Oversight of SBA's Implementation of Final Rules to Expand Access to Capital (Senate Small Business Committee hearing, April 26, 2023)
Summary
The printed record of a Senate Committee on Small Business and Entrepreneurship hearing, S. HRG. 118-91, titled Oversight of SBA's Implementation of Final Rules to Expand Access to Capital, held April 26, 2023 in the 118th Congress, with Benjamin L. Cardin as Chairman and Joni Ernst as Ranking Member. The witnesses are Patrick Kelley of the SBA's Office of Capital Access, Sheldon Shoemaker, Deputy Inspector General of the SBA Office of Inspector General, Hilda Kennedy of AmPac Business Capital and Chris Pilkerton of Accion Opportunity Fund. In his opening statement Cardin says the hearing examines two SBA rules, one lifting the moratorium on small business lending companies and one loosening affiliation standards and streamlining lending criteria. The record also includes letters, a statement by Senator Marco Rubio and answers to questions for the record.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“Oversight of SBA's Implementation of Final Rules to Expand Access to Capital (Senate Small Business Committee hearing, April 26, 2023).”
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S. HRG. 118–91
OVERSIGHT OF SBA’S IMPLEMENTATION OF FINAL
RULES TO EXPAND ACCESS TO CAPITAL
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
OF THE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
APRIL 26, 2023
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
53–225 WASHINGTON : 2024
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED EIGHTEENTH CONGRESS
BENJAMIN L. CARDIN, Maryland, Chairman
JONI ERNST, Iowa, Ranking Member
MARIA CANTWELL, Washington MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho
EDWARD J. MARKEY, Massachusetts RAND PAUL, Kentucky
CORY A. BOOKER, New Jersey TIM SCOTT, South Carolina
CHRISTOPHER A. COONS, Delaware TODD YOUNG, Indiana
MAZIE HIRONO, Hawaii JOHN KENNEDY, Louisiana
TAMMY DUCKWORTH, Illinois JOSH HAWLEY, Missouri
JACKY ROSEN, Nevada TED BUDD, North Carolina
JOHN W. HICKENLOOPER, Colorado
SEAN MOORE, Democratic Staff Director
MEREDITH WEST, Republican Staff Director
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CONTENTS
Page
OPENING STATEMENTS
Benjamin L. Cardin, Chairman, U.S. Senator from Maryland ............................ 1
Joni Ernst, Ranking Member, U.S. Senator from Iowa ........................................ 4
WITNESSES
Mr. Patrick Kelley, Associate Administrator, Office of Capital Access, U.S.
Small Business Administration .......................................................................... 5
Prepared Statement ......................................................................................... 8
Mr. Sheldon Shoemaker, Deputy Inspector General, Office of Inspector Gen-
eral, U.S. Small Business Administration ......................................................... 11
Prepared Statement ......................................................................................... 13
Ms. Hilda Kennedy, Founder/President, AmPac Business Capital ..................... 43
Prepared Statement ......................................................................................... 45
Mr. Chris Pilkerton, Chief Legal Officer, Accion Opportunity Fund .................. 52
Prepared Statement ......................................................................................... 55
ADDITIONAL LETTERS/STATEMENTS FOR THE RECORD
National Association of Development Companies (NADCO)
Letter dated April 26, 2023 ............................................................................. 62
National Association of Federally-Insured Credit Unions (NAFCU)
Letter dated April 25, 2023 ............................................................................. 63
Senator Marco Rubio
Statement .......................................................................................................... 65
QUESTIONS FOR THE RECORD
Mr. Patrick Kelley
Responses to questions submitted by Chairman Cardin, Ranking Member
Ernst, Senators Hickenlooper, Risch, Young and Kennedy ...................... 67
Mr. Sheldon Shoemaker
Responses to questions submitted by Ranking Member Ernst and Senator
Risch ............................................................................................................... 88
Ms. Hilda Kennedy
Responses to questions submitted by Senator Hickenlooper ........................ 96
Mr. Chris Pilkerton
Responses to questions submitted by Ranking Member Ernst and Senator
Hickenlooper .................................................................................................. 99
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OVERSIGHT OF SBA’S IMPLEMENTATION OF
FINAL RULES TO EXPAND ACCESS TO CAP-
ITAL
WEDNESDAY, APRIL 26, 2023
UNITED STATES SENATE,
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP,
Washington, DC.
The committee met, pursuant to notice, at 3:33 p.m., in Room
428A, Russell Senate Office Building, Hon. Benjamin Cardin, chair-
man of the committee, presiding.
Present: Senators Cardin [presiding], Shaheen, Hirono, Rosen,
Hickenlooper, Ernst, Risch, Young, Hawley, and Budd.
OPENING STATEMENT OF SENATOR CARDIN
The CHAIRMAN. The Small Business committee will come to
order. Let me welcome our guests today. This hearing is scheduled
for the oversight of SBA’s implementation of final rules to expand
access to capital.
So, today’s hearing will examine two new rules SBA finalized
this month that aim to address the gaps in small business lending.
The first would lift the moratorium on the number of small busi-
ness lending companies, or SBLCs, participating in the SBA’s flag-
ship lending programs.
The second would loosen affiliation standards and streamline
lending criteria requirements in SBA’s small business loan pro-
grams.
These rules first proposed six months ago and scheduled to go
into effect on May the 12th, make significant changes that will af-
fect which borrowers and lenders participate in SBA’s lending pro-
grams going forward.
Notably, the rule significantly reconfigured the Community Ad-
vantage Program, which has been successful in providing capital to
small businesses and communities that historically have been left
behind.
While I recognize that the SBA issued these rules with the goal
of expanding access to capital for businesses in underserved com-
munities and increasing the number of small dollar loans, I am
concerned that the final rules do not offer the stability or specifics
necessary to ensure Community Advantage’s future success.
I also worry that the rules that leave so many decisions to the
discretion of the agency would have unforeseen and possible regret-
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table consequences down the road.
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Like many of us, I was disappointed that the final versions of
these rules are almost identical to those that were proposed. Giving
the degree of interest from so many corners and the significance of
changes under consideration, it is surprising that the agency
wasn’t more receptive of many of the constructive comments it re-
ceived.
In our hearing with Administrator Guzman last month, we re-
ceived assurances that many of our concerns would be addressed,
yet the rules were released without the SOP guidance, which detail
how the rule will be implemented and without meaningful changes.
Lenders and borrowers need to know what will be expected of
them as these rules are implemented and scheduled to go into ef-
fect on May 12th. And while the SOP guidance will address some
of the missing details from the final rules, the fact that the agency
retains discretion to make critical decisions on a case-by-case basis
means that many program participants will remain uncertain
about where they stand.
This is particularly true for Community Advantage lenders.
While I appreciate that the SBA aims to give the program stability
through the rulemaking, many lenders may not even be aware that
the program will be transitioned into the SBLC lending program in
the coming months or understand what that entails.
Even more concerning, the rule allows the SBA to make case by
case decisions about important matters like lenders’ required loan
loss reserves and capital requirements. It worries me that this pro-
gram could be changed dramatically by subsequent Administra-
tions without any notice to the public by issuing new SOP guid-
ance.
Furthermore, I am concerned that these rules do not ensure the
long-term integrity of the Community Advantage’s important mis-
sion. The final rule does not specify target markets or metrics for
success, thereby eliminating the key markers and accountability
measures that previously ensured the underserved markets were
served.
Access to capital in underserved communities has been a per-
sistent weakness of SBA lending programs, but Community Advan-
tage has been our most successful program in reaching these small
businesses.
The program allows mission-oriented nonprofits to make 7(a)
loans up to $350,000, focusing on economic development for under-
banked small business owners. Although it is smaller, more tar-
geted program than 7(a), the Community Advantage program has
been very effective in addressing the credit gap.
As I have repeated since this rulemaking process began and long
before, I believe the Community Advantage needs the stability that
comes with statutory codification. The Community Advantage Pro-
gram was created as a pilot more than a decade ago, and now in
recognition of its success, connecting underserved small businesses
with capital, Congress needs to make it permanent and establish
fixed, transparent requirements.
I will continue to push our community to do just that as part of
our bipartisan reauthorization process. I just might point out that
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part of the reason we are here today talking about the rule and our
concerns is that Congress has not acted in this area.
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We have a responsibility as Congress to give the guidelines. That
is why I think it is absolutely essential that we move forward with
our bipartisan reauthorization of the SBA laws, where we can
speak to the specifics. And if we don’t do that, we are ceding of our
authority to the Executive Branch.
This is not to take away from the many good ideas in these rules,
some of which will speed up loan approvals for modernizing the un-
derwriting process. However, the changes seem heavily focused on
giving lenders greater autonomy and less guidance, enabling them
to rely on automation.
Absent proper oversight, it is easy to imagine a scenario in which
these changes enable predatory lending practices to creep into the
program. Efforts to increase speed and volume can help modernize
SBA programs, but they must be accompanied by corresponding
commitments to exercise caution and vigilance.
The rule gives considerable new responsibilities to the Office of
Credit Risk Management, or OCRM. However, according to a re-
cent whitepaper released by the Inspector General, this office is
currently short staffed and has been for some time.
While Administrator Guzman told us earlier this month that
SBA is confident that OCRM can handle both its current and fu-
ture responsibilities with its existing staff levels, the Inspector
General observed that the office is not currently keeping up with
the oversight of the 7(a) loan program.
Given this new direction, I remain concerned that the President’s
budget did not recommend an increase for OCRM, assuming the
agency knew these rules were close to being finalized in the coming
year, the budget request should have accounted for the growing im-
portance of this office as a primary overseer of the agency’s lending
programs.
Again, while we may not see eye to eye on all the particulars,
I do want to commend the Administration for its commitment to
expanding the reach of SBA lending programs to underserved com-
munities.
And I assure the Administration, I want to work together, I want
this committee to work with the Administration in order to accom-
plish our mutual goal of extending credit opportunities, particularly
to the smaller small businesses and those in underserved commu-
nities. Small businesses across the country rely on 7(a), 504, Com-
munity Advantage, micro loan programs.
Lenders and small businesses alike need these programs to re-
main stable, transparent, and sufficiently empowered to reach un-
derserved borrowers. These should be our guiding principles.
I look forward to hearing from both panels of our witnesses today
so we can better understand the concerns and we can move forward
on a common agenda. And with that, let me recognize the distin-
guished Ranking Member, Senator Ernst.
Senator ERNST. Thank you, Mr. Chair, and thanks to our wit-
nesses for being here today.
And given the importance of today’s hearing, according to our
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committee’s rules, any member of the committee shall be empow-
ered to administer the oath to any witness testifying as to fact.
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So, if you both please would rise and raise your right hand, I will
administer the oath. Do you solemnly swear to tell the truth, the
whole truth, so help you God?
Mr. KELLEY. I do.
Mr. SHOEMAKER. I do.
OPENING STATEMENT OF SENATOR ERNST
Senator ERNST. Okay. Thank you very much. Just one month
ago, Administrator Guzman was before this committee, and Chair-
man Cardin and I both expressed concerns with the SBA’s new pro-
posed lending rules.
Fast forward to our very next committee hearing today, and now
the rules are final, and none of the concerns we discussed were
considered or addressed. It is really disheartening to many of us on
this committee, as we saw in a bipartisan manner, where numbers
of our committee members raised issue with the proposed rules,
and it shows that the Administrator and the SBA was not working
in good faith with us.
