The Coronavirus Crisis: Next Steps for Rebuilding Main Street (S. Hrg. 117-30, February 25, 2021)
Summary
Senate Hearing 117-30 records the February 25, 2021 remote hearing of the Committee on Banking, Housing, and Urban Affairs on the coronavirus crisis and rebuilding Main Street, with Chairman Sherrod Brown presiding and an opening statement by Senator Toomey. Witnesses are Watchen Harris Bruce of Baltimore Community Lending, Joe DeLoss of Hot Chicken Takeover, Jessica Milano of Small Business Majority, Joel Griffith of The Heritage Foundation and Dani Ritchie of Studio Alchemy. Brown says Community Development Financial Institutions and Minority Depository Institutions help businesses that big banks turn away. Small Business Majority recommends extending the Truth in Lending Act's disclosure requirements to small business loans.
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“The Coronavirus Crisis: Next Steps for Rebuilding Main Street (S. Hrg. 117-30, February 25, 2021).”
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[Senate Hearing 117-30]
[From the U.S. Government Publishing Office]
S. Hrg. 117-30
THE CORONAVIRUS CRISIS: NEXT STEPS FOR REBUILDING MAIN STREET
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE AFFECT OF CORONAVIRUS ON AMERICAN BUSINESS AND NEXT STEPS
FOR REBUILDING MAIN STREET
__________
FEBRUARY 25, 2021
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
45-014 PDF WASHINGTON : 2021
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Tanya Otsuka, Counsel
Dan Sullivan, Republican Chief Counsel
John Crews, Republican Policy Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
(ii)
C O N T E N T S
----------
THURSDAY, FEBRUARY 25, 2021
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 32
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
WITNESSES
Watchen Harris Bruce, President and CEO, Baltimore Community
Lending, Inc................................................... 5
Prepared statement........................................... 33
Responses to written questions of:
Senator Warren........................................... 49
Joe DeLoss, Founder and CEO, Hot Chicken Takeover, Columbus, Ohio 7
Prepared statement........................................... 34
Responses to written questions of:
Senator Cortez Masto..................................... 50
Jessica Milano, Board Member, Small Business Majority............ 8
Prepared statement........................................... 35
Responses to written questions of:
Senator Brown............................................ 51
Senator Warren........................................... 52
Senator Sinema........................................... 55
Senator Warnock.......................................... 58
Joel Griffith, Research Fellow, The Heritage Foundation.......... 10
Prepared statement........................................... 39
Dani Ritchie, Owner/Stylist, Studio Alchemy, Harmony,
Pennsylvania................................................... 11
Prepared statement........................................... 47
(iii)
THE CORONAVIRUS CRISIS: NEXT STEPS FOR REBUILDING MAIN STREET
----------
THURSDAY, FEBRUARY 25, 2021
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:31 a.m., remotely, via WebEx, Hon.
Sherrod Brown, Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. This Committee will come to order. This
hearing of the Senate Banking, Housing, and Urban Affairs
Committee is in a virtual format. A few reminders as you begin.
Once you start speaking there will be a slight delay before you
are displayed on the screen. To minimize background noise,
please click the mute button until it is your turn to speak or
to ask questions.
You should all have one box on your screens labeled
``Clock'' that will show how much time is remaining. For
witnesses, you will have 5 minutes for your opening statements.
For all Senators, the 5-minute clock still applies to your
questions. At 30 second remaining, for statements and
questions, you will hear a bell ring to remind you that time is
almost expired. It will ring again when your time has expired.
If there is a technology issue we will move to the next witness
or Senator until it is resolved.
To simplify the speaking order, as we do this remote,
Senator Toomey and I have agreed to go by seniority for this
hearing.
One of the most important things we can do in this
Committee is to give a voice to all people who have not had
enough of a voice in their Government. Last week, we began by
hearing from Ohioans and witnesses from around the country who
do not have corporate lobbyists but they understand their
communities and who know the challenges regular people are
facing right now. Today we will continue that work, hearing
from small business owners and small lenders from Columbus,
Ohio; Baltimore, Maryland; and from Pennsylvania.
Just like American workers, these are businesses that are
often left behind or steamrolled by the largest corporations
and the biggest banks and their allies in Washington. Wall
Street too often excludes small and minority-owned businesses
and only measures success by the stock market. The Dow does not
tell us much about how a restaurant in Columbus or an early
learning center in Baltimore is doing, and how their workers
and their customers are doing.
These entrepreneurs are an important measure of the real
state of our economy. Small businesses create jobs and generate
economic growth in our communities in the heartland and Black
and Brown communities, places that often do not get a lot of
outside investment. The stakeholders in these businesses are
not nameless, faceless shareholders. They are our neighbors.
They are our family members. They are the people you see at
school, at the grocery store, at church. We will not have a
strong recovery unless we reach these businesses and the
lenders and organizations that support them.
These businesses know how important it is to have local
lenders and institutions that understand small business needs
and serve their communities. It is the Community Development
Financial Institutions, the CDFIs, and the Minority Depository
Institutions, the MDIs, that help them fight to save their
businesses when the big banks turn them away or were never an
option in the first place.
People in Ohio and across the country remember how, after
the last economic crisis in 2008-09, big corporations recovered
while large swaths of the country, including in my State, were
left behind. Many of these same communities have watched for
decades as factories closed and investment dried up and
storefronts were boarded over. They are often places that have
never had the investment they should, because of
discrimination, because of redlining, because of decades of
policy that funneled resources and jobs away from entire
neighborhoods and towns and regions of our country.
In all these places so many Americans know what it is like
to wake up one day and realize the only jobs to be had were at
big-box chains, for rock-bottom wages, with no health care, no
paid sick leave, no power over your schedule. We cannot allow
that to be our future. We need to invest everywhere in the
places that have seen investment dry up, in places that were
overlooked, that were discriminated against, that were outright
preyed upon to begin with. If we allow another Wall-Street-
first recovery, where the big guys get taken care of while
small businesses fight over the scraps, we will end up with
more hollowed-out towns and neighborhoods, more workers trapped
in a broken corporate business model.
President Biden understands that. His rescue plan will help
these businesses and the communities they support around the
country. The number one thing we must do to support all small
businesses is to get every American vaccinated as quickly as
possible. That is how we protect workers. That is how we ensure
customers feel safe, going shopping, going to restaurants,
going to the movies or the concerts and the barber shops, and
other places again. Our rescue plan will fund the massive
mobilization we need to make that happen. It will give more
financial support to these small and minority-owned businesses
and the community lenders that support them.
In addition to continuing to fund and improve the PPP and
EIDL programs, we are going to restart a successful Treasury
program that will give more small businesses access to capital.
We will make sure mission-based lenders, CDFIs and MDIs, have
what they need to serve their communities.
Our work does not end, though, with this emergency bill. We
need to invest in these entrepreneurs represented today and
their communities for the long term. We need to rethink our
economy and how we value the people and the places it is made
up of. When we put communities, not big corporations, at the
center of our policy we will get more businesses that actually
value their workers and measure success the same way families
do, not in quarterly earnings reports. We will get more
entrepreneurs building something for the long time, something
with roots in our communities.
People are proud of where they come from. They want to see
the Main Streets they love thriving again. Our witnesses today
know that. They know the vibrancy, the dynamism, the diversity
of working-class towns and neighborhoods all over this country.
