenders.net or scan the QR code. R-~•••
ATTACHMENT
Insert offset folio 59 here 50575A.036
49
Chairman CARDIN. Well, thank you for your testimony, particu-
larly the nice things you said about my bill. I appreciate that very
much.
Ms. Murphy.
STATEMENT OF ANNEMARIE MURPHY, EXECUTIVE VICE
PRESIDENT, PRESIDENT OF SBA LENDING, FIRST BANK OF
THE LAKE, GREENVILLE, SOUTH CAROLINA
Ms. MURPHY. Chairman Cardin, Ranking Member Marshall, and
members of the Committee, my name is Annemarie Murphy, and
I am President of SBA Lending for First Bank of the Lake, a small
community bank.
Lenders can, and need, to do more in reaching underserved mar-
kets, but let us look at some facts. Because of the program’s statu-
tory ‘‘credit elsewhere’’ mandate, every 7(a) loan serves a borrower
that would otherwise be left behind by banks conventional lending
policies. We are inherently a mission program.
Let us look at stats from last year in 7(a). Roughly 50 percent
of all loans were $150,000 or smaller. More than two thirds of all
loans were $350,000 or smaller. One-third of all loans were to mi-
nority borrowers, a number that has been steadily on the rise.
Twenty-five percent of our borrowers did not identify their race or
ethnicity, so the actual percentage of loans to minorities is likely
higher than the statistics indicate.
African Americans are the fastest growing demographic in the
program, with nearly $1 billion in loans last year alone, with near-
ly a 60 percent increase since FY ’17, and so far this year, loans
to African Americans are up 52 percent in units and 72 percent in
dollars compared to last year.
Hispanics totaled $1.5 billion, more than a 27 percent increase
since FY ’17, and so far this year, loans to Hispanics are up 91 per-
cent in units and 98 percent in dollars compared to last year.
Our loans in rural areas totaled roughly 20 percent of all loans.
Into this success story, SBA is proposing to change the 7(a) pro-
gram with the stated intention to aid underserved markets. We
agree with this intent. Increasing mission lending and welcoming
more lenders into SBA is good. Our concerns have nothing to do
with competition. Our concern is about the unintended con-
sequences of harming underserved borrowers and damaging pro-
gram integrity.
SBA proposed two new regulations. The affiliation rule proposes
to remove the specific, longstanding, prudent credit criteria, and
the SBLC rule would invite an unlimited number of non-Federally
regulated entities, including fintechs, into a program that would
then be devoid of lender guardrails.
Rather than test these new concepts in a gradual fashion or in-
vite fintech to take part in 7(a) using current prudent lending
standards, SBA has veered in the opposite direction, morphing the
7(a) program to fit the fintech business model. SBA did not include
any specific mission requirements for these new lenders to make
any loans to underserved markets even though that was the stated
intent. SBA did not include any framework for these non-Federally
dmwilson on DSKJM0X7X2PROD with HEARING
regulated entities that would mirror Federal regulatory standards
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
50
like anti-money laundering or Bank Secrecy Act to protect against
fraud.
SBA proposes the removal of well-established underwriting
standards that protect taxpayers from excessive losses. Past experi-
ence indicates that without these underwriting standards losses
would rise. As a result, Congress may have to increase fees on the
very borrowers we are trying to help or provide appropriations to
cover increased losses from risky underwriting.
SBA says it will approve three new non-mission lenders right
now, but the actual rule allows an unlimited number and unlimited
loan volume. SBA says it has the capacity to monitor these addi-
tional entities, but lenders know SBA’s oversight resources are al-
ready stretched too thin.
And, SBA would permit political appointees to decide critical pro-
gram requirements.
Over the past seven months, Treasury, OCC, CFPB, the House
Financial Services and Senate Banking Committees have all ex-
pressed serious concerns about fintech in financial activities with-
out oversight. Most explosive is the Select Subcommittee on the
Coronavirus Crisis report released this month, which revealed how
fintechs’ inexcusable misconduct resulted in tens of billions of dol-
lars of fraudulent loans. SBA wants to duplicate the perceived suc-
cesses of PPP and 7(a). These fraud results are the last thing we
should recreate.
Congress and this Administration have valid and substantive
concerns with fintech. So why is SBA rushing to invite fintech into
7(a) without limitations of any kind while simultaneously elimi-
nating many of the program’s lending standards? If ever there was
a need to press pause on an issue that raises more concerns than
answers, it is now.
Let us reach more borrowers by exploring innovative solutions,
but SBA should not be making changes to the detriment of bor-
rowers or the integrity of the 7(a) program, and they should not be
ignoring valuable resources that already exist in Community Ad-
vantage. Congress should make it permanent, and SBA should be
leaning into their existing mission lenders who have mission re-
quirements and let the rule changes from May take effect that
would further aid mission lending.
Over the past two years, the 7(a) loan program delivered almost
$62 billion to almost 100,000 borrowers, with over $19.3 billion
going directly to minority borrowers. Let us preserve that impact.
Thank you, and I will take any questions.
[The prepared statement of Ms. Murphy follows:]
dmwilson on DSKJM0X7X2PROD with HEARING
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
51
"Improving Access to Capital in Underserved Communities: The
Community Advantage Program, Microloans, and other SBA Initiatives"
Testimony before the Senate Committee on Small Business and Entrepreneurship
December 14, 2022
Submitted by
Annemarie Murphy
First Bank of the Lake
Greenville, South Carolina
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 65 here 50575A.037
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
52
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
Chairman Cardin, Ranking Member PauL and Members of the Committee--my name is
Annemarie Murphy and I am currently tbe President of SBA Lending for First Bank of the Lake,
a small community bank. While I operate out of Greenville, South Carolina. the bank is
headquartered in Missouri witb a national footprint and roughly $500 million in assets. First
Bank of the Lake has a dedicated focus on SBA lending, and we deliver roughly $228 million in
7(a) loans annually and served on the frontlines of delivering PPP loans across the country. I am
tasked with managing all aspects of the bank's SBA lending program. from sales to servicing and
liquidation, as well as ensuring compliance with all aspects of the bank's credit and regulatory
policies witl1in tl1e government guaranty lending programs.
With more than two decades of multiple roles within the government guaranteed industry, I have
seen firsthand how banks can be successful at reaching undcrserved markets, as well as tl1e ways
in which we can improve. I look forward to today's focus on how SBA. programs reach
underserved communities. It is critical to continue the collective discussion examining how the
SBA lending industry can better serve tl1ese communities. In doing so, we must also bring to
light the pitfalls and misconceptions behind SBA' s most recent proposed rules tl1at purport to
increase lending to underserved communities, but which have the potential to bring financial
harm to our most vulnerable borrowers and tl1e 7(a) loan program as a whole.
7(a) Lending to Underserved Markets
First, l' d like to be clear: as lenders, we can and need to do more in reaching underserved
markets. And lenders need to advance more quickly as an industry when it comes to reaching
those borrowers that are tl1e most vulnerable. The SBA' s loan programs rely on private-sector
lenders to deliver loans to An1erica' s small businesses, but it is first and foremost a public policy
program ,md that means that all lenders who participate must understand that Congress will
continue to prioritize various underserved markets that need to be better reached. And as a small
community lender, I am dedicated to improving how we serve our communities. This basic
premise is at the heart of all my testimony.
It is also important to note that the 7{a) loan program is inherently a mission program. In the
Small Business Act, the 7(a) loan program's core premise of eligibility is to provide access to
capital to small business borrowers who cannot find credit elsewhere on reasonable terms and
conditions. As lenders, we cannot make a 7{a) loan if it does not meet this credit elsewhere
requirement, and I personally review with our team tl1at each loan is documented extensively as
to why it meets our core credit elsewhere obligation. In other words, by virtue of the
Congressional intent for the 7{a) loan program, every 7(a) loan serves a borrower that would
otl1erwise be left behind hy banks' conventional lending practices, whether that loan is reported
as having been delivered to a certain demographic or not.
We also need to understand who the 7{a) loan program currently serves before we can assess
how we need to improve. And I am proud to report that the 7(a) loan program as a whole is
making progress year over year in many targeted, key underserved markets. Again, as it always
bears repeating, we can and should do more--but, as a leader of a team at my bank, l have
learned tl1at you cannot expect others to strive to improve ifwe fail to even acknowledge or
value where they currently succeed. Applying this principle to the 7(a) loan program, any
1
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 66 here 50575A.038
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
53
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
observer of SBA 's OVv11 data would quickly see that 7(a) lenders today are reaching underserved
markets.
So where does the 7(a) loan portfolio currently stand?
Roughly 50% of all 7(a) loans made in FY22 were $150,000 or under. Let me underscore this:
half of all 7( a) loans are the smallest of the small loans.
68% of all 7(a) loans made in FY22 were $350,000 or under.
Now that SBA announced small dollar fee waivers for any loan $500,000 or under, ifwe
consider $500,000 the benchmark for small dollar loans per SBA's own indications, we would
expect the proportion of small dollar loans would increase. SBA does not currently publicly
report on loans $500,000 or below, and instead reports on loans over $350,000 to $2 million, so
it is impossible to report on exact figures for what SBA now considers small loans.
But, understanding the market and the numbers we are provided (and outlined here), it is safe to
say that roughly three out of every four loans made in the 7(a) loan program are small loans.
SBA has statutory discretion to adjust fees for program participants ifthere is an excess in fee
income after taking in the expected cost of 7(a) lending for a given Fiscal Year. Given that SBA
has waived all fees for bon-owers and lenders for all loans $500,000 and below for FY23 with
this discretion, it is a show ofincredible support to small dollar loans that likely over three-
quarters of the entire 7(a) portfolio does not pay any fees to obtain access to capital through the
SBA 7(a) program.
Roughly one-third of all 7(a) loans in dollars are made to minority populations, and about 30%
of all 7(a) units are made to minority populations.
It is likely these numbers are understated as it is critical to note that roughly 25% of all loans
made in FY22 went unreported-meaning, the small business borrower chose not to disclose
their race, ethnicity, or other demographics to the lender. Remember, as lenders, we cannot force
a borrower to report any relevant demographic and we cannot do that for them. There are critical
fair lending laws and regulations that require lenders to lend in a color-blind fashion. As a result,
the borrower must always opt to se!f:report and it is not mandated. We also know anecdotally
tl1at it is underserved markets and minority borrowers who are most reticent to check a box
disclosing their race or ethnicity. ln my personal experience as a lender, minority borrowers are
worried that somehow that disclosure will lead to a negative outcome for them. While that is a
cultural perception we will need to continue to work hard to reverse, it is significant to
understand this dynamic at play when evaluating the success of 7(a) lending in minority
populations. One-quarter of all loans made, roughly $6.5 billion in 7( a) loans, went unreported
last year, and knowing what we do about minority borrowers' hesitations to seH:report, we could
likely conclude that lending to minority populations in the 7(a) program is greater than one-third
of all loans each year.
2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 67 here 50575A.039
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
54
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
Loans to African-Americans are at an all-time high in the 7(a) loan portfolio and saw the largest
jump in lending in FY22 compared to any other minority demographic: rising from 4% (in
FYI 7) to 7% (in FY22) of the total loans made over the past six years and rising from 2% (in
FY! 7) to 4% (in FY22) of the total dollars delivered in the past five years. This is a 39%
increase in the number of loans and a 59% increase in dollars over the past six years. In FY22
alone. $984 million in loans were made to African-American small businesses.
The proportion of loans in the 7(a) portfolio to Hispanics are at an all-time high: l 0% of the total
loans made and 7% of the total 7(a) dollars in FY22 went to Hispanic borrowers, amounting to
$1.84 7 billion in loans to Hispanic small businesses last year.
Roughly 20% of 7(a) loans are made to rural populations, and roughly 80% are made to urban
populations.
All of this data was provided by SBA's ovm weekly loan reports published publicly.
And finally, an important note on data and how it can be used to tell a desired story: As is true
for comparing any Fiscal Year against another in a progTan1 like the 7(a) program, these
percentages fluctuate slightly each Fiscal Year based on what our borrowers need and apply for
each year. The percentage of all 7(a) loans $350,000 or under has fluctuated in recent years-in
FYJ 7 that percentage was at a high of74%, in FY2l it dipped to 55%, and now in FY22 we are
on a sharp increase once again to 68%.
It is no secret what happened in FY20 and FY21 to cause a dip in any sector of lending-a
global pandemic that proved earth-shattering for small business. The pandemic kept many
bo1rnwers on the sidelines of growth, and therefore kept them from applying for loans. Many of
our small business customers applied for capital thtough the PPP instead ofa 7(a) loan in those
years.
While it is not factually vifong for SBA to say that small dollar loans declined in the height of
the pandemic, it doesn't give an accutate portrayal of how numbers can fluctuate month to month
and year to year, places far too much emphasis on shifts that amount to a handful of percentage
points, and, most importantly, it doesn't acknowledge the .lfln:. A global pandemic crisis is a
pretty good "why'' as to a decline in any lending <luting those two FY s, especially when the
federal government was offering, even encouraging, those same borrowers into another program.
And SBA's assertion about a small dollar loan problem certainly doesn't acknowledge the sharp
upswings we are seeing in small dollar loans now that we are on the other side of delivering PPP.
SBA's ovm data tells a story of a loan program that is succeeding at delivering small dollar loans
and is improving in many key un<lerserved markets.
Why is this important to raise? Over the past several weeks, SBA released two proposed rules,
Affiliation and Lending Criteria for the SBA Business Loan Programs, 87 FR 64724 ("Affiliation
Proposed Rule") and Small Business Lending Company (SBLC) Moratorium Rescission and
Removal of the Requirement for a Loan Authorization, 87 FR 66963 ("SBLC Proposed Rule").
The entire premise of the proposed rules as presented by SBA is to increase mission lending.
3
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 68 here 50575A.040
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
55
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville. South Carolina
Even Vice President Harris announced from the Department of Treasury that these proposed
rules would combat racial equity.
The 7(a) lending industry could not agree more with the intent behind these proposed rules--any
creative thinking to bring about more mission lending and welcome more lenders into the
program is for the better. Lenders are used to competition and even expect it. Competition is
healthy and often fuels results that could lead to reaching more borrowers.
But in justifying why the SBA is proposing these rules, the agency has painted a narrative that
somehow the 7(a) program is currently failing. SBA even undercuts the Community Advantage
pilot program, stating that "the low historic loan volume and lack of any CA loan aetivity in
some rural and underserved geographic areas makes this an unviable alternative." 1
The Community Advantage program should be applauded, not criticized. The Community
Advantage program should be made permanent, not disregarded. This past May, SBA made
significant regulatory changes to Community Advantage to aid the pilot progran1 even further in
reaching more borrowers-these new changes should be given a chance to take effect The
Community Advantage program makes a small number of loans that make a profound impact,
but SBA has highlighted this number and indicated that it means the Community Advantage
program is not succeeding. Even as a small community bank, I only make an average of200
7(a) loans annually-are those loans not valuable to the underserved borrowers we help? Our
underserved borrowers would disagree. I am deeply worried that in a post-PPP world, we have
become numb to volume and expect every program to show PPP-like numbers with big, splashy
impact-this would be a mistake of enormous proportions.
As a leader of people and a seasoned 7(a) lender, I know this is not the best way to go about
change. It is critical that we look at the agency's data for ourselves so that we can better
understand the reality of our reach to small loans. And per SBA's own data, the 7(a) loan
program's reach to small dollar loans .lli a success story.
SBA 's Proposed Rules
So, what is included in the proposed rules and how will they impact the underserved
communities that they aim to help?
The Affiliation Proposed Rule would loosen or remove the 7(a) program's requirements for how
lenders undernTite loans. The SBLC Proposed Rule would lift the existing forty-year
moratorium on the number of non-federally regulated institutions (called Small Business
Lending Companies or SBLCs) that can make loans under the 7(a) program and permits SBA to
add an unlimited number of SBLCs to the existing 14 licenses. SBA also creates a new type of
SBLC called "Mission-Based SBLCs" that are meant to have mission requirements, but which
are not specified. In other words, the Affiliation Rule proposes removal of the prudent lending
standards [ have spent my career relying upon, and the SBLC Rule proposes to bring unregulated
1 Small Business Lending Company (SBLC} Moratorium Rescission and Removal of the Requirement/or a Loan
Author/cation, 87 FR 66963. https://www.federalrcgister.gov/documents/2022/l l/07/2022-23597/small-business-
lending-company-sblc-moratorium-rcscission-and-removal-of~the-requiremcnt-for-a-loan
4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 69 here 50575A.041
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
56
Annemarie Murphy I President of SBA Lending ! First Bank of the Lake I Greenville, South Carolina
entities, such as FinTech, into a program that has now been stripped down of its prudent
guardrails.
Let me say upfront: all lenders understand the value of automation and simplification, particularly for
underserved borrowers. We are not anti-FinTech and we are not averse to simplifying SBA
processes where they can be simplified. What lam profoundly opposed to are impmdent proposals
that could harm underserved markets and damage the 7(a) loan program's integrity from both a
reputation and performance perspective. I believe these proposals as drafted do just that.
lvfission Lending. First, the proposals as drafted fail to demonstrate bow they will aid mission lending
whatsoever. The additional SBLCs, like the existing fourteen licenses, would not have any mission
requirements and do not seem to be meant to serve underserved borrowers in any way. The Mission-
Based SBLCs, while presumably meant to focus on mission lending, do not have any defined set of
mission-lending requirements, leaving it up to the SBA political appointees to establish program
parameters on a lender-by-lender basis. As a lender, I worry that borrowers, especially the most
vulnerable, will be disadvantaged without clear rules and standards that apply consistently to all
lenders-and, as a long-time SBA lender, it is a worrisome shift that there is not one standard
rulebook for all participants and that the program rules will be determined on an individualized basis
by political appointees.
There are also requirements for Mission-Based SBLCs to form separate non-profit corporations that
could present financial and legal barriers for non-profit mission entities that have limited resources.
It was also surprising that there was no described pathway for entities which are not currently
involved in Community Advantage to become a Mission-SBLC, a glaring omission if the purpose
to bring more lenders into the program. Finally, it is unclear how allowing Community Advantage
lenders to make larger loans outside of Community Advantage (where the maximum loan amount is
capped at $350,000) helps more small dollar loans.
If a proposed rule is built entirely on the premise of aiding underserved markets, it's not a good sign
for there to be this many gaps and concerns about how it actually aids those underserved markets.
Oversight. As a lender, I am deeply troubled that SBA does not have the oversight capacity to serve
as primary regulator for additional SBLCs. The Office of Credit Risk Management (OCRM) serves
as the office within SBA responsible for all lender oversight, and, as such, supervises both 7(a)
lenders and 504 Community Development Corporations (CDCs). In addition, within the 7(a)
program, OCR,M serves as the primary regulator for Community Advantage participants and SBLCs,
and would continue to serve as primary regulator for any additional SBLC. Given the ofiice's
current responsibilities, especially as SBA continues to untangle from a post-PPP world, OCRM is
operating at its maximum capacity in my opinion. As a lender, I see firsthand the in which
OCRM lacks the resources and has limited staff. I hear from my SBLC counterparts are part of
the existing group oflicenses discuss how they have waited for many months for their regular review
results from OCRM-by law, the Small Business Act requires that OCRiM deliver a review to
lenders within 60 days or provide notice of their delay in writing. SBA states they currently have the
capacity to take on three additional SBLCs without a mission focus-my front row seat would tell
me otherwise. SBA states that adding existing Community Advantage participants as SBLCs would
not present any additional burden-I would that bringing in lenders in a completely different
capacity to make loans up to $5 million when were formerly capped at $350,000 absolutely
presents an additional supervisory hurden.
5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 70 here 50575A.042
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
57
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville. South Carolina
Unlimited Nature. SBA did not propose a slow and steady test run of bringing FinTech into the
7(a) loan program. The preamble of the proposed rule states that they will bring in three new
SBLCs, which arc not mission lenders, right now. However, the actual proposed rule allows an
unlimited number ofSBLCs into the program whenever SBA sees fit.
In addition, rather than impose a cap on volume for the new SBLCs, SBA is silent on this front.
This concept of capping volume on new entities or new programs is not new-by statute, any
pilot program is capped at 10% of the volume of the overall portfolio. While SBA did not
present this expansion as a pilot program, even though it does present a new purpose which
would seem to trigger the need for a pilot program classification, it would seem reasonable to
present some sort of volume cap. This kind of cap is especially relevant given that the types of
entities proposed to enter the program are FinTech, which are built on a lending and business
model that relies entirely on very high volume meant to be made at rapid pace.
My concerns about a lack of any limitations are not raised out of fear of competition. Rather, my
concerns are two-fold. First, I would expect that most reasonable recommendations would
follow the mantra of introducing untested cnncepts that could present great risk to the portfolio
in a gradual fashion. And secondly, 1,ve live within the realities of a Congressional program with
a Congressionally imposed authorization cap on total program volume each Fiscal Year. The
7(a) loan program may make loans in FY22 only up to $30 billion-after which, the program
would shut down for the remainder of the Fiscal Year. If FinTech brings their current high-
volume model to 7(a) lending, we could face a programmatic shutdown mid-Fiscal Year. Again,
this is not about existing 7(a) lenders wanting their share of the pie-this is about making sure
we understand the limitations of a government guaranteed program, and wanting to ensure we
avoid a programmatic shutdown which serves no borrower or lender.