These final rules threaten to drastically change the SBA’s flag-
ship small business lending program. The Administration will
allow for an unlimited amount of non-depository institutions,
fintechs, to become permanently licensed SBA lenders.
It also removes underwriting standards that will inevitably in-
crease risk. Taxpayers recently witnessed the Federal Government
lose more than $64 billion in paycheck protection program funds
due to fintechs facilitating widespread financial fraud and improper
loans.
Yet before oversight investigations into these entities have
crossed the finish line, the SBA has decided that now is the time
to replace community lenders with artificial bots.
The SBA is not prepared to evaluate the use of artificial intel-
ligence or machine learning algorithms for underwriting and loan
processing, nor does it have the capacity to enforce Federal anti-
money laundering laws and know your customer compliance, which
are vital controls in the U.S. financial system to keep money from
flowing to and between bad actors.
The rules state that it will fill the market gap for smaller dollar
loans to underserved borrowers. But the rules do not limit the new
non-bank lenders to small dollar lending. It begs the question, do
we think fintechs will pursue small dollar loans or take up the op-
portunity to do $5 million loans if they have the ability to be repaid
by the Government for a default?
At the same time, the rule will allow for larger businesses to ex-
ploit these programs intended for truly small businesses. Lastly,
the rules will give the SBA Administrator the authority to reverse
loan decisions, forcing lenders to provide a loan, which is a back-
door way to direct lending by the agency.
These sweeping changes will encourage risky lending behavior,
causing subsidy rates to rise and increase fees on the very bor-
rowers that SBA is trying to help. In spite of a bipartisan push for
the SBA to exercise diligence and restraint, the SBA has ignored
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Congress, Democrats and Republicans, specifically this committee,
every step of the process and is moving full speed ahead.
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Mr. Chairman, I do hope that we can work together to reign in
the SBA’s ill-conceived changes to these critical programs and actu-
ally address the gaps in small dollar loans and lending in rural
America.
Shifting loans from our banks on Main Street to bots in San
Francisco isn’t the best interest of our small businesses in Iowa,
nor across the United States. And I want to be very clear about
this, we need to come to a bipartisan agreement on a legislative re-
sponse to these rules before we begin negotiations on other aspects
of modernizing the SBA.
Small business lending is the foundation of SBA’s programs, and
we can’t undertake renovations to the rest of the agency until this
dire problem is fixed. Thank you, Chairman.
The CHAIRMAN. Let me thank the ranking member. We will now
hear from our first panel of witnesses. Let me introduce both.
Thank you both for being here.
Mr. Patrick Kelley serves as the Associate Administrator for the
Office of Capital Access at the Small Business Administration.
In this role, he is charged for overseeing the office’s operations,
and the office is responsible for making capital available to small
businesses through banks and other lending partners. This is his
second stint at SBA, as he previously served in several positions
during the Obama Administration.
And Mr. Shelton Shoemaker serves as the Deputy Inspector Gen-
eral for the SBA’s Office of Inspector General. He has been with
OIG since 2011. He served in numerous positions at that agency
before assuming his current role.
As the Deputy Inspector General, he serves as a principal advi-
sor to the Inspector General and assists in overseeing the office’s
operations.
Without objection, both of your full statements will be made part
of the record. You may proceed for approximately five minutes,
leaving time for us to be able to ask questions. We will start with
Mr. Kelley.
TESTIMONY OF PATRICK KELLEY, ASSOCIATE ADMINIS-
TRATOR, OFFICE OF CAPITAL ACCESS, U.S. SMALL BUSINESS
ADMINISTRATION
Mr. KELLEY. Chairman Cardin, Ranking Member Ernst, mem-
bers of the Small Business committee, thank you for the oppor-
tunity to appear here today on behalf of Administrator Guzman
and the Biden-Harris Administration.
I began as the Associate Administrator for the Office of Capital
Access in March of 2021, and as the Chairman mentioned, I have
been responsible for the Paycheck Protection Program, the COVID
EIDL loan program, the Restaurant Revitalization Program, and
now oversee the 7(a) program, the 504 program, micro-loans, and
the Surety Bond Program.
What I want to start first by saying today is for the first two
years of this position, the number one priority from Administrator
Guzman was to take care of the challenges that we inherited when
President Biden took office regarding the CARES Act programs.
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Over the last two years, we have screened 49 million applications
across the CARES Act programs, PPP, and COVID EIDL, as well
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as SVOG, and Restaurant Revitalization, which were part of the
American Rescue Plan.
We have flagged almost 6 million files for suspicious activity, we
have conducted 3.5 million manual reviews, and we have referred
over 3 million instances of attempted fraud in what we believe is
fraud on disbursed loans. Close to 800,000 loans that were dis-
persed and 3 million more that were attempted.
So roughly $40 billion is the fraud estimate that we believe was
dispersed, and $60 billion of attempted fraud totaling $101 billion.
And we intend to support, and our budget reflects that from Presi-
dent Biden, the Office of the Inspector General in their attempt to
go get the bad guys that we have identified.
Since Administrator Guzman took office, we have made every
single piece of data available to the Office of the Inspector General.
Our predecessors sued the Office of the Inspector General and the
public to keep that information private, which I believe created and
exacerbated the issues regarding the allegations and estimates of
fraud.
We have addressed all of the material weaknesses that we inher-
ited, IP static address, failure to check business address, auto-
mated screening, data analytics to determine which supervised
learning models, which prioritized files we need to manually re-
view.
So, I start there because it is important to understand that for
two years, we have, through automated screenings, through data
analytics tools, through manual reviews, referred now 3.5, 3.6 mil-
lion applications to the Office of the Inspector General for them to
go after, and we will continue to work with them on that.
I start there because it is important to understand that the
CARES Act program legacy will not simply be the management
challenges that the Biden-Harris Administration handled, but what
the Biden-Harris Administration did to stop that, to put an end to
it, and then to take from there and make sure it never happens
again.
In our programs moving forward, and I look forward to dis-
cussing all of the issues that Ranking Member Ernst and Chair-
man Cardin addressed, I look forward to discussing how we will
screen in all of our existing programs pre each ran authorization
for eligibility and fraud moving forward.
And I am happy to get into the details of that. We believe that
that is an important step that will be reflected in my colleagues,
Deputy Inspector General Sheldon’s testimony regarding the need
for reviewing borrower and lender certifications so that we never
again go to the point where we are relying on lender or borrower
certifications.
So, the last thing that I will share with my remaining minutes
that I think is important for the members of the committee to un-
derstand and is important for me to share with the rest of the folks
here, my family comes from Manchester, Connecticut.
My parents grew up in East Hartford, which is the home of John
Larson, and my grandmother lived on Mitchell Drive there, and it
was an FHA home, post-World War II. She worked as a clerk in
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a grocery store. My grandfather worked in Pratt Whitney as a fire-
fighter.
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When my grandmother passed away, my mother was in the
house or finishing up the estate, and at a certain point, maybe she
wouldn’t want me to share this, she was cursing a blue streak from
the kitchen. In these houses, and for the kids here that don’t re-
member, there were phones with cords, extension cords that would
go throughout.
And my mother was cursing a blue streak because she learned
that my grandmother was leasing her phone, the phone on the
wall, from the phone company. That phone company had taken ad-
vantage of my grandmother and cost her money that that Social
Security check was precious.
So, I remember this vividly, and I understand what our responsi-
bility is to go after charlatans in the financial markets. And I have
spent a career working on those issues, and I look forward to han-
dling all the questions today and working with the committee as
we move forward. Thank you.
[The prepared statement of Mr. Kelley follows:]
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The CHAIRMAN. Mr. Shoemaker.
TESTIMONY OF SHELDON SHOEMAKER, DEPUTY INSPECTOR
GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. SMALL
BUSINESS ADMINISTRATION
Mr. SHOEMAKER. Thank you. Chairman Cardin, Ranking Mem-
ber Ernst, and distinguished members of the committee, thank you
for the opportunity to be here before you today on behalf of Inspec-
tor General Ware.
IG Ware currently is part of a high-level delegation to promote
law enforcement partnerships with foreign counterparts in further-
ance of rooting out fraud in the pandemic response programs.
I am honored to represent the dedicated men and women of OIG
and their hard work as this committee examines SBA’s implemen-
tation of two recently finalized rules. SBA’s final rules rescind the
moratorium on new SBLC licenses, remove requirements for a loan
authorization, and remove control as an element of affiliation,
among other various regulatory changes in the 7(a) and 504 loan
programs.
OIG provides independent and objective oversight of SBA’s pro-
grams and operations. In doing so, our office provides recommenda-
tions to SBA leadership to improve the performance of SBA’s pro-
grams and services for the benefit of the American people.
SBA 7(a) lending program provides financial assistance to small
business in the form of Government guaranteed loans. SBA’s lend-
ing partners in this program where the basis of the Paycheck Pro-
tection Program, which delivered vital financial assistance through
the lending partners to mitigate economic damage resulting from
the pandemic.
There has been no higher priority for our office than providing
oversight of the pandemic response. In the past two years alone,
OIG’s work has resulted in an exponential return on investment to
the taxpayer, which is valued at more than $9 billion.
In doing so, we have published 49 reports. Our work also has
played a major role in the return of more than $30 billion in pan-
demic relief funds from borrowers and financial institutions.
This work and our decades of oversight of the lending programs,
affirms SBA must take deliberate and intentional steps to design,
implement, and operate an effective internal control system as it
lifts the moratorium on new SBLC licensors and as the Community
Advantage SBLC into the 7(a) program.
When SBA placed a moratorium on approving SBLC licenses in
1982, it did so to reduce the administrative resources needed to
prudently regulate and oversee nine depository lenders with a na-
tionwide 7(a) lending platform.
As recent as 2020, SBA stated in its rule aimed at the supervised
lender application process, that it does not have the administrative
resources needed to increase the number of SBLCs beyond 14 or to
oversee their participation in a nationwide 7(a) lending platform.
Such concerns are well founded, especially in context of increased
risk that are associated with lending authorities available within
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a 7(a) program, which presently are not authorized by the Commu-
nity Advantage pilot program.
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Concerns also are present in context removal of loan authoriza-
tion during loan origination. OIG’s white paper on risk awareness
and lessons learned from prior audits of economic stimulus loans,
which was offered by OIG at the outset of the pandemic response,
sought to inform the policy decisions in implementing the Paycheck
Protection Program.
Among the considerations in this white paper was for SBA to
issue clear requirements and ensure timely communication to lend-
ing partners. Clear guidance and program requirements following
the current rulemaking will enable lenders to participate in the
programs with confidence that guarantees are secure if terms and
conditions are met.
I have offered additional insights on risk in my written state-
ment that are based on our prior work. We believe appropriate con-
sideration should be given to mitigating this risk as SBA imple-
ments these rules.
Solid rules and regulations, strong internal controls, and effective
process for oversight and monitoring can mitigate risk and lead to
efficiency and effectiveness. Technology also can be a powerful tool
in establishing a robust internal control environment for program
management, for responsibilities of monitoring oversight, and for
regulatory enforcement.
Such efficiencies can augment limited resources. However, tech-
nological tools can be limited by availability of essential data. To
effectively employ artificial intelligence, comprehensive data must
be available and be current.
It is vital where data limitations exist, the internal controls also
are not absent and are calibrated in a manner that provides nec-
essary assurance. OIG has an established track record of providing
oversight at the inception of new programs, such as the State trade
expansion program.