We need to get to work to invest in them and ensure that those
places, America's Main Streets, not Wall Street, are the center
of our recovery and are the building blocks of a better
economy.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J.TOOMEY
Senator Toomey. Thank you, Chairman Brown, and thanks to
our witnesses for testifying today. You know, COVID has been an
unprecedented crisis, and Congress' response has been
unprecedented as well. Congress has passed five bills in
response to the pandemic. They have provided almost $4 trillion
in relief. The most recent $900 billion bill was signed into
law less than 2 months ago. And all five of those bills
received overwhelming bipartisan support, designed to prevent
the economy from spiraling into a crisis and to facilitate the
economic recovery that we have needed.
And let's be clear--the economy is in recovery mode. The
unemployment rate that was 15 percent in April is 6.3 percent
in January. As of December, 18 States had unemployment rates
below 5 percent, and we have seen strong economic growth these
last two quarters, and the consensus forecast for the year we
are in now is likely to exceed 5 percent, real economic growth.
Unfortunately, despite all this, President Biden and our
Democratic colleagues are pushing a $1.9 trillion bill that is
completely detached from any kind of economic reality. The bill
is not designed to find common ground. In fact, the procedure
that is being used to pass it virtually precludes common
ground. And unlike previous bills, it is not an economic relief
bill, as its size and its content bears no relation to the
economic circumstances we are in.
For example, the Democratic plan for small business aid
would spend billions, tens of billions, when billions have
already been spent, and are still available. The Democratic
plan includes spending another $15 billion for Economic Injury
Disaster Loans, $10 billion to restart the Obama-era State
Small Business Credit Initiative, known as SSBCI, another $7.5
billion for the Paycheck Protection Program, known as PPP. But
Congress has already provided over $1 trillion in relief for
small business, and just 2 months ago Congress gave $248
billion for the hardest hit businesses to apply for a second
round of PPP loans, another $20 billion for EIDL loans, $12
billion for the Minority Depository Institutions and the
Community Development Financial Institutions to invest in low-
and moderate-income communities.
And the MDIs and the CDFIs will not even be able to push
this money out the door. The $12 billion that we already gave
is 50 times the annual amount of the CDFI funds. And billions
of these dollars are still available. As of earlier this week,
more than $140 billion in PPP loan money is available,
untapped. As of yesterday, none of the $20 billion for EIDL has
been disbursed, and it is doubtful that much, if any, of the
$12 billion for MDIs and CDFIs has been put to you. And yet,
they want still more money.
There is no need for the $10 billion to restart a program,
the SSBCI, that was tried and failed. That program was
operational in the early 2010s and the results were very
disappointing, as is often the case with Government programs.
It was slow to launch, inefficient at deploying the capital,
loans and investments often took months or years to reach small
businesses, and we know that they will not be able to give
money to small businesses quickly now. The program is also
riddled with all kinds of problems. The audits by the
Treasury's inspector general and the GAO point to a program
that was wasteful, inefficient, poorly managed, and more
fundamentally, the program is objectionable on its face.
Unlike PPP, this program is not about providing COVID
relief, since it makes funding available for years after the
expected duration of the pandemic. In fact, CBO estimates that
only 8 percent of the $10 billion meant for the SSBCI will be
spent in 2021. And unlike PPP, it is not about keeping
employees on payroll, since it contains no such requirement.
The program is just a means for the Government to allocated
credit.
In addition to misusing taxpayer resources for things like
SSBCI, the Democratic plan is rife with provisions that will
actually harm small businesses and workers, their employees,
and the recovery that is underway. For example, the $15-an-hour
minimum wage. That is an increase that is going to not only
harm small businesses but prevent low-skilled workers from
getting their first job. CBO projects a loss of 1.4 million
jobs, and maybe as high as 3.7 million.
Today we have two witnesses who tell us more about the
damage that they believe will occur if we have a $15-an-hour
minimum wage. I am looking forward to hearing from Joel
Griffith from The Heritage Foundation and Dani Ritchie from my
home State of Pennsylvania on this matter.
Another important point to make here is that our Democratic
colleagues, this bill is not targeted to provide the temporary
aid that has resulted from the pandemic. According to CBO's
estimates, only a fraction of the $1.9 trillion will be spent
this year. Among the spending items under the Banking
Committee's jurisdiction, CBO estimates that in 2021, only
about half of the $19 billion for rental assistance will be
spent. Only 8 percent, as I said, of the $10 billion for SSBCI
will be spent in 2021. Only 5 percent of the $5 billion for
emergency housing vouchers will be spent in 2021. And this one
is just incredible--they estimate that 0 percent of the $5
billion for homeless assistance will be spent in 2021. Do they
think that this pandemic goes on for decades? I mean, this
makes no sense.
And then, of course, there are the provisions that have
absolutely nothing to do with COVID, under any circumstances,
like $86 billion to bail out multi-employer pensions, $100
million earmark for a subway in Silicon Valley, $135 million
for the National Endowment for the Arts, $50 million for
environmental justice grants, whatever that is. But small
businesses and workers do not need a $1.9 trillion bill that is
wasteful, not at all targeted, and largely unrelated to COVID,
and they certainly do not need to lose job opportunities by
virtue of a $15 minimum wage.
So rather than ramming through a partisan, bloated, and
unnecessary spending bill, we ought to be focusing on lifting
Government shutdown orders, reopening our schools, and the one
thing I think we do agree on, distributing vaccines as quickly
as we possibly can so that businesses can reopen, workers can
go back to work, and people can go back to normal lives.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey. I will now
introduce today's witnesses. I will introduce them in the order
in which they will testify.
Mrs. Watchen Harris Bruce is the President and CEO of
Baltimore Community Lending. She has more than 30 years of
experience in banking, finance, economic development, and
affordable housing. Welcome, Mrs. Bruce.
Joe DeLoss is the Founder and CEO of Hot Chicken Takeover,
a popular restaurant that started as a popup window in Old Town
East neighborhood in Columbus. He has expanded to Westerville,
Westlake, and in northeast Ohio he is going to expand in
Strongsville, and it is a favorite eating place of both my
daughter, Elizabeth, and a young man in my office by the name
of Andy.
Jessica Milano is a board member of Small Business Majority
and a senior advisor at Calvert Impact Capital. Though she
appears today in her personal capacity, she previously served
as the Deputy Assistant Secretary for Small Business, Community
Development, and Housing Policy at the Department of the
Treasury, and is a senior advisor to the Administrator of the
U.S. Small Business Administration.
Mr. Joel Griffith is a research fellow in the Roe Institute
at The Heritage Foundation. He previously worked as the
Director in the Center for State Fiscal Reform at the American
Legislative Exchange Center, as the Deputy Research Director at
the National Association of Counties.
Ms. Dani Ritchie is the owner and stylist at Studio Alchemy
in Harmony, Pennsylvania, a part of Pennsylvania not far from
my State of Ohio, and it does not look that much different from
that part of my State.
Welcome to all five of you. Ms. Bruce, if you would begin,
and you have about 5 minutes. Thank you.
STATEMENT OF WATCHEN HARRIS BRUCE, PRESIDENT AND CEO, BALTIMORE
COMMUNITY LENDING, INC.
Mrs. Bruce. Chairman Brown, Ranking Member Toomey, and
distinguished Members of the Committee, thank you for the
opportunity to appear before you today. My name is Watchen
Harris Bruce, and I serve as President and CEO of Baltimore
Community Lending. BCL is a Community Development Financial
Institution, CDFI, located in the heart of Baltimore, with the
dedicated mission to support the revitalization and
strengthening of targeted neighborhoods through innovative and
flexible financial resources. BCL's services include mini-perm
mortgages and construction loans, in addition to non-real
estate small business lending that may not require collateral.