Regulatory Gap. As a federally regulated lender, I am worried and surprised that SBA did not
propose to require new SBLCs mirror any federal regulatory and compliance requirements
imposed on depository institutions that are supervised by a federal banking agency or the
National Credit Union Administration (NCUA). Imprudent lending behavior could lead to risk
to both borrowers and the performance ofSBA's 7(a) portfolio. Every day l go to work, I have
to ensure compliance with Bank Secrecy Act and Anti-Money Laundering requirements,
concentration caps, safety and soundness parameters, stress test parameters, and other regulatory
criteria to promote prudent lending. These compliance standards dictate every decision my bank
makes in both our conventional and SBA loan portfolios. But not one of these standards is set
out by SBA. Instead, I am told by SBA's guidelines that I should follow my federal regulator's
requirements. My 7(a) loans are reviewed and monitored by SBA. but the agency does not
attempt to replicate what my federal regulator requires. Many of these rules and regulations
were put in place to protect the small business owner and guard against imprudent lender
behavior.
Why is this significant? If SBA is opening the program in an unlimited fashion to entities that
have no federal regulator and plans to serve as primary regulator, we need to understand the
basic premise that SBA does not have federal regulator-like standards to apply to these new non-
federally regulated entities. In other words, they are not set up to act like a primary regulator in
the manner in which the federal regulators are equipped, and the proposed rule does not even
6
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 71 here 50575A.043
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
58
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
aitempt to remedy this gap. If the goal is to help underserved markets, this regulatory gap should
raise concerns. as it is the most basic notion that a prudent regulatory framework protects
borrowers.
Policy Shift. Tam also troubled by the clear direction that SBA is taking the 7(a) loan program-
instead of bringing FinTech into the existing program ,vith guardrails, the agency appears to be
modifying the program for FinTech, removing guardrails to make 7(a) lending fit into a low-
touch model that fin Tech cunently utilizes. Of particular concern, the Affiliation Proposed Rule
removes the detailed list of factors to be considered when lenders are determining whether a loan
applicant is creditworthy. As a substitute for the existing credit analysis factors, SBA proposes
to amend the regulations to require lenders and CDCs to use "appropriate and prudent generally
acceptable commercial credit analysis processes and procedures consistent with those used for
their similarly-sized, non-SBA guaranteed, commercial loans." 2 This has colloquially been
described to lenders by SBA as "Do what you would do."
If a lender is directed simply to follow procedures it would use for its similarly sized non-SBA-
guaranteed loans, the likely result is that federally regulated lenders will continue to operate
based on the requirements imposed on them by their primary federal regulator while non-
federally regulated lenders will have no such limitations. Who is hurt by this? Borrowers,
especially in underserved markets.
Imagine all lending entities, including FinTech, being able to "Do what you would do" as the
underpinning of all SBA credit analysis and underwriting criteria. As a lender, I can tell you
immediately that for non-federally regulated entities, this kind of hall pass on prudent lending
guardrails would lead to a different risk tolerance than federally regulated lenders. This equates
to higher losses and an impact to overall 7(a) loan portfolio performance.
The current 7(a) loan program has low loss rates and strong performance since the Great
Recession. Every lender that participates in the program contributes to this performance---all of
our loans combined make up the entire 7(a) portfolio. If even a few handful of lenders begin to
make riskier decisions and have higher losses than we currently have. the estimated costs of7(a)
lending will have to increase. This means that fees required ofbonowers and lenders will need
to be increased to cover higher expected losses. All ofthc fee waivers at SBA 's discretion would
likely be eliminated, and Congress would likely have to increase fees that are currently set in the
Small Business Act and already at their statutory maximum. If fees are not increased, Congress
would have to provide an appropriation. In the absence of one of those options to cover the cost
of the progran1, the progran1 would shut down. This domino effect vvill not happen right away.
Typically, losses occur three to five years after the loan has been originated.
There are real consequences to greater risk and higher losses. Tbe greater risk is not due to the
borrowers being served-the greater risk is because of the types of entities SBA is inviting into
the program in an unlimited fashion while simultaneously removing the rulebook. When a
program is drastically more expensive for borrowers and lenders because losses are increased,
underserved borrowers get left behind in a program that has suddenly become cost prohibitive.
2 Affiliation and Lending Criteria for the SBA Business Loan Programs (87 FR 64724),
https://www.govinfo.gov'content/pkg, FR-2022-10-26/pdf/2022-23 167 .pdf
7
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 72 here 50575A.044
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
59
Annemarie Murphy l President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
Criminal and Congressional Investigations. Finally, I am deeply disturbed that SBA is
welcoming FinTech into the program in an unlimited fashion with a loosening of rules just as
Congress is releasing explosive reports announcing that FinTech was at the center of tens of
billions of dollars in fraud because of the lack of prudent behavior and internal guardrails from
those entities. But this history of looking into FinTech goes beyond just recent reports.
Congressman Cleaver started a probe in 2017 into how the algorithm at the heart of all FinTech
lending could be discriminatory and harm underserved markets. asking the Consumer Financial
Protection Bureau (CFPB) to take a closer look.
CFPB issued a statement in May 2022 to affirm that the Equal Credit Opportunity Act (ECOA)
that protects borrowers against discrimination applies even to entities that rely purely on an
algorithm to make lending decisions, having cited long-standing concerns that algorithm-based
lending can lead to black-box credit decisions that have a potentially disparate impact on
minority borrowers.
The Department of Treasnry under the current Bi den Administration released a report just last
month titled Assessing the Impact ofNew Entrant Non-bank Firms on Competition in Consumer
Finance Afarkets, which concluded that non-bank firms increase market risk and need enhanced
oversight.
Finally, the Select Snbcommittee on the Coronavirus Crisis has released troubling conclusions
about the role of FinTech in PPP.
In early findings, the Select Snbcommittee on the Coronavirus Crisis noted that "Recent reports
have found that FinTechs and their bank partners handled 75 percent of the approved PPP loans
that have been connected to fraud by DOJ, despite facilitating just 15 percent of PPP loans
overall." 3
Most recently, on December 1, 2022, in the most stnnning example showcasing the need to press
pause on bringing FinTech into the 7(a) program, Congressman Clyburn and the Select
Subcommittee on the Coronavirus Crisis released a report identifying how FinTech participation
in SBA's PPP resulted in wide-scale fraud. 4 This new report ilhuninates in detail the ways in
which FinTech utilized "inexcusable misconduct" amounting to tens of billions of fraudulent
loans, significant harm to the taxpayer, and in many cases, the prioritization of only large loans. 5
The report concludes that "any plans by the SBA to again open 7(a) participation to Fintechs and
other unregulated. non-depository institntions must be accompanied by a well-defined, more
rigorous, and better-resourced initial review process, and such entities should be subject to
continuous monitoring to confirm their adherence to SBA rules and industry best practices." 6
3 https:I /coronav irus.housc.gov/ncwsipress-re leases/sclect-su bcommittee-launches-invcstigation-role-fintech-
industry-ppp-fraud
• New Select Subcommittee Report Reveals How Fintech Companies Facilitated Fraud In The Paycheck Protection
Program,
https://coronavirus.house.gov/newslpress-releascs/clybum-fintech-fraud-ppp-doj-sba
'Ibid.
6
Ibid.
8
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 73 here 50575A.045
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
60
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
Congress, the IG community, the Department of Justice, the Department of Treasury, CFPB, and
law enforcement all seem to be unified-FinTech is not currently properly regulated, FinTech
can pose distinct risks to underserved borrowers, and FinTech brought about what appears to be
the largest scale of fraud we've seen in recent decades in the federal government.
SBA appears to be moving in the opposite direction from their counterparts.
As a lender who has served as a long-time steward of the program, this is an impossible
contradiction. While investigations into potential criminal behavior by Fin Tech companies in
one federal government program (PPP) are still underway, SBA should not invite FinTech
entities into another federal government program before better understanding the role these non-
federally regulated entities played in this large-scale fraud.
No other factor is as significant as these recent Congressional findings to lead to the common-
sense solution of pressing pause on SBA's proposed rules. A pause would allow for reasonable
actions to be taken in response to the Congressional report and to give the opportunity to
incorporate Congressional recommendations before moving forward.
This is especially poignant when re-reading SBA's proposed rule now that the Congressional
investigation into FinTech in PPP has been released. The SBLC proposed rule reads:
"many non-traditional lenders participated in SSA's Paycheck Protection Program
(PPP). which provided billions ofdollars to small businesses during the economic
iqJheaval caused by the COVJD-/9 pandemic. Based on the success of the PPP, removing
the moratorium on licensing new SBLCs and lvfission-Based SBLCs opens opportunities
for more non-traditional lenders to participate in the 7(a) Loan Program, providing
additional sources of capital to America's small businesses and targeting gaps in the
credit market.,.;
How could we possibly still want to move forward with a proposed rule that cites bringing in the
supposed success of entities in PPP to the 7(a) loan program when those same types of entities
are now at the center of a Congressional report pointing to large scale misconduct?
Recommendations
To further progress 7(a) lending outreach to minority communities, first we need to ensure no
hann is done to underserved borrowers and the portfolio, which means pressing pause on SBA's
two recently proposed rules through Congressional action. As an industry, many of us have seen
this before-it was 2008 right before the Great Recession. The 7(a) loan program helps tens of
thousands of borrowers every year and currently injects billions of dollars into minority
communities. Let's keep the guardrails we need to ensure prudent lending behavior and address
the concerns of Congress and this Administration when it comes to FinTech, especially in the
wake of Congressman Clyburn' s most recent report.
7
Small Business Lending Comp,my (SBLC) .Morarorium Rescission and Removal of the Requirement for a Loan
Authori=ation. 87 FR 66963, https:/iwww.fedcralregistcr.gov/documents/2022/l l/0712022-23597ismall-business-
lcnding-company-sblc-moratorium-rescission-and-removal-of-the-requirement-for-a-1oan
9
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 74 here 50575A.046
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
61
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
Next, there are several legislative solutions that have been introduced by Members of this
Committee that would greatly improve 7(a) ]ending's reach to underserved markets if they were
to pass. The first is Chairman Cardin's bill that would make Community Advantage permanent,
the Community Advantage Loan Program Permanency Act of 2022-this is critical to give
program participants the assutance that this mission-driven subset of the 7(a) program will be
available for the long-term. The second piece of legislation is Senator Ernst's Child Care Small
Business Investment Act, a targeted bill that would improve access for non-profit childcaTe
providers to utilize the 7(a) loan program and aid many communities, especially rural, that rely
on non-profit child care facilities to help working parents gain greater access to quality and
affordable care.
I would also encourage the facilitation of more informal, roundtable style conversations with
existing 7(a) lenders and Congress so that there can be a more wholistic brainstonning of what
else we can tangibly do to improve minority lending even fmther. Ideas sucb as targeted goals
for small dollar loans for each 7(a) lender, and codifying in statute fee waivers for small dollar
loans are both issues we should discuss. \¼bile hearings are beneficial to placing insight on the
record, they rarely facilitate the kind of discussion the industry and Congress could and should
have on a regular basis so that ideas such as small dollar loan incentives could be better fleshed
out.
Improved reporting and data collection of lending to underserved markets is also a critical piece
of how \Ve better our reach-when we have an accurate picture of what kind of lending we do,
we can work towards improvement based on facts. As an example, when pulling data collected
from our fair lending reporting required of the bank on race, gender. and ethnicity, it did not
match with the data we pulled from our bank's SBA data platform. When I investigated further,
I found that many of the smaller loans we made utilized what is called a Rollover Business Start
Up, or ROBS, which allows a borrower to use money from their 40 I K toward their required
equity injection for the loan. Upon further examination, SBA's data entry platform for lenders
does not require that lenders submit any borrower-provided answer on underserved
demographics when using a ROBS loan structure. For other loans, SBA's platfonn requires an
entry----even if the borrower does not voluntarily report raee or ethnicity, lenders are required to
click "NIA." This is not the case for ROBS-lenders in their daily rush can simply click through
the platform and not fill out anything, even "N/A." This should be addressed with SBA so that
lenders are required to relay to SBA what the borrower opted to fill out. Again, this does not
require the borrower to report data on race that would violate fair lending laws and regulations-
it simply requires lenders to relay borrower-provided information. These small tweaks, which
Chaim1an Cardin championed in the context of collecting data in PPP, can make small
differences that add up. When we don't have an accurate picture, we can't assess our reach
accurately.
We also need to better represent these data collection deficiencies in our collective dialogue. At
the bottom of every report on loan activity published by the SBA on a weekly basis, SBA states:
"DISCLAiiifER: The in.formation being provided above is derived solely from Agency
records that are submitted by the Agency's participant lenders engaged in making SBA
loans. This information is collected by the lenders.from SBA loan applicants who provide
10
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 75 here 50575A.047
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
62
Annemarie Murphy I President of SBA Lending I First Bank of the Lake I Greenville, South Carolina
it on a voluntary basis. It is then forwarded by the lenders to SBA. Since the information
the loan applicants on a voluntary basis, it is not necessarily inclusive of
SBA borrowers, nor can its accuracy be verified by the Agency. Accordingly, SBA
cannot make any representation as to the completeness or accuracy of the information
provide
In other words, SBA asserts demographic data is limited and based entirely on a borrower's
cooperation and disclosure. Perhaps there is more progress to be made for lenders as to how we
educate borrowers on why this data is being collected, and perhaps SBA could aid in that
improvement.
Finally, I want to share a personal case study from my own institution: nine months ago, I
launched a Veterans Initiative Team within First Bank of the Lake to target lending activities to
our nation's veterans. I come from a Jong-serving military tradition within my immediate
family--my father. my husband, my brother, my nephew, and my have all served or are
currently serving in the military. My oldest daughter is currently in Guam, and I am
proud of her service and who she is beyond measure. Because I know this community of
underserved borrowers, I was anxious to tackle how my bank approached veterans. I started
hiring veterans to create a team of lenders that had served. Once I had staffed with individuals
that had a shared experience with the borrowers we were trying to reach, my bank easily tripled
its volume in loans to veterans within the first nine months. My bank went from 4% of our loans
going to veteran borrowers to 12% of our loans.
When we personally invest in our institution's approach to underserved markets and shape our
teams in a way that the lenders reaching out to underserved borrowers share common ground and
experience with those borrowers, I believe we can make enormous gains individual institution by
individual institution. And small improvements lead to bigger progress.
Thank you for the opportunity to testify, and I look forward to continuing the dialogue on these
critical topics.
8 SBA Weekly Lending Reports, https:/iwww.sba.gov/documentireport-2022-weekly-lending-reports
11
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 76 here 50575A.048
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
63
Chairman CARDIN. Let me thank all four of our witnesses, very
constructive testimony, appreciate that, on the existing programs
as well as the two proposed rules by the SBA.
And I appreciate the testimony in regards to the Community Ad-
vantage program. It clearly is reaching—doing a better job in
reaching the underserved communities and with smaller small
businesses.
What is the advantage of it being made permanent? The Admin-
istration did expand its reach by action earlier this year. What ad-
ditional advantage would there be if this is a permanent program,
Mr. Villarreal?
Mr. VILLARREAL. Thank you for the question, Senator. So the
first and foremost thing is, while SBA did extend the program—at
that time, I think it was 28 months, so now it is less than 2 years.
And we have heard the words ‘‘prudent lending’’ go around a lot.
And if you are a mission lender and see that a program has a sun-
set of now 22 months or 23 months, it does not make any sense
to make that investment to become an SBA Community Advantage
lender because it takes a lot of resources to do that and it takes
time to ramp up. Even in the SBA’s proposed rule change, they
talked about the ramp-up period for SBLCs.
So the most critical one is that it gives security to a lender in
that it knows the program is going to be around, so that is the pri-
mary one. So then it can start to build a team around that and
start to build a marketing strategy to get to those.
I think the other one, particularly as it is proposed, Senator, is
it allows a greater guarantee for loans under 150, to 90 percent,
and then for loans from 150 to 350, of 80 percent.
And why is this important? A lot of the Community Advantage
lenders are smaller lenders that can be capital restrained. So the
ability to take that guarantee and sell it in the secondary market
and recapitalize and get back—if you do a $100,000 loan and you
get back $90,000, you can continue to recycle that money in your
community, and these smaller Community Advantage lenders are
not in that wheel of having to go and continuously fundraise and
get more money.
So those are two critical things that permanency will do, particu-
larly the way it is written. It will allow Community Advantage
lenders to not have to go out and fundraise as much and really
make an impact in their community.
Chairman CARDIN. Several of you have mentioned the progress
we have made in the 7(a) programs in reaching the traditionally
underserved communities, and we have made progress. But one
trend line appears to be just the opposite: that is, the size of the
loans. Over the years, the average size of a 7(a) loan has grown in
dollar amount, not gotten smaller.
And, as we know, the smaller small businesses are the ones who
are always more challenged to have the capacity to get a loan.
What can we do to target the program more to the smaller small
businesses in traditionally underserved communities? Mr. Gaines,
do you have some thoughts on that?
Mr. GAINES. Well, thank you again, Senator. Appreciate that
question. I think there are certainly a few ideas we can certainly
dmwilson on DSKJM0X7X2PROD with HEARING
think about right off the bat there because again we are dealing
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
64
with—I am going to say small ‘‘micro businesses’’ is probably the
best term I would use.
I would say right off the bat, in regards to making it easier, of
course, we all know there is importance to have regulation. But the
process that we go through in terms of really underwriting the
loan, to really make it simpler from the standpoint of actually mak-
ing it easier to underwrite the loan, makes it quicker for the bor-
rower but also makes it quicker for the lender to basically do the
work they need to do to get those funds out to the borrower.
So I would say one thing right off the bat would be simpler. I
do not want to say simpler regulation, but I want to say simpler
documentation from that standpoint to make it easier to happen.
What other things we could probably—or, other recommenda-
tions that could be out there to make it easier for smaller business
loans? I think we need to continue to further the outreach that we
do as well in regards to working with small businesses just so they
know because we are sometimes challenged by language barriers.
Speaking briefly, in terms of Wisconsin, you know, two-thirds of
our business owners are ladies. We want to make sure that we are
doing everything we can to really kind of bridge those cultural di-
vides and really work hard to communicate with folks from a mar-
keting perspective so it makes it easier for small businesses to un-
derstand who we are, what we do, and, just as importantly, work
with us.
Chairman CARDIN. Thank you. Ms. Murphy, I want to give a
shout-out to what you have been able to do in the veteran commu-
nity. It shows that if you really want to make a difference, if you
do the outreach, you can reach a community that has had a chal-
lenge in reaching services. So tell us your secret. How did you get
those good results in the veteran community?
Ms. MURPHY. Thank you, Chairman Cardin. So what we did was
recognize that many of our underserved borrowers want to work
with somebody that they feel that they have a shared experience
with, someone that they have something in common.
And when we looked at it—I come from a longstanding military
family tradition. I will give the shout-out to my daughter who is
currently serving in Guam. What we realized was that when we
started putting teams together of veterans and then started doing
outreach to veteran organizations, having that common experience,
all of a sudden our veterans were willing to check the box, to say,
‘‘Yes, I am a veteran. Yes, here is my DD214. Yes, I now have the
advantage of the no fee for my veteran loan’’ because they felt com-
fortable with that person.
So we have expanded that to now include veteran underwriters.
We are looking at other operations positions at this point and
training veterans who are now separating from service and train-
ing them up in SBA lending. And, we are looking to replicate this
since we had that success this year. We launched this on January
1st of 2022. So we are not even a full year into it and tripled it.
So now we are looking to replicate what we did and start doing
that with other underserved markets.
Chairman CARDIN. Thank you.
Mr. Schwellenbach, I just really want to compliment you on your
dmwilson on DSKJM0X7X2PROD with HEARING
testimony as to the way you framed it. I look forward to your spe-
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
65
cific recommendations in regards to modifications of the proposed
rule to deal with the guardrails and concerns that you express. You
seem very positive about SBA expanding competition but raise an
issue we are all concerned about, and that is having adequate pro-
tection and accountability. So we look forward to your specific rec-
ommendations in that area.
Mr. SCHWELLENBACH. Right. So there is a bit of a gap here. And
thank you for the question, Chairman Cardin. So many of the par-
ticipants in the PPP were traditional depository institutions Feder-
ally regulated by the Treasury Department, OCC, and on and on,
with ample experience complying with Bank Secrecy Act, Know
Your Customer Act—Know Your Customer requirements.
And the PPP was a big experiment in expanding participation to
fintech lenders, and to their great credit, you know, they played a
major role in helping a lot of underserved and minority-owned and
other businesses that had trouble accessing capital get PPP loans.
The big downside is a lot of these fintechs just kind of opened the
floodgates to fraud.
And many of these fintechs and their supporting companies, com-
panies like Blue Acorn and Womply, they really had no experience
or very little experience complying with the Bank Secrecy Act and
Know Your Customer requirements prior to the PPP, and suddenly
they are processing tens of billions of loan applications.
And I will not go into great detail, but the House Select Sub-
committee report is very disturbing. But, really, what it points to
is that the SBA was not doing its own due diligence at the front
end in allowing many of these companies to participate.