The transparency afforded by our work and our well-founded rec-
ommendations for corrective action improve program delivery to
the nation’s small businesses. The nation once again could depend
on OIG to provide independent, objective, and timely oversight of
SBA.
Thank you for the opportunity to speak with you today. I am
happy to answer any questions you may have of me.
[The prepared statement of Mr. Shoemaker follows:]
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The CHAIRMAN. Well, let me thank both of you for your public
service. Thank you very much for being here. And thank you for
the role you are playing on behalf of small businesses.
Mr. Kelley, I appreciate your testimony in regards to going after
those who have committed either fraud or mistake. That is some-
thing that was really the subject matter of our last hearing. This
hearing, the subject matter of the two rules that have been promul-
gated.
And I am somewhat disappointed that your statement doesn’t
really address that rule. It is more dealing with the fraud issues
than it is the rule that is before us on this hearing.
So let me try to drill down a little bit. This rule is going to take
effect in two weeks. When do you expect the SOP to be available?
Mr. KELLEY. I think our deadline right now is May 3rd, or in and
around that date.
The CHAIRMAN. And can you tell me why the rule? How do we
guarantee that we are going to see loans to small businesses,
smaller loans? How are we going to guarantee that the CA lenders
are concentrating in underserved communities?
How are we going to assure CA lenders are borrowers of the cost
of the loans or the underwriting rules? I don’t see that in the rule
itself.
So, if I am a CA lender, what confidence do I have that this pro-
gram is really geared towards my mission, which is to provide help
in underserved communities and smaller, or small loans.
What assurance do I have that someday it won’t be turned over
to the larger loans, as we saw what happened with the 7(a) pro-
gram?
Mr. KELLEY. So first, as Administrator Guzman did share with
you and we shared with staff, we intend to put in the SOP and you
will see reflected the 60–40 rule that was reflected in the Commu-
nity Advantage Program guide.
We have also discussed with your staff your bill, the Cardin-Chu
bill calls for a 70–30 ratio. One of the reasons that Administrator
Guzman did not put a 60–40 requirement into the rule is because,
as she shared with you and members of the committee, the current
definition of underserved does not include women or minorities.
And so, any definition of underserved, I think in the room, would
include those two bodies, most especially since African Americans
represent 12 percent of the population, they represent 41 percent
of sole proprietors, and they see 2 percent currently of 7(a) loans.
And so, for example, when my counterpart here in the private
sector, Hilda Kennedy, testifies of her lending in California, if her
shop wanted to focus on meeting that underserved gap regardless
of income level, she would not be able to focus exclusively on that
as a mission-based lender. And it is the same for women who are
underrepresented as well in the seven loans for the same thing.
The CHAIRMAN. So, I am a bit confused. You are saying you
didn’t want to put anything in here to protect the mission and to
the rule itself because basically court concerns about target groups.
So, we have had a program that has been successful. The CA
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program has worked with the guidance on a percentage of loans in
underserved communities, and you are throwing that out and say-
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25
ing we are not going to have anything in the rule but trust us. Is
that what I am hearing from you?
Mr. KELLEY. No. That is not what you are hearing. So, in the
7(a) program, all lenders make 50 percent of their loans to the cur-
rent definition of underserved.
So, the current definition of underserved is rural, low to mod-
erate income, hub zone startup, those businesses in business less
than two years, and veteran owned businesses. So regardless of
lender type, regardless of loan size, roughly 50 percent of the
loans——
The CHAIRMAN. Which is not in this rule, is it?
Mr. KELLEY. I am saying you are correct. It is not a requirement
of the rule. And yet every year the lenders, through their lending
activity by nature of the——
The CHAIRMAN [continuing]. But that is the pilot program—that
is the CA pilot program.
Mr. KELLEY. Correct. But the—what I am explaining is that if
you did not have a 60–40 percent threshold in the Community Ad-
vantage program like we do not have in the 7(a) or the 504 pro-
gram, when the lenders are making their loans, the outcome, the
outcome of the loans, the standard 7(a) express 504 loans ends up
meeting the underserved definition that is defined in the Commu-
nity Advantage, 50 percent.
What is better in the Community Advantage Program is the
loans to women and minorities. But in that definition, they do not
get credit in the 60 percent threshold of meeting that 60 per-
cent——
The CHAIRMAN. But they are meeting—look, the communities—
the Community Program is working. We have the 60 percent and
we also have the penetration to the target groups who would like
to get the loans. And the loans are also smaller dollar amounts and
are also costing less. But none of that is in the rule.
Mr. KELLEY. Yes. So, as I explained to you, and Administrator
Guzman explained to you as well, we are putting that 60 percent—
40 percent threshold in the SOP. Each lender is responsible for
executing the form 750.
The first line or first two sentences of that form, the form 750
requires that the lender comply with all statute, all regulation, and
all SOP guidance regarding the rules.
The CHAIRMAN. What assurance do I have as either a lender or
a borrower about the cost of a low—a small loan which is competi-
tive under the CA pilot program but not necessarily under 7(a) pro-
gram? What assurance do I have on costs? Is there something in
the rule that I haven’t read?
Mr. KELLEY. When—so are you referring to rate and fees of a
7(a) loan or are you referring to the capital requirements, the fidel-
ity insurance requirements?
The CHAIRMAN. I am really referring to both, but right now I am
talking about the cost of processing.
Mr. KELLEY. Okay. So historically, Community Advantage lend-
ers have always enjoyed a higher interest rate than standard 7(a)
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lenders. Most recently, we promulgated rules to standardize that
for all lenders. And so——
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26
The CHAIRMAN. Is there something in this rule that I can look
at that says that we are protecting the 7(a) CA program on costs,
processing costs?
Mr. KELLEY. Yes, so——
The CHAIRMAN. It is in the rule?
Mr. KELLEY. So, the rates themselves are in——
The CHAIRMAN. Processing costs, I am talking about.
Mr. KELLEY. Yes. Okay. So, then that is the fidelity insurance
and capital requirements and loan loss reserves. So, for example,
in the Cardin-Chu bill, you do not call for a capital requirement
threshold or a fidelity insurance threshold. So let me explain——
The CHAIRMAN. Are you supporting the statutory approach of our
legislation?
Mr. KELLEY. We are absolutely—we were directed by Adminis-
trator Guzman to, after working with your staff on Build Back Bet-
ter regarding making Community Advantage permit, to look for the
areas where your bill could direct us in a way that would make the
Community Advantage program stronger.
So, for example, in your bill you call for a 5 percent threshold
for the loan loss reserve requirements, which allows for over 36
months of performing loan performance for that loan loss provision
to come down.
The CHAIRMAN. Are you supporting us statutorily passing legisla-
tion to make permanent CA program similar to the legislation that
has been—was filed? Are you supporting a statutory approach or
not?
Mr. KELLEY. I would support anything that helps Community
Advantage lenders with their mission.
The CHAIRMAN. I will take that as a yes. Senator Ernst.
Mr. KELLEY. Good.
Senator ERNST. Mr. Chair, Senator Risch does have another com-
mitment, so I will yield my time to him.
Senator RISCH. Thank you, Mr. Chairman and Ranking member.
First of all, I was hoping Ms. Guzman herself was going to be
here because I wanted to thank her and congratulate her by accom-
plishing something that is very, very seldom done around here, and
that is bringing Republicans and Democrats together to oppose
what they are doing on this thing. This is a disaster in the making.
What shocked me was—I mean, we were treated like chopped
liver around here. Guzman told us, oh, they are going to pay close
attention to the concerns that we have. And less than just ten busi-
ness days later, they announced that the rule was moving forward
without any consideration of what this committee input that is put
in here.
Look, the financial industry—if you were in front of the Banking
committee, I think they would be taking your head off here. The
banking industry, the financial industry needs really close over-
sight regulation.
I am no fan of Government regulation, but when it comes to fi-
nances, this country has learned over and over and over again with
the banks—start with the savings and loans disaster that we had.
If we aren’t looking over the shoulder of the lenders, this is a dis-
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aster waiting to happen. And that is exactly what you are doing
bringing the fintechs in here.
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27
We certainly should have learned this from the PPP program. All
of us knew when we voted for that, that it was—we were taking
a chance because of the know your customer was going to be out
when there were too many customers. And that is exactly what you
are headed for here. I would hope that you back up on this.
I suspect you are going to be facing the CRA if you don’t. Prob-
ably a bipartisan CRA if this regulation comes down the pike. But
you know, the—one of the things that struck me is you are Fiscal
Year 2022 goal for 7(a) loans to underserved markets was how
much? 43 percent. Do you know what the actual production was on
it? It was 68 percent.
So, there is no failure here. I mean, you far exceeded the goals
of what you were trying to do. So, I am not sure who the geniuses
that brought this up, but I wish you guys to take this back to the
drawing board and listen to us. I think Senator Cardin is right.
I think, you know, we trust the agencies generally to do the
kinds of things that we don’t have time to do. It looks to me like
we are going to have to take the time to do this, and I agree with
you, Mr. Chairman. I think this is going to take a statutory answer
to this.
I have some very specific questions for the record, and if it is
okay, I will submit those, Mr. Chairman.
The CHAIRMAN. Certainly. Thank you. Senator Hirono.
Senator HIRONO. Thank you, Mr. Chairman. I take it that the
concerns being expressed by my colleagues regarding these new
rules also have to do with whether or not there are enough protec-
tions in the new rules to guard against fraud. Is that correct, Mr.
Chairman?
So, Mr. Kelley, what is in these rules that is different from what
happened during the CARES Act provision, which, by the way, we
did not—it is not as though Congress put in a lot of resources for
SBA to do this stuff. We just sort of said, here, go and do it.
So, in these new rules, what kind of anti-fraud measures are in
the rule, briefly?
Mr. KELLEY. So, the moratorium allows a lender to participate in
the 7(a) program. And as such, they comply with all the statutes,
regs, and SOP related to 7(a) loan.
So, for example, what was different—what is different about a
7(a) loan than a paycheck protection loan program? First off, there
is underwriting. Second, there is collateral.
Third, there are personal guarantees for any owner of 20 percent
or more. And then what I indicated in my testimony and the rea-
son I began with the CARES Act programs is because I wanted the
committee to understand one of the major lessons that we did take
away at the agency from the challenges that the Biden-Harris Ad-
ministration inherited with respect to fraud in the CARES Act pro-
grams, and that was that if we need to do speed and certainty
both, not just speed.
And certainty requires that we put in place systems that will
screen automatically before we disburse the money. The notion
that you can go get the money after it goes out the door was never
a real strategy.
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So, what we are also putting in place with this SOP for the first
time is for all delegated loans, all non-delegated loans, any loan
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28
that is going to be originated across 7(a) and 504 and we did this
in PPP three, we will be screening 19 different categories of eligi-
bility and fraud.
And if there are alerts and flags, which there were in POP three
and there were in COVID EIDL, then we will move to determine
whether there is a false positive, meaning it was an error and the
person can move forward and demonstrate that that was a false
signal.
Or if not, we will prevent that from moving forward. And what
that addresses in the audit reports that we share and that they
provide feedback for us, is the notion of improper payment related
to ineligible loans or reasonable reassurance of repayment.
Senator HIRONO. So, Mr. Kelley, you are telling me that there
are many checks, many more checks than that were in place during
the whole PPP and EIDL and those programs, because we directed
you to put all this money out there in the community during a very
challenging time for our small businesses. Is that correct?