Prior to COVID-19, many of our businesses faced significant
challenges accessing needed capital, due to business size,
race, gender, and the inability to provide adequate collateral.
As a result, many businesses have turned to more expensive
capital resources, including, but not limited to high-interest
credit cards and online lenders, many of whom are predatory.
These trends were concerning prior to the pandemic, and COVID
has worsened the already existing lack of affordable capital
conditions in our community.
That said, in my testimony today, I would like to address
the major issues and concerns facing my CDFI in Baltimore, and
the CDFIs like mine around the country. As an African American
led CDFI, BCL is a member of the African American Alliance of
CDFI CEOs. The alliance is a nonprofit coalition comprised of
over 46 CDFIs covering 50 States, with the purpose of
strengthening the operational and fiscal capacity of alliance
members and the mission of closing the Black wealth gap.
CDFIs can play a significant role in narrowing the racial
gap and have been an effective tool in generating economic
development in low-income and African American communities.
However, African American led CDFIs have been significantly
underfunded, greatly impacting our ability to stimulate and
grow local the local Black and Brown economies that have
consistently experienced disinvestment and underinvestment for
centuries.
According to a recent study conducted by the Hope Policy
Institute, covering the period between 2014 to 2017, the assets
of White led CDFIs grew by $22 billion, while the assets of
minority led CDFIs grew by just $683 million. This is an
unfortunate result and directly impacts capital liquidity and
our ability to successfully fund businesses and economic
development projects in the communities we serve.
In the recent COVID relief packages passed by Congress,
this body ensured that the CDFI fund received additional
appropriations, which is a big step in the right direction.
However, in passing the Emergency Capital Investment Program,
ECIP, a program which provides $9 billion in investment capital
targeting minority led CDFIs, low-income communities, and areas
of persistent poverty, the legislation excluded nonbank CDFIs,
leaving many of our organizations still void of needed
investment capital.
We believe it was the original intent that nonbank CDFIs
not be excluded, and we ask that you consider opening
additional authority and appropriations, specifically targeting
minority led nonbank CDFIs. That said, I would also ask that
you look to the New Markets Tax Credit Program as another
mechanism for directly reaching minority led CDFIs. Our concern
is that many minority led and smaller CDFIs and CDEs may be
excluded from receiving awards, not due to the lack of
experience or ability because the program's scoring system
prefers larger, more tenured applicants. A possible solution
for the Committee to consider is whether the fund should
preserve a portion of each allocation cycle for emerging
qualifying CDFIs and CDEs.
Thank you for the opportunity to provide testimony and
share my views on these very important issues. We look forward
to our continued work together and developing solutions for
small businesses, affordable housing, and job creation. I thank
you.
Chairman Brown. Thank you, Mrs. Bruce. Mr. DeLoss, welcome.
STATEMENT OF JOE DeLOSS, FOUNDER AND CEO, HOT CHICKEN TAKEOVER,
COLUMBUS, OHIO
Mr. DeLoss. Thank you, Chairman Brown and Ranking Member
Toomey, for the invitation to testify before this Committee. My
name is Joe DeLoss. I am the founder and CEO of Hot Chicken
Takeover. We are a small fast-casual restaurant chain based in
Columbus, Ohio and intent on growing throughout the Midwest
right now.
Though our business has an absolutely ridiculous name, it
was built with a serious, transformative mission. I started Hot
Chicken Takeover to provide employment to those who have
experienced significant adversity in their lives, ranging from
incarceration, to homelessness, to addiction, and to many
things in between. Our team is a diverse cast of players, all
working together to be a best-in-class restaurant chain. We
currently have five restaurants open and a sixth under
construction. Our team will approach around 200 people before
the year end.
So this introduction, especially including mention of our
employees' pasts, often garners warm, sympathetic responses.
With that in mind, it is very important for me to distinguish
that Hot Chicken Takeover is very far from a charity or some
late-night TV commercial with sappy music. Our business is
strong because our people are strong. Though they have been
overlooked by the greater employment market, our team has led
Hot Chicken Takeover to countless awards, national media
exposure, and private investment from some of the greatest
innovators in our industry. Our business is a very for-profit
business, demonstrating the positive economics that can happen
from deeply caring for and investing in your team.
When COVID-19 hit in the United States, our leaders
immediately concerned themselves with the stability of our team
and our community. With fear that restaurant sales may dry up
completely, we made a choice to temporarily close our
restaurants and move our team onto the emergency assistance and
unemployment benefits that many of you engineered. This
transition was far from smooth. Our remaining team essentially
became a makeshift case management department, ensuring our
team members' needs could be met through our own discretionary
resources while the Government unburied itself from such
immense service demand.
The other major consequence for our business from the
pandemic was that we lost nearly $2 million in committed
private investment capital that was set to close the last week
of March 2020.
So operating at a tremendous deficit, our remaining scrappy
team jumped into action to pivot our concept and ready
ourselves for reopening. This effort included everything from
safety and sanitation initiatives, to reconfiguring our menu,
to employee benefits, and to new integrating multiple new
technologies. Along the way, we were able to secure the first
round of PPP funding, some EIDL dollars, and received several
sympathetic investments from our existing business partners.
Without these supports, Hot Chicken Takeover would have been
another casualty of the crisis. I am sure of it.
Thankfully, our concept was well positioned to serve post-
COVID consumers. We began reopening locations in May of 2020.
With dining rooms closed to ensure the safety of our team and
our guests, we doubled down on carry-out and delivery business.
We are still doing our best to avoid a lot of the predatory
fees and poor service models of many other third-party vendors
in our industry.
But we successfully recalled 90 percent of our employees
upon reopening, which was a huge testament to our team and
their commitment. We actually began hiring others displaced by
the pandemic to accommodate some increased demand we were
seeing. And since reopening, we have been able to stabilize
financially, and we are cautiously approaching growth again,
intent on creating more transformative and meaningful jobs.
All this said, the COVID crisis is far from over for our
company, but we finally see a path forward for Hot Chicken
Takeover and our team. And though we do see some glimmers of
hope on the horizon, we represent a very small segment of just
a completely decimated industry. Further assistance for our
businesses and employees is critical for our communities to
move forward.
Thank for this opportunity to share testimony, and thank
you all for your leadership. I look forward to your questions
and our discussion.
Chairman Brown. Thank you, Mr. DeLoss. Ms. Milano.
STATEMENT OF JESSICA MILANO, BOARD MEMBER, SMALL BUSINESS
MAJORITY
Ms. Milano. Thank you, Chairman Brown, Ranking Member
Toomey, and all of the Members of the Committee for inviting me
to testify today.
Today I would like to discuss ways that we can move beyond
small business to focus on how we can support sustainable,
longer-term solutions for rebuilding Main Street small
businesses. Many of the communities hardest hit by the pandemic
have been communities of color. A study from the New York Fed
found that Black-owned businesses are more likely to be located
in counties with higher incidence of COVID-19 and concentrated
in retail, restaurants, and other service industries most
impacted by shutdowns. To make matters worse, these businesses
often had weaker cash positions and weaker bank relationships
before the pandemic, leaving them particularly vulnerable to
the economic shocks that followed.
Research has shown that businesses that were underbanked
prior to the pandemic had trouble accessing Federal relief like
PPP. Very small businesses, the self-employed, and small
business owners of color were much less likely to have a
business banking relationship prepandemic. While roughly one in
three applied for a PPP loan, only 23 percent of Black-owned
businesses, and 27 percent of Latino-owned businesses received
the full amount requested.