So one thing I did lay out in my testimony is that we need to
have sufficient criteria when evaluating companies that want to
participate in these programs. Do they have a track record of com-
plying with the Bank Secrecy Act or have they demonstrated that
they can comply with the Bank Secrecy Act? And, does the SBA
have the capacity to vet them at the front end and then continually
monitor them over time to make sure it was not—they are not just
passing the test at the front end and then throwing away all their
anti-fraud resources to save a buck later on?
And the Select Subcommittee’s report goes into great detail about
how some of these companies, when they started to flag a number
of loans as suspicious and potentially fraudulent, cut back on their
automated systems for processing loans. Some of them were throw-
ing reviewers into processing loans without any training at all and
looking for signs of potential fraud.
So at the SBA side, you need to have sufficient criteria so that
these companies that are not regulated by the Treasury Depart-
ment or OCC or other Federal entities can meet the standards that
traditional banks and credit unions have to meet when it comes to
knowing your customer.
The SBA itself flagged hundreds of thousands of loans as poten-
tially fraudulent because it found signs that they were not active
businesses before February 15th, 2020. If these lenders were doing
their Know Your Customer requirements properly, they would
know if these loan applicants existed, you know, before February
dmwilson on DSKJM0X7X2PROD with HEARING
15th. It is a very basic thing.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
66
So you know, a lot of this is SBA making sure that the lenders
who participate and their supporting companies—that is a really
key part of this—comply with these standards and that the stand-
ards are high enough.
Chairman CARDIN. Thank you.
Senator Marshall.
Senator MARSHALL. Chairman, I will yield my time to Senator
Ernst if that is okay with you.
Senator ERNST. Okay. Great. Thank you, Chairman, and thanks,
Ranking Member, very much.
And, Mr. Schwellenbach—did I say it correctly?
Mr. SCHWELLENBACH. That is pretty good. Schwellenbach, yes.
Senator ERNST. Schwellenbach. Thank you. I appreciate it.
No, I do appreciate you talking about the role that fintech
firms—financial technology firms—played in distributing funds to
our small businesses during PPP. So many of us were involved
with the Paycheck Protection Program during COVID–19. I think
largely in part it was a great success for our small businesses, but
of course, we did run into issues when it came to fraud. And so I
am glad that you have had the opportunity to do investigative work
in these areas.
We did have unprecedented levels of fraud within the program,
which I hate that we have to report that, but that is the way it
is. And we need to make sure that there are appropriate guard-
rails. I think it was close to an estimated amount of a hundred bil-
lion dollars of fraud, and so that does have to be corrected.
It is very important that we make sure our underserved commu-
nities have equal access to SBA lending programs, but as we are
looking at this, we also have to make sure that our taxpayer dol-
lars are being adequately protected from fraud and waste caused
by a lack of oversight. So I appreciate you outlining for Chairman
Cardin some of those changes that you would like to see and cer-
tainly would love to work with you in the future just so that we
can strengthen some of those anti-fraud protections, so I just want-
ed to start off with that.
But then, Ms. Murphy, I would like to go to questions with you,
and I really appreciate you talking about our veterans community
as well. There are a number of underserved communities, espe-
cially as we look at some of the SBA lending programs. I will start
with a priority that I have been working on, and then we will move
into more of the veterans and some of those underserved commu-
nities.
But one of the longstanding priorities that I have had is to ex-
pand access to child care for small businesses, especially those that
are in the rural and underserved areas that have little or no access
to quality child care services. And because of the inability to access
child care, it has created these economic barriers for so many peo-
ple out there, these families that want to return to work, maybe
do what they were doing pre-pandemic, but some of their child care
is gone.
So earlier this year, I introduced the Childcare DESERTS Act,
and that would allow for small businesses to use SBA loans to pro-
dmwilson on DSKJM0X7X2PROD with HEARING
vide child care services to employees.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
67
And I am also a co-sponsor of the Small Business Child Care In-
vestment Act, which would allow for nonprofit child care providers
to access those SBA 7(a) loans, and I am glad you talked about
those 7(a)s, really appreciate that.
How could the SBA provide further assistance to eligible SBA
lenders to help provide small businesses with access to quality
child care in rural or those underserved communities?
Ms. MURPHY. Thank you, Senator Ernst. It is a great question.
So the bill would actually need to pass in Congress because the
way the SBA program is structured right now it is ineligible for
nonprofits.
Senator ERNST. No nonprofits, mm-hmm.
Ms. MURPHY. Mm-hmm. So we would need that to pass, but we
would absolutely look forward to sitting down with you and putting
something together and seeing what we can do because it is so im-
portant, especially for our working families, to have reasonable
child care.
Senator ERNST. Mm-hmm. And it is important because in many
of our rural areas there are a lot of churches and other nonprofits
that really want to expand availability of childcare, but they just
lack that access to loans and other types of programs. So I would
love to work with you on that.
So I would like to dive in as well to assisting our veterans, of
course. I have a daughter who is active duty, serving right now. I
am a veteran. We have lots of veterans that live in our commu-
nities and are engaging in small business activities.
What more can we do? I know checking the box is great, but
what more can we do to get veterans engaged through SBA loan
programs?
Ms. MURPHY. A lot of it is the continued outreach. SBA is doing
that, and we have been working with many of the Veteran Busi-
ness Outreach Centers to get in front of veterans and talk to them
from a lender perspective of what exactly we need to put together
and how we can best serve what they are looking to do as an entre-
preneur.
Senator ERNST. Very good. And my time is expired, so I will yield
back, but thank you very much.
Thank you, Ranking Member.
Chairman CARDIN. Thank you.
Senator Hirono.
Senator HIRONO. Thank you, Mr. Chairman.
My focus is on the smaller loan programs that target the minor-
ity-owned businesses; that would include women-owned businesses.
And I met with—every time I go home, I meet with those busi-
nesses who benefitted from the PPP program, and one of the really
interesting things is last time when I was talking with two women-
owned businesses was that they both started their businesses dur-
ing the pandemic. They decided that they would start their busi-
nesses. So it was a really interesting kind of timing that I had not
heard, that people would actually start a business during the pan-
demic, when businesses were having such a hard time. So I think
that they would definitely have benefitted from some of the smaller
dmwilson on DSKJM0X7X2PROD with HEARING
programs that we have.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
68
So for example, the Community Advantage loan program, about
$104 billion was lent through that program nationwide, and we did
not have any of that going to any businesses in Hawaii. However,
the Microloan program, with $63 billion lent out, there was at least
one entity, nonprofit entity, in Hawaii that lent something in the
order of close to $500,000 in very small loans.
The idea of increasing the money available for these kinds of
really small loans, is that in the cards? I should ask you, Mr.
Gaines.
Mr. GAINES. Yeah, thank you, Senator. Definitely a good question
there. I certainly think it is important to note that it is always a
couple things. I call it trust and then also access to capital, and
those are very, very critical when we are talking particularly small
loans.
I would say certainly the trust factor is so critical because, again,
I am a person that has no idea. I have nowhere to turn. I do not
know how to get started.
How can we help them really kind of bridge that gap in terms
of moving forward? So we have to continue to work on that piece,
and I think we all, as microlenders, are really working hard to—
how do we figure out a way to use trust to build those connections,
to get folks much more involved and focused in regards to that.
But certainly, I would go right back to, as you would say, Sen-
ator, I think it is important. We need to continue to increase the
funding available, the capital available. It could be Microloan inter-
mediaries but also other partners as well because, again, there is
no way with 150 Microloan intermediaries we can loan all the
funds that are needed out there in regards to the communities at
large. So it is still critical.
So I would say, yes, we need to increase capital, and we certainly
need to use things like trust and other resources to build that out.
Senator HIRONO. So while there is approximately $100 billion in
fraud under the PPP program, do you know if there was this kind
of a percentage, kind of fraud, in these smaller Microloan pro-
grams?
Mr. GAINES. That is a good question. I do not know the answer
to that, Senator.
Senator HIRONO. Anybody? Ms. Murphy.
Ms. MURPHY. I do not know the answer to the Microloan ques-
tion. However, what I can say is that the guardrails we already
have in the 7(a) loan program, they really prevent a lot of fraud.
It is never going to be 100 percent perfect, and I cannot tell you
what the percentage would be. But we verify the tax returns with
the IRS that we receive from the borrower, and right there that
stops quite a few people when they find out we are verifying with
the IRS themselves.
Senator HIRONO. Are there those kinds of guardrails in the
Microloan program and the Community Advantage loan program?
Mr. GAINES. Yes, definitely. Certainly, Senator.
Senator HIRONO. Okay.
Mr. GAINES. Yeah, there are definitely reviews of those.
Senator HIRONO. To me, as I focus on the targeted—these kinds
dmwilson on DSKJM0X7X2PROD with HEARING
of targeted loans, these programs can use a lot more funding if you
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
69
already have these guardrails. So we are not going to see the kind
of massive fraud that we saw in PPP.
And it is astounding to me that the kind of fraud in PPP totals
$100 billion when you have these other small programs that do not
total much more than what was fraudulently acquired under PPP.
So it seems to me that we can do more.
Mr. VILLARREAL. So, Senator, if I can add, as both a microlender,
like Jon—and he is also a Community Advantage lender, like our-
selves—SBA is our regulator, and we have heard some negativity—
a bit about SBA. But they are our regulator, and they are looking
at the loans because a lot of them are going through the loan proc-
essing center. Not on the SBA Microloan, but for us, every year or
every other year, SBA staff does come out and look at our portfolio.
So there is some strong oversight.
And in regards to the funding, we think that Senator Cardin’s
bill, as proposed, would really help. And we would really like to
talk about this continuum of capital from SBA microlenders to
Community Advantage lenders and then on to traditional financial
lenders. So I think that is what this bill could do, and some of the
reforms that Jon talked about and the permanency of Community
Advantage, I think, would strengthen this ecosystem of support for
small businesses.
Senator HIRONO. So I think that makes a lot of sense.
And at the same time, if I can complete my thoughts here, re-
garding the Microloan program, I did have a nonprofit entity in
Hawaii that found this program to be generally, while challenging,
very useful. But the one concern they had was the complexity of
the reporting requirements from SBA. So when you are dealing
with these really small kinds of loans, we can probably make the
reporting requirements and maybe other kinds of requirements,
while still maintaining the guardrails, much more user-friendly.
Thank you, Mr. Chairman. Thank you.
Chairman CARDIN. Senator Marshall.
Senator MARSHALL. All right. Thank you, Mr. Chairman.
Ms. Murphy, your business model was built upon trying to get
to ‘‘yes’’ for your customers. People apply online. They come into
your bank. You would like to help them—within, of course, the
rules—get to ‘‘yes.’’
What are some of the major reasons people are unsuccessful
qualifying for this loan? Is it credit score, is it they do not have a
financial statement or they kind of just drop out because they are
overcome with the process?
Ms. MURPHY. That is a great question. So we generally do not
have people dropping out because they are overwhelmed with the
process. We do focus—as a government guaranteed lender, we do
have dedicated resources for the borrower on our team.
Where we find the turndowns is usually, you know, the lack of
repayment ability. It comes back to, the core of what we have to
do in SBA is the borrower has to be able to repay the loan. So
when they send in their financials and the projections and they
cannot repay the loan on their projections, or historically, then un-
fortunately we have to tell them right now ‘‘No. We need you to be
dmwilson on DSKJM0X7X2PROD with HEARING
able to repay this loan.’’
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
70
When a borrower cannot repay and then there is a default, effec-
tively, they now have a debt collector of the U.S. Government until
that is paid in full.
When we look at these two proposed rules, the affiliation rule re-
moving the guardrails around underwriting, around the repayment,
the basic premise well-established of how we underwrite, there is
a fear that that is where we would have increased program cost be-
cause of increased defaults, which hurts the borrower.
Senator MARSHALL. Eventually, it would.
One of the big advantages of a community bank or a credit union
is really knowing your customer and being able to—you know, a
reputation is still worth something, and you get this, are they
hardworking, some of those things. And as you figure out their
ability to repay that loan, certainly there are objective measure-
ments.
But if you are a fintech program, do you think that they will be
able to assess the ability to repay the loan in the same fashion you
will?
Ms. MURPHY. I think it comes back to, again, the well established
rules that are already set that the SBA is proposing to remove.
With those guardrails down, we just do not know on how these bor-
rowers are going to perform; we do not know what their repayment
ability is going to be.
And the reality is, as a Federally regulated lender, as a bank, we
will still be doing those things. Our regulators expect us to do those
things. So all of a sudden, our borrowers do not have an equal play-
ing field depending on what lender they are talking to. The rules
would be different because the rules are not set by SBA anymore.
Senator MARSHALL. Mr. Schwellenbach, as you look at these
rules for fintech, do you feel like that they are being held at the
same level as community banks and credit unions?
Mr. SCHWELLENBACH. I am not sure exactly how to answer that
question, but I will echo my fellow witness. The rules of the pro-
gram are absolutely critical. If you look at some of the internal cor-
respondence by some of these fintech executives, talking about
these high rates of fraud that they were internally seeing during
the Paycheck Protection Program, a lot of them were very
dismissive of these high rates of fraud because they said ‘‘Look,
this is on the SBA. The rules are lax. It is on the government.’’
So if you have lax or nonexistent rules, you know, how can you
expect companies that are participating to stop this?
Senator MARSHALL. So an SBA loan, just by definition, is going
to be more risky than a PPP loan for a business that has been open
for 5 or 10 years. What would we need to add to beef up the rules
that we have seen to try to bring fintech to a level playing surface
and to try to make sure we do not have more fraud? What needs
to be added?
Mr. SCHWELLENBACH. So I want to start off by saying that there
are some really unusual things about the Paycheck Protection Pro-
gram, and that may be the understatement of the day.
Senator MARSHALL. That is really not my question.
Mr. SCHWELLENBACH. Obviously, it was a huge program. In
many ways, it was more of a grant program since such a high per-
dmwilson on DSKJM0X7X2PROD with HEARING
centage of loans were just forgiven.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
71
So at the front end, you know, there was sort of this expecta-
tion——
Senator MARSHALL. I am sorry, my question is about the PPP
rules. I am saying, going forward, what needs to be added to give
us some less rate of fraud and less rate of failure?
Mr. SCHWELLENBACH. Oh, in the PPP rules or the 7(a)? The 7(a).
Senator MARSHALL. The new 7(a) rules for fintech.
Mr. SCHWELLENBACH. So I think you want to keep a lot of the
rules in the 7(a) program and not weaken them. You do not want
to take them too much in the direction of what you had with PPP.
You want to know if the borrower can repay. You want to make
sure that the lender who is processing the loan actually verifies
that the company seeking the loan actually exists and is an active
business and is not someone who is just going to buy a Rolls Royce
with the money and flee to another country.
So these lenders, or potential lenders, SBA needs to make sure
that they have their ducks in a row, that they have their systems
in place, to know their customers.
Senator MARSHALL. Okay. I yield back. Thank you.
Mr. SCHWELLENBACH. And, just one more thing. Even pre-pan-
demic, the SBA’s Inspector General has found that the SBA’s Office
of Credit Risk Management was not conducting enough oversight
over participating lenders, and this is all pre-PPP.
Chairman CARDIN. Well, there is a history about the SBA regu-
lating lenders, and we recognize that. One of the reasons they put
the moratorium in effect was because of capacity issues to regulate
the number of lenders.
The PPP. We need to understand the challenges that were cre-
ated, but the Paycheck Protection Program was aimed at getting
money out quickly in order to save not only small businesses but
our economy.
It was—and I agree with you, Mr. Schwellenbach. It was more
of a grant program than a loan program. Although, for smaller
small businesses it was a loan, and they had to report it as a loan.
And that was, for many, a factor that slowed them down in re-
questing the help because they did not know whether they could
handle it on their books.
So, yes, we have to learn from the experiences under the Pay-
check Protection Program, but I think your point about where we
were pre-pandemic and what we need to have now that we have
a little bit of time to understand what we are doing is to put into
the program the proper mission requirements and accountability
and oversight.
And, yes, this regulation, these two regulations, are aimed at a
limited number of new lenders, but the regulation as written does
not restrict it to just a few new lenders. So this could become a
model moving forward for competition for lenders, and we have to
make sure it is done right. It could far exceed this Administration
in its implementation, so we have to make sure we have the proper
protections as we start this new program.
I want to—I have been told there is another member that is two
minutes away, and I want to tell you this: I know this member.
And he told us one time he was close by for a vote, will we hold
dmwilson on DSKJM0X7X2PROD with HEARING
the vote open, and sort of indicated he was at an airport coming
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
72
in. What he did not tell us is that he was in an airport in New Jer-
sey coming in. So we will give Senator Booker a few minutes to see
if he is here.
We do have a hard stop in about 10 minutes. There is a cere-
mony in the Rotunda for Speaker Pelosi that I know some of us
want to attend.
Senator MARSHALL. Chairman, I want to go hear one of our
members speak as well——
Chairman CARDIN. Oh, that is right. We have Senator Shelby
speaking.
Senator MARSHALL. Exactly. So, thank you again to all of our
witnesses. We do appreciate it. This is a great program and what-
ever we can do to make it better, so thank you.
Chairman CARDIN. I will take a moment to see if Senator Booker
arrives. If not—he said two minutes. We will give him four min-
utes.
Well, let me—I will follow up on a few other points while we are
waiting for Senator Booker. We talked about the Microloan pro-
gram. We talked about the Community Advantage programs. It
really does get smaller loans out there.
So, as I asked Mr. Gaines, how do we encourage smaller lending
within the 7(a) program? Banks like to give out larger loans. They
would rather give out one large loan than two smaller loans that
equal the size of a larger loan. So what can we do to provide addi-
tional incentives for our traditional 7(a) program to be more useful
to the smaller of the small businesses?
Ms. MURPHY. Was that to me?
Chairman CARDIN. That is to you.
Ms. MURPHY. Okay. Well, there are a few things we can do. So
what Congress can do is make Community Advantage permanent.
That gets more lenders in, knowing that the program will still be
here. Have SBA press pause on these rules and let us get it figured
out on the best way to reach more of these underserved borrowers.
SBA pull back on the proposed rules, and they can lean into CA.
But specifically, as a lender, what would help is codifying small-
dollar loans and keeping those no-fee for our borrowers. That is
powerful, especially for our underserved borrowers. Like I said,
with the success we have seen with veterans, when they all of a
sudden find out that, ‘‘Oh, wait, if I do check that box, there is no
fee for me,’’ all of a sudden we are getting more.
And I did want to give you an updated stat on veterans. We are
up 47 percent year-to-date in 7(a) with veterans.
Chairman CARDIN. As I said, lenders like you have made a huge
difference in that regard. So, really, congratulations to you.
Ms. MURPHY. Thank you, Mr. Chairman.
Chairman CARDIN. We have been joined by one of the most dis-
tinguished members of the United States Senate and this Com-
mittee, Senator Booker.
Senator BOOKER. I want to say that is a low bar, but. [Laughter.]
I am really grateful. I literally ran over here just to hope to ask
you this one question. I just want to say to you again, my staff—
every time in my notes, they always say, thank Senator Cardin for
the justice-involved entrepreneurs and all the work that we have
dmwilson on DSKJM0X7X2PROD with HEARING
done together to make things better.
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00076 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
73
Chairman CARDIN. Yes.
Senator BOOKER. So I am just continually grateful for the leader-
ship of Senator Cardin.
Hello, everybody. So I just appreciate the SBA’s incredible efforts
on proposed rulemaking to simplify and streamline all the lending
applications. I am sure that has been discussed. Too often, entre-
preneurs face an overwhelming, bog-down sort of a process that
really makes it difficult for them to apply because of the burden-
some nature.
But I just want to hone in on one of my issues, which is this deep
concern I have for some of the unintended consequences of paring
down the affiliation rule and how it could impact the lending mar-
ket for truly small businesses.
So to be specific, in 2018, the SBA’s Office of Inspector General
found that the 7(a) lending program was facilitated with a wide-
spread abuse in the poultry industry, with huge multinational
poultry corporations pushing small growers into abusive contracts,
with funding provided by the 7(a) loan program.
These are awful tournament systems. They are living in—these
farmers are living in horrific debt. They are small growers. They
are independent on paper but were found by the SBA to have little
control over their operations. The larger scale poultry integrators
oversaw and dictated every aspect of their functions, from where
and how to walk through the houses, the frequency and timing of
inspections, and how to record the results. They provided detailed
construction specifications for growers’ broiler houses, site grading
equipment, signage, and other attributes, really down to the small-
est aspects of their business they worked at.
So SBA OIG concluded that these practices were so egregious
that it was inappropriate for the taxpayer dollar to be subsidizing
the poultry industry at all. And across the Federal Government
today, from USDA’s Proposed Rule on Competition and Market In-
tegrity under the Packers and Stockyards Act, and the Department
of Labor’s efforts to address worker misclassification in the indus-
try, the Biden administration, I am grateful, is working to crack
down on these efforts.
So I guess for the panel, I just—for the SBA, do you think it is
appropriate for large corporations to be benefitting from a small
lending program? Really, what they are subsidizing is this god-
awful process.
And then do you think the proposed rule which would eliminate
the requirement to consider control of a company, providing ade-
quate guardrails to ensure these large corporations are continuing
to siphon this 7(a) lending program from high growth small busi-
nesses and start-ups really to these multinational poultry organiza-
tions that are so abusive?
Ms. MURPHY. The simple answer is ‘‘no.’’
Senator BOOKER. That is a great answer. All right. Thank you
very much.