Mr. KELLEY. Yes, it is.
Senator HIRONO. It sounds like. Okay, good. Then, did I hear you
say that the definition of underserved do not include women and
minorities owned businesses?
Mr. KELLEY. Correct.
Senator HIRONO. So that is a change, isn’t it, that you are mak-
ing?
Mr. KELLEY. No, it is not—it is not a change. It is never in-
cluded. It has never been included.
Senator HIRONO. Why wouldn’t you include minority owned busi-
nesses as underserved in the underserved group?
Mr. KELLEY. The agency under the Obama Administration, when
we created the Community Advantage program in 2011, deter-
mined that using class, race, and gender as a differentiator would
not be considered Constitutional.
Senator HIRONO. Has that been tested in court?
Mr. KELLEY. Well, we were sued, as you know, in the Restaurant
Revitalization Program, where we had economically and socially
disadvantaged and women as a priority applicant.
And two injunctions were issued by two different courts. So, it
has not been directly tested because we have not included it, but
it was tested in the Restaurant Revitalization Program. And that
is one of the reasons that you do not see in the definition.
So the point I was trying to make to Chairman Cardin—I didn’t
do a good job and I know we are in align on this, but I am doing
a bad job communicating, is that when we think of my friend back
here, Hilda Kennedy, who is going to testify in the next panel for
Accion, for the other guy, their focus is in these marketplaces, rural
women, minority borrowers.
And from the Administrator’s perspective, she does not believe
that mission-based lenders are going to forget their mission when
they go to lend. And she wants to make sure that they are not ever
in a position where they are non-compliant with our threshold be-
cause they want to originate 100 percent of their loans for women,
for example, women entrepreneurs.
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Senator HIRONO. So, I understand that you do have some legal
concerns, but when we are talking about wanting to expand access
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29
to capital for minority owned businesses, that speaks—that says to
me, you obviously have information relating to black owned busi-
nesses.
I would like to know whether you have any data on hispanic
owned businesses, Asian-American businesses. There are thou-
sands of small businesses in these categories, but you are saying
that you have a concern about keeping track of the kind of loans
that are made to these groups of businesses, of which there are
thousands, and they are not all in hubs or all in rural areas, or
whatever other categories you have.
Mr. KELLEY. Yes. So, what I am saying is, is that that data today
is—has always been voluntary.
The CFPB 1071 rules that have just been passed, which to my
friend from Idaho with respect to the Banking committee, the
banks were not in favor of 1071 for reporting, right, but that is a
rule that is going to give us transparency on this very issue.
And the further point that I am trying to make for Administrator
Guzman is that because there is a question of Constitutionality in
the minds of the Biden-Harris Administration, the Trump Adminis-
tration, and the Obama Administration, three different Administra-
tions that kept the Community Advantage Program alive and did
not include those definitions that, we think we might be under-
mining the mission based focus on race and gender, which we to-
tally agree violently agree that is where the true gap is.
So, this would be, to Chairman Cardin and Ranking Member
Ernst, in their desire to pass a law to make Community Advantage
permanent. If Congress wants to make the underserved definition
to include race and gender, which, for example, we worked with
Senator Cardin’s staff on Build Back Better, it would have, then we
will implement the law as it is passed.
But from the standpoint of the beginning of the Community Ad-
vantage Program to now, that definition has not included those.
Senator HIRONO. Okay. Thank you, Mr. Chairman. I think you
should think about including race and gender as factors.
The CHAIRMAN. Senator Ernst.
Senator ERNST. Thank you, Mr. Chair. And as you can see, there
is a lot of concern across the board about our discussion at the last
hearing and the issues that were raised by the Senators on this
committee.
I know there are concerns in the House as well about the issues
with the rules, and yet no changes were made to those rules. So,
Mr. Kelley, I am concerned you started making calls to stake-
holders to garner support for these rules when you noticed that
they weren’t receiving support.
At any point during the rulemaking, did you conduct outreach or
have discussions with stakeholders that was not made public and
part of the rule’s records, yes or no?
Mr. KELLEY. The—did we conduct outreach? Yes, we made all of
the folks available—all the folks aware that the rules were avail-
able. We conducted staff meetings with Senator Cardin, for exam-
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ple, with members of different Community Advantage working
groups.
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30
There was various, Now CAB, other groups as well who provided
feedback. And then that feedback was reflected in the public writ-
ten record as it was put forward.
Senator ERNST. So, okay. So, you did have discussions with
stakeholders and it was made public.
Mr. KELLEY. Yes, I believe so.
Senator ERNST. And part of the rules record?
Mr. KELLEY. I believe so.
Senator ERNST. Did you make any promises or commitments con-
cerning the standard operating procedure documents or agency pro-
cedural notices in order to garner support for these rules, yes or
no?
Mr. KELLEY. In order to garner support, no.
Senator ERNST. Will you provide the committee with copies of
your schedule, phone logs, and email communications during the
rulemaking period.
Mr. KELLEY. I will do that—as you know, all of that information
is the agency’s property and working with the committee, you can
submit a request——
Senator ERNST. So, yes.
Mr. KELLEY. But I think for full transparency, as Senator
Cardin’s staff understands and knows, and as we have alluded to
in these discussions, Administrator Guzman had discussions, as is
mentioned, with all of members of the committee regarding the
rules and the feedback and regarding the public comments that
had come in.
And we discussed the public comments that were in the public
record with various members about their concerns and their ques-
tions to amplify whatever they had already raised in the public
record.
Senator ERNST. Okay.
The CHAIRMAN. I just want to point out, I am not sure Mr. Kelley
can fully answer that question. These are legal issues that I would
want the SBA to be able to work with us to get the information
that we need. So, I recognize that is a question that may not be
under your specific decision making.
Senator ERNST. I would also—thank you, Mr. Chairman. And I
also would want to know, of course, if there were discussions with
stakeholders outside of Congress as well.
Moving on from that, the SBA under your direction ended debt
collections on $1.1 billion worth of unforgiven PPP loans under
$100,000, and according to the Inspector General, is planning to do
the same with about $71 billion worth of COVID emergency dis-
aster loans, or the EIDLs.
So, I sent a letter to Administrator Guzman on this EIDL deci-
sion, and I did receive a response, but I consider it an insufficient
response. And that response came this morning, conveniently today
as you are testifying. The letter failed to answer any of my ques-
tions.
So, let’s make sure we are setting the record straight, Mr. Kelley.
Is SBA going to pursue debt collections on EIDL program loans
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under $100,000? And have you reached out to every borrower to
confirm their ability to repay these loans?
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Mr. KELLEY. Yes, we have. And I would like to clarify this, too,
because it is important that we don’t mislead borrowers. Every sin-
gle borrower of PPP loan and every single borrower of a COVID
EIDL loan must repay the loan.
If they do not repay the loan, they were referred to credit bu-
reaus. If they do not pay the loan, they are referred to Treasury,
do not pay. The decision we made with the law—the law calls for
the agency to make a cost benefit analysis for instances under
$100,000, where the cost of administering the Treasury offset
would be higher than the recovered dollars.
And we looked at the costs, which it was estimated to cost about
$6 million to collect $3 million on that $1.2 million—or 1.2 billion
or 77,000 PPP loans. And that is because when we took a more
conservative loan portfolio snapshot, we took 2009 to 2022, loans
that had been underwritten, loans that had personal guarantees,
loans that had all available collateral but could be unsecured, and
we looked at what Treasury offset wage garnishment had collected,
in that 13-year period, had collected $65,000.
We had no personal guarantees. We had no underwriting. We
had no collateral. These were all by design. These were not bugs.
These were features of these programs. And so, after someone has
not made repayment and the lender has taken the servicing and
liquidation action that they can take, they seek purchase.
And when we estimated the cost of pursuing Treasury offset, or
TOP, it would cost us more than the money we would collect. And
that is why we opted to stop that so that we didn’t waste $3 million
of taxpayer money.
Senator ERNST. Mr. Kelley, I don’t think it is a waste to ask
Americans to repay loans that they signed——
Mr. KELLEY. We are asking them to repay. We are not—we are—
I want to make this really clear. We 100 percent, I want everyone
watching at home on C–SPAN, you must repay your loan.
If you do not repay your loan, if you do not seek forgiveness, inci-
dentally, if you miss 60 days of nonpayment in the PPP Program
by design, ratified by the Economic Aid Act, you still have up to
five years to come back and seek forgiveness.
So, we would be referring to Treasury debt. You are then allowed
to have an administrative hearing as a member of the public re-
garding that before that wage offset kicks in.
That costs the agency $700,000 in fees. You then can seek for-
giveness for which under $100,000, by law, under the Economic Aid
Act, you need to submit a one-page form to the lender who then
services the forgiveness decision.
So, repayment is 100 percent required. We will put them in
Treasury do not pay, which means that they are barred from seek-
ing any other aspect of Federal programs until they make the Gov-
ernment whole on that.
They are referred to the credit bureau, so their credit score goes
down and we should make a distinction as well. If anyone is an
LLC, s-corp, or c-corp and they borrowed money, less than
$100,000, they can enter into bankruptcy. And because the pro-
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gram did not require any personal guarantees, they will be dis-
charged.
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32
And because we are in subordinated position as a result of the
program, we don’t have any standing in order to recover anything
from the senior debt holders. So, repayment is absolutely required.
We are doing everything, as are the lenders, to get repaid.
We have forgiven 10.6 million out of 11.4 million PPP loans to
date. And as you know, the taxpayer already gave 103 cents on
every PPP dollar to either be used for purchase or for forgiveness.
So, the only step that we are foregoing seeking is where we are
going to lose $3 million more dollars of taxpayer money.
The signal is not that we are telling you not to repay. We are
absolutely telling you repay. But when we decided as a country,
Congress and the Executive Branch, that we were going to provide
emergency relief and we weren’t going to require any of the safe-
guards that are normally associated with these loans, that was
going to impact our ability to collect on the back end, which is why
the subsidy rate was 103 cents to 100 cents.
So, it is important that we will absolutely seek repayment.
Senator ERNST. Well, and I know we need to move on, Mr. Chair,
but I think the message is out there, though, that we are not doing
everything we humanly can. We would rather not spend the $3 mil-
lion. It is just like the charlatan that went after your grandmother
on the phone issue——
Mr. KELLEY. That person got away. In the case of the PPP pro-
gram, we have identified the folks that either attempted fraud or
committed fraud and we have referred them to the IG so that we
can all go get them. That is the distinction.
Senator ERNST. Thank you. And we will go ahead, Mr. Chair.
The CHAIRMAN. Thank you. Senator Hickenlooper.
Senator HICKENLOOPER. Thank you, Mr. Chair. Associate Admin-
istrator Kelley, nice to see you again. I know that the SBA is only
adding three additional SBLC licenses at the moment on top of the
14 licenses successfully managed for 30, 40 years, I guess, as part
of its rulemaking.
However, many of the comment letters on the SBLC’s final rule-
making have argued that removing the moratorium completely
risks the—risks letting too many firms into the program for the
SBA to be safely able to manage it.
Are you willing to commit to only adding additional SBLC li-
censes once and only after the SBA has conclusively demonstrated
it can provide appropriate oversight of the new SBLCs?
Mr. KELLEY. Yes. So, we indicated the reason that we didn’t, and
we indicated this in the proposed rule, and that we felt we had the
capacity to take on three additional lenders.