This data is not a criticism of PPP but highlights the
challenges policymakers face in helping capital reach
businesses and communities historically underserved and
underbanked by traditional lenders.
The announcement this week of an exclusive 2-week window
for businesses with fewer than 20 employees to apply for PPP is
an acknowledgement of this and a positive step to provide
relief to these businesses. But rebuilding Main Street will
require support beyond this spring.
PPP also does not support new businesses. A silver lining
of the pandemic has been the number of new business starts.
According to recent census data, in 2020, there were nearly 4.5
million new business applications, a 24 percent increase from
2019. It is too soon to tell how many of these businesses will
survive, but the data is encouraging because it reverses a
decades-long decline in new business formation and shows how
entrepreneurship can help lead the way out of the crisis.
As the Committee hears proposals to rebuild Main Street, I
would like to recommend reauthorization of the State Small
Business Credit Initiative as a complement to PPP and more
durable form of long-term support. SSBCI worked by allowing
States to set up their own small business support programs
targeted to local economic needs. In total, it funded 154
programs nationwide and dedicated $1 billion to lending
programs and over $400 million to venture capital programs
targeting investment in early stage businesses.
The program succeeded in providing capital to very small
and young businesses. Eighty percent of SSBCI loans or
investments supported businesses with 10 or fewer employees,
and nearly half were less than 5 years old, and 42 percent of
SSBCI loans or investments were made to businesses in low- and
moderate-income communities. This was achieved because the
program partnered with often smaller community lenders and
CDFIs that exist to meet the unique needs of historically
underbanked communities.
In the last year, some States have sought to replicate
these models. In May, New York launched the New York Forward
Loan Fund with LISC, a CDFI that works with other New York-
based CDFIs to provide low-cost working capital loans to
businesses with fewer than 50 employees. And in November,
California launched the California Rebuilding Fund, a public-
private partnership that drives capital to CDFIs so that they
can extend loans to the small businesses they serve.
To date, these programs have reached over 1,000 of the
hardest-to-reach small businesses across their States, with 77
percent of loans to businesses in LMI areas or owned by an
historically underbanked population. These businesses are the
smallest of the small: 76 percent have 5 or fewer full-time
employees.
Reauthorizing the SSBCI would help make these programs
available in more States and help more small businesses access
affordable loans beyond March 31st, when PPP is set to expire.
Also, by providing flexible working capital and other forms of
small business credit and investment products, SSBCI would
address the gaps left by PPP and help more small businesses
keep the doors open, so when restrictions are lifted they are
ready to welcome back customers, stronger and more resilient
than before.
Thank you again for inviting me to testify today, and I
look forward to the discussion to follow.
Chairman Brown. Thank you, Ms. Milano. Mr. Griffith,
welcome.
STATEMENT OF JOEL GRIFFITH, RESEARCH FELLOW, THE HERITAGE
FOUNDATION
Mr. Griffith. Good morning, Chairman Brown, Ranking Member
Toomey, and Members of the Committee. I thank you for the
opportunity to testify today. My name is Joel Griffith. I am a
research fellow at The Heritage Foundation.
Beginning in March of last year, our Nation witnessed a
historic plunge in economic output. This was the first time in
our Nation's history that the Government intentionally
suppressed the supply of goods and services and also suppressed
consumer activity by artificially suppressing demand. It is
certainly not for want of Government spending that the economy
still has not recovered. The Federal Government has borrowed,
printed, and spent trillions of dollars in an effort to cushion
the economic downturn. And rather, it is Government-mandated
closures and the public perception of the health crisis that
continues to deter investment and suppress economic activity.
Congress has already approved more than $1 trillion of aid
intended for small businesses, including $800 billion to the
Paycheck Protection Program. Much of this aid is actually still
available. In fact, of the additional $284 billion provided for
PPP in the December stimulus package, only 36 percent had
actually been obligated through February 7th. Another $15
billion in this current legislation is proposed for the
targeted Economic Injury Disaster Loan program, but as of
February 12th, none of the $20 billion that has already been
appropriated has been obligated either.
On top of all of this prior spending and all of the
spending that has already been approved but not allocated, this
current legislation provides $10 billion to restart the State
Small Business Credit Initiative. The SSBCI funds State
programs that provide Government loan guarantees and Government
loan purchases to politically favored businesses. Numerous
problems have plagued this program in the past. It has been
well documented. In fact, the Office of Inspector General found
only four States to be in full compliance with the program.
These funds for SSBCI do not actually fill a need of small
businesses that have not already been met by the market.
Instead, this serves to operate as a slush fund for State and
local government politicians across the Nation, a purpose which
is most certainly detached for combating the economic fallout
from the shutdowns.
It is a misnomer, in general, to believe that credit
markets are not providing funds to small businesses. Most small
businesses are now saying they are generally not looking for
more credit. Only 3 percent of respondents to a recent NFIB
survey reported that their borrowing needs are not satisfied.
Small business credit conditions in December, based on the
percentage of businesses reporting easier lending conditions,
were actually identical to conditions 1 year prior, and that
was months before COVID-19 began. Obtaining financing is the
reported top concern of just 1 percent of small business
owners.
Our credit markets serve an important function of
efficiently allocating resources across the economy. Usually,
businesses and projects must compete with each other to obtain
limited amounts of capital in order to secure the resources to
function. When the Government provides capital at submarket
interest rates, or in the form of outright grants, businesses
which otherwise may not secure funding in a competitive
environment find it possible to continue consuming limited
resources which would have been more productively deployed
elsewhere, to other companies, and this crowds out private
capital. More importantly, this places control over the
allocation of resources into the hands of Government officials
rather than the free market.
Another troubling component of this legislation is the $15
Federal minimum wage. This would price those who earn less than
$36,000 per year, which is the payroll cost of employing
somebody--this would price them out of the marketplace and it
would destroy jobs and opportunities for those who most need
it, including the 26 million Americans who have not graduated
from high school. Young adults seeking first jobs, people with
living disabilities, people reentering society after
incarceration will be amongst the first to be priced out of the
jobs market by $15 national minimum wage.
And The Heritage Foundation recently released a study that
showed that this would also result in child care prices
increasing by 20, even 30 percent across the country, a $5,000
to $6,000 burden on middle-class families.
A full economic recovery does not stem from stimulus checks
or bailouts from Washington, D.C. Rather, it is a result of
individuals and businesses safely and legally interacting with
others. The pace of this recovery varies across the Nation, but
in States that have actually ended their lockdowns you see
economic growth far exceeding that of the national average. In
fact, we have eight States now, in this country, that have a
larger economy now than they did prepandemic, and this
contrasts sharply with places like New York City, L.A., and
Chicago, which are mired in the midst of an economic recession
produced by policies which refuse to allow people to reenter
society.
Thank you for the opportunity to testify this morning.
Chairman Brown. Thank you very much, Mr. Griffith.
Ms. Ritchie, please proceed. Thank you for joining us.
STATEMENT OF DANI RITCHIE, OWNER/STYLIST, STUDIO ALCHEMY,
HARMONY, PENNSYLVANIA
Ms. Ritchie. Thank you. Chairman Brown, Ranking Member
Toomey, and Members of the Committee, thank you for the
invitation to testify today and allowing me to share my story.
My name is Dani Ritchie. I am a hair salon owner and part-
time service worker from New Castle, Pennsylvania, and my hair
salon is located in Harmony, Pennsylvania. I opened my business
in 2016, only a year after graduating cosmetology school.