Ms. MURPHY. The affiliation rules, as written right now, that we
all do have, just like we talked about the well established under-
writing requirements that are also as part of the affiliation rule,
proposing to be removed, these all were put in there for exactly
dmwilson on DSKJM0X7X2PROD with HEARING
that reason. There was something that has happened in the past,
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
74
and we are now trying to prevent that behavior. SBA, in this rule,
is proposing to take all of these out.
Now affiliation was simplified under the Community Advantage
Pilot Program back in May, and we are looking to see how is that
working.
Senator BOOKER. Okay.
Ms. MURPHY. But Community Advantage loans are limited to
$350,000 and under. So what this does is it would remove affili-
ation requirements right down to—and we did not talk about it, is
the franchise directory. The franchise directory. Right now, the
SBA has provided the lenders with a list of all the franchise con-
cepts. They have reviewed the documents and said: Yes, this is not
affiliated. This loan is eligible. So you, as a lender, your borrower
has control over their own business. They do not have a multi-
national corporation.
Yes, they tell them what the sign says. Yes, McDonalds is not
making hot dogs; they are making burgers. But at the end of the
day, SBA is even taking that away now, something that is working
really well, and that is being removed as well as part of the pro-
posed rule.
Senator BOOKER. Did you want to comment?
Mr. VILLARREAL. No. I just wanted to say, as Ms. Murphy said,
we are a Community Advantage lender, and so SBA is our regu-
lator. But we are capped at $350,000. We were at 250 until earlier
this year. So while it may work under the Community Advantage,
which is a smaller loan program, very targeted to entrepreneurs of
color, start-ups—half of our loans are to pure start-ups—I think we
do need to be cautious about expanding this at this current mo-
ment and let us see how it works within the way we are working
it with Community Advantage.
Senator BOOKER. I appreciate that because the poultry industry
is so abusive to these so-called small, independent businesses and
they are preying upon a lot of these programs designed to help
independent, small businesses and they have created a system that
really is not that.
Sir, thank you.
Chairman CARDIN. Senator Booker, you always add to the hear-
ing. So I appreciate you being here and your questions, and I ap-
preciate your friendship and your service in the United States Sen-
ate.
Senator BOOKER. Thank you. Thank you very much, sir. Thank
you very much.
Chairman CARDIN. The Committee record will remain open for
one week in case members have additional questions that they
would ask you to respond to.
We really thank you all, but we are not dismissing you without
a request that we will be seeking your guidance as we continue to
work on ways to improve the tools available at the SBA as well as
responding to the rulemaking that the Administration just recently
announced.
And with that, the Committee will stand adjourned. Thank you.
dmwilson on DSKJM0X7X2PROD with HEARING
[Whereupon, at 3:45 p.m., the Committee was adjourned.]
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
75
Question & Ansn·er Responses by Jon Gaines
"Improving access to capital in underservcd communities:
the Community Advantage Program, the ,\.ficroloan PraRram, and other SBA initiatives"
Wednesday, December U, 2022, 2:30 f'.lvl (ET)
COMMITTEE HEARING
QUESTION & ANSWER
"Improving access to capital in
underserved communities:
the Community Advantage Program, the
!vlicroloan Program,
and other SBA initiatives"
hy:
Jon Gaines, Vice President Business
Services & Finance at the Wisconsin
Women's Business Initiative
Entrepreneurship and Corporation
Financial Wellness Training •
Lending • Coaching
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 92 here 50575A.049
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
76
Question & Answer Responses by Jou Gaines
"Improving access to capital in underserved communities:
the Community Advantage Program. the Microloan Program, and other SBA initiatives"
Wednesday. December U 2022, 2:30 P.M. (ET)
Senate Committee on Small Business and Entrepreneurship Hearing
December 14, 2022
Follow-up questions for Mr. Jon Gaines for the record
Thank you Senator Cantwell and Senator Rosen for following up on the Small Business and
Entrepreneurship Hearing. We appreciate the work you continue to do and for reaching out to ask us more
questions. We always welcome you lo reach out as we are happy lo share details and how we can together
-best serve our small business entrepreneurs.
Questions from Senator Cantwell
The barriers faced by women-owned small businesses and entrepreneurs have been exacerbated by the
pandemic. The lack of access to capital has been one of the greatest barriers to start ups and
entrepreneurs, disproportionately affecting women and minority-owned businesses.
Nearly 13 million women own companies in the United States, an increase of2J percent since 2014 and
more than double the annual growth rate for all businesses nationwide. Minority-women-owned
businesses account for half of all women-owned businesses. The Washington state Women's Business
Center served over 1,200 clients and helped start 55 women-owned business in 2021 alone.
As ,ve heard from witnesses in this committee's hearing on Women Entrepreneurs as An Economic
Growth Engine for America in October last year, women and minorities may not have the credit scores or
the collateral to get a loan - in a post-pandemic world, it will be worse for small businesses that went
under and need a re-hoot.
Question I: How do you see growing the role for these programs to improve the efforts of minority
and women entrepreneurs to access capital'/ How can we improve the ability of these programs to
reduce barriers to accessibility?
In FY 2021, intermediaries made 4,514 loans to small businesses, totaling more than $74.7 million. Of
this amount, over two-thirds went to minority entrepreneurs. Existing businesses accounted for 63
percent of the loans made, over 48 percent went to women~owned businesses and almost 37 percent to
startups. This financing led to the creation of 7.500 jobs and the retention of an additional I 0,000 jobs.
Through FY 2021, intermedimy lenders have used SBA Micro loan funds to originate more than $1.39
billion in loans to small businesses that have created 130,000 jobs and retained over 200,000 jobs since
the program's inception in 1992. Of this total, more than $260 million supported rural businesses and
more than $470 million to went to minority entrepreneurs. An additional $6 l .4 million has been lent to
veteran entrepreneurs, and more than $440 million has been lent to more than 43,000 woman-owned
businesses. 1
1 lbid.
2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 93 here 50575A.050
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
77
Question & Answer Responses by ,Ion Gaines
"Improving access to cupita/ in underserved communities:
the Community Advantage Program, the 1'vficroloan Program, and other SBA initiatives,,
Wednesday, December 1../, 2022, 2:30 P,M (ElJ
Despite intermediaries serving "at risk" small businesses, the SBA Microloan program has a historical
cumulative default rate of less than 2 percent
The SBA Microloan program is an impo1iant tool to ensure that the full spectrum of small businesses and
entrepreneurs have access to the capital and technical assistance needed for business survival and growth,
Historically, it has cost $1,700 per job supported by the program. Micro loan proceeds may be used only
for working capital and the acquisition of materials, supplies. furniture, fixtures. and equipment
As l testified, while the program has had great success, there are a number of technical changes that
would further enhance program performance and assistance to underserved populations and communities.
HR 1502, the Microloan Improvement Act, passed by the House in 2022, makes a number of
improvements to the Microloan program, which we support, including:
(l) Interest Rates for Intermediaries
- Changes the definition of small loans from $7,500 to $10,000. Intermediaries with loans averaging the
small loan rate qualify for SBA Micro loans with an interest rate 2 percentage points below the Treasury
rate.
(2) Lines of Credit
Authorizing the use of micro loans for lines of credit.
(3) Extended Repayment Terms
- Modifies loan tenns to a maximum of7 years for loans of$10,000 or less, and to a maximum of IO
years for loans that are greater than $10,000.
(4) Credit Reporting
-A credit reporting process is established to ensure intermediaries are able to provide the major credit
reporting agencies with information about bmTowers relevant to credit reporting, such as the borrowerts
payment activity on the loan.
(5) 1/55 rule
- Eliminates the 1155 rule, and simply leaves in place the existing ceiling of 300 intermediaries able to be
funded. Under current law, SBA may only make available the lesser of$800,000 or 1155 of the amount
appropriated for microloans for the first two quarters of $800,000 or 1155 of the amount appropriated for
microloans for the first two quarters of the fiscal year. This creates an administrative bottleneck for the
agency, and paperwork problem for intermediaries. ln order to continue to address the needs of
underutilized states, the amendment reserves I 5 percent of the appropriation for the first two quarters of
the fiscal year for those states.
3
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 94 here 50575A.051
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
78
Question & Answer Responses by Jon Gaines
"Improving access to capital in underserved communities:
the co,rmnunuv Aavam'aPe Program, the Aficroloan Program, and other SBA initiatives"
wo.dno'""'"' December 14, 2022, 2:30P,M (ET}
Question 2: Do you have ideas how you can liel1> entrepreneurs in underserved communities learn
to navigate financing?
Small business owners' access to capital has been a major concern, especially for small businesses,
microenterprises, and startups. This is especially true of businesses owned by people of color: According
to the Joint Center for Political and Economic Studies, 58. l % of Black business owners report facing
challenges needed to obtaining capital, with 35.8% of Latino business owners repo11ing challenges, Only
24,2% of white business owners reported these same challenges. (2022, Exploring Challenges for Small-
Business Owners Across Race, Joint Center for Political and Economic Studies). In Wisconsin, the
opportunity to access capital is also decreasing, with 54% of FDIC regulated financial institutions closing
between 2002 and 2022 in Wisconsin (FDIC State Table Comparison Data, All Insured institutions
Wisconsin September 30, 2022 to All Insured Institutions Wisconsin September 30, 2022). Credit Unions
have also seen a similar shrinking with 203 in 2011 shrinking to 113 in 2022 (CUNA State Credit Union
Profile, Wisconsin Credit Unions Quarterly Trends Mid-Year 2022 to Wisconsin Credit Union Quarterly
Trends Mid-Year 201 l),
In Wisconsin, mfoority owned small businesses report barriers to accessing capita! including not
understanding the opportunities/requirements available in financing. There is also a feeling of not being
heard by traditional banks and financial institutions for both financing as well as technical assistance
needs by minority small business owners. In Wisconsin, minority owned small businesses are
considerably more likely to use CDFls and credit unions, who may not have the resources available to
fully finance requests or meet the pre-loan and post-loan training and technical assistance needed,
especially by startups and entrepreneurs (2022 WEDC Report on the Grant Ethnically Diverse Business
Community COVID-19 Response Assessment: 2020 Federal Reserve Bank of Cleveland Community
Development Publications 88855 ''An Uphill Battle: COVID-l9's Outsized Toll on Minority-Owned
Firms").
Access to capital is only one factor in the "recipe" for entrepreneurial success, but equally important is the
ability to effectively access that capital. New entrepreneurs and microbusiness ovmers may not be
prepared for the scrutiny of a commercial lender and are often turned down for capital for very specific
reasons relating to lack of business management experience. \X/WBIC's Small Business Consultants and
Loan Officers provide a great deal of pre-loan assistance to address these reasons. WWBIC works hard to
support clients in their requests for capital so they can be ready to apply successfully for financing,
Frequent pre-loan business topics WWBIC addresses:
How to develop a very specific strategic marketing plan
• I low to get repeat business
• How to track cost per lead and cost per service
• I low to track profits and expenses
4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 95 here 50575A.052
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00082 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
79
Question & Answer Responses by Jon Gaines
'' Improving l.ll'Cess to capital in underse-rved communities:
the Community Admntage Program. rhe lvficroloan Prowarn and other SRA initiatives"
Wednesday. Decemher U 2022. li30 P.tvf (ET)
Importance of accurate records and ability to produce clear financial statements to track yearly,
monthly, quarterly
lmpo1tance of using standard accounting programs such as QuickBooks (often clients may be
using Excci spreadsheets or even relying on handwritten notes)
For dients to improve their business acumen and grow their companies, they have to be able to
understand and clearly articulate what is required to access capital markets. This includes keeping
accurate records, using marketing dollars wisely, having exceptional customer service, reducing operating
expenses as the business grows, and diversifying the customer base so that revenues are not heavily
dependent on a few custorners.
WWB!C also addresses access to capital by providing responsible lending options to small businesses
who arc traditionally underserved by banks and other financial institutions including women-o\vt1ed
businesses (70% of loans), businesses owned by people of color ( 61 % of loans), and businesses owned by
lower wealth individuals (63%).
The CHIPS and Science Act supercharges America's investment in innovation. It also promises new
resources and policies to allow historically Black colleges and universities and other minority-serving
institutions to participate equitably and genuinely in this research funding. and in the entrepreneurship
and economic opportunity it can create.
l believe that this innovation economy can be strengthened by inclusivity and greater diversity.
The SBA can participate in the support of this objective through its lending and capital progrmns
including those we are discussing here today. Even the smallest loans can be the seed funding for a new
idea or for a ne\V company to contribute to the innovation supply chain.
Innovative ideas can come from anywhere, anybody. And with CHlPS and Science. \Ve envision
technology hubs to be inclusive at all levels of contribution, including early-stage businesses that have
something to offer but may not be able to get conventional loans.
Question 3: Can you to share your views on how the SHA can focus its resource and capital
programs to bring more minority individuals and businesses into the innovation economy'!
Microbuslness can provide an economic lifeline for undcrservcd communities and WWBlC's
programming can offer new hope for rural entrepreneurs, panicularly women, lower wealth individuals,
and people of color. Too many Americans have been denied the oppo11trnity to become small business
owners because they lacked the required capital to do so. Traditional banking institutions reported a year-
ovcr-yc-ar decline in small business lending with the end of the Paycheck Protection Program even ,vhile
credit usage by small businesses remained stable and demand for new credit increased during the same
5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 96 here 50575A.053
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
80
Question & Answer Responses by Jon Gaines
.. Improving access lo capital in underserved communities:
the Communily Advantage Program, the Micro!ow1 Program, and other SBA iniliotives ..
Wednesday, December l.J, 2022, 2:30 P.M (ET!
time period. Banks also tightened their credit standards for small businesses, especially for new business
owners,
According to the most recent data by the Federal Reserve, the average loan amount for a new small
business loan from a traditional bank is $593,000. 5 Requests for capital below this amount are often
ignored by traditional banks and lenders, with CDF!s and SBA Microloan and Community Advantage
lenders covering this gap up to $350,000; meaning a gap of$243,000 potential exists.
Microlenders offer businesses assistance, which a bank both cannot afford and cannot offer because of
lender liability. In fact, most Micro loan requests come from businesses who either cannot get bank
financing or cannot get bank financing without the participation ofa Microlender. Finally, many banks
support the Microloan program because it leads to stronger businesses that will ultimately become
bankable customers.
The decrease in small business financing to low-income business owners highlight a need for nonbank
financial institutions like WWBIC with flexible underwriting, low fees or no fees, low and fixed interest
rates and development services. WWBIC's Target Markets experience significant economic distress of
poverty, income, and unemployment. These challenges prevent access to traditional financing, as clients
often have few assets, poor credit ratings, and may lack social connections to wealthier potential
investors.
WWB!C serves an array of clients from those that are thinking about starting a business to those with
established, successful businesses who are in need of additional financing to grow their businesses.
WWBIC offers an assortment of training opportunities to suit entrepreneurs at any level. Most loan clients
come looking for financing, but frequently their success is attributable to the combination of financing
and technical assistance. WWBIC focuses on providing a holistic approach for fair and responsible capital
by offering: business training; pre & post business technical assistance; and access to financial products
(business lending).
Questions from Senator Rosen
.fuu2l,nding SBA Loan Eligibilitv
The pandemic was devas1ing for our nation's small businesses, especially in my home state of Nevada.
While thankfully the outlook is better now than in 2020 or 202 L I have heard from many of my
constituent small business owners that without additional access to capital for their businesses, some
could still end up shutting their doors for good.
That is why I've made it a priority to ensure that ALL small businesses in Nevada and nationwide can
access SBA loans, Last month, I introduced the Fair Access for Cannabis Small Business Act, which
6
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 97 here 50575A.054
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00084 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
81
Question & Answer Responses by ,Ion Gaines
in underserved communities:
the Community Aa'vanta,qe Program, Micro/oan Program, and other SBA initiatives"
December /.I. 2022, 2:30 P.A1. (ET)
would ensure that legally operating cannabis small businesses have access to loans and programs
provided by the Small Business Administration (SBA).
And earlier this Congress I introduced with Senator Ernst the Small Business Child Care Investment Act,
which would allow non-profit child care providers that are small businesses to participate in all SBA loan
programs.
Question l: Mr. Gaines, how might opening up SBA program eligibility to more businesses help
small businc-s.s owners in underserved communities, particularly those operating minority~owned
businesses?
Many of the technical changes passed by the House in HR 1502 will improve the Microloan program and
increase access to underserved communities and businesses.
In addition, P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
(Division N, Title II! of the Consolidated Appropriations Act of202 l ). among other provisions, waived
the Microloan Technical Assistance program ·s matching requirement in FY 2021 and limitations on the
pre-loan technical assistance and consulting and increased the Micro!oan intermediaries' aggregate loan
amount after their first year of participation in the program from $6 million to $10 million in FY 2021.
The aggregate loan amount was reset to $7 million on October I, 2021.
There continues to be great demand for Microloans and raising the cap on intennediary loans will allow
high-performing intermediaries to secure additional resources to assist small business in their
communities. Waiving requirements for technical assistance matching will make more intermediary
resources available to businesses. Current law limits to 50% the use of technical assistance grants for pre-
loan technical assistance and use of consultants. We urge the Committee to consider extending or making
these provisions permanent.
Question 2: How might this enhance the impact of the Certified Development Center (CDC) and
the Women Business Initiative Corporation?
WWB!C's SBA Microloan program began in 2005. Since the program launched, WWBIC's loan team
has deployed 941 microloans for at $20.6 million, with an average loan size of$2 l,891.60. The pandemic
altered the scope of microlending with immediate relief for small businesses through grants and
forgivable loans. In 2018 (pre-pandemic), WWBIC deployed $1.4 million dollars in SBA Microloan
funding and $980.000 was deployed in 2019. Pre-pandemic an average SBA Micro loan was $27,000. In
2020 during the onset of the pandemic, there was $372,000 in SBA micro loans, $656,125 in 2021, and
$530,000 in 2022 deployed. WWBIC has served on average, 63% of SBA Microloan clients as female;
46% low to moderate income, and 26% minorities.
Through the SBA Microloan program, WWB!C has been able to provide pre/post loan technical
7
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 98 here 50575A.055
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
82
Question & Answer Responses by Jon Gaines
to capital in underserved communities:
the the Microloan Program, and other SBA initiatives"
Wednesday, December 14. 2022, 2:30 P.M (ET)
assistance to these entrepreneurs and business O\\mcrs. The pre loan TA includes topics such as business
plan, financial projection, budgeting, business fonnation, licenses and permits while the post loan TA
will focus one on one counseling on business operations/ expansion to business owners after receiving
the microloans. The pre/post TA is critical to ensure a long-tenn success/minimize loss for entrepreneurs
and microenterprises/small businesses.
WWBIC has fiercely championed its mission by operating in five regions with over 65 staff. Offering
services statewide in \Visconsin; WWBIC channels its activities through two primary lines of business:
small business lending (ranging from $1,000 to $350,000) & technical assistance/financial training. In
over thirty-five years of impact, WWBIC has assisted over 72,000 individuals; loaned almost $100
million to small business borrowers; helped entrepreneurs create and retain over 2 l ,000 jobs; and started.
strengthened, or expanded almost 9.000 businesses.
In 202 l alone, WWB!C served over 5,400 unduplicated clients; held a loan portfolio of approximately
$23 million with over 900 loans; and in 2020 and 2021 provided over $8.3 million of forgivable loans.
Paycheck Protection Program (PPP) and direct pass-through grants to hundreds of small business owners.
Keeping small businesses alive while allowing them to transform and leverage new ways for
sustainability and growth. WWB!C is advancing hope and opportunity for entrepreneurs.
£wnding Online Resources for Small Business Owners
As a result of the pandemic, small businesses have relied more and more on online tools~ ranging from
teleworking to e-commerce. It is important that the federal government meets small business owners
where they are, including via expansion of digital internetions between small businesses, SBA ·s resource
partners. and other independent entities to SBA.
That is why. l introduced the One Stop Shop for Small Business Licensing Act. This bipartisan legislation
requires the Small Business Administration (SBA) to create a centrnlized web portal for local, state, and
federal licensing and business pennit information and materials for small businesses. This portal would
make it easier for aspiring small business owners to access the proper tools to start and register their
business, taking one major hurdle out of the way from accessing the capital needed for ensuring their
business thrives.
Mr. Gaines, I have heard from small businesses about the need for more digital tools and counseling
through the SBA and its private entities.
Question 3 & 4: Is either the Certified Development Center or Women Business Initiative
Corporation considering making investments to increase online access for small business owners to
business counseling? And, arc there similar plans to provide small business startups more online
tools to help them navigate often confusing compliance requirements?
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 99 here 50575A.056
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
83
Question & Answer Responses by ,Jon Gaines
"Improving access to capital in underservcd communities:
the Community Advantage Prowam, the A1icroloan Program, and mher SBA initiatives"
Wednesdi\}', December I./, 2022, 2:30 l'.1\f (ET)
Investing in technology for WWB!C clients will also invest in the future of a more diverse field of
entrepreneurs thus creating more equitable opportunities for aspiring business owners. Third party
research recently reported every dollar WWB!C invests in a small business; results in $22 economic
activity. For serving over 5.000 clients per year as well as providing Srntc\\idc services: W\VBlC is
making pulling priority to intentionally deploy & design u tcchnoiogy roadmap that keeps clients.
stakeholders, donors. funders, and partner first
The economic crisis of Covid-19 changed our world and is pushing for technology platforms that
streamline standardization, drive financial inclusion) and continue to focus on more equitable economic
growth. Covid 19 introduced remote work, technical assistance provided virtually, and borrowers
transitioned to electronic payments. Staff pivoted to working remotely while gathering and inputting data,
providing technical assistance) deploying funds, collecting payments, and servicing loans all from the
convenience of a computer. Barriers were identified by clients with no access to technology, internet, or
streamlined services. WWBIC pivoted and sought funding for technology tools and training for training
sessions, laptops, and scholarships. To best accommodate clients and their changing needs, WWBIC
deployed many application platfon11s to drive the operational workflow (loan servicing, business
training/technical assistance, human resource functions including payroll, reporting/analytics).