And I think what is important to understand is that in the 40-
year history of the SBLC licenses, there has been 14 licenses.
Those licenses have been available for sale for that entire 40-year
period and have transferred 61 times.
Each time there is a transfer, you need to—the buyer and seller
need to apply to the SBA. There is a process written out in the
SOP in the standard operating procedures. It has been there. It is
not changing. It is not going anywhere.
You apply when the application is reviewed. So, when we look to
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see whether the buyer should be approved from the seller, we look
at the safety and soundness.
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33
We look at their portfolio history. We look at their business plan
approach. We look at whether or not they comply with all of the
rules that they need to comply with as an entity. So, for example,
State user laws. We look at Bank Secrecy Act and those types of
things.
So, all of those things are put into consideration today that was
in existence when we were growing the Community Advantage pro-
gram up into the moratorium.
And that program, the high water mark of that program was 130
entities. It dropped down post moratorium through attrition to the
low nineties and has since moved up to 108 entities.
So, when we looked at the existing capacity, we looked at the
oversight headcount. We see exactly what you see. Administrator
Guzman, I, we all share the same concerns. We looked at the fact
that we had the capacity under the ceiling and we set it at three
because we understood clearly that we were going to be doing
something different.
But we should make no mistake about the following either. And
I think it was a great point that Chairman Cardin and Ranking
Member Ernst brought up. You know, how do we know that these
lenders will make small dollar loans or how do we know that these
lenders will fill the gap?
Why are we not asking the same of the lenders who have partici-
pated in the program for years? We have not—we have not been
called on to require a quota for any of the banks or credit unions.
Credit unions make 500 loans a year in the SBA program, and
yet there are north of 5,000 institutions out there. In the 90s, cred-
it unions explained, against the bank wishes, that they were going
to grow access to capital by serving underserved needs, and yet
their average daily balance to high-net-worth individuals has
grown.
So, each time we look at these institutions, we are keenly aware
that the lending intermediaries that we work through can make
choices. But I don’t know why we are limiting ourselves to being
concerned about the lenders who in the marketplace are showing
time and time again that they have created a comparative advan-
tage.
They think their business model is competitive and we are going
to give them a conforming product, a product that has transparent
terms, better amortization periods, better rates, better fees, and
that is the only thing that they can originate.
And as I said in my opening testimony, we can screen now, prior
to each brand authorization, with digital tools, we do random au-
dits of those files every time they file.
So, to Ranking Member Ernst’s concern, every time they make
a bad loan, and Deputy Inspector General can echo this, if they
make a bad loan in less than 18 months as an early default, it is
referred to the Inspector General as well as us, and we look to re-
pair and deny the guarantee.
So, I think that we—I just want to make everyone aware that
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we completely agree with all members, bipartisan, that this is a
thing that has to be taken soberly, has to be taken seriously.
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34
And we believe that we have systems that we have developed
over time that can support that. And yes, we are going to move
slowly. We are going to move judiciously to get it right.
Senator HICKENLOOPER. Good. I think the question, which I
think you have answered, is that we want to make sure that there
that we are not losing anything in the transition, and that some-
how the having the barn door open a little bit isn’t going to lead
to some level of, you know, uncontrolled transformation.
And I am that is not a worry of mine. I think that you have dem-
onstrated that you have the capacity to administer the program
properly and that you are going to do so cautiously and expedi-
tiously. I yield back, Mr. Chair.
Senator SHAHEEN. Thank you. Senator Budd.
Senator BUDD. Thank you, Chair. Again, thank you both for
being here. Mr. Kelley, I want to go back to a previous conversation
you had with Chairman Cardin. Can you clarify of the 60, 40 split
in the SOPs that applies to all lenders or just the SBLCs?
Mr. KELLEY. So currently right now, the 60, 40 requirement is
in the Community Advantage program only.
And so what I shared with Chairman Cardin, now I will repeat
for you, Senator Budd, is that roughly 50 percent, right, in a given
year of 7(a) loans and 504 loans, regardless of size and regardless
of lender touch, the definition of underserved—and the definition
of underserved includes low to moderate income, hub zone, startup,
those businesses in business less than two years, and veteran
owned businesses, and rural.
Senator BUDD. So that is 50 percent?
Mr. KELLEY. That is roughly 50 percent. Yes, there is—give or
take. And so, my point to Chairman Cardin was that if minorities
are seeing less loans or women are seeing less loans, then the cen-
sus track is demonstrating that they are sole proprietor.
So sole proprietors, as you know, seek smaller dollar amounts,
right, by definition, right. And so, if those types of entities
overindex, which they do in the census track, to minorities and
women, and we are not seeing—when we are seeing a five-year de-
cline of like 45 to 50 percent in terms of small dollar lending, then
the outcome that is created by that, right, is that you are going to
see less loans, right.
And if those there are less loans to sole proprietors, you are
going to see a disproportionate impact, right, or a disparate impact
on classes that are overrepresented in that type of entity type.
So, our position is that when we are choosing lender inter-
mediaries, the whole point—I was there at the beginning of the
Community Advantage, but the whole point of the Community Ad-
vantage Program was, don’t try to figure out for the private sector
entity how to—figure out the business model.
They have established their business model. They are already
showing you that they have a market niche for whatever their rea-
sons are. That is how they make their money and that is how they
serve their thing.
And in the case of mission based CDFIs, their primary focus is
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often rural, veteran, minority, women, and they have all different
types of strategies.
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35
And so, if we allow them to use the same tool, then they will
reach a customer and they will enjoy the benefit of that tool no dif-
ferent than the bank or credit union that has enjoyed exclusivity
historically.
Senator BUDD. Thank you for that. Mr. Shoemaker, thanks for
being here. You know, some of the rules that have been discussed
today would allow the SBA Administrator to review reconsideration
of denial requests and make a final decision without transparency
or justification.
In other words, it provides the Administrator with the sole power
to grant 7(a) loans or—regardless of the credit creditworthiness of
the loan applicant.
Mr. Shoemaker, should the SBA be required to be transparent to
both borrowers and lenders by providing written justification when
making final decisions on reconsideration of denial requests?
Mr. SHOEMAKER. Certainly, transparency is a key. In regard to
whether or not the Administrator has the authority to do the recon-
sideration, certainly there is always the chain of command that
gets to that level. I believe that is actually already in place, that
she has that ability to make that decision—if you want, but go
ahead—thank you——
Mr. KELLEY. Yes. So, yes, for reconsiderations, we do—so, for ex-
ample, in the COVID EIDL program, all folks that were denied and
were seeking reconsideration received a written justification for,
you know—and we improved in the summer of 2021 the expla-
nations of things that they need to do to cure—yes——
Senator BUDD. Mr. Shoemaker, and follow up if we needed, Mr.
Kelley. Should the SBA Administrator have the authority to force
a lender to provide a 7(a) loan regardless of the credit worthiness
of the borrower, or if the application may be fraudulent or im-
proper?
Mr. SHOEMAKER. Again, the Administrator does have the author-
ity to make the loans. I certainly wouldn’t advocate for a loan——
Senator BUDD. This is about forcing a lender to provide the 7(a)
loan.
Mr. SHOEMAKER. Sure. So, I wouldn’t advocate for a loan that
has any of those poor standards to be put out in the—expose the
taxpayer to that risk.
Mr. KELLEY. And speaking on behalf of the Administrator, no, we
would not want to force a lending intermediary to make a loan that
they don’t want to make.
Senator BUDD. Thank you. I yield back.
Senator SHAHEEN. Thank you. Mr. Kelley, the SBA played a crit-
ical role during the pandemic. I think we could all agree with that.
And the benefits are still out there.
We have seen a record number of new small businesses being
formed over the last two years. But I am concerned that the recent
affiliation rules that the SBA just finalized will allow larger compa-
nies and to your loan programs. So, can you explain the rationale
for that?
Mr. KELLEY. Yes. And I encourage you, if you are able, in the
second panel, Hilda Kennedy is testifying and she is part of a cer-
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tified development corporation, serves on the board of Nabco, which
I am sure you are familiar with as a trade association.
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36
Granite State is obviously a huge player in the 504 program. Be-
ginning in 2011, during the Obama Administration, members of
the National Association of Development Companies came to us
coming out of the Great Recession, this is under the Obama Admin-
istration, and the board said that there are two critical challenges,
amongst others, in the 504 program in terms of being able to do
economic development.
The first was affiliation. The second was the personal resource
test. During the Obama Administration in 2004, we removed the
personal resource test with respect to affiliation. We did not ulti-
mately go forward with the affiliation change.
The reason that affiliation has historically been complicated for
lender and borrower alike is that the concept under the Small
Business Act, independently owned and operated, was viewed as
two separate prongs, so independently owned and independently
operated.
And what we have chosen to do is interpret the regulation as a
non-severable clause, comparable to cruel and unusual punish-
ment, because based on feedback from practitioners, lenders and
borrowers, when you ask a small business owner who owns the
business, the ownership test is key, and what we found is that the
primary driver of size in our programs is determined by the Gov-
ernment contracting and business development size standards,
which set based on the industry standard, either revenue or em-
ployee threshold.
And under that, even counting affiliates, 97 plus percent of appli-
cants are considered small, and that is by design. That is how the
Government contracting, and the lending programs in particular.
In 2010, under the Obama Administration, we passed the law,
the Small Business Jobs Act, and that included an alternative size
standard which allowed for a $15.5 million tangible net worth and
$5 million income test. So, under the lending programs, the size
standard has always enabled folks to qualify.
What was confusing was the subjectivity of the concept of nega-
tive control on how a lender, without lawyers, could review man-
agement agreements that were entered into by third parties.
And so, beyond the size standards, in practice, how this happens
is the biggest inhibitor to large entities getting SBA debt is because
any owner of 20 percent or more has to provide a personal, uncon-
ditional guarantee, and for medium sized entities or publicly traded
companies, that is a do not pass go.
And so that critical requirement, together with the fact that a
credit not available elsewhere borrower, so somebody that is—can’t
find conventional credit, can seek today in the junk bond market
a 9.3 percent total cost of borrowing versus the current rate for an
SBA 7(a) or 504 all in fees plus interest rate, is closer to 11 per-
cent.
Senator SHAHEEN. I have some follow up questions on that that
I would like to get explain, but I will do those for the record be-
cause I am almost out of time, and I have another question that
I am very concerned about. Last August, we talked about staffing
levels at district offices.
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And your—I think your response to my concern was that it was
dependent on the Appropriations committee. Well, I sit on the Ap-
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37
propriations committee, and I want to be clear that I believe the
committee thinks that SBA should focus on oversight of lending.
And the SBA now appears to be able to shift resources to add
staff in order to do that. But while it is doing that, it is also cutting
district offices and small business development centers.
So can you explain the tradeoff there and how we can make sure
that our district offices and the small business development centers
have the resources they need in order to operate, because they are
the ones who really have boots on the ground in our States, who
are working with small businesses.
Mr. KELLEY. I apologize. I am the Associate Administrator of the
Office of Capital Access, and there is a lot of ground that I cover
with the loan programs, the CARES Act programs.
I am not the CFO of the SBA, and I am not the Chief of Staff.
I am not the Administrator, and I don’t make the budget deter-
minations for the Office of Entrepreneurial Development or the Of-
fice of Field Operations.