In addition to working as a hairstylist, I work part-time
as a server and bartender, and working in the restaurant
industry while attending college, I could pick up extra shifts
when I was low on cash, and my flexible schedule allowed me to
go to school while still making an income. I have worked in the
restaurant industry for 18 years now, and 10 of them at North
Country Brew Pub in Slippery Rock, Pennsylvania, where I am
still currently employed part-time.
Being a server and bartender is what allowed me to pursue
my passion of becoming a cosmetologist and open my salon. The
flexible hours allowed me to attend school, and the generous
tips are what helped me to save and open my salon without
having to get a loan.
When Pennsylvania first imposed business shutdown orders in
March of 2020, I had to close the doors to my salon for over 3
months, while still having to pay rent and utilities for an
unoccupied building. I was also unable to work at the brewery
at that time because it was temporarily shut down, but luckily,
when the brewery was permitted to open back up on a limited
basis to provide take-out and delivery orders, I was able to
pick up work there.
The owners of North Country Brewing Company, Bob and Jodi
McCafferty, are incredible people who have worked so hard to
provide not only one, but three unique, sustainable businesses
in Slippery Rock and Harmony. All three locations have provided
secure employment for 206 people, that is, until the Government
put in place coronavirus restrictions for restaurants.
During the first round of shutdowns, they could only keep
23 active employees on payroll, and during the second round of
shutdown, there were only 39 active employees on payroll. It is
heartbreaking to see the astronomical number of restaurants and
other small businesses that have suffered financially and had
to close permanently because of the economic hardship caused by
Government shutdowns and restrictions.
Given these challenging circumstances, I am deeply
concerned by the proposal to raise the national minimum wage to
$15 an hour and eliminating the tip credit. This proposal would
be financially devastating to restaurants and other small
businesses and many of their workers. Servers at the brewery
are paid $3 an hour plus tips, and our tips provide us with an
income that surpasses $15-an-hour minimum wage. Asking Bob and
Jodi to increase the majority of their front-of-house staff to
$15 an hour is asking them to give a 400 percent raise to most
of their employees. That would be a severe increase in
expenses, at any time, but will be especially difficult given
that COVID shutdowns and restrictions have caused an enormous
hit to sales.
Jobs will be lost, and menu prices will skyrocket to cover
the mandated raises, which will undoubtably deter customers
from wanting to go to any restaurant. The small businesses that
have been lucky to keep their doors open after COVID
restrictions are going to have an incredibly hard time
surviving if they are forced to pay these wages. That is not to
mention the hit to the service industry, tip-reliant workers
like myself. We take jobs at restaurants knowing that we are
signing up to make $3 an hour, and we work hard to provide
great service to our customers with the hope that they will
compensate us with tips for the ``above and beyond'' service
received. We are not asking for a flat rate of $15 an hour,
which will be a major cut in our income.
The restaurant industry has been running on this model for
over 80 years now, and it is not broken. The majority of people
fighting for this ``one fair wage'' have never worked at a
restaurant a day in their lives and do not understand that we
make a good living with our tips. We are not asking for their
help, and they are actually doing us way more harm than good.
What restaurants, other small businesses, and their workers
need is for the economy to fully reopen. Many Government-
imposed business restrictions, such as the 25-50 percent
capacity, are unnecessarily harmful and need to be lifted as
soon as possible. These capacity restrictions do not make sense
for many businesses, including my hair salon. With what we
know, and are continuing to find out about the virus, I believe
we can safely accommodate 100 percent capacity with
modifications that allow for proper social distancing and mask
wearing. It should be up to the individual to decide if they
want to go to an establishment or stay home, because, after
all, we are supposed to have freedom of choice here in America.
Thank you for your time and for listening to my story as a
small business owner of 5 years and a tipped service worker for
18 years. Please hear my words as someone who has been blessed
to earn a more than fair income in the restaurant industry with
the wage model set in place, as-is also as a small business
owner, negatively affected by Government restrictions imposed
as a response to this pandemic. Piling on more requirements for
businesses will only hurt business owners and employees who
have already been through enough, and we need to move forward
from this before it completely crashes our economy and crumbles
small, locally owned businesses.
Chairman Brown. Thank you, Ms. Ritchie.
I will begin with 5 minutes of questions. Mr. DeLoss, Hot
Chicken Takeover is known for giving its employees a second
chance and treating them well. Describe, if you would, how
investing in your employees has benefited your business.
Mr. DeLoss. Thank you, Senator Brown. Yeah, Hot Chicken
Takeover employment model is something I have worked on, at
this point, for about 15 years, between this business and
others. We take a strategy of offering our employees kind of
myriad benefits, and though there are conventional benefits
like health care, 401(k)s, other things that opportunistically
move people forward, we also meet our employees where they are
at, with relevant benefits surrounding matched savings
accounts, deeper investments in financial literacy and support.
We do all of this and it pays a return.
And so what we have seen from our orientation to our team
is that we are producing two to three times better retention
than most in our industry. So when you are looking at
statistics of a turnover of an employee costing you upwards of
$5,000 in hard costs--I think Cornell just put that out--what
we are seeing, we are seeing our turnover at sub-40 percent
versus 150 percent a year. So we can look at kind of the hard
math of an ROI and what the investments we do in our team make
for our business, and we are grateful to continue them and
advocate to other people to do them as well.
Chairman Brown. Thank you. Ms. Bruce, we heard from Federal
Reserve Board Chair Jerome Powell this week that when it comes
to our recovery the job is not done. Wall Street might be doing
fine but I hear from small businesses in Ohio and across the
country that they still struggle to stay afloat during the
pandemic, which, as you have pointed out, hit Black and Brown
businesses and communities disproportionately hard.
How do the products and services you offer help your
clients keep their doors open and help your clients address the
racial wealth gap?
Mrs. Bruce. Thank you, Chairman Brown. The products and
services we offer are very important to creating wealth and
helping them sustain themselves. Our products are flexible and
they are definitely below market. Our products are catering to
people who ordinarily will not qualify for traditional banks.
Because we are a CDFI we are mission based, but our products
help businesses have access to capital because of this
flexibility and also long term.
For example, a lot of the businesses we are working with
are microbusinesses, and so most commercial banks do not do
loans, microloans, even small business loans below $250,000. So
most of our products are below that. But without our products,
a lot of them would not have access to the capital needed to
expand or grow their businesses. And this helps them to create
wealth for themselves and their employees. So that is why we
need more flexible, long-term capital to do more to help our
businesses sustain themselves and generate the type of cash-
flows they need for their businesses.
Chairman Brown. Thank you, Mrs. Bruce. Ms. Milano,
President Biden's American Rescue Plan called for an addition
$50 billion in small businesses assistance. As part of this,
the House Financial Services Committee, the House counterpart
of this Committee, approved a measure that would approve $10
million in the State Small Business Credit Initiative to help
small businesses recover from the pandemic.
How would the SSBCI funding help businesses in underserved
areas like Butler County, Pennsylvania, and Black and Brown
communities rebuild or expand their operations and recover from
the pandemic? Ms. Milano.
Ms. Milano. Yes. Thank you. So SSBCI, I think, helps
because it is very different from other Federal small business
support programs because it is not a one-size-fits-all approach
with top-down sort of uniform loan requirements like PPP or
other SBA loan programs. It really is a flexible form of
support that works with States to develop and design their own
small business support programs to address market gaps like
funding to CDFIs, to smaller community lenders. And,
importantly, it is the only program of its kind that support
venture capital financing to help drive investments to
communities that are outside sort of the venture capital
financing hubs in America, in New York, Boston, and San
Francisco. It really works to attract funding in other areas of
the country.