WWBJC's on line "on demand'' classes continue to gain momentum in both urban and rural areas. A new
dimension to our small business consulting model in 2018 is our on line technical assistance lnitiate Po11al
online 24/7. The Portal provides 100% of clients with 2417 access to technical assistance and powerful
coaching tools. For WWBlC, the Portal improves operation efficiency and helps standardizes our
approach to client service. Under the guidance of their assigned WWBIC Small Business Consultant, the
portal offers more than 200 specific, in-depth resources: videos, calculators and articles. organized under
money, marketing and management - with then sub-topical areas, al I available in ways that support
various learning styles.
Question 5: And what can Congress do to he helpful in facilitating such an effort?
Congress can support more efforts such as the Small Business Broadband and Emerging Information
Technology Enhancement Act which would leverage the SBA 's existing resources to train small business
owners on how best 10 integrate broadband internet and other emerging technologies into their businesses.
The impact of COVlD 19 was felt all around the world. This created challenges for our businesses that
included reduction of demand, employee health concerns resulting in temporary closure and business
owners finding it harder to catch up to the now digital world that the pandemic created. Another critical
component that will continue to be folt are talent shortages for small businesses as staff capacity hinders
their ability to function.
9
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 100 here 50575A.057
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
84
Question & Answer Responses hy ,loo Gaines
1m1m,vInF access to capital in zmdersf!rved communities:
the Community An'w1.nln!<1 e Program, the Mieroloan Program, and other SBA initiatives"
December 14, 2/122, 2:30 P,i'vt. (El)
·ro this end, we have ramped up WWBK''ls program trainings to focus around human resource capabilities
and capacities - how to retain and attract talent, marketing strategies, and how to live in a digital
world, Supply chain issues continue to disrupt small businesses and their ability to offer products and
services to pre-pandemic levels. These items are being monitored hy \VWBIC and continually being
reviewed to ensure we remain diligent to provide programming for both of these components. The future
is unknown \Vith what long-term implications v-.ill reverberate across the economy.
WWB!C's diversity in ensuring availability and access to a myriad of programming offerings to provide
exemplary customer service to assure needs are being met. Unfortunately. due to the pandemic.
uncertainty continues to rattle the small business community which creates level of stress on how best to
plan, To this end, it is diflicult to knovv what the (Tends will be one thing is for certain, WWBlC remains
the front line for economic development and meeting small business owners where they are at
i1Tcspectivc of the state of the economy.
The two most common bmTiers w success for our !ow~income clients are lack of basic financial acumen
and lack of a formal business plan. and we offer ex.tensive programming around these topics.
Along ,vith lending, business training, access to net,vorks and business technical assistance \V\VBlC vvill
continue to provide the financial capability to our consumers ,vith this funding. \VWBIC was an early
adopter of the personal financial capability training now widely promoted by financial institutions and
other organizations, Financial capability also benefits our micro borrowers, who generally have their
personal and business finances intertwined.
Outreach to Start-Up Entrepreneurs
Nevada home to more than 280,000 small businesses, which make up over 99% of all businesses the
slate, And over the past few years, Nevada has seen a spike in startups,
According to the Economic Development Authority of Western Nevada, in the Reno-Sparks area alone,
nearly I00 startups \vcrc created since the beginning of 2020. Startups are an integral part ofNevada~s
economy and the United States. As a strong advocate for entrepreneurship, I want to see this surge
continue and want to ensure entrepreneurs of color have the proper access to capital and resources in
order to grow their businesses.
Question 6: Mr. Gaines, what specific actions have the Certified Development Company (CDC) or
Women's Business Initiative Corporation (WWBlC) taken to ensure aspiring entrepreneurs of
color are aware of the resources that your centers provide to startups?
WWBJC is a leader and innovator in entrepreneur business training. \VWBIC offers trainings to promote
financial acumen and in starting, sustaining, and growing a business for entrepreneurs at various levels.
Information and registration arc listed on website and sessions arc offered in English and Spanish.
10
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 101 here 50575A.058
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
85
Question & Answer Responses by Jon Gaines
'1mproving access lo capital in underserved communities:
!he Community Advanlaf,;e Program, the Microloan Program, and other SBA initiatives"
Wednesday, December 1-1, 2022, 2:30 P.M (E7J
Entrepreneurship training topics include financial management, technolo;~', operations, marketing, and
other aspects of successfol operation. Trainings are offered throughout the state through WWBIC's
network of five regional offices offering a hybrid approach to ensure access to alL Solid business
planning, personal money management, strong management skills, and access to markets are vital for
both individual and business success.
Pre & Post Business Technical Assistance
WWBIC's extremely pro-active model for providing technical assistance to loan clients mitigates the risk
of lending to unbankablc borrowers. Prior to receiving a loan, clients receive one-on-one counseling,
which can include evaluating or creating a business plan and understanding financial and operational
constraints. SBA micro lenders also receive accounting, human resource management, and information on
research in their industry. WWBIC provides pre-loan technical assistance through group training sessions
as well as one-on-one consultations.
A WWBIC "Small Business Consultant'" staff member is assigned to each loan client immediately upon
loan closure and begins providing post-loan technical assistance that continues during the life of the loan.
up to ten years. Clients also have access to WWBIC's Initiate Portal to access online technical assistance
24/7. WWBIC offers credit counseling and credit repair to help individuals qualify for a small business
loan. ln addition. the small business consultants leverage the local community expertise of more than 400
volunteers in professional fields (including banking, law. and accounting) who work one-on-one as
coaches and mentors to WWBIC clients. To best help the borrower better market their business and be
successful. WWBIC can even work with a client who is having financial and/or repayment difficulty.
Business Lending
WWBIC's access to capital initiatives provide a continuum of options to best meet business borrower
needs, ranging from $1.000 to $350,000. WWBIC's programs include very small loans through a
collaboration with Kiva, microloans up to $50,000, lines of credit, and larger loans up to $350,000 -
many of which have an SBA Community Advantage guarantee. There is also a piloted a nano-grant
program and small equity investments for defined businesses. ln addition to managing its own portfolio,
WWBIC also supports a small number of other entities with the underwriting and management of their
microloan activities.
Both WWBIC's business and micro loans can be used for starting or expanding a business, purchase of or
repair of machinery or equipment, furniture and fixtures, inventory, supplies and working capital. The
targeted and typical profile of a \VWBJC microloan client is low or moderate income, has experienced
personal financial setbacks, credit history issues, is financially insecure, may be working a low-wage job
with no opportunity for advancement. and is at a point in life where starting a business may be the best of
few options, These smaller, riskier loans are often under-secured and require a high level of business
technical assistance in order to be sustainable.
11
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 102 here 50575A.059
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00089 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
86
Question & Answer Responses by ,Jon Gaines
"Improving access to capital in underserved communities:
the Community Advantage Program, the Microloan Program, and other SBA initiatives"
Wednesday, December 14, 2022, 2:30 P.l,f (ET)
WWB!C offors lines of credit to more established clients to supplement their tcnn loans to address cash
flow management needs. The h-vo most common barriers for our low-income clients are lack of basic
financial acumen and lack ofa forn1al business plan. We have extensive programming around these
topics. Approximately half of our pre-loan clients need individual counseling or one-on-one business and
technical assistance to become loan ready. A personal relationship encourages timely repayments to us
and other creditors.
The rate for both Micro and Business loans ranges from 8-10% (with some special limited funds at
2%.) Fees range from $500 for micro loans to $1.500 for business loans; SBA Community Advantage
loans require up to a 2.5% packaging foe for a $350,000 loan. Flexibility features include
col lateralization requirements, smaller down payments & lower equity contributions than b,mks require.
WWBIC underwrites on projected business cash flows & debt service coverage (not simply collateral &
credit score) character. & ability to repay the debt. WWBIC lends to low credit scorers in special
circumstances like medical debt or divorce, & to those at least 18 months past bankruptcy discharge if
low score or bankruptcy was not due to credit abuse. More than 50% of WWBIC loans finance stmtups in
higher-risk sectors (restaurants, retaiLjewelry stores, building trades & childcare.)
Financial Capability
WWBIC was an early adopter of the personal financial capability training now widely promoted by banks
and other organizations. WWBJC was named a "Legacy Award" recipient in the 2014 Governor's
Financial Literacy Awards. WWBJC offers a multi-part Make Your Money Talk classroom education
series covering personal finances. Graduates who income-qualify can open a matched savings account to
save for one or more of select assets: first-time home purchase, starting or expanding a business, vehicle
expenses, debt repayment., or returning to school for post-secondary education. One-on-one financial
educational counseling helps clients create and maintain personal budgets. Through the WWB!C-le<l
Wisconsin Saves public awareness campaign, pat1icipants save money that might otherwise go to check
cashing firms and payday lenders.
Thank you for your time and your continued service to our communities!
Sincerely,
Jon Gaines, MBA I Vice President, Business Services and Finance
WWBIC
A Leading Innovative Statewide Economic Development Organization
Statewide Headquarters/Milwaukee Office
1533 N. RiverCenter Drive I Milwaukee, Wisconsin 153212
Direct: 414-395-4531 I General Info: 414-263-5450
IQ O: www.wwbic.com
12
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 103 here 50575A.060
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
87
Questions for Mr. Schwellenbach
Question from:
Senator Cantwell
The CHIPS ond Science Act supercharges America's investment in innovation. It also promises
new resources and policies to allow historically Black colleges and universities and other
minority-serving institutions to participate equitably and genuinely in this research funding, and
in the entrepreneurship and economic opportunity it can create.
I believe that this innovation economy can be strengthened by inclusivity and greater diversity.
The SBA can participate in the support of this objective through its lending and capital programs
including those we are discussing here today. Even the smallest loans can be the seed funding
for a new idea or for a new company to contribute to the innovation supply chain.
Innovative ideas can come from anywhere, anybody. And with CHIPS and Science, we envision
technology hubs to be inclusive at all levels of contribution, including early-stage businesses that
have something to offer but may not be able to get conventional loans.
QUESTION 1:
Can you to share your views on how the SBA can focus its resource and capital programs to
bring more minority individuals and businesses into the innovation economy?
POGO has not reviewed the SSA's role in expanding opportunities for individuals
from minority communities and businesses owned by them in the innovation
economy, but there are some best practices that the agency should embrace.
Engaging these communities early on is important when agencies are considering
launching new programs or changing existing ones. In a variety of contexts,
advocates, experts, and government officials have told me that early stakeholder
outreach is highly likely to shape program design since communities may have
insights that federal officials are not aware of.
SBA outreach should be proactive and as inclusive as possible. As the Partnership
for Public Service's Loren DeJonge Schulman and Accenture Federal Services'
Kathy Conrad have written, "It may be that the people the agency needs to hear
from most are the least likely to participate in a customer survey or listening
session, perhaps because of issues such as past discrimination that makes them
less likely to trust government. Special efforts may be needed to get them
involved."
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 104 here 50575A.061
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00091 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
88
Such stakeholder outreach should not just be a box-checking exercise and the SBA
should not be reflexively adverse to approaches that significantly diverge from
business as usual. The agency should strive to be creative and flexible. If there are
genuine structural challenges to change, such as statutory or budgetary barriers,
the agency should be fully transparent in explaining them to stakeholders. Full
transparency regarding barriers can lay the groundwork for broader changes in
partnership with Congress and stakeholders. The SBA should also be open to
program changes after program rollout if shortcomings are identified.
The SBA should collect and utilize data to identify equity challenges, such as
r1,,:nia,r,t,,... in who is receiving loans and who is being denied loans. The
discrimination that minorities face can result in a loan denial. As my colleague,
POGO Senior Policy Analyst Sean Moulton, has written, there is a lack of
demographic data "collected for businesses receiving assistance awards such as
grants, federal loans, or direct payments. Without this data, federal agencies
cannot reliably say how equitably they are distributing assistance to companies."
access to SBA loans is just part of the challenge. The agency should take
a broad approach, such as considering whether to make loan repayments less
onerous for businesses that have been structurally locked out of accessing private
capital. According to a 2016 Stanford Institute for Economic Policy Research paper
on minority-owned startups' access to capital, there is evidence suggesting that
"access to formal debt channels remains limited for minorities."
It is important that these efforts are properly resourced SBA and receive the
organizational attention by high-level officials that they deserve.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 105 here 50575A.062
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
89
Question from:
Senator lnhofe
Capital Access for Rural Communities
Mr. Schwellenbach, as a former small business owner, I know firsthand the work required
to build a company from the ground up. Entrepreneurs in rural parts of Oklahoma often
struggle with finding access to capital and will use SBA programs like the 7(a) loan
program to help.
During the pandemic, the SBA's Paycheck Protection Program had insufficient guardrails
that led to over a $ 700 billion dollars' worth of fraud.
QUESTION 7:
Mr. Schwe/lenbach, how can the SBA ensure that programs meant to provide capital
access to rural communities won't experience high rates of fraud?
POGO has conducted over two years of investigative work focused on fraud and
potential fraud in the Paycheck Protection Program. A key lesson from that work
is that the SBA should not rely on loan applicants' self-certification of eligibility. It
is important that lenders and lender service providers participating in SBA
programs conduct adequate due diligence, such as complying with Know Your
Customer (KYC) rules. When lenders and their service providers follow these rules
and adequately vet loan applicants, it is less likely that funds will be fraudulently
diverted to ineligible entities, as made dear by a December 2022 report from the
House Select Subcommittee on the Coronavirus Crisis. The SBA also needs the
capacity to conduct adequate oversight of those participating lenders and service
providers, a shortcoming that the SBA's Office of Inspector General identified in
October 2022 as one of the agency's top management challenges.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 106 here 50575A.063
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00093 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
90
momentus Ventures
capital. CAPITAL 1 ►1PACT LIND!WG 1·•CHNOLOGH!.S
Senate Committee on Small Business and Entrepreneurship Hearing
December 14, 2022
Follow-Up Questions for the Record
Question from:
Senator Cantwell
The CHIPS and Science Act supercharges America's investment in innovation. It also promises
new resources and policies to allow historically Black colleges and universities and other
minority-serving institutions to participate equitably and genuinely in this research funding, and
in the entrepreneurship and economic opportunity it can create.
I believe that this innovation economy can be strengthened by inclusivity and greater diversity.
The SBA can participate in the support of this objective through its lending and capital programs
including those we are discussing here today. Even the smallest loans can be the seed funding for
a new idea or for a new company to contribute to the innovation supply chain.
Innovative ideas can come from anywhere, anybody. And with CHIPS and Science, we envision
technology hubs to be inclusive at all levels of contribution, including early-stage businesses that
have something to offor but may not be able to get conventional loans.
QUESTION 1:
Can you to share your views on how the SBA can focus its resource and capital programs to
bring more minority individuals and businesses into the innovation economy?
Thank you for the question, Senator. I agree with you that innovative ideas can come from
anywhere and anybody and SBA can be part of the ecosystem that supports innovation.
One positive step has been the development of The Interagency Community Investment
Committee (!CIC), which is focused on operations and execution of federal programs that
facilitate the flow of capital and the provision of financial resources into underserved
communities, including Communities of Color. ICIC is composed of Treasury, SBA,
Commerce, HUD and USDA. I would ask that your office follow the progress of the !CIC to
guarantee that the goal of facilitating the flow of resources to underserved communities is
met.
There is no question that SBA has a critical role in ensuring capital flows to underestimated
communities. To date, this includes the development of the SBA Community Advantage
program in 2011, and subsequent revisions of the program. In April of 2022, the program
underwent its latest revisions, and we applaud SBA for the recent changes, However, SBA
can continue to do more, This includes:
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 107 here 50575A.064
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00094 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
91
1. SBA supporting Congressional action to make Community Advantage a permanent
program
2. As an interim measure, SBA extending the pilot program until September 30, 2034,
to encourage greater lender participation
3. Increasing the maximum SBA guarantee on CA loans to 90 percent recognizing that
lenders are intentionally targeting underserved businesses
4. Reduce the CA program minimum SBSS Score from 140 to 130
5. Expand the definition of a "small business concern in an underserved market" for
purposes of the CA program to include a business owned by one of more socially
and economically disadvantaged individuals, and also any woman-owned business
6. Ensure that adequate training is provided to CA lenders, especially those new to
SBA lending
7. Ensure SBA staff, including district office staff and other SBA resource partners,
receive training and are familiar with the CA program, its mission and goals, and
what is expected of CA lenders in order to safeguard the programmatic integrity of
CA
8. Make grants available (SBA grants) to CA lenders to support the delivery of
business assistance and support services provided to business borrowers. These
support services are a crucial component of the CA program and critical to the
success of CA bor-rowers and their ability to manage risk and effectively address
the needs of underserved community businesses
9. Allow 100% financing for all types of use of proceeds without requiring an owner
equity injection
10. Eliminate the credit elsewhere test for CA lenders or at a minimum ease the
burden associated with satisfying the test since CA lenders are intentionally
targeting businesses that are not bankable for a variety or reasons. Requiring a
business owner to produce a bank turn down letter is not only burdensome it
can also be interpreted as disrespectful, by the client
11. Implement a streamlined, limited documentation closings for seasoned CA lenders
making CA Loans of $150,000 or less [similar to what SBA allows in SBA 7(a)
Express]; including -·
a. No life insurance required for CA loans of $150,000 or less
b. Simplified verification of use of proceeds and equity injection
Questions from:
Senator Rosen
Expanding SBA Loan Eligibilitv
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 108 here 50575A.065
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00095 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
92
The pandemic was devasting for our nation's small businesses, especially in my home state of
Nevada. While thankfully the outlook is better now than in 2020 or 2021, l have heard from
many of my constituent small business owners that without additional access to capital for their
businesses, some could still end up shutting their doors for good.
That is why I've made it a priority to ensure that ALL small businesses in Nevada and
nationwide can access SBA loans. Last month, I introduced the Fair Access for Cannabis Small
Business Act which would ensure that legally operating cannabis small businesses have access
to loans and programs provided by the Small Business Administration (SBA).
And earlier this Congress I introduced with Senator Ernst the Small Business Child Care
Investment Act, which would allow non-profit child care providers that are small businesses to
participate in all SBA loan programs.
QUESTION 1:
Mr. Villarreal, how might opening up SBA program eligibility to more businesses help small
business owners in underserved communities, particularly those operating minority-owned
businesses?
Thank you for the question, Senator. To clarify, your question is referring to opening up
eligibility for more small businesses or to more new lenders? I will address both.
In regard to small businesses, almost all for-profit businesses are eligible for SBA loans.
There are certain categories of small businesses which are not eligible, such as those of a
prurient nature. The SBA has recently revised the rules on returning citizens and we are in
support of that expansion. What the SBA can continue to make improvements on is
"expanding the credit box" for small businesses. As the leading SBA Community Advantage
in the country, we are able to assist a number of underserved businesses because we are
allowed to lend to those businesses with a lower SBSS score (than traditional 7a lenders).
That score could be further lowered. We, and many other mission lenders, have
demonstrated via non-SBA lending products that taking greater "risk" does not result in
substantial losses.
As to "opening up" the SBA to new lenders, particularly non-traditional lenders, we have
some concerns. As you are aware, the SBA recently proposed lifting the moratorium on
licensing new Small Business Lending Companies (SBLCs). While we share the SBA's
commitment to bridging the gaps that for too long has prevented aspiring entrepreneurs
and small businesses from accessing the financing they need to launch and sustain their
enterprises, particularly businesses in underestimated and underbanked markets, we have
concerns with the SBA's proposal and specifically questions about how the SBA's proposal
would increase SBA-backed lending to the underestimated communities and entrepreneurs
that The Agency is looking to serve those "struggling to obtain financing on non-predatory
terms." As the rule is currently proposed, there are no requirements on the new lenders to
deploy a percentage of their loans to underserved communities.
If the Agency is looking to provide greater access to underserved communities, particularly
communities of color, then they should be clear and explicit to any new "non-traditional"
lenders that they are required to serve these targeted communities and build in
accountability measures. Without proper guardrails and requirements, Congressional leaders
2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 109 here 50575A.066
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00096 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
93
should be very wary of allowing new for-profit lenders access into the government program
which was initially developed to support underserved small businesses.
QUESTION 2:
How might this enhance the impact of the Certified Development Center (CDC) and the Women
Business Initiative Corporation?
As part of the SBA's proposal to "open up" the SBLC licenses, the Agency is recommending
a new type of SBLC, called mission-SBLCs. These would be current Community Advantage
lenders (like CDC Small Business Finance and the Women's Business Initiative Corporation)
to become SBLCs. While we are supportive of this recommendation, the Agency needs to
provide greater clarity as to how they will regulate mission-SBLCs. The proposed rule is still
too vague for Community Advantage (CA) lenders to fully commit from transitioning as CA
lenders to mission-SBLCs. While there is the utmost confidence and trust in the current
leadership at SBA, there are concerns that as administrations and leadership at SBA
change, the rules for mission-SBLCs could change, creating an inconsistent program for the
lenders.