I also share with you that the district offices, as does the Admin-
istrator, are a valuable resource to assisting lenders and assisting
borrowers, finding lenders, and we work through those 68 district
offices. But I don’t really——
Senator SHAHEEN. So last year when you told me that that was
dependent on Appropriations, you didn’t have the same issues that
you do this year?
Mr. KELLEY. Well, it doesn’t—doesn’t my answer still hold? So,
what I am saying is—what I meant by that is if you—if the appro-
priators disagree with the President’s budget, my understanding is
that they can appropriate money and in different buckets, in salary
and expenses.
And so, all I am trying to say there is that I don’t have the abil-
ity to move money around at the agency. And I don’t have—obvi-
ously, I am not a member of, I don’t have the ability to appropriate.
So that is what I meant by that.
Senator SHAHEEN. Well, thank you for that clarification. I can as-
sure you that I will be advocating that we adequately fund district
offices and small business development centers.
And I hope you will take the message back to the leadership at
the SBA that this is a priority for the members of this committee
and I believe for most of the members of Congress, because they
are the folks who actually are working at, they are working with
small businesses.
And while we appreciate the support structure that the office
gives to those offices, I don’t think it ought to be a tradeoff that
that we should take the operating expenses away from them so
that work can be done in Washington. So, thank you, Mr. Chair-
man.
The CHAIRMAN. Well, Senator Shaheen knows I strongly support
the point that she is making. I think this whole committee does
service in the community, and our States are the bedrock of the
link between small businesses and the services that we can help
provide.
Mr. Shoemaker, the fact that no one asked too many tough ques-
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tions of you, you should take that as a compliment. Just want you
to know that I do hope, though, that there will be a working rela-
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38
tionship between SBA and the IG in implementing any expansion
of supervision over lenders.
There is a concern about the resources, and I would hope that
the Inspector General would work with the SBA to make sure
there is adequate personnel to handle whatever responsibilities,
whether it is under this new rule or legislative legislation that we
pass in Congress.
So, I heard you make that offer of help during your testimony.
Just want you to know that we are going to be requesting that you
keep us informed as to your observations.
And Mr. Kelley, I have asked this question before of the SBA,
and I always get a positive answer that you always want to work
with the IG and you are willing to accept their recommendations
and try to work in a cooperative spirit and let the record show you
are shaking your head affirmatively. And then lastly, let me just
point out, that on mission lending, the CA program has mission
lenders.
Now, I have confidence in mission lenders, I do, but we have a
60 percent requirement in there and it has worked. The CA pro-
gram has a record of exceeding twice as many loans in minority
small businesses than the CA—than the 7(a) program. So, they are
reaching these groups that we cannot specify because of legal chal-
lenges.
So, my concern is whether the rule itself will preserve mission
lenders. And without being specific, I see the larger loans and the
larger lenders may be consuming the mission lenders because they
don’t have the same type of volume and profit that the larger lend-
ers have.
That is my concern, that they could be consumed without protec-
tion built into the program.
Mr. KELLEY. Yes, so I think it is totally—I share and as does the
Administrator, and it is a totally legitimate concern that we all
care about producing a better set of outcomes than historically we
have.
And what I want to underscore is, as Administrator Guzman in-
dicated to you, we intend to preserve the 60, 40 percent threshold
in the SOP. Your bill called for 70, 30, as we have indicated to staff
in conversations that we have had—as she did.
That might be the right threshold. There are other elements of
your bill, for example, with respect to cost that made total sense.
And we are putting into the SOP as well. So today the loan loss
reserve requirement in the Community Advantage program is 10
percent.
We are putting 5 percent. And I do want to clarify something.
There was a lot of comment, public comments in the rulemaking
about requiring capital requirements for CA SBLCs and requiring
fidelity insurance for SBLCs. That was part of the 100 comments
that you are talking about. That was not in the proposed rule.
We did reflect in the final rule the authority for the Adminis-
trator, that the person that holds my office or a designee, the right
to set those thresholds, as we do in the for profit SBLCs.
And the reason that we created a separate class was to build off
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of the 13-year pilot where we provided a temporary license, which
part of what we waived was the moratorium in that program.
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39
And those lenders can’t afford, quite frankly, the liquidity to
meet the $5 million threshold that the for profit SBLCs are require
for capital, as you know, and the fidelity insurance, which is $2
million and then goes up from there.
The CHAIRMAN. So, lastly, let me mention the affiliation rule and
my concern.
Mr. KELLEY. Sure.
The CHAIRMAN. And that is, with the determination of affiliation
now being primarily made by the borrower and the lender, rather
than the SBA, my concern is that you are liable to see large enti-
ties through the use of affiliations that they really control.
They may not have the ownership technically because they can
do that through a lot of different mechanisms and policing financial
mechanisms with the right to foreclose.
My concern is that are we now going to be seeing more of the
resources at SBA going to the larger small businesses rather than
the smaller or small businesses, and maybe to businesses that are
well beyond the size limitations through the use of affiliation?
It is an issue that has me greatly concerned because I know that
you always had the ability to audit, but I don’t see, as we have
seen before, it is not easy to catch this after the sources are out.
Mr. KELLEY. So, totally, totally agree. Historically, eligibility has
been a borrower certification on the form 1919. There is a question
regarding affiliate—affiliation, for example.
There are subsequent questions to that. And then the lender was
required in all but the franchise area to be responsible for deter-
mining whether eligibility had been met. And as is indicated, there
have been instances over however many years there have been
audit reports that there have been lenders who have approved in-
eligible loans.
And those ineligible loans are, if they default, if they default in
less than 18 months, they are referred to the Inspector General. If
they default beyond that, right, we have the ability to repair the
guarantee, lower the guarantee, or outright deny it based on the
error.
The only instance where eligibility was determined prior to—
from 2018 to 2023, a franchise business model could prevent—could
present the franchise or agreement, and an attorney at the SBA
would review that franchise or agreement for two reasons, affili-
ation and ineligible business model.
There are 212 instances from 2018 to 2023 where the businesses,
the franchisee was disallowed based on ineligible business model.
So, what we are putting in place, and this is what I opened with,
and I apologize for starting with CARES Act, but what we were
able to do beginning in Biden-Harris was put in 19 automated
screening filters, which involves NAICS codes, affiliation, business
address, those type of——
The CHAIRMAN. But here is the change. The changes—you have
changed the standards on affiliation as well as not having a reg-
ister.
And when you change the ownership and control issues, it makes
it easier for a large company through very sophisticated agreement
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to control a franchise but still be able to claim that they are inde-
pendent for the SBA loan.
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40
That is my concern, and I don’t think you are going to be able
to pick it up under the way you are doing. Let me recognize Sen-
ator Ernst for any comments she wants to make, or questions.
Senator ERNST. Yes. Thank you, Mr. Chair. And I do agree we
have seen troubles with the affiliation rules in the last couple of
years, so I would rather not revisit that.
As we move forward, we need to make sure we are getting it
right. So, yes, I don’t want you to leave Mr. Shoemaker, or Shoe-
maker, without feeling you have gotten a fair shot at discussion
today.
So just very briefly, I am still having a little bit of trouble wrap-
ping my mind around the $3 million investment for recovering the
$71 billion in EIDL.
Mr. KELLEY. To only collect $3 million, to lose $3 million. That
is what we are explaining——
Senator ERNST. But there is $71 billion hanging out there of
EIDL.
Mr. KELLEY. The $71 billion is the amount of outstanding debt
yet to be repaid in the COVID EIDL program. It hasn’t defaulted
yet. And then in order to get to Treasury offset, we have to—we
have offered in compromise as far part of the repayment period
where we can create partial payment plans to offset the loss to the
taxpayer.
So, it is—we can estimate that every single COVID EIDL loan
outstanding under $100,000 is going to default. But we have sub-
sidy models where we forecasted, beginning under the Trump Ad-
ministration, what the likelihood of default was, and it is based on
historic norms.
And so, in the disaster loan program, we normally see 21 percent
or higher. In the case of 9/11, it was upward—it was north of 30
percent, with respect to nationwide for default.
Senator ERNST. Okay. So, you—and you are saying here today
you will not be seeking loan forgiveness as SBA for EIDL loans
under $100,000.
Mr. KELLEY. There is no loan forgiveness allowed in the COVID
EIDL program.
Senator ERNST. Nor in the PPP?
Mr. KELLEY. Correct. In PPP, the loan was by design, by statute,
it was a forgivable loan. In the COVID EIDL loan program, there
was never an option for forgiveness. So, what I am saying is every
single borrower has to repay both the PPP loan or seek forgiveness.
That is another option they have in PPP.
In COVID EIDL, they only have the option to repay. If they do
not repay, right, normally, in the normal disaster loan and in our
core programs, we would have personal guarantees, we would have
collateral, we would have all these other additional guardrails for
collection, which is why we run a negative subsidy, which means
we make money for the taxpayer.
In this program, we don’t have that. And then when you look at
the wage garnishment results, so we can look at the Treasury
money that has come back to us over the years for loans where we
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actually underwrote the loan, right, in the beginning and had these
guardrails, and we see we only collected $65,000.
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41
That is why we are making the decision. We are not making the
decision to forego offset because we don’t want to collect—we would
collect—there is no reason why we don’t want to collect the money.
We were looking at the cost, benefit and saying, why should we
lose $3 million more dollars of taxpayer money?
Mr. SHOEMAKER. If I may——
Senator ERNST. Yes. And I was going to redirect to you. We got
into a conversation there, so. Yes, Mr. Shoemaker.
Mr. SHOEMAKER [continuing]. Senator Cardin, we do have a
healthy relationship inside of SBA between SBA and OIG, which
means that there are areas of disagreement, and this is one. To
that extent, we disagree that there was a comprehensive cost ben-
efit analysis performed relative to the PPP.
We have ongoing work in EIDL. And as you appropriately indi-
cated, the area of risk is $71 billion. That area was actually $76.9
billion. My colleague just indicated, you know, that this is just a
potential risk. The loans are performing.
Right now, we are seeing more than $60 billion that are past due
of that $76.9 billion. And we have seen close to $30 billion that
have already defaulted. What that means is that that collections
will not go forward through the Treasury offset program.
Collections, you know, can always happen. SBA—and Patrick is
absolutely right. You know, first of all, the borrowers should repay.
And you know that is first and foremost. And there are other ave-
nues and mechanisms to ensure that they don’t gain access to other
benefits.
There is reporting as an indication and there is lots of different
vectors that get into do not pay. One of them is the Treasury offset
program. But what is important about the Treasury offset program,
you know, unlike the conversation here is, Treasury offset is a
means of collection.
That is how you get the money back that has defaulted. You
know, there are—the cost benefit analysis could show other models
outside of the Treasury offset program. But our contention is that
we believe that a comprehensive cost benefit analysis needs to be
performed.
There is an open recommendation on the PPP program. I expect
it will probably be revisiting the same conversation when we issue
the EIDL report.
Senator ERNST. And I do understand, Mr. Shoemaker, that there
is an IG report that is coming out very soon on EIDL collections.
Is that correct?
Mr. SHOEMAKER. That is correct.
Senator ERNST. Okay. So, all of that will be spelled out, I as-
sume, in that report.
But I think this dialog today is just all the more reason that with
these rules, we need to make sure that things are right. Because
if we are seeing fraud in a hastily put together program such as
EIDL during COVID, you know, we certainly can expect to see that
through fintechs as well and some of the other methods that are
coming out through the rules.