So I think that is a very important difference, and I think
that is a longer-term form of support that is really focused on
helping rebuild coming out of the pandemic as opposed to the
sort of current programs which are focused on relief.
Chairman Brown. Thank you. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Ms. Ritchie,
thanks very much for joining us today. You have an
extraordinary story, and I wanted to ask you about this. I want
to make sure I understand some of the facts.
In Pennsylvania, I believe the minimum wage is $7.25 an
hour.
Ms. Ritchie. Correct.
Senator Toomey. And I think the minimum tip wage is $2.83
an hour.
Ms. Ritchie. Mm-hmm.
Senator Toomey. And your story, if I have got it right, is
that while working in an industry where the minimum wage was
$2.83 an hour, you managed to support yourself, put yourself
through cosmetology school, and then launch your own small
businesses. How is that even possible on $2.83 an hour?
Ms. Ritchie. What a lot of people do not understand is
though the minimum wage is set at $2.83 an hour, we are covered
by the tip credits. And what a lot of people do not understand
is what the tip credit actually is. So say, like, in my case I
make $3.00 an hour at the brewery. If I go to the brewery, and
say it was a fluke day, nobody comes in, I do not make any
tips, then it is up to Bob, as the restaurant owner, to make
the difference in my paycheck hourly to ensure that I make at
least minimum wage.
Senator Toomey. And, in fact, when business is pretty good,
you can make much more than minimum wage, right?
Ms. Ritchie. Much more, yes. Thankfully.
Senator Toomey. Yeah, and you often did.
Ms. Ritchie. Mm-hmm.
Senator Toomey. Right. Let me ask you this. Now you have
your own small business. What do you think would be more
valuable for your employees, a $15 minimum wage or to be able
to fully open and accommodate, safely, the customers you can
accommodate?
Ms. Ritchie. We definitely need to reopen. This is not
doing anything good for the economy. As I said whenever I gave
my testimony, the 50 percent capacity just does not make sense,
especially because in a hair salon I have to be so incredibly
sanitized and sterilized anyway, and the distance between our
stations is much more than six feet, so I believe we can
absolutely safely accommodate 100 percent capacity.
Senator Toomey. And you and your customers have every
incentive to be careful, to take the proper precautions. Is
that what you do now, with respect to the customers you are
able to serve?
Ms. Ritchie. Yes, absolutely, and we actually, at the
salon, we do have masks to provide to customers that do not
show up with their own, and we have hand sanitizer everywhere.
We sanitize our stations and our tools after every client,
whenever we are finished with them, before anybody else even
enters.
Senator Toomey. Well, congratulations----
Ms. Ritchie. Thank you.
Senator Toomey. ----on an amazing and terrific story.
Mr. Griffith, you know, we see the CBO estimate that if the
minimum wage goes up to $15 it could destroy 1.4 million jobs,
maybe considerably more than that. It seems pretty clear that
what this amounts to is the Government picking winners and
losers. Some people would get raises, but a lot of people would
lose their job. You know, Thomas Sowell wisely observed that
the Government can set any minimum wage it wants, but there is
always a minimum wage of zero.
So let me ask you this. If we double the minimum wage, why
couldn't businesses just raise their prices to cover the added
costs, so that they would not have to lay anyone off?
Mr. Griffith. That is a good question, and if you look at
the sectors in which the minimum wage is most prevalent, a lot
of those are sectors with very low profit margins. So think of
a restaurant, for instance, that has a 5 percent profit margin
and labor costs that eat up half of their expenses. Well, if
you double or triple--and let's just go with doubling the
minimum wage to $15--well, suddenly their entire profit margin
is eaten way. They become either insolvent or they have to
raise the prices to accommodate that.
Well, in many of these restaurants they would have to raise
prices on their standard fast-food package by close to 40
percent, and in those instances, many individuals would choose
no longer to frequent the restaurant but go somewhere else, or
that restaurant will be forced to prematurely automate.
Automation can be a positive thing, but in this case this would
be Government nudging these companies to automate early, and
many of these individuals that work there, they do not work in
those jobs for long. They get the on-the-job training and they
move on. I worked at a minimum wage job for several years
through college, getting that experience. You move on after you
get it. But when you double this, it just denies people that
opportunity to get that first shot at getting that on-the-job
training.
Senator Toomey. And just very quickly, you indicated in
your testimony that all of this Government funding and grants
and loans is having the effect of crowding out private capital
and misallocating resources. Can you explain to us, what is the
net effect of that? So what? What is the problem with the
Government being a substitute for the private allocation of
capital?
Mr. Griffith. Sure. Well, when the Government becomes a
substitute of that private allocation it means that businesses
that otherwise would have been able to obtain capital and
produce things more efficiently, it means they will not have
access to that. Usually you think of businesses bidding with
each other by paying higher interest rates for a limited amount
of capital, and those businesses that can produce the most,
they are able to go ahead and obtain that loan or obtain that
investment.
In this instance, you end up having the Government
allocating capital to a business, based on other factors beyond
credit-worthiness or beyond whether or not that company is
likely to be able to produce, and then you are able to curry
political favor but it does not result in net economic growth.
And we have seen SSBCI riddled with this over the years, and we
have many, many studies now that are able to look at how those
loans have gone to businesses that actually did not produce the
economic output that we hoped for.
Senator Toomey. Thank you. Thank you, Mr. Chairman.
Chairman Brown. Senator Menendez of New Jersey.
Senator Menendez. Thank you, Mr. Chairman, and thank you to
all our panelists.
It is clear that our small businesses have been hit hard by
the pandemic. According to the Federal Reserve, 78 percent of
small businesses experienced revenue loss in 2020, and overall
revenue growth and employment decreased substantially for the
first time in 5 years. As small businesses continue to struggle
with sharp revenue losses, businesses are desperately seeking
financial lifelines to make it through these uncertain months
ahead.
Stepping up to fill these financing needs are alternative
financing companies, promising easy approvals with little to no
documentation requirements and funding in under 24 hours.
However, some of these financing companies are not transparent
in their loan terms, and small businesses can end up taking on
debt they do not understand and cannot afford. Without cost
transparency, businesses cannot distinguish financial lifelines
from land mines.
So let me ask, Ms. Milano, do current small business
financing disclosures provide small business owners with the
information they need to understand the costs of the credit
product and make an informed decision about whether it fits
their needs or not?
Ms. Milano. While some States have taken steps to set
disclosure requirements for small business loans, at the
Federal level there is no standardized disclosure requirements.
As you know, Truth in Lending Act disclosures do not apply to
small business credit products. This makes it very difficult
for a small business owner to know what they are getting into
with some of the riskier products online, as you mentioned, and
second, it makes it impossible to comparison shop for the best
terms. Some providers disclose rates that are not APRs, but
business owners assume they are APRs, leading them to take out
financing that is far costlier than anticipated, and possibly
unaffordable.
Senator Menendez. Well, I appreciate that and completely
agree. I mean, the current lack of any disclosure requirements
leaves small businesses exposed to deceptive practices.
According to the Federal Reserve, current small business loan
disclosures often leave business owners unable to make informed
comparisons about the price of financing, and additionally,
according to the Fed's study of online lenders, small business
owners found the descriptions difficult to understand or
lacking detail about costs and features.
So what types of financing terms would small business
owners find helpful to bring transparency and uniform
disclosures so as to better understand a credit product?