We are also supportive of your bill introduced with Senator Ernst, the Small Business Child
Care Investment Act. We have developed a team that has a deeper understanding of home
child-care providers and how they operate. We would welcome the addition of non-profit
childcare providers and facilities being eligible for SBA lending.
We would also encourage the SBA to lower the SBSS score for Community Advantage
lenders from 140 to 130. Lowering the score would make the SBA 7(a) program more
available to underserved small business owners, who have not had the opportunity to build
a strong credit score (which is one of the primary drivers of the SBSS score).
Expanding Online Resources for Small Business Owners
As a result of the pandemic, small businesses have relied more and more on online tools, ranging
from teleworking to e-commerce. It is important that the federal government meets small
business owners where they are, including via expansion of digital interactions between small
businesses, SBA' s resource partners, and other independent entities to SBA.
That is why, I introduced the One Stop Shop for Small Business Licensing Act. This bipartisan
legislation requires the Small Business Administration (SBA) to create a centralized web portal
for local, state, and federal licensing and business pennit information and materials for small
businesses. This portal would make it easier for aspiring small business ovmcrs to access the
proper tools to start and register their business, taking one major hurdle out of the way from
accessing the capital needed for ensuring their business thrives.
Mr. Villarreal, I have heard from small businesses about the need for more digital tools and
counseling through the SBA and its private entities.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 110 here 50575A.067
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
94
QUESTION 3:
Is either the Certified Development Center or Women Business Initiative Corporation
considering making investments to increase onlinc access for small business owners to business
counseling?
CDC Small Business Finance has a robust Technical Assistance (TA) program, with six
business advisors providing over 10,000 hours of TA per year. Historically our TA was in-
person, very bespoke, with 1:1 counseling. When the pandemic hit, we quickly had to pivot
and provide TA via digital platforms. This included daily webinars (bi-lingual) to walk small
businesses through the PPP application process. After the PPP program ended, these
webinars continued, walking PPP recipients through the forgiveness process.
We are now applying what we learned during the pandemic to increase online access to TA.
This includes providing digital resources such as LivePlan (business planning tool), Be Boss
Online, which assists with digital marketing. We are also exploring partnerships with
organizations that have on .. line platforms for TA. For example, we recently entered into an
agreement with Macy's, to be their preferred lender to their diverse suppliers. We will
deploy $200 million in capital over the next five years to their diverse suppliers. To better
serve these small businesses, which are located across the country, we will need to work
with an on-line platform to deliver quality and relevant TA.
QUESTION 4:
And, arc there similar plans to provide small business startups more online tools to help them
navigate often confusing compliance requirements?
CDC Small Business Finance has developed an expertise in lending to start-ups. ln fact,
over 50% of our Community Advantage lending in 2002 was to start-ups and for all
Community Advantage lenders, 42% of lending went to start-ups (as defined by SBA). This
compares to just 15% for standard (primarily banks) lenders.
To be successful in lending to start-ups requires an investment in TA, as this is the
differentiator that results in our loss rate to startups being the same, or even better, than to
established businesses. As noted above, we have the tools identified and we will continue to
explore additional on-line resources.
QUESTIONS:
And what can Congress do to be helpful in facilitating such an effort?
Eliminate the 50/50 rule on SBA Microloan TA. This was presented by Mr. Gaines in the
hearing. Further, allow the SBA microloan TA grant to be used for TA on other SBA
programs, such as the Community Advantage, 7(a) and SBA 504.
Congress could allocate TA dollars specifically for Community Advantage lenders.
Community Advantage lenders provide TA to their borrowers yet are not compensated for
this service. We are also required to provide reserves greater than traditional ?a lender (3%
on the amount that is sold in the secondary market). Therefore, Community Advantage
lenders are asked to serve the "non-bankable," provide greater service (TA), with the
4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 111 here 50575A.068
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
95
requirement of increased costs to be in the program. Congress should make the program
permanent, provide resources to the lenders, and also to SBA for oversight.
In addition, Senator Cardin's legislation (the Community Advantage Loan Program
Permanency Act of 2022) seeks to expand the reach of CA lending by seeking to formalize
the Community Advantage Network Partners. Among other benefits, the CA Network Partners
model would provide an on-ramp for mission lenders considering entering the CA program.
These mission lenders are touchstones in the local community and have established trust
within the community. This local network creates a pathway for small business owners and
entrepreneurs to establish a local relationship with a local lender, and, where the business
owner may receive technical assistance or simple reassurances as they go through the
application process. The small business owners receive financing structured on the historical
cash flow available to service the debt while the company grows. The legislation will also allow
SBA 7(a) lenders to refinance CA loans after the small business owner has demonstrated key
indicators like the need for additional capital and a track record of timely payments.
Outreach to Start-Up Entrepreneurs
Nevada is home to more than 280.000 small businesses, which make up over 99% of all
businesses in the state. And over the past few years, Nevada has seen a spike in startups.
According to the Economic Development Authority of Western Nevada, in the Reno-Sparks area
alone, nearly 100 startups were created since the beginning of 2020. Startups are an integral part
of Nevada's economy and the United States. As a strong advocate for entrepreneurship, I want to
sec this surge continue and want to ensure entrepreneurs of color have the proper access to
capital and resources in order to grow their businesses.
QUESTION 6:
Mr. Villarreal, what specific actions have the Certified Development Company (CDC) or
Women's Business Initiative Corporation (WWBIC) taken to ensure aspiring entrepreneurs of
color arc aware of the resources that your centers provide lo startups?
We work through SBA partners, such as Women Business Centers, Small Business
Development Centers (SBDCs) and SCORE. We also participate in the SSA's Lender Match
program. This is an on-line referral program on the SBA's website, We receive
approximately 100 referrals a week from this site and applaud SBA for continuously
improving the site.
In Nevada, CDC Small Business Finance has funded 34 loans for just over $3 million. More
than half have been to start-ups.
It is clear that Community Advantage lenders are doing a better job of financing "pre-
revenue" or "pure start-ups. The SBA only recently started to monitor lending to pure start··
ups as part of their weekly lending reports and one thing that is clear is that CA lenders
are making loans to these businesses at a MUCH higher rate than conventional 7a lenders.
This is not at all surprising and I might even argue that traditional 7(a) lenders should be
working with CA lenders regarding pure startups as these are businesses that need
assistance AND financing, and CA lenders can provide both.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 112 here 50575A.069
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00099 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
96
Senate Committee on Small Business and Entrepreneurship Hearing
December 14, 2022
Follow-Up Questions for the Record
Questions for Ms. Murphy
Question from:
Senator Cantwell
The CHIPS and Science Act supercharges America's investment in innovation. It also promises
new resources and policies to allow historically Black colleges and universities and other
minority-serving institutions to participate equitably and genuinely in this research funding, and
in the entrepreneurship and economic opportunity it can create.
I believe that this innovation economy can be strengthened by inclusivity and greater diversity.
The SBA can participate in the support of this objective through its lending and capital progran1s
including those we are discussing here today. Even the smallest loans can be the seed funding for
a new idea or for a new company to contribute lo the innovation supply chain.
Innovative ideas can come from anywhere, anybody. And with CHIPS and Science, we envision
technology hubs to be inclusive at all levels of contribution, including early-stage businesses that
have something to offer but may not be able to get conventional loans.
QUESTION 1:
Can you to share your views on how the SBA can focus its resource and capital programs to
bring more minority individuals and businesses into the innovation economy?
I have seen firsthand the impact of investing in early-stage small businesses. as well as the types
of small businesses you describe that are part of the innovation economy. While SBA docs not
provide data on the types of businesses by industry, there is valuable data provided by the
Agency regarding the extent to which the 7(a) portfolio currently reaches early-stage and
minority-owned businesses. Here is what we know when it comes to how the 7(a) loan program
performed in FY22:
• 55% of all 7(a} loans in dollars were made to new businesses, with 33% of those loans
going to small businesses that have been operational for 2 years or less or where the
capital is going to open the business. which we describe as a new-start; and 22% of those
loans going to small businesses that have a change of ownership. which are generally
considered new-start businesses on the whole. ln terms of units ofloans delivered, 49%
of all 7(a) loans in FY22 went to these small businesses (operational for 2 years or less,
new-start businesses, or change of ownership).
• One-third of all 7( a) loans in dollars are made to minority populations. and about 30%, of
all 7(a) units are made to minority populations--ancl these numbers have been steadily on
the rise.
1
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 113 here 50575A.070
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00100 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
97
• 25% of 7(a) borrowers amounting to $6.5 billion in small business loans did not idcntif)
their race or ethnicity, so the actual percentage ofloans to minorities is likely higher than
the statistics indicate, knowing that disclosure of any demographic is entirely voluntary
and mus\ be completed by the borrower. and that anecdotally, we know it is most likely
underserved markets and minority borrowers who are most reticent to d1eck a box
disclosing their race or dhnicity.
" African Americans arc the fastest growing demographic in the program, wi1h nearly$!
billion in lonns last year alone-nearly a 60% increase since FYI 7. And so far this year,
loans to African Americans are up 52~/;, in units and 72% in dollars compared to lust year.
" Ilispanics totaled$ l .85 hiilion--more than a 27% increase since FYI 7. And so far this
year, loans to Hi spanks arc up 91 % in units and 98% in dollars compared to last year.
Knowing anecdotally and from <:xpericnce that new-start businesses and borrowers from
undcrst'rved markets most ottcn seek smaller dollar loans, here is what th<: program achieved in
smail dollar loans in FY22:
• Roughly 50'\·o of all loans were $150.000 or smaller, and
• More than two-thirds of all loans were $350.000 or smaller.
• It also appears SRA is now defining small dollar loans as $500.000 or below considering
the SBA announcement of small dollar fee waivers in FY2.1 for loans $500.000 or below.
the percentage of small dollar loans in the 7(a) loan program is even larger than reported.
Likely three out of every four loans made are $500,000 or below, but SBA docs not
publicly provide that breakdown.
All this data is taken dircc1ly from SBA ·sown publicly published data.
We also cannot forget to look at the Community Advantage Pilot Program when we arc
assessing what SBA does in the minority lending space for the types of borrowers you describe.
Th~ Community Advantage Pilot Program has existed sinc1: 2011. and allows mission-focused
lending participants to make 7(a) loans up to $350.000. a maximum loan cap that was just raised
this past May by recent SBA changes. This pilot program continues to he extended by SBA
while Congress continues to m)I'k through legislation to make it statutorily permanenL In the
meantime. the Community Advantage program has not waskd any time----hundreds of loans
made to minority borrowers are made each year. and these loans have a profound impact.
Rather than celebrate what the 7(a) loan program docs achieve for minority borrowers and lean
in to better support Commuuit} Advantage. SBA claims that the 7(a) loan program is failing at
small dollar loans and critici,:cd Comrnunit:,- Advantage as '"um·iahk'' in their recent!> Proposo;;d
Rules relt:ascd in the falL As a lender. this is dis1.:011raging and hard to follow.
SBA"s ,\niliation Propused Ruk would louscn or rc1m1vc the 7(a) program's requirement~ for
ho" lenders undcnuite loans. rhe SBLC Propo~ed Ruk would lift the existing forty-year
moratorium on the number of non-federally regulated institutions (called Small Business
Lending Companies or SBLCs) that can make loans under the 7(a) program and permits SBA to
add an unlimited numhtT ofSBLCs to the existing 14 liccnses.
2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 114 here 50575A.071
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00101 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
98
I low does this relate to your focus on minority borrowers looking to finance new-starts'? These
Proposed Rules could hann borrowers. especially those most vulnerable and least served.
WhcneYer we start strippin!,l a program· s prudent lending guiddines away. it ope-ns the door to
erode program performance and increases a program·, nverall risk profile. This in turn leads tn
higher losses which would need lo be supported by higher fees eventually. Making the cost of
ac,~ess to capital for borrowers higher is not helping underserved markets. Further. bringing in
non-federally regulated entities that W'<' not properly regulated and have no framework to ensure
against fraud or predatory practices in the way we have all come to expect from the financial
serYiccs sector will not only damage 1hc 7(a) loan program·s int;;grity and pcrt,mnancc. but it
will do real harm to the borrowers you mention in your question. Without any limitations.
guardrails. or n:gulatot-Y framework. we should not rush to bring FinTcch into SBA ·s loan
programs at the same time that Congress has identified that Fin Tech was responsible for tens of
billions of dollars in fraud in the Paycheck Protection Program. These ideas need to be better
thought ,1ut with reasonable guardrails. and shouldn't he proposed at the same time that SBA is
stripping the program of all prudent lender standards. rm worried personally for the future of
SBA kuding.
So how can SBA focus its loan programs on bringing more minority borrowers into the
inmwation economy''
First. do no harm-withdraw the Proposed Rules as dratted. Next. SBA needs to better support
th1: C,,mmunity A.dYantag<' program hy extending the.: pilot prngram·s sunset date and allowing
recent programmatic changes to take affect that could help holster further success.
Finally. we need to discuss common sense improvements. not wide-sweeping removal of all
prudent guardrails like SBA is attempting. These could include ideas such as targeted goals for
small dollar loans fr>r each 7(.a) lemkr and codifying in statute tee waivers for small dollar loans.
Improved reporting and data collection of lending to undcrscrvcd markets is also a critical piece
ofhov. we netter our reach. When we have an accurate picture of what kind oflending w.: do. we
can work towards improvement based on facts.
3
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 115 here 50575A.072
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00102 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
99
Question from:
Senator lnhofe
Capital Access for Franchises
Ms. Murphy, one of the most successful staffing companies in the U.S. is headquartered right in
the heart of my home state in Oklahoma City. And it's a franchise - Express Employment
Professionals started in 1983 and grew to be a multi-billion-dollar company with over 800
locations worldwide. Approximately IO percent of SBA 7(a) loans go to franchises. which
support hundreds of thousands of jobs many in my home state of Oklahoma. The proposed
changes to the 7(a) program will change credit scoring and underwriting rules that could
jeopardize the program for businesses like these.
QUESTION 1:
Ms. Murphy, how would the proposed SBA regulations impact the integrity of the 7(a) loan
program. and consequently franchises who access capita! through the program?
The Aftiliation Propos,::d Ruk would loosen or remove the 7(a) program's requirements for hov.
lenders underwrite loans. The SBLC Proposed Rule would lift the existing tony-year
moratorium on the number of non-federally regulated institutions (called Small Business
Lending Companies or SB! ,Cs) that can make loans under the 7(a) program and permits SBA to
add an unlimited number ofSBLCs to the existing 14 licenscs. SBA also creates a new typt of
SBLC called "Mission-Based SB! ,Cs" that art meant to have mission requirements. but which
art' no\ specified. In other words. the Atliliation Ruk proposes removal of the prudent lending
standards I have spent my career relying upon, and the SBLC Rule proposes to bring unregulated
entities. such as Fin Tech. into a program that has now been stripped down of its prudent
guardrails.
Let me say upfront: all knders understand the value of automation and simplification,
particularly for undcrservcd borrowers. We an: not anti-FinTech. and we arc not averse lt)
simplifying SBA processes where they can be simplified. What l um profoundly opposed to are
imprudent proposals that c,mld harm undcrsaved markets anu darnag1: the 7( al loan program· s
integrity from both a reputation and performance perspccti vc. ! hclicve these proposals as
dralted do just that.
!'he concerns are numerous. First. the proposals as drafted fail to demonstrate how they will aid
mission lending. The additional SBLCs, like the existing fourteen licenses. would not have any
mission requirements and do not seem to be meant to serve underserved borrowers in any way.
The Mission-Based SBLCs, while presumably meant to focus on mission lending. do not haw
any defined set of mission-lending requirements. leaving it up to the SBA political appointees to
establish program parameters on a lender-by-lender basis.
As a lender, ! am deeply troubled that SBA docs not have the oversight capacity to serve as
primary regulator for .iddilional SBI.Cs. Given the ollice·s current responsibilities. especially as
4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 116 here 50575A.073
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00103 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
100
SBA continues to untangle from a post-PPP world, OCRM is operating at its maximum capacity
in my opinion. As a lender, 1 see firsthand the ways in which OCRM lacks the resources and has
limited staff SBA states they currently have the capacity to take on three additional SBLCs
without a mission focus-my front row scat would tell me otherwise.
SBA did not propose a slow and steady test run of bringing FinTcch into the 7(a) loan program.
The preamble of the proposed rule states that they will bring in three new SBLCs, which are not
mission lenders, right now. However, the actual proposed rule allows an unlimited number of
SBLCs into the program whenever SBA sees fit
As a federally regulated lender.. l am worried and surprised that SBA did not propose to require
new SRI ,Cs mirror any federal regulatory and compliance requirements imposed on depository
institutions that are supervis<:d by a federal banking agency or the National Credit Union
Administration (NCUA). Imprudent lending behavior could lead to risk to both borrowers and
the performance of SB.I\', 7(a) portfolio. lfSBA is opening the program in an unlimited fashion
to entities that have no federal regulator and plans to serve as primary regulator. we need to
understand the basic premise that SBA does not have federal regulator-like standards to apply to
these new non-federally regulated entities. In other words. they are not set up to act like a
primary rc'gulator in the way the tederal regulators arc equipped, and the proposed rule does not
attempt to remedy this gap. If the goal is to help underserved markets, this regulatory gap should
raise con12crns, as it is the most basic notion that a prudent regulatory framework protects
borrowers.
l am also troubled by the clear direction that SBA is taking the 7(a) loan program-instead of
bringing FinTech into the existing program with guardrails. the agency appears to be modifying
the program for FinTech, removing guardrails to make 7(a) lending fit into a low-touch model
that FinTech currently utilizes.
If a lender is directed simply to follow procedures i1 would use for its similarly sized non-SBA-
guaranteed loans, the likely result is that federally regulated lenders will continue to operate
based on the requirements imposed on them by their primary federal regulator while non-
federally regulated lenders will have no such limitations. Borrowers, especially in underserved
markets. would be harmed by this.
Finally, I am deeply disturbed that SBA is welcoming FinTech into the program in an unlimited
fashion with a loosening of rules just as Congress is releasing explosive reports announcing that
FinTech was at the center of tens of billions of dollars in fraud in the Paycheck Protection
Program because of the lack of prudent behavior and internal guardrails from those entities.
While investigations into potential criminal behavior by FinTech companies in one federal
government program al SBA are still underway, the Agency should not invite FinTech entities
into another federal government program before better understanding the role these non-federally
regulated entities played in this large-scale fraud.
Specifically regarding your concern about franchises. SBA is proposing in its Affiliation
Proposed Ruic to loosen standards lenders need to consider when examining if a borrower is
afliliatt:d with a larger business (key lo th~ franchise relationship you mentioned). In this
5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 117 here 50575A.074
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00104 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
101
loosening of affiliation standards. the end result could be that SBA ·s small business loans could
be going to large businesses that should not be getting these types ofloans. Further, SBA has
also proposed that they will no longer be providing a guiding framework to d<:termine eligibility
for franchise lending. called the SBA l'ranchisc Directory. This is a process that works very well
right nnw and a large portion of SBA 7(a) loans go to franchisees currently. in part because of
the success of the existing system. By SBA proposing to do away with this directory. there will
be a comp Icw lack of consistency in how lenders evaluate franchisees, lenders will be left to
guess at basic eligibility criteria mi:cting SB/•:s asscss1rn:nts, and ultimately, kss knding lo
franchisees will he the likely result. This is the opposite result we should want.
As a lender, I'm deeply troubled by the direction SBA is takin11, the loan programs and look
forward to your assist~nce in remedying these issues.
6
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 118 here 50575A.075
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00105 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
102
Improving Access to Capital in Underserved Communities: The Community Advantage Program,
Microloans, and other SBA Initiatives
December 14, 2022
Senator Hickenlooper Statement for the Record
Affordable access to capital is the lifeblood of small businesses, The SBA and its partners have
diligently worked together, primarily through its flagship 7(a) program, to expand access to loans
for entrepreneurs who cannot otherwise secure affordable capital,
Unfortunately, as the country has emerged from the pandemic, the rate of small businesses
applying for financing has fallen sharplv-from 43% in 2019 to 34% in 2021. Of those businesses
that did apply, only 31% received all the funding they sought in 2021, compared to 51 % in 2019.
These issues are compounded by significant gaps in lending, especially for micro-businesses and
those in underserved areas, which makes today's hearing especially timely.
Many entrepreneurs, especially women, minorities, and those living in rural areas, still struggle to
access affordable capital from traditional lending institutions. According to data from the 2018
State of Small Business Credit Survey, only 64% of Black- and 65% of Hispanic- owned firms
were approved for financing compared to 80% for White-owned firms. Both policymakers and the
private sector must work together to ensure creditworthy individuals are not overlooked by
financial services providers.
Financial technology firms (fintechs) and other non-bank lenders have demonstrated a capacity to
h£ln expand the pool of those looking to serve small businesses and fill gaps in access by deploying
innovative strategies to support borrowers and serve traditionally undcrbanked communities.