We need to protect the taxpayers against fraud. We want to
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make sure that the dollars are going to those small business enti-
ties that are truly deserving and need those resources.
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Mr. SHOEMAKER. Right. The answer on the fintechs is, it re-
quires—the lenders require strong oversight and monitoring by the
SBA. The SBA is the supervised lender. PPP is completely different
that than 7(a) program.
You know, there is the 100 percent guarantee. You are dealing
with self-certification. But one of the things that happened, you
know, in the use of fintechs as financial technology companies is
not—you know, it is a little bit of a misnomer in this idea of
fintechs as just—as a lender.
The regulated entity, the supervised entity by, you know, of SBA
basically had contractual agreements that exported some of these
lending responsibilities, the loans—you know, lending service pro-
vider. The lending service providers are under the oversight of the
regulated entity. That regulated entity is under the purview of
SBA.
So strong oversight and monitoring within the lending commu-
nity is key to this notion of financial technology companies, you
know, being part of the program. Financial technology has been a
part of, you know, the banking industry for a long time.
You know, anytime that anybody logs on and does mobile bank-
ing, it is probably not the bank that is promulgating that tech-
nology. It is probably a contractual relationship.
However, you know, in this model where we are talking about,
you know, a relationship where an eligibility decision or know your
customer, bank secrecy regulations, I mean, even questions about
bank secrecy regulations on whether, you know, some of the loan
companies may be even covered by it, I think that needs to be ex-
plicit in that regard.
Because the know your customer was what was on the front end
of that financial technology. This is where you see, you know, a
fraudster hitting 35, 40, hundreds of, you know, loan portals to,
you know, steal from the taxpayer.
Mr. KELLEY. Yes, I totally agree. And if you look at—so first, I
worked for a bank prior——
The CHAIRMAN. We are going to need to wrap up.
Mr. KELLEY. Okay.
Senator ERNST. Yes. I apologize. Thank you.
The CHAIRMAN. No, sorry. We have two witnesses that have been
extremely patient, and this is not the end of our discussion.
I really do appreciate both of your testimony today has been ex-
tremely helpful, and I mean that. As I said in the beginning, I
want to work in a constructive environment. I still feel the best
ways for Congress to speak to policy.
And we have been somewhat missing in action on this issue, so
I hope that we will have a chance to express ourselves and we can
get something that we are all in agreement with Democrats, Re-
publicans, House, Senate, and the White House. That will give you
greater guidance.
And I know the frustration of some of the members and regards
to targeted groups. It frustrates me as well, but we have to work
within the legal confines to try to achieve these objectives. With
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that, let me thank both of our witnesses and we will call up the
second panel who has been very, very patient.
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43
By the way, there is a vote going on. I have already cast my vote.
Senator Ernst has not had a chance to cast that vote yet. So, every
once in a while, we have to balance also the votes on the floor of
the Senate. Let me welcome our two witnesses.
First, Mrs. Hilda Kennedy. She is the Founder, President of Im-
pact Business Capital, which is a nonprofit certified lender of SBA
that participates in the SBA Community Advantage pilot program.
Prior to founding AmPac Capital, Mrs. Kennedy worked in local
Government in California. She has also served on the White House
and SBA Council on Underserved Communities, and currently
serves as the President elect for the National Association of Women
Business Owners California.
Ms. Kennedy received her degree from the University of Cali-
fornia at Berkeley, completed a postgraduate fellowship with the
Corow Foundation, and completed a master’s coursework at the
University of San Francisco.
Our second witness is Mr. Chris Pilkerton, serves as the Chief
Legal Officer for Accion Opportunity Fund, which is the nation’s
largest CDFI concentrating on small business support for under-
served communities.
Prior to his current role, he served as Senior Policy Advisor at
the White House, and Executive Director of the White House Op-
portunity Now Initiative, as well as Acting Administrator and Gen-
eral Counsel of the SBA during the Trump Administration.
He holds a BA from Fairfield University, an MBA from Columbia
University, a J.D. from Catholic University School of Law. We will
start with Ms. Kennedy.
By the way, your statements all will be made part of the record,
without objection. You may proceed as you wish.
STATEMENT OF HILDA KENNEDY, FOUNDER/PRESIDENT,
AMPAC BUSINESS CAPITAL, ONTARIO, CALIFORNIA
Ms. KENNEDY. Thank you very much. Chairman Cardin and
Ranking Member Ernst in her absence right now, distinguished
members of the committee in their absence, good afternoon and
thank you for having us today.
As President and Founder of AmPac Tri-State CDC in Ontario,
California, as stated, we are an economic development and mission
driven lender, and we participate in the SBA 504 Community Ad-
vantage and microloan programs, as well as a CDFI.
In fact, as a 504 lender, we have done a little over $1 billion in
SBA 504 lending in the past 16 years, and we have on balance
sheet a little over $9.8 million in loans through our community im-
pact loan programs from $5,000 to $350,000.
And so, we care deeply about expanding access to SBA lending
programs, and my faith is at the root of that. Knowing that with
God all things are possible, we approach our work from an it is
possible mentality, creating possibilities for the communities who
need it most through entrepreneurship, small business formation,
job creation, and building generational wealth.
And that is why I believe so strongly that Congress and SBA
must address the inequities for underserved businesses and must
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work in concert and complement each other, and that is my most
urgent message today. Looking at the tenets outlined in the small
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44
business that it states, and I quote, ‘‘that the opportunity for full
participation in our free enterprise is essential if we are to obtain
social and economic equality and improve the functioning of our na-
tional economy.’’
So on this 70th anniversary of the Small Business Act of 1953,
I believe the Community Advantage Loan Program Permanency
Act of 2022, helmed by you Chairman Cardin, and its companion
House bill, championed by my Congresswoman Judy Chu, and the
SBA’s expected May 12th launch of the final rule with the Commu-
nity Advantage Small Business Lending License, and the other
SBLC licenses, are parallel efforts that can provide the traction to
finally hit the stride we have been seeking to elevate our nation.
Chairman Cardin and Representative Chu have been seeking to
diligently codify the CA program, and I thank you for your dedica-
tion to these communities that are often overlooked. Equally, I
think Ranking Member Ernst, whose leadership and commitment
to increasing access for rural small businesses, with the mission of
the CA program.
Just an example of one of our CA borrowers, Dr. Zuniga and Dr.
Espinosa, they were five-year doctors. They had been practicing
under a physician, and they wanted to buy their building, or they
wanted to do a small business loan to start their practice, but they
couldn’t with their bank that they thought they had a relationship
with.
So, they came to us. They were turned down because they a
startup. They had a lot of student loans, and they had recently pur-
chased their home. But because of our work as a Community Ad-
vantage lender, we were able to give them a loan because of the
transformational work of the community advantage reforms that
happened back in March.
And that really made a difference and I believe was the first and
necessary step for the rulemaking process in considering this CA,
SBLC, and other SBLC licenses. You will have more details in my
written remarks, but I want to close by highlighting my rec-
ommendations in my remarks.
First, I believe we need to shift the narrative from either, or to
welcoming all efforts to improve access to SBA’s lending programs
for underserved communities, which was intended in the Small
Business Act.
Second, Congress should pass your bill, Chairman Cardin, and
the House bill to make Community Advantage a permanent offer-
ing of SBA. Third, Congress should capitalize on challenges faced
by mission-based lenders in accessing capital to provide to under-
served communities.
And finally, SBA should apply provisions from Chairman
Cardin’s bill in areas where the SBA, SBLC, and SBLC rules lack
clarity, such as target market cap, capital requirements, loan loss,
reserve requirements. Lenders need a bright line and metrics so
that we can collectively know what success looks like.
AmPac and the mission lending community will continue helping
businesses access capital through the SBA’s lending programs, and
we look forward to working with the committee and SBA to create
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more opportunities for underserved businesses. Thank you.
[The prepared statement of Ms. Kennedy follows:]
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52
The CHAIRMAN. Thank you very much for your testimony. Mr.
Pilkerton.
STATEMENT OF CHRIS PILKERTON, CHIEF LEGAL OFFICER,
ACCION OPPORTUNITY FUND, TILGHMAN, MARYLAND
Mr. PILKERTON. Thank you, Chairman Cardin, and thank you,
the Ranking Member, Ernst, for holding this committee meeting
today.
I am honored to be with Ms. Kennedy and to receive the invita-
tion to this hearing, because I believe the thoughtful support for
small businesses must be a bipartisan priority. Over the last sev-
eral years, I have spent my career focusing on issues related to the
small business community, with a particular focus on underserved
populations.
I served as the GC at the U.S. Small Business Administration
under Linda McMahon, serving from 2017 to 2020, as well as the
Acting Administrator of the agency from April 2019 into early
2020.
During my tenure as Acting Administrator, I was particularly
proud of our efforts to lead workforce development programs, for
far too often, marginalized citizens, such as those returning from
incarceration, young adults aging out of foster care, as well as
workforce opportunities for disabled individuals.
In March of 2020, I was asked to join the White House to lead
a program called the Opportunity Now Initiative, which included
significant outreach to underserved communities on the topics of
access to capital and technical assistance through State and local
officials, as well as webinars with minority focused trades such as
the National Minority Supplier Diversity Council.
Since leaving Government, I have continued this work in various
capacities. First and foremost, I serve as the Chief Legal Officer for
Accion Opportunity Fund, the leading nonprofit community devel-
opment financial institution focused on small business lending to
communities of color, low income—low to moderate income bor-
rowers all across the country, and women.
I have also co-founded and developed an initiative called the
Small Business Corps, a private sector led program to provide un-
derserved small businesses with specific, goal focused technical
support provided by fellows who are recent college and business
school graduates.
That program is housed at the Georgetown University
McDonough School of Business and includes DMV engagement
from schools such as Georgetown, Johns Hopkins, Old Dominion, as
well as HBCUs, Howard, Morgan State and Norfolk State.
I have also worked closely with the performing artist Ice Cube
and his work to identify and secure opportunities for black owned
businesses in the corporate supply chain.
Our most recent success was a commitment from the National
Football League to provide $150 million in contract opportunities
to several black owned businesses, including Fearless, a technology
company located in Baltimore, Maryland, that has gone on to incu-
bate other minority and women owned companies in that city.
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We all agree that increased access to capital for underserved
communities is important, but like anything, there is the goal and
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53
the execution of the plan to achieve that goal. I will begin by ad-
dressing the rule regarding the lifting of the SBLC moratorium and
the creation of the new mission based SBLC category.
While I understand the intention of the rule, it does not speak
to the critical need to establish a consistent approach to responsible
under review, but rather highlights that the agency needs flexi-
bility in its lender evaluation to address unforeseen circumstances.
While I appreciate the need to be flexible on certain components
of such a program, underserved borrowers need that certainty of
publicly articulated standards to ensure they are dealing with re-
sponsible and vetted lenders.
As SBA Inspector General Hannibal said, for whom I have tre-
mendous respect, in a House hearing last week in response to this
issue, he said he has concerns with the inclusion of any lender that
doesn’t have clear rules, an internal control structure, and a proper
oversight mechanism.
In short, appropriate inspection and oversight on the front end
can limit investigations, enforcement proceedings, and harm to bor-
rowers on the back end.
As such, I recommend that in consultation with Congress, the
implementation of this rule will be delayed until there has been an
independent study, a business plan, if you will, about the necessary
guidelines and procedures that should be in place in order to secure
a safe and responsible lending environment for those businesses
and provide clear and consistent rules for those participating lend-
ers that may, in fact, be new to the SBA landscape.