Ms. Milano. Sure. So first I think it is important to apply
disclosures not just to loans but all small business credit
products. So that includes merchant cash advance and other
products similar to loans. And then I think APR is essential
for borrowers to compare products and make informed decisions.
Borrowers often need to know the financing amount, the payment
amount, the frequency of payments, if it is more frequent than
monthly, and the term. They should also know any up-front or
scheduled changes and prepayment costs.
Senator Menendez. So APR disclosure in small business
credit is essential to make comparisons from apple to apple,
cost comparisons. Would Truth in Lending Act, would TILA to
small business financing with APR calculation guardrails that
prevent manipulation by bad actors provide enough transparency
and uniform term disclosures to allow small business owners to
make informed financial decisions?
Ms. Milano. Yes. I think APR is the only established metric
that we have that enables informed comparisons of the cost of
capital over time and between products of different dollar
amounts and term lengths. That is why APR is the long-standing
price metric that people are familiar with. It has been vetted
for over 50 years through the Truth in Lending Act, and an
estimated APR can be used, and has been used by some market
participants, when providing variable term financing such as
merchant cash advances, sot that consumers can actually compare
those products to loans with fixed APR.
Senator Menendez. Well, thank you. It seems to me that
transparent price disclosure is the foundation of a free market
without which price competition effectively fails, and TILA
requires transparent disclosure for consumer loans but not for
small businesses. And to ensure truly transparent and
competitive market, disclosure requirements should apply
equally, I think, to small business financing products.
Congresswoman Velazquez and I are working on a bill to
extend TILA to small business loans, if, as they say, the sun
is the best disinfectant, it is time to give some sunlight to
the small business credit.
Finally, the Administration has taken the important step of
setting aside a 2-week window where only small businesses with
fewer than 20 employees can apply for the PPP forgivable loans.
Ms. Milano and Mrs. Bruce, are there any similar actions along
those lines that you would recommend to ensure that minority-
owned and other underserved small businesses get equal access
to COVID relief?
Mrs. Bruce. Yes, Senator. Thank you, Senator, for the
question. Yes, I think it is a very important action because,
for example, our product in Baltimore, and similar CDFIs
nationally, we target businesses under 50 employees. And I
think this act is important because we provide a lot of
technical assistance and capacity-building so countless
businesses understand what they are applying for. We just
talked about the truth in lending and disclosure.
But it is important to provide comprehensive technical
assistance, meaning helping them to understand the credit, what
they are applying for before they receive the loans, and after
they receive the loans. This helps to mitigate the risks for
default, but also just having resources to provide technical
assistance like capital grants, because that is not an income-
generating product. We provide that in-house, and it would be
great if there are products similar to what the housing
industry is doing for pre- and post-counseling for home
ownership. We need similar products like that on the small
business side, because education is important, especially if
they understand the risks they are taking on, it helps to
mitigate defaults and helps improve cash-flow.
So this is a great step, a first step in helping targeting
small businesses with 20 or less employees. Thank you.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Brown. Senator Rounds from South Dakota, if he is
here. If not, Senator Hagerty from Tennessee, you are next.
Please proceed.
Senator Hagerty. Thank you, Chairman Brown, Ranking Member
Toomey. I appreciate your holding this hearing today as we look
to rapidly recover from the effects of this pandemic and get
the resources that we are providing most directly targeted to
those in need. I would also like to say that I am very
optimistic at the fact that Operation Warp Speed has gotten
vaccines going into arms, that we are seeing our economy
recover.
I am very pleased with the projections that Main Street is
on the road to recovery, and want to acknowledge the important
role that our community banks have played, that our credit
unions have played, that our Community Development Financial
Institutions, Minority Depository Institutions have played, in
helping bring our economy back. And I want to acknowledge the
role that the Congress has played, multiple times, addressing
this pandemic on a very bipartisan basis, and I hope that we
can continue to do so as we move forward, in a bipartisan way.
First I would like to start with Mr. DeLoss. I am from
Tennessee and I am very interested in your Hot Chicken concept.
I am curious about what inspired that.
Mr. DeLoss. A trip to your fine State, in fact.
Senator Hagerty. I was thinking that might be the case.
Mr. DeLoss. My wife and I took a trip to Nashville on a bit
of a babymoon before our first kid was born, and were inspired,
and had nothing like it in our market.
Senator Hagerty. Well, I will have to say this. Coming from
Tennessee, from the Nashville area, Nashville is going to
remain the home of Hot Chicken, the capital of Hot Chicken, but
I am delighted to see it expand.
I also want to commend you for your hiring practices. I
think you are doing a great service. I think it is very
consistent with the criminal justice reform that we saw under
the past Administration that was passed on an overwhelmingly
bipartisan basis. So I want to thank you for what you are doing
and the leadership that you are bringing to bear there. And my
very best wishes to you and I am delighted to hear that the PPP
has been a product that has helped you continue through this
crisis.
I would like to turn next to Ms. Milano. Ms. Milano, I want
to thank you for your dedication to America's small businesses.
You have deep experience in this area, and, you know, our small
businesses really have been at the core. They have been the
engine of our economic growth for so long. They are going to
continue to be critical to our growth as we come out of this
pandemic.
I really want to understand the impact of what we have been
talking about here on the pandemic, and specifically the timing
of the programs that are involved. You have had a lot of
experience running this program, and if you could take a look
at the other programs that the Biden administration is in the
process of implementing since December of 2020, that came
through our bipartisan relief packages, including, for example,
$12 billion for CDFIs and MDIs, $15 billion to shuttered venue
operations.
In your best estimate, how long will it take us to get
those programs set up and begin to get dollars, incremental
dollars into the accounts of those small businesses that need
them?
Ms. Milano. Sure. Thank you. So I think that those
programs--and Treasury is in the process of standing those up
right now, as I understand it, and I think that the $3 billion
for the CDFI fund, or loan funds, and the $9 billion, or $12
billion that was put for MDIs and CDFIs and the Emergency
Capital Investment Program have enormous potential to
recapitalize these institutions. And I think that Treasury is
getting ready to release rules and program guidelines for
those, and get those dollars out the door this year, and I
think that helps recapitalize those institutions to help serve
underserved borrowers and their communities.
And I think that what we are being requested today, like
SSBCI, sort of comes in after that and complements that by
working with different types of financing entities in the small
business ecosystem to support not just the lenders, which those
two programs support, but also the businesses themselves, and
provide different types of financing, like venture capital
financing, which is not part of those programs that were passed
at the end of the year. So I really do think they are
complementary.
Senator Hagerty. Yeah. You know, I am a businessperson for
a long time, and resource allocation is absolutely critical.
And if you look at the PPP fund, in which we have been able to
put billions of dollars into the economy on a very rapid basis,
the package that was passed in December, of $284 billion, as of
Sunday only half of that has been put to work. There is $144
billion that is still there, waiting to be put to work.
In my sense, and I hope you will agree, is that our
resources should be most focused on addressing the pandemic, on
those that have been impacted by the pandemic, and addressing
that PPP lending program and getting those dollars into the
economy before we look at other forms of long-term lending that
could take, you know, months or longer to get in place.
Ms. Milano. I mean, I think that those programs--PPP
applications will expire March 31st, and there will be a need,
we know, beyond the end of next month for funding. And so I
think it can work together.
Senator Hagerty. My hope is that we focus very heavily on
targeting the PPP funds and getting this $144 billion out the
door.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Hagerty. I would add,
from Mr. DeLoss's statement, my wife and I, right before the
shutdown, took a trip to Nashville--we had never been there--
for her birthday. It was decidedly, fortunately not a babymoon
for us. But nice touch. I appreciate that from both of you.