Fintech fim1s provided a lifeline to underbanked Paycheck Protection Program (PPP) b01TOwers
by serving new customers. A New York Federal Reserve study from May 2021 found that, while
disbursing only a small share of total PPP loan amounts, fintechs provided important support to
minority business owners. Approximately l in 4 Black-owned companies applied to fintech
lenders, more than twice the rate of other firms.
I'm aware of recent reports that certain fintech PPP loan providers engaged in fraudulent activity
and facilitated fraud in the progran1. However, there is no reason to believe that bad behavior by a
select group of fintechs is representative of the entire industry. Fintech lenders should engage in
all the compliance measures required of traditional banks such as know your customer rules, anti-
money laundering rules, and seek to engage in transparent underwriting processes.
Moving forward, we must employ the lessons learned during PPP to modernize the 7(a) program
while ensuring sufficient oversight and compliance mechanisms are enforced. That's why Senator
Tim Scott and I have introduced the Expanding Access to Affordable Credit for Small Businesses
Act, which would lift the SBA's moratorium on allowing additional non-banks to serve as Small
Business Lending Companies (SBLCs) and allow qualifying non-banks to provide access to the
7(a) program as guaranteed lenders.
In its November 7th rulemaking, the SBA announced plans to implement our bill by removing the
SBLC lending cap. We applaud the SBA's decision to do so, and look forward to a rigorous notice
and comment period on how best the SBA should proceed.
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 119 here 50575A.076
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00106 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
103
Over the past four decades the SBA has successfully managed 14 SBLCs, and supervised the sale
of their licenses. As the SBA looks to implement regulations to expand the program, it must ensure
that it has the resources to maintain sufficient oversight of every SBLC. Similarly, introducing
flexibility for traditional SBLCs and new Mission-based SBLCs is critical to serving underbanked
communities. However, under no circumstances can the SBLC program become a haven for
financial services providers to engage in regulatory arbitrage. All 7(a) loan providers must be held
to the same fundamental safety standards to preserve the long-term health of the 7(a) program.
Using technology and innovation, fintech firms have created new products, have offered more
choice, and reduced costs for small firms looking for capital. That's why I support efforts to
strengthen and modernize the SBA with programs such as the SBLC program. We must continue
to develop, implement, and preserve innovative ways to support traditionally underserved small
business owners.
2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 120 here 50575A.077
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00107 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
104
National Association of Development Companies (NADCO) Statement for the Record
"Improving Access to Capilal in Underserved Communities: The Community Advantage
Program, 1\4icroloans and other SBA Initiatives,,
Senate Committee on Small Business and Entrepreneurship
December 14. 2022
The National Association of Development Companies (NADCO) represents the Certified
Dcvdopment Company (CDC) industry whose economic development mission is realized
through delivery of the Small Business Administration's (SBA 's) 504 Loan Program,
Community Advantage Loan Program (CA), Microloan Program, and a host of other federal,
state, and local progran1s. In pm1icular, CDCs comprise over 40 percent of CA lenders delivering
nearly 60 percent of CA dollars.
With this context in mind, NADCO offers the following comments on recent congressional
action related to the Community Advantage Loan Program, as well as proposed rules released by
the SBA that would impact underscrved borrowers by l) streamlining lending criteria and
affiliation principles for SBA 's business loan programs, and 2) lifting the moratorium on Small
Business Lending Companies (SBLCs) and creating a new category ofSBLC geared toward
mission lending (Mission-Based SBLC).
Community Advantage Loan Program
SBA established the Community Advantage Lom1 Program in 2011 as a pilot housed within the
7(a) Loan Program, which is delivered by non-profit, mission-lenders with parameters intended
to reach underserved borrowers who were not only left behind by conventional lending options,
but were still not being served by SBA programs. Since its inception, the CA progrmn has
undergone a number of programmatic changes. Most recently. in April 2022, SBA announced
changes to the CA program intended to speed loan processing, delivery of capital of underserved
communities, and encourage greater lender participation. Specific reforms included -
1. Extending the pilot program for two years (to September 30, 2024)
2. Removing the temporary moratorium on new CA lender participation applications
3. Granting delegated authority to all experienced CA lenders
4. Modifying lending criteria to simplify and streamline underwriting mid approval of CA
applications, including authorizing the use of business credit scoring models
5. Modifying regulations to provide equitable access under SBA programs and economic
opp011unities to justice-involved individuals
6. Increasing the maximum CA loan size from $250,000 to $350,000
7. Revising fee methodology and maximum interim rate to encourage greater lender
participation in the CA Loan Program
8. Revising collateral requirements to increase the speed for capital being delivered to small
businesses while decreasing overall costs to the CA lender and borrower
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 121 here 50575A.078
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00108 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
105
9. Allowing revolving lines of credit to better meet the evolving capital needs of small
businesses
10. Revising the requirements for hazard insurance
l l. Simplifying affiliation principles
NADCO supported these changes in written comment to the Agency, but expressed the need for
a longer extension of the program. NADCO has long advocated for the CA Loan Program to be
made permanent either through congressional action or through SBA 's long-term extension of
the program to create certainty around program availability and encourage increased lender
participation. NADCO also supports additional reforms to increase participation and better meet
the capital needs ofunderserved communities by expanding the definition ofun<lerserved
communities. addressing lender capitalization constraints. establishing performance metrics. and
incorporating parameters for suc.:css around business and technical assistance.
Chairman Cardin Community Advantage Loan Program Bill
Chairman Cardin has a long track record of focusing on the gaps in financing available for
underserved communities and crafting legislation to fill those gaps and reach underserved
borrowers in an equitable manner. Most recently, Chairman Cardin along with Representative
Judy Chu introduced the Community Advantage Loan Program Permanency Act o/2022 on
November 15, 2022.
NADCO supports this legislation and the impactful changes it makes to the CA program to
bolster lending to underserved communities. Namely, the bill makes Community Advantage
permanent, which creates certainty for lenders and borrowers alike. The bill also makes the
following changes:
• Expands the definition ofunderserved to better reach these communities
• Appropriately balances risk with capitalization concerns by reformulating contributions
to the Loan Loss Reserve for CA loans
" Further addresses capitalization concerns of non-profit lenders by increasing the
guarantee for CA loans
• Focuses needed attention on developing performance metrics for CA lenders. as well as
business and technical assistance metrics for both lenders and borrowers
• Incorporates valuable training for CA lenders and collaboration between lenders and
SBA
• Requires extensive reporting to Congress to be made publicly available that will better
capture the impact of the program and areas for improvement
Affiliation and Lending Criteria Proposed Rule
SBA released a proposed rule titled, "Affiliation and Lending Criteria for the SBA Business
Loan Programs," on October 26, 2022. The proposed rule streamlines SBA's c1ment !ending
criteria from nine metrics to three, incorporates the use of credit scoring in the unden.vriting
process, and simplifies affiliation principles to ease understanding and compliance by lenders
and lxmowers. To provide further detail outlining our support for these proposed rule changes
(with noted caveats), NADCO offers the following commentary:
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 122 here 50575A.079
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00109 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
106
l. NADCO supported SBA's recent streamlining of lending requirements for the CA
program and supports extending the simplification and modernization of its lending
requirements to the 504 Loan Program, while also embracing new teclmology to allow
generally acceptable commercial credit analysis processes and procedures, including loan
scoring models, to streamline underwriting. However, we also strongly encourage SBA to
continue its focus on prudent lending standards while balancing program access with
portfolio performance and program integrity.
2. For 504 Loan Program purposes, NADCO specifically supports SBA removing the
requirement to consider character and reputation because as SBA stated in the proposed
rule, "the lending industry commonly uses the terms character and credit history
interchangeably." Credit history is a more objective, empirical measure than the
amorphous concepts of"character" and "reputation.'' SBA's proposed change would
focus more appropriately on current conditions more indicative of creditworthiness rather
than minor infractions in an applicant's past.
3. There are a few caveats to NADCO's support for the proposed changes to lending
criteria. First is the concern that SBA may implement a minimum credit score for all
loans - we recommend SBA make clear in SOP guidance that CDCs are able to use
mitigating factors when a credit score is impaired for explainable reasons. NADCO also
recommends that SBA retain the consideration of "experience and depth of management"
in its lending criteria, as this is particularly important for start-up or new businesses -
while management strength can be implied by the financial performance of existing
businesses, it should be a separate consideration for start-up or new businesses where
underwriting is based in part on management skills and projections.
SBA's proposed rule also seeks to streamline SBA's affiliation criteria for all of its business loan
programs, including 504 and 7(a). SBA proposes to specifically remove the principle of control
of one entity over another as a separate basis for fmding affiliation because the concept of
control has proven particularly burdensome for applicants and lenders to understand and
implement. NADCO supported SB.A's streamlining and modernizing affiliation principles in the
Community Advantage Loan Program in April 2022 and advocated for SBA to extend those
changes to the 504 Loan Program as part of our long-term goal of program simplification.
Additionally, the cnrrent level of complexity has led to inconsistent interpretation and
implementation by all parties in the loan approval process. SBA's proposal would create a
"bright line" test that CDCs and small businesses can easily understand and implement.
With respect to the individual revisions to affiliation principles -
1. NADCO supports SBA's proposed revisions to affiliation based on ownership
2. NADCO supports SBA's proposed revisions to affiliation based on stock options,
convertible securities, and agreements to merge
3. NADCO supports SBA's proposed elimination ofaffiliation based on
management. NADCO also supports SBA's statement that "it [SBA] should not
interfore in a business owner's right to enter into a service agreement with a
management company." To the extent that SBA requires review and approval of
management agreements for loan program requirements (i.e., passive business
3
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 123 here 50575A.080
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00110 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
107
activity), NADCO expects SBA will continue its current guidance established in
existing Standard Operating Procedures (SOP).
4. NADCO supports SBA's proposed elimination of affiliation based on identity of
interest NADCO agrees with SBA that the existing requirement is "inherently
unfair and impractical" when a close relative is not a principal of the Applicant
business.
5. NADCO supports SBA's proposed elimination of affiliation based on franchise
and license agreement· however N • • • • •
SBA Franchise Dir
uiremcnts i.e. b • ss c • i ilit . The current franchise review and
approval process for business model eligibility has evolved over time and is
working well for CDCs, third party lenders, and small business applicants.
Keeping SBA involvement in the approval of business model eligibility will
assure consistency and avoid second guessing through SB A's oversight activities.
NADCO recommends that SBA continue reviewing franchise and license
agreements for compliance with loan program requirements and publishing that
data on the Franchise Directory to provide transparent assurance to CDCs, third
party lenders, and small business applicants.
Small Business Lending Company (SBLC) Proposed Rnle
SBA released a proposed rule titled, '"Small Business Lending Company (SBLC) Moratorium
Rescission and Removal of the Requirement for a Lo,u1 Authorization," on November 7, 2022.
This proposed rule lifts the moratorium on new Small Business Lending Companies (SBLCs),
which will allow new for-profit SBLCs into the program, SBA will also create a uew type of
non-profit Mission-Based SBLC, which SBA purports ¼ill help bridge financing gaps,
particularly in underserved communities. Based on current oversight capacity, SBA anticipates it
has the ability to approve three new SBLCs in total (regular for profit SBLC and Mission-Based
SBLC).
As drafted, ~ Q J : l Q Q s e s ~ rule - we do not believe it will improve
access to capital for underserved communities, nor do we believe this route is the best avenue to
create pem1anency for mission-lenders within the 7(a) Loan Program. We foresee significant
adverse impact of the rule on Community Advantage and its current lending community. which
will harm the very borrowers we are seeking to serve. Finally, we do not believe it prudent for
SBA to open the doors to financial technology institutions to deliver government guaranteed
programs during a time in which Congress is investigating their actions during delivery of SBA
emergency COVID relief programs.
The following items do not incapsulate the totality ofNADCO's concerns, but provide further
context for NADCO's strong objection to the proposed rule:
1. Lifting the moratorium and adding non-mission SBLCs does not improve access to
mission lending for underserved communities since the proposed rule does not
impose .!illY mission-based requirements on non-Mission-Based SBLCs, which is
contrary to SBA's stated goal. Furthermore, the rule leaves programmatic details (i.e.,
geography, maximum loan size, target markets, etc.) to be approved by SBA
4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 124 here 50575A.081
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00111 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
108
personnel on a lender-by-lender basis, thus creating separate guidelines for each
lender and places added responsibilities on an already overburdened agency to devise,
approve, and monitor individualized lender compliance.
2. The proposed rule is absent specificity and transparency around Mission-Based Small
Business Lending Companies (SBLCs) and the transition of existing CA lenders to
this new category. SBA proposes to "allow CA Lenders an opportunity to apply to
pennanently participate in the 7(a) Loan Program as a Mission-Based SBLC while
continuing to meet the needs of undcrserved communities." However, the proposed
rule provides no details on this ·'application" process and no assurance that all
existing CA lenders will be granted the new Mission-Based SBLC designation.
Depending on how implemented, transitioning existing CA lenders could be costly
and time-consnming to lenders and inhibit tl1eir ability to serve borrowers. The rule
also contains no details on an application process for new Mission-Based SBLCs not
coming from the CA loan program. Further, SBA removed the temporary moratorium
on new CA lenders in April 2022 to encourage greater lender participation in the CA
program, bnt the proposed rule states that SBA "has capacity to authorize three new
SBLC Licenses" and "SBA anticipates approving three SBLCs, including Mission-
Based SBLCs, in the full first year after this proposed rule hecomes effective." This
would restrict adding new mission lenders when no such restriction exists in the CA
Loan Program today.
3. The proposed rule is silent on capital requirements for Mission-Based SBLCs, which
could impede existing CA lenders from transitioning to a Mission-Based SBLC
designation and deter new lenders from applying. For context, the current SBLC
capital requirement is $5 million, or 10 percent of the aggregate of its share of all
outstanding loans, whichever is greater.
4. Per the proposed rule, Mission-Based SBLCs would be to the same oversight
requirements as non-Mission-Based SBLCs, ,vith an initial 0,000 and
soundness review and a total biennial cost of these risk-based reviews is currently
$50,000 to $150,000 per institution. As mission-based non-profit lenders, CA lenders
pay oversight fees commensurate with the size of their CA loan portfolios and
associated risk; whereas traditional SBLCs are for-profit lenders not subject to SBA' s
mission lending mandates, have significantly larger portfolios, and can make loans up
to $5 million. This proposal raises concerns about creating another cost pain point for
mission-based lenders and forcing smaller CA lenders to exit the program, which is
counterproductive to the goal of increasing lending to underserved communities.
5. Lifting the moratorium could have significant impact on program integrity. For
example, as proposed, both regular and Mission-Based SBLCs would operate within
the SBA 7(a) Loan Program. Because there is no limit to the number of SBLCs SBA
could potentially add to participate in 7(a) lending, borrowers in underserved
communities may experience disruptions in their ability to access capital through the
7(a) program if for-profit SBLCs lend at a rate to which the authorization cap is
reached and the program is shut down, which would require an act of Congress to
5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 125 here 50575A.082
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00112 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
109
address. Additionally, unfettered access to the 7(a) Loan Program by for-profit
SBLCs may result in subsidy costs to the program necessitating not only the
elimination of fee waivers for small dollar and veteran borrowers. but higher fees for
all borrowers. Borrowers will suffer any unintended consequences of Iifting the
moratorium on SBLCs.
6. Finally, SBA"s April 2022 refo1ms to the CA Loan Program included lifting the
moratorium on new lenders and extending the program until September 30, 2024.
Lenders considering CA program participation must balance the cost of investing in a
new program with the uncertainty of the program ever becoming permanent As SBA
stated in the proposed rule when discussing new SBLC lenders. "newly established
SBLCs take up to five years to reach the current lending activity sustained by
established SBLC license holders." In contrast, SBA's reforms to the CA Loan
Program have only been in place since April 2022. Rather than being '•an unviable
alternative" for increasing volume in underserved lending, CA simply needs time to
realize the impact of recent changes. Additionally. had SBA paired its program
reforms with a longer extension of the pilot, lenders would have more certainty to
justify the investment in a program to deliver mnch-needed capital to underserved
communities.
We appreciate the ability to offer NADCO's perspective on the Community Advantage Loan
Program, including Chairman Cardin's bill, and the SBA's proposed rules. We welcome further
dialogue to advance our shared goal of creating parity in access to capital to underservcd
communities.
Sincerely,
Rhonda Pointon
President & CEO
National Association of Development Companies (NADCO)
6
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 126 here 50575A.083
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00113 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
110
December 12, 2022
Dianna Seaborn, Director
Office of Financial Assistance
U.S. Small Business Administration
409 Third Street SW
Washington, DC 20416
RE: RIN 3245-AH87
Document ID: SBA-2022-0012-001
Affiliation and Lending Criteria for the SBA Business Loan Programs
Dear Ms. Seaborn:
The National Association of Development Companies (NADCO), on behalf of the Certified Development
Company (CDC) industry, submits these comments in response to the U.S. Small Business
Administration's (SBAs) Proposed Rule titled "Affiliation and Lending Criteria for the SBA Business Loan
Programs (RIN 3245-AH87)."
Background
NADCO provides comments specific to CDCs and their involvement in SBA programs as mission-based
lenders focused on promoting economic development through job creation. CDCs are non-profit lenders
approved by SBA to participate in specific agency loan programs, including the 504 Loan Program, the
Community Advantage (CA) Pilot Program, and the Microloan Program. The Agency is the primary
regulator and conducts rigorous oversight of CDCs, including but not limited to- a biennial review of
each CDCs risk rating, historical performance measures (e.g. default rate, purchase rate and loss rate),
and portfolio compliance; quarterly Loan and Lender Monitoring System (L/LMS) analysis of the
outstanding balance of each CDCs portfolio; specific reviews and biennial reapproval for CDCs who have
Accredited Lenders Program (ALP) or Premier Certified Lenders Program (PCLP) status; an extensive
Annual Report to SBA covering every aspect of CDC activity from operations of the CDC to loan portfolio
metrics; and more.
CDCs are by design economic developers, which is a primary reason that in addition to the myriad of
other federal, state, and local programs they offer, they all have in common delivery of the SBA's 504
Loan Program. The 504 program is SBA's only program for which economic development in the form of
job creation or meeting public policy or community development goals are requirements for eligibility,
which differentiates it from other SBA capital access programs for which credit elsewhere (including
consideration of personal resources) is a statutory determinant for eligibility. Additionally, the 504 loan
Program is focused on economic development through the purchase of commercial real estate and
capital equipment, in essence, fixed assets.
The Community Advantage Loan Program is also delivered by non-profit entitles, which includes nearly
50 CDCs, many who have delivered the program since its inception in 2011. This program is also mission-
driven with 60% of loans made in underserved communities, encapsulating rural, HUBZone, low-to-
moderate income, and new businesses. Many of the changes SBA proposes in this rule were introduced
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 127 here 50575A.084
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
111
for the Community Advantage Loan Program on April 29, 2022 (87 FR 25398), which NADCO supported
in comments submitted to the Agency on May 24, 2022. At that time, NADCO encouraged SBA to
extend many of these reforms to the 504 Loan Program.
NADCO's comments below are reflective of the manner in which CDCs operate within the SBA
ecosystem, the unique parameters of the programs they deliver, and are consistent with comments
made to the Agency previously. NAOCO has long advocated for simplification and streamlining of SBA's
504 Loan Program and Community Advantage Loan Program to promote speed, consistency, and
certainty for small business access to capital.
Given this background, NADCO offers the following -
Section 120.130-Restrictions on Uses of Proceeds
Current§ 120.202 restricts Borrowers from using 7(a) loan proceeds to purchase a portion of a business
or a portion of another owner's interest. SBA proposes to revise this section to allow Borrowers to use
7(a) loan proceeds to fund partial changes of ownership in addition to full changes of ownership.
NADCO supports SBA's desire to assist small businesses and provide a path to ownership for
employees, While no such regulatory restriction on partial change of ownership projects exists in
§ 120.884 for SSA's 504 Loan Program, SBA has historically used Standard Operating Procedure
/SOP) guidance to allow full change of ownership projects in 504. SBA has not historically
allowed 504 to fund partial change of ownership projects. NADCO recommends that SBA change
its guidance ta allow the 504 Loan Program to finance full or partial change of ownership
projects provided those projects are supported by underlying fixed assets.
Section 120.1.50-What are SRA's lending criteria?
Current§ 120.150 states that SBA's lending criteria for 7(a) and 504 loans requires that the applicant
(including the Operating Company) must be creditworthy; loans must be so sound as to reasonably
assure repayment; and SBA will consider nine specific factors in its lending criteria. The factors consist
of: (a) Character, reputation, and credit history of the applicant (and the Operating Company, if
applicable), its Associates, and guarantors; (b) Experience and depth of management; (c) Strength of the
business; (d) Past earnings, projected cash flow, and future prospects; (e) Ability to repay the loan with
earnings from the business; (f) Sufficient invested equity to operate on a sound financial basis; (g)
Potential for long-term success; (h) Nature and value of collateral (although inadequate collateral will
not be the sole reason for denial of a loan request); and (i) The effect any affiliates (as defined in part
121 of this chapter) may have on the ultimate repayment ability of the applicant.