When it comes to lending to underserved communities, we have
frameworks to examine, such as the Treasury’s CDFI pending cer-
tification program rules that are already in place and would serve
as valuable data points for consideration.
All this as set forth in the Responsible Business Lending Coali-
tion letter for comment on this rule. I also have concerns with the
bandwidth of the agency to oversee the influx of program partici-
pants contemplated in this rule.
The SBA career staff are some of the most dedicated public serv-
ants I have ever worked with, but with limited resources, they may
very well be stretched beyond their capacity. The agency needs to
ensure that the staff has the resources they need to implement a
program that can sensibly be regulated in a consistent fashion.
I believe a thoughtful, independent analysis could calculate the
required resources and provide necessary confidence to the market-
place. As to the rule on affiliation, Senator Cardin, I share your
concern. I think it is important that this body consider the poten-
tial unintended consequences of removing this standard from SBA’s
analysis.
The reason the rules are in place is to ensure that taxpayer guar-
antees are truly going to the statutorily mandated, independently
owned and operated small businesses that need this unique Gov-
ernment program, and that it is not a subsidy program for larger
corporations who already have a competitive advantage.
The combination of these changes to the program as currently
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written, coupled with the trusted imprimatur of SBA, could un-
doubtedly result in a significant flow of capital.
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54
But I believe a thoughtful, independent study around these pro-
grams would help ensure the integrity of the admitted lenders,
maximize the flow of responsible loans to small businesses, and
minimize the potential for fraud.
The results of such an analysis could ensure that Congress, the
agency, and the American taxpayer have clarity on how the scope
of this program can truly support our country’s underserved com-
munities in a way that is both responsive and responsible. Thank
you very much.
[The prepared statement of Mr. Pilkerton follows:]
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57
The CHAIRMAN. Well, let me thank both of you. Mr. Pilkerton,
good staff work. You mentioned Fearless. That was a—you got my
attention early in your testimony.
To both of you, your testimonies are extremely helpful. And I
thank you for your patience because I think your contributions are
so valuable.
Ms. Kennedy, I want to agree with you. Look, the Biden Admin-
istration extended the CA program and gave it greater life. So, we
are very appreciative of what they have done. This rule has the
benefit of finding a home for the CA program, which is something
that I think is important.
That is why I have introduced legislation that I did. So, I think
we are all in the same path here. It is not either or, it is how we
get it done right.
So, I appreciate the way that you said that. And Mr. Pilkerton,
flexibility versus certainty. You are absolutely right. I can tell you
certainty is critically important. If you are going to be in this busi-
ness, you need to know what the rules are.
You can’t say, well, we want this to go right, and we will look
at your individual case by case and determine whether we think
it meets that standard. That is not the way you can get partners
that are your partners. You are not going to enter that field.
So, I agree with the points that both of you have reached. But
here is my point. I am trying to make this as distinct as possible.
This rule is going into effect and most likely will remain in effect.
I think we have a responsibility to do exactly what the two of you
have said, and that is by legislation. And we are going to work very
hard to get legislation done.
So, to Mrs. Kennedy, how do we—what additions would you like
to see Congress impose to make sure that we are focusing on those
who need, the underserved—focusing on the smaller of the small
businesses?
What changes would you like to see Congress entertain in order
to make that possible? I appreciate your support of my legislation.
I think we should make the CA program permanent. It is not in-
consistent with the rule.
So, I think we can do that—we can consider that, but what else
should we be doing to make sure that we are focused on the goal
of helping those who really need the help?
Ms. KENNEDY. Thank you, Senator—Chairman Cardin. I think
that you—it is also in the legislation, really codifying standards.
You know, lenders do need a bright line test. We do need to docu-
ment how do we know we have been successful. So, the elements
of loan loss reserve, the elements of the cash required, and then
the definition of underserved, especially the definition of under-
served.
The fact is Community Advantage today does have a threshold—
60 percent of your loan portfolio has to go to underserved commu-
nities. And I just believe if you aim at nothing, you will hit it every
time.
So, if you don’t have guidelines, you are going to hit that. But
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if you do have guidelines, you are going to hit that. And that is
what CA does today, and that is what has to happen going forward.
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58
So, codifying that legislatively is the right way to move that for-
ward because discretion is discretion. And so, in the next Adminis-
tration, that discretion may look different, but if we have the legis-
lation to back that up, I think it is hugely significant and I appre-
ciate the direction and your commitment to that.
The CHAIRMAN. Thank you. Mr. Pilkerton, let me ask you a ques-
tion of what would you recommend as we should take up for cer-
tainty?
I mean, you mentioned the concern about knowing the rules.
What rules are important for Congress to weigh in, to make clear
that is not in the proposed rule? And then the second question I
would ask deals with the affiliation rules.
There are some good things in the affiliation rule, trying to make
it streamlined just a little bit. What do you think—what protec-
tions do we need to add to make it clear that we don’t want the
big corporations being able to come in under this revised rule?
Mr. PILKERTON. So, I will start with what the agency I think
should be looking at, as far as making loans in underserved com-
munities. I think that this rule as written is going to have a lot
of capital that goes into the system. And I think everybody touched
on this.
My biggest concern about these rules is OCRM, right, the Office
of Credit Risk Management. They are the cop on the beat. You saw
the Inspector General here today. They are the cop after the fact.
So, giving OCRM what they need is really, really critical. And I
think that is where an independent study could be incredibly help-
ful. Let’s think about what just happened to the agency.
For the last two years, the SBA became the tip of the spear on
almost $1 trillion program. You have 2,000 people or so that work
there. Many of them worked there for decades, and they were
ready to retire in 2019, into 2020. They didn’t. They didn’t because
they wanted to actually make it through PPP, help their col-
leagues, and help the American people. But they have retired.
And so, you have got a lot of institutional knowledge, decades,
I mean, probably hundreds and hundreds of years of SBA experi-
ence that has left because they have, you know, obviously had the
right to and it has been good for them to retire. I really think
OCRM should be a huge focus of this committee, in part too, be-
cause the rule doesn’t address a lot of these rules that were put
in place.
I had the opportunity to listen to the earlier testimony. I learned
stuff about what is going to be happening in these programs. And
without putting that information into the notice and comment pe-
riod, the public doesn’t have the opportunity to opine on that.
So, I think that is going to be a critical piece for the agency and
for this committee. The second thing I will say about affiliation. I
want to give you an example of something that we did in 2018. It
was called the Franchise Directory, and Mr. Kelley made reference
to it.
Basically, what was happening was these borrowers were doing
these eligibility reviews and you were getting inconsistent analysis.
The people in my office when I was in the Office of General Coun-
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sel ended up putting together a list that got, I believe it was over
4,000 different franchises.
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We reviewed all of those agreements, and if the agreements
didn’t meet the standard that franchises were separate from the
franchisors, then they would actually sign an addendum to the
agreement to ensure that they were eligible. The thing about fran-
chises is there a huge opportunity for underserved communities.
A number of folks that actually work in a franchise, a really high
percentage of those will go on to own a franchise. And the reason
it was good policy was because if I wanted to open up a restaurant,
for example, as a borrower, I could see there is that sandwich shop
I want to open up and I could go into an SBA lender and say, look,
it is on the franchise directory, so you have to make me that loan,
assuming I meet all the other requirements.
And that lender had the certainty of knowing that if I defaulted
on that loan, they would get the SBA guarantee. So, I think it is
really important. And the way the rules written now, I am very
concerned that there is a bit of a slippery slope, particularly in that
space.
The CHAIRMAN. Thank you. Senator Ernst.
Senator ERNST. Yes, thank you. This has been just a great dis-
cussion this afternoon. And I thank you both for being here and
sharing your thoughts with us. Mr. Pilkerton, you have already an-
swered a number of my questions.
Senator Cardin had asked a number of those as well. So, I will
move on to you, Ms. Kennedy. As part of the SBA’s defense of the
affiliation rule, part of that defense has been the 504 lenders wel-
come the underwriting and affiliation changes.
It is important for all of us to differentiate between what is a 504
and what is a 7(a) loan program. The 504 loan program is an eco-
nomic development program with job creation goals, and nearly
every 504 loan receives approval from SBA before those funds are
disbursed.
So, this rule will create a more of a one size fits all approach to
underwriting all of those SBA 7(a) loans and 504 loans. So, can you
walk us through the 504 underwriting process, and why these
changes might be acceptable for 504 but not for 7(a)?
Ms. KENNEDY. Thank you, Ranking Member Ernst. I want to
thank you for this question because it is a really important ques-
tion and a really critical distinction between the 504 program and
the 7(a) program, the 7(a) being more of a general purpose loan
program—the 7(a) program, and the 504 being targeted for job cre-
ation and economic development through ownership of commercial
real estate and equipment.
And that is significantly a difference with the 504 program, in
that we are required statutorily to be an economic development
and job creation program. And there are five components.
There are several other differences between the programs, but I
am going to focus on your question related to underwriting. There
are five components of the underwriting program for 504 in this
public private, partnership.
So, there is a first trust deed lender, and then there is the SBA
second. That is where the CDC, or certified development com-
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pany—both lenders, underwrite the loans. So, the first trusted
lender underwrites their portion of the loan.
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Typically, up to 50 percent of the loan amount, could be more.
And it has to go through their underwriting, and underwriting poli-
cies according to their regulations. The SBA 504 portion by the
CDC is underwritten by the CDC, and then it goes to an inde-
pendent loan committee of the CDC that must have at least two
commercially licensed bankers on that committee.
And then that loan is sent to the SBA to review for eligibility
and credit matters. So you can see it has several different steps in
the underwriting process to ensure that it meets all of the eligi-
bility requirements of the program, and so addressing those mat-
ters associated with the affiliation, there is no compromise of the
loan in terms of eligibility and credit, and in terms of meeting the
SBA size standards so that we are really targeting those businesses
that are small under the SBA size standards.
Senator ERNST. Yes. Thank you very much. And, Mr. Chair, I
will go ahead and yield back the rest of my time. Thank you.
The CHAIRMAN. Once again, let me thank both of you. We are
going to be reaching out to you as we are working together. There
is going to be a process in regards to this rule, and I think both
of you can be extremely helpful to us.
So, I hope that we can have communications beyond this hearing
as we try to deal with this, because I think we all have the same
objectives. We are all trying to achieve the same thing.
I think Senator Ernst and I want to see more certainty. We want
to see more direction. We think it is our responsibility. We are dis-
appointed that the rule didn’t provide that.
And we understand the Administration will correct some of that
on the SOPs, but it would be better, the more definitive legisla-
tions. The best second best is by regulation. So, we are going to try
to correct that as we go forward.
We will keep the record of the committee open for seven days for
additional questions that may be asked by members of the com-
mittee.
I expect that that will be more directed towards the first two wit-
nesses and the second two witnesses, but we would ask that they
be promptly responded to that.
And if there is no further business, the committee will stand ad-
journed, with thanks.
Senator ERNST. Thank you very much.
[Whereupon, at 5:30 p.m., the hearing was adjourned.]
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File and source
- File
- CHRG-118shrg53225.pdf
- Size
- 19,031,202 bytes
- SHA-256
- c2586ad22d2a07476c3bf081cca4399c0708084015586a83102a77b50972cae4
- Our copy
- CHRG-118shrg53225.pdf
- Original
- www.govinfo.gov