SBA proposes to revise this regulation by retaining the requirement that the applicant (including an
Operating Company) must be creditworthy and that loans must be so sound as to reasonably assure
repayment and streamlining the nine specific factors in its lending criteria to three specific criteria when
approving loans: (al The credit score or credit history of the applicant (and the Operating Company, if
applicable), its Associates and any guarantors; (b) The earnings or cashflow of the applicant; or (c) where
applicable, any equity or collateral of the applicant
SBA is also incorporating into the regulation a new requirement that Lenders and Certified Development
Companies (CDCs) must use appropriate and prudent generally acceptable commercial credit analysis
processes and procedures consistent with those used for their similarly sized, non-SBA guaranteed
commercial loans. The rule also adds language to§ 120.150 to permit Lenders, CDCs, and SBA to use a
WWW. NADCO .org Page 2 of 5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 128 here 50575A.085
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00115 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
112
business credit scoring model to streamline loan underwriting. Lenders and CDCs may use SSA's Small
Business Scoring Service (SBSS) credit scoring model. Lenders and CDCs may also use other credit scoring
models; however, when doing so, Lenders and CDCs must be able to validate the credit scoring model
and must document with appropriate statistical methodologies that their credit analysis procedures are
predictive of loan performance, and they must provide that documentation to SBA upon request and
during oversight reviews.
NADCO supported SBA's recent streamlining of lending requirements for the Community
Advantage /CA} Laan Program [implemented in April 2022 via Federal Register Notice Vol. 87,
No. 63 and via Federal Register Notice Vol. 87, No. 83}, as these changes expanded access to the
CA program's delivery of critical capital through small loans ta underserved communities. CDCs
have participated in the Community Advantage Loan Program since its inception in 2011.
Historically, approximately 40-50 CDCs have delivered the program as part of our mission-based
lending ethos, representing over 40% of total CA lenders and over 60% of CA lending dollars.
NADCO supports SBA's desire to extend the simplificotion and modernization of its lending
requirements to the 504 Loan Program, while also embracing new technology to allow generally
acceptable commercial credit analysis processes and procedures, including loan scaring models,
to streamline underwriting. NADCO strongly encourages SBA to continue its focus on prudent
lending standards while balancing program access with portfolio performance and program
integrity.
For 504 Loon Program purposes, NADCO specifically supports SBA removing the requirement to
consider character and reputation because as SBA stated in the proposed rule, "the lending
industry commonly uses the terms character and credit history interchangeably." Credit history
is a more objective, empirical measure than the amorphous concepts of "character" and
"reputation." SBA's proposed change would focus more appropriately on current conditions
more indicative of creditworthiness rather than minor infractions in an applicant's past.
NADCO is concerned that SBA may use this change to implement a minimum credit score for all
loans and recommends that SBA make clear in SOP guidance that CDCs are able to use
mitigating factors when a credit score is impaired for explainable reasons. NADCO recommends
that SBA retain the consideration of "experience and depth of management" in its lending
criteria, as this is particularly important for start-up or new businesses - NADCO acknawledges
that management strength can be implied by the financial performance of existing businesses,
but it should be a separate consideration far start-up or new businesses where underwriting is
based in part on management skills and projections.
Section 120.160-Loan Conditions
Current§ 120.160{c) states that for 7(a) and 504 loans, SBA requires hazard insurance on all collateral
and does not distinguish this requirement by loan size. In the proposed rule, SBA is modifying the
requirement for hazard insurance for all 7(a) and 504 loans $150,000 and under to create flexibility for
SBA Lenders to mirror their hazard insurance requirements for their similarly sized non-SBA loans. SBA
proposes revising this regulation to state that SBA requires hazard insurance for loans greater than
$150,000.
NADCO supported SBA making this change in the Community Advantage Loan Program for small
loans to underserved communities. As NADCO has long advocated for SBA to simply and
www.NADCO.org Page 3 of 5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 129 here 50575A.086
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00116 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
113
streamline the 504 Loan Program, we support this change for 504 loans, as it allows for CDC
flexibility to meet the needs of the small business Applicant more cost-effectively. To the extent
that the CDC believes that hazard insurance is necessary far small loans secured by real estate,
the proposed rule still a/laws that flexibility.
NADCO has advocated for SBA ta grant similar flexibility for life insurance for the 504 Loan
Program and recommends thot SBA not automatically require life insurance for single owner
businesses, allowing the CDC and Applicant to make the case that life insurance is not necessary,
even for sole proprietorships and single member LLCs. In situations where life insurance is
deemed necessary for these entities, if SBA's collateral gap calculation is less than a minimum
threshold (i.e., $50,000), NADCO advocates for SBA to simply waive the requirement for life
insurance altogether as this cost can be onerous for small business owners while providing
minimal risk to SBA.
Section 120.193-Reconsiderotion After Denial
Under current regulation§ 120.193, the Director of the Office of Financial Assistance (OFA) makes all
reconsideration decisions. To facilitate fair and expeditious reconsiderations, SBA is proposing to grant
the OFA Director the ability to delegate decision making to designees -for 7(a) loan applications, the
Director's designee would include the Chief, 7(a) Loan Policy; for 504 loans, the Director's designee
would include the Chief, 504 Loan Policy. From time to time, SBA may change the designee(s) and would
do so in accordance with published Delegations of Authority.
NADCO supports this proposed change.
Section 120.202-Restrictions on Loans far Changes of Ownership
Current§ 120.202 restricts Borrowers from using 7(a) loan proceeds to purchase a portion of a business
or a portion of another owner's interest. SBA proposes to revise this section to allow Borrowers to use
7(a) loan proceeds to fund partial changes of ownership in addition to full changes of ownership.
This proposed change is contemplated in conjunction with SBA's proposed change to§ 120.130
as outlined above. As stated above, NADCO supports SBA's desire to assist small businesses and
provide a path to ownership for employees. While no such regulatory restriction exists in SBA's
504 Loan Program, SBA has historically used Standard Operating Procedure (SOP) guidance to
restrict partial change of ownership prajects in 504. NADCO recommends that SBA change its
SOP guidance to allow the 504 Loan Program to finance full or partial change of ownership
projects provided those projects are supported by underlying fixed assets.
Section 121.301-What size standards and affiliation principles are applicable to financial assistance
programs?
SBA's proposed rule seeks to streamline SBA's affiliation criteria under§ 121.301 for all of its business
loan programs, including 504 and 7(a). SBA proposes to specifically remove the principle of control of
one entity over another as a separate basis for finding affiliation because the concept of control has
proven particularly burdensome for applicants and lenders to understand and implement.
NADCO supported SBA's streamlining and modernizing affiliation principles in the Community
Advantage Loan Program in April 2022 and advocated for SBA to extend those changes to the
504 Loan Program as part of our long-term goal of program simplification.
www.NADCO.org Page 4 of 5
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 130 here 50575A.087
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00117 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
114
To use SBA's words, existing affiliation rules are "particularly burdensome for applicants and
lenders to understand and implement." Additionally, the complexity hos led to inconsistent
interpretation and implementation by all parties in the loan approval process. SBA's proposal
would create a "bright line" test that CDCs and small businesses con easily understand and
implement.
With respect to the individual revisions ta§ 121.301 -
1. NADCO supports SBA's proposed revisions to affiliation based on ownership in§
121.301(f)(1).
2. NADCO supports SBA's proposed revisions to affiliation based on stock options,
convertible securities, and agreements ta merge in§ 121.301(f}{2).
3. NADCO supports SBA's proposed elimination of affiliation based on management in§
121.301{f){3). NADCO also supports SBA's statement that "it [SBA] should not interfere
in a business owner's right to enter into a service agreement with o management
company." To the extent that SBA requires review and approval of management
agreements for loan program requirements (i.e., passive business activity), NADCO
expects SBA will continue its current guidance established in existing Standard Operating
Procedures (SOP).
4. NADCO supports SBA's proposed elimination of affi/iotion based an identity of interest in
§ 121.301(f}(4}. NADCO agrees with SBA that the existing requirement is "inherently
unfair ond impractical" when a close relative is not a principal of the Applicant business.
5, NADCO supports SBA's proposed elimination of affiliation based on franchise and license
agreement in§ 121.301(f)(5}; however, NADCO does not support elimination of the SBA
Franchise Directory and SBA's approval of compliance with loan program requirements
(i.e., business model eligibility). The current franchise review and approval process far
business made/ eligibility has evolved over time and is working well for CDCs, Third Party
Lenders, and small business Applicants. Keeping SBA involvement in the approval of
business model eligibility will assure consistency and avoid second guessing through
SBA's oversight activities, including Payment Integrity Information Act of 2019 (Pl/A)
audits and CDC reviews. NADCO recommends that SBA continue reviewing all franchise
and license agreements for compliance with Loan Program Requirements and publishing
that data on the Franchise Directory to provide transparent assurance to CDCs, Third
Party Lenders, and small business Applicants.
NADCO appreciates the opportunity to provide these comments and welcomes additional collaboration
with SBA ta create additional efficiencies in the 504 Loan Program.
Sincerely,
I '---'?
Wayne Williams
Executive Vice President
Regulatory Affairs & Training
www.NADCO.org Page 5 ofS
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 131 here 50575A.088
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00118 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
115
Mi%ion Lenders Working Group
Buildiny Success in l Tnde,·sen•ed Conmwnitie,
Testimony for the Record
Submitted to the
Senate Small Business and Entrepreneurship Committee
For the hearing:
"Improving Access to Capital in UndcrscrYcd Communities: The Community Advantage
Program. Microloans, and other SBA Initiatives"
\Vednesday. December 14, 2022
Submitted by Alison Feighan on bdialf of the Mission Lenders Working Group
Chairman Cardin and Ranking Member Paul, on behalf of the Mission Lenders Working (ircmp (ML\VG),
l write to thank you for convening a hearing focused on improving access to capital in underserved
communities and for the opportunity to reflect on how the SBA 's Community Advantage (CA) pilot
program has increased SBA-backed lending to underserved businesses and markets, We were very pleased
that CA lender CDC Small Business Finance was invited to testify before the committee alongside
representatives from the traditional 7(a) program, and the microloan program,
fhe Mission Lenders Working Group (MLWG) is a network of SBA 7(R) Community Advantage (CA)
lenders that was organized in 2015 as a way for CA lenders to share best practices. offer peer•lo•peer
training and support, and collaborate on education and advocacy to keep policymakers updated on the
pilot's impact. ML\VG members act as agents of change in their communities by intentionally making
capi1al accessible to support and sustain underservcd and underbanked sma 1l businesses. ML\VG
membership represents the diversity of the mission lending industry including some of the largest CA
lenders in terms of volume as well as smaller lenders, rural-focused lenders, and len,fors targeting
underscrved urban centers, hut an are seasoned lenders and aH are intentionally mission~driven and
committed to financing, supporting and sustaining underbanked businesses.
Together, the MLWG members are responsible for more than half of all CA lending in terms of loan count
and volume to date. Based on the experience of the MLWG members, we are sharing comments for the
tommittce ~s hearing record on:
" SBA 's Community Advantage Pilot Loan Program,
• Chairman Cardin's legislation to codify the CA program within the Small Business Act, and
" SRA's proposed mle released on November 7, 2022, that would negatively impact underserved
small business owners and entrepreneurs by litting the moratorium on Small Business Lending
Companies (SBLCs) as well as creating a new category of SBLC known as Mission-Based SBLC
with no accountability to underserved markets,
1
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 132 here 50575A.089
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00119 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
116
The 7(a) Community Advantage (CA) pilot was launched by the SBA in 2011 to expand access to SBA-
backed loans for underserved small businesses. Initially, CA loans were capped at $250,000 hut on May
31. 2022. the SBA increased the maximum CA loan size lo $350,000. There are approximately 110 CA
non-profit lenders consisting of SBA-Authorized Certified Development Companies (CDC's). SBA-
Authorized Microloan Intermediaries. and Community Development Financial Institutions (CDF!s).
\Vhen the CA pilot was lmmd1ed, the SBA recognized the unique capacity of nontraditional lenders
particularly CDC's, CDFls, and SBA Microloan intermediaries-- to finance and grovv businesses that
traditional 7(a) lenders could not and in many cases should not lend to. The SBA acknowledged that in
order to increase lending in underserved markets using SBA 's flagship 7(a) loan guarantee - they needed
to enlist the expertise of non-traditional lenders that had experience and a presence in the markets that
conventional banks and traditional 7a lenders could not reach. The CA program aims to help these
underserved and underbanked small businesses climb the ladder of economic opportunity, contributing to
business growth and economic development in emerging markets.
CA lenders are required to deliver at least 60% of their CA loans to businesses in an "underserved market,"
cum.mtly defined by SBA as Empowerment Zones and Enterprise Communities, HUBZones, Low-to-
Moderate Income communities (LMI), Opportunity Zones. rural areas. startups. and veteran-owned
businesses.
While not required, CA lenders often provide support or technical assistance to a borrower or prospective
bonmver and this approach to lending is one of the factors that allows mission lenders to manage the risk
involved in lending to businesses deemed ·unbankable' by conventional lenders (including start-ups.) As
mission-oriented organizations. CA lenders consistently exceed the 60% requirement
The CA model works and is powerful for reaching underserved and underbanked small businesses and
entrepreneurs. CA lenders know their communities and it is within their mission to serve small businesses.
The CA program henefits economically and socially disadvantaged husinesses that need access to patient
capital that is structured as affordable for the businesses to grow.
Since the CA pilot launched in 2011, the SBA has approved a total of $1,050,734,400 in CA loans to 7,673
businesses with an average loan size of $139.000. Traditional 7(a) and Community Advantage lending
declined during the pandemic as lenders shifted their locus to processing PPP loans. ln addition. many
States rolled out their own affordable capital programs and provided free business support services to small
businesses. In FY 2020, SBA lending staited to pick up with CA lenders continuing to target a significant
portion of their lending to underserved markets. In FY 2022, 717 CA loans were approved for an average
loan size of$158.995, representing an increase in CA loan approval of21 percent.
What the SBA has not done is to define or specify what success looks like in terms of acceptable or
unacceptable risks. t'nder the program, mission-based CA lenders were asked to serve the hardest-to-reach
markets. While there is an expectation of higher losses, that has never been publicly defined and presented
to the CA lenders. A conversation with SBA and agreeing upon the success of the program would assist in
further defining the program for new lenders and likely increase participation.
The MLWG is committed to working with the SBA to increase SBA-backed lending to underserved markets
and increase the efficiency of SBA lending while at the same time making sure every small business owner
seeking an SBA loan is able to access the product(s) andhir service(s) they need. We understand the
2
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 133 here 50575A.090
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00120 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
117
importance of a business having access to credit - but ifs critically impottant that loans are "right-sized,
priced" and strnctured to meet the needs of a business.
The Community Advantage Loan Program Permanency Act of2022
The CA program has been operating as a pilot for more than ten years and based on the success of the pilot
the MLWG is urging Congress to codify the program and grant it full status as a mission-driven loan
program within the flagship 7(a) program.
We appreciate Chairman Cardin's leadership and support for the codification of CA and the MLWG is
pleased to endorse the Community Advantage Loan Program Permancnc:v Act of 2022 (S.5102) introduced
by the Senator last month. In addition to elevating CA from a pilot program, the Chairman's bill
incorporates important lessons learned over the pilot period and the bill seeks to improve and stTengthen
the program to more effectively serve businesses.
The bill expands the definition of ·'undcrserved community" to include businesses owned by socially and
economically disadvantaged individuals, businesses owned by women, and mral businesses, vvhich is an
essential step in achieving parity for small business owners that are underbanked and underestimated.
This critical legislation recognizes the need to institutionalize mission-driven lending as part of the SBA's
mission to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns"
by identifying markets that have historically been undcrserved and requiring CA lenders to make at least
70% of the loans to identified markets. This is up from the 60% target threshold in the CA pilot.
We appreciate that The CA program should serve as the SBA's primary vehicle for delivering loans ofup
to $350,000 to economically and socially disadvantaged business owners who lack banking relationships.
This legislation will help small business owners to navigate and continue to rebuild from the Covid-19
economic crisis.
The legislation seeks to expand the reach of CA lending by seeking to fo1111alize the CA Network Partners.
Among other benefits, the CA Network Partners model would provide an on-ramp for mission lenders
considering entering the CA program. These mission lenders are touchstones in the local community and
have established trust within the community. TI1is local network creates a pathway for small business
owners and entrepreneurs to establish a local relationship with a local lender, and, where the business owner
may receive technical assistance or simple reassurances as they go through the application process. The
small business owners receive financing structured on the historical cash flow available to service the debt
while the company grows. The legislation will also allow SBA 7(a) lenders to refinance CA loans after the
small business owner has demonstrated key indicators like the need for additional capital and a track record
of timely payments.
The Continuum of Capital
Lender: TA if needed, financing
and had the capital to assist new 11nrlerserv,afi businesses
During the hearing, there was some discussion about the fate of a business that applied for a 7(a) loan but
is turned down for one reason or another, often based on a determination of their inability to repay. This is
where CA lenders can step in, possibly with business assistance or with the ability to accept collateral or
manage the risk that a conventional lender could not. CA lenders assist these businesses to secure the right-
3
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 134 here 50575A.091
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00121 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
118
sized financing to build their financial resumes and get them ·bankable' over time. This is where our work
begins and places a small business on the ·continuum of capital.'
The CA program has operated as a "pilot program'' for the last ten years. despite its proven success and
sustainability in reducing credit disparities. Since 20 l I. the CA program received several sho1t-term
extensions, leaving lenders without assurance of the program's long-term outlook and its capacity to serve
the most overlooked small businesses. The CA program is currently set to expire at the end of FY 2024.
The multiple extensions of the program over difforcnt administrations, along with changing operating rules.
have made it problematic for new mission lenders to commit to the program. No large for-profit financial
institution would tolerate such programmatic changes, yet mission lenders are expected to continue to reach
the hardest to serve and adapt to the changing rules, which are more restrictive than to other 7(a) lenders.
This legislation creates a pathway for emerging mission lenders to invest in a long-term CA program.
The CA program, which has a ten-year established. successful track record in supplying capital lo
underbanked businesses. should be among the core strategies for wealth-building and economic
development in underserved communities. CA program permanency would allow mission lenders to grow
their CA lending portfolios, invest in the necessary staff and systems, and continue using SBA loan
guarantee authority to finance smali businesses that traditional 7(a) lenders and other financial institutions
do not serve. The MLWG urges the SBA Administrator to publicly endorse Senator Cardin's legislation.
SBA's proposed rule 011 Small Business Lending Companies
We appreciate the opportunity to share our thoughts. questions. and concerns regarding the SBA 's proposal
to list the moratorium on Small Business Lending Companies and create a tier of non-profit Mission SBLCs
with criteria that differ from those in place for traditional SBLCs.
While we appreciate and share SBA's commitment to addressing the needs of businesses and entrepreneurs
in underservcd markets. the MLWG concerned that the proposed rule as drafted will not actually promote
mission lending.
\Ve question the need for having two types ofSBLCs and specifically question why the SBA would certify
three new for-profit SBLCs without requiring the new entities to abide by any of the mission objectives that
would be assigned to the non-profit SBLCs.
The MLWG was also troubled by a statement in the Federal Register notice regarding the limitations
CA program: "SBA considered leaving the regulations unchanged and relying upon the CA Pilot Loan
Program to address the needs of access to capital in underserved markets; however, the low historic loan
volume and lack of any CA loan activity in some rural and underserved geographic areas makes this an
unviable alternative."
This statement implies that mission lenders arc failing at loan production volume even as that was never
explieit requirement. The CA program was not intended to be a volume-producing program but a program
to fill the small dollar loan gaps within the 7(a) program to underserved markets. We urge the SBA to lean
into the CA program. The CA model does work and is powedi.tl for reaching underservcd and underbanked
small businesses and entrepreneurs. The June 2018 Industrial Economics Incorporated Report states
·'Overall, the evaluation finds that the CA Program is serving an important function for its target market.
4
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 135 here 50575A.092
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00122 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
119
The financing and technical assistance provided by mission-oriented CA lenders is reaching the program's
target market of small businesses in emerging markets at a critical stage for these businesses .. " 1
The MLWG will be submitting a comment letter to the SBA on the proposed rule and we are committed to
working with the SBA to strengthen the CA program in a way that will also serve to advance the SBA 's
equity plan and ensure more lending to underserved businesses and markets.
Closing
As a network of committed CA lenders, members of the MLWG see themselves as stewards of the
mission and goals of the CA pilot, and as such we are committed to working with this Committee
and with the SBA to intentionally and responsibly advance the stated goals of the CA pilot - to
increase access to credit for small businesses in an underserved area and expand points of access
to the SBA 7(a) loan program by allowing non-traditionaL mission-oriented lenders lo participate.
~ Industrial Economics !ncor-porated, 'Evaluating Technical Assistance and Economic Opportunity Outcomes of the Community Advantage Pilot
Program," June 201e. p '// a / / / / fx~L.l!!I.!,g..11..J_Q;!Jt.122.t
5
0
dmwilson on DSKJM0X7X2PROD with HEARING
Insert offset folio 136 here 50575A.093
VerDate Sep 11 2014 23:57 Oct 17, 2023 Jkt 050575 PO 00000 Frm 00123 Fmt 6633 Sfmt 6602 E:\HR\OC\A575.XXX A575
File and source
- File
- CHRG-117shrg50575.pdf
- Size
- 10,518,194 bytes
- SHA-256
- 31176c39817063f0af311493211992ae586c9f560fb9eca426f6e2aa259ae174
- Our copy
- CHRG-117shrg50575.pdf
- Original
- www.govinfo.gov