Senator Tester from Montana.
Senator Tester. Yeah, thank you, Mr. Chairman, and thank
Ranking Member Toomey too for having this hearing, and all the
witnesses who have testified. And I would just tell you this,
Mr. DeLoss. Montana is a long way away from Pennsylvania, but I
tell you, we like good food there too, so come on down any
time. You can expand this venture that you have got going. But
congratulations.
My questions are for Jessica Milano, and they really do
dovetail into some of what Senator Hagerty was asking you, and
it deals with the State Small Business Credit Initiative. In
following the last economic crisis, this was incredibly
successful in Montana. So successful that Montana is often used
as an example of how this program can benefit small businesses
and the communities where they reside.
I have been pushing, for the last year, to use the program
again to help address this current health and economic crisis
that we are in, and I have been hearing consistently from
Montanans that small businesses are still struggling. There are
industries where we will continue, even once there is a widely
available vaccine, to struggle. And for some of those small
businesses the Federal programs so far have not met their
needs. And one of the great benefits of the SSBCI program is
that the economic development organizations are able to address
the specific needs in their communities in a much more
effective way.
So, Jessica, from your perspective, helping run the first
iteration of the SSBCI program, and you have touched on some of
this stuff with Senator Hagerty, but could you highlight, for
the folks on this Committee, and anybody else who is watching,
what makes this program so useful.
Ms. Milano. Absolutely. Thank you, Senator Tester. So I
think, again, it is a complement of what has been done to date,
and what is different about it is it worked with States like
Montana to develop and design their own programs that were
targeted to their unique needs. So if they needed to serve
microbusinesses, they could establish a credit program to do
that. If they wanted to commercialize technology around a
university ecosystem, like Pennsylvania did, they could do
that.
And I think that flexibility really helped create vibrant
small business ecosystems around the country that were best
tailored to local market needs, and I think that is an
important continuing need that we will have coming out of this
pandemic.
Senator Tester. I could not agree with you more. Tailoring
it to local market needs is the key here, and then I think it
is really what makes this program so really effective.
But let's talk about if there are any areas of improvement
from the previous SSBCI program that could be make this version
even more impactful in addressing the challenges caused by this
pandemic.
Ms. Milano. Absolutely. There are always ways that we can
improve things, and that is the purpose of evidence-based
policy. So having gone through this once I think there are a
couple of key ways.
First, we could make it a little bit easier for multi-State
programs, for States to actually, or lenders that have a
regional footprint, to work across States. I think, second, you
know, given how much funding has already been put toward PPP,
we could try to further support CDFIs and ensure that minority-
owned businesses are receiving the capital, by putting an
emphasis, or setting aside a portion of the money competitive
to be awarded in a way that targets programs that meet those
underserved populations.
Senator Tester. Very good. Well, thank you. I am going to
yield back the rest of my time, but I want to thank all the
witnesses for being here, and I appreciate your commitment to
the economy of this country, and we will move from there.
Thank you, Mr. Chairman.
Chairman Brown. I am not clear who is in line, the names on
the screen. Senator Warner--is Senator Warner here?
I think Senator Lummis will be next, if she is here. I know
Senator Van Hollen wants to ask a question of Mrs. Bruce, but
he stepped out for a moment.
Senator Cortez Masto, if you are ready.
Senator Cortez Masto. Thank you so much. This has been a
great conversation and I so appreciate the thought process
going into this, because in Nevada, and I think we all agree,
small business is the backbone of our economy, and we want to
make sure not only are they driving, but for our workers that
they are paid a livable wage. And so I appreciate this
conversation [inaudible] an individual that we are looking at,
that should only have to work one job to have a livable wage
and not have to work 40 hours a week and still not be able to
survive or thrive. I just thank you for your work ethic and
your entrepreneurship.
In Nevada, this is an issue for us, as across the country,
because this pandemic has just devastated our economy. And we
all recognize that we need to increase our wages, but at the
same time we want to make sure our small businesses can thrive
as well. That is why I so appreciate this conversation, Ms.
Milano, around the SSBCI. I think our goal here is to balance
both of those, so our workers thrive, our businesses thrive,
and I think this is a great program for us to incorporate for
our small businesses as we come out of this pandemic and help
them thrive.
But I guess the first question I have, maybe Ms. Milano,
during the pandemic, monthly business applications have surged
well above their historic levels, and according to data from
the Census Bureau it is clear that many Americans have decided
to use this time to transition from traditional employment and
become entrepreneurs. And I have seen that in my State as well.
My question to you is, what policies should we be thinking
about to help these new entrepreneurs? Is it just addressing
the SSBCI? What other things can we be thinking about to make
sure that these new entrepreneurs thrive?
Ms. Milano. Well, thank you, and I think it is some of what
has been done to date. For sure, some of the programs that we
have done to put capital into CDFIs and Minority Depository
Institutions I think help reach those businesses. And then I
think SSBCI also helps reach those businesses. I think those
businesses will be very varied. Some of them will need
microfinancing, you know, small-dollar loans to get their
businesses off the ground. Some of them might actually be those
rare, high-growth businesses that become the real leading job
creators in their State, and could benefit from the type of
early stage financing that SSBCI can provide.
Senator Cortez Masto. Thank you. I appreciate that. Is
there anything that we should be also thinking about as we come
out of this pandemic and we look to our labor workforce,
particularly, as I said, I come from Nevada, we have one of the
highest unemployment rates in southern Nevada. We are a service
industry. What else can we be doing to support our workforce?
Is there more that we should be doing for workforce training
and development? And I would open that up to the panel, if
anybody has any ideas around that.
Ms. Milano. I mean, I think there is always more that we
can be doing to support both workforce training and then I
think technical assistance for folks that are just filing this
application to become an entrepreneur, to work with them, to
understand what it means to get credit ready, to have a
business plan, and to grow their business. And then I think,
you know, there is more that can be done to provide education
and training for both businesses and workers of those
businesses, to ensure that they can be matched with the
employees they need to help that business grow.
Senator Cortez Masto. Thank you. I am sorry. Did somebody
else want to say something?
Mrs. Bruce. Yeah. Can I just add to that, I just wanted to
second what Jessica said. In essence, especially for those
employees that are transferring or lost their job during the
pandemic, they need technical assistance to transition to
employment. Like our CDFIs will work with a lot of startups, so
we have a product to target businesses that have been around
for less than a year. But they need a lot of technical
assistance or training to help them.
So it would be great to have products like equity, like the
EQ2's or access to flexible investment capital like what was
just recently passed. The Emergency Capital Investment Program
is almost like equity loan-like program, but it was not given
to CDFIs, nonbank CDFIs like our CDFIs. So we hope to receive
those types of flexible, long-term equity-like investments,
because we are providing a lot of technical assistance to help
businesses sustain and stay in business after they receive
financing. Thank you.
Senator Cortez Masto. Thank you so much to the panel. I
know my time is up. I so appreciate the conversation.
Chairman Brown. Thank you. Senator Lummis from Wyoming,
welcome.
Senator Lummis. Thank you, Mr. Chairman, and I want to
first of all say to Mrs. Bruce, you spoke about a subject
earlier in your remarks that I find really important to
Wyoming, in the area of American Indians. You spoke about the
program that you are working with and made some recommendations
for how to improve them. Could you just start by explaining a
little further what your programs provide in the minority
community you serve?
Mrs. Bruce. Well, thanks for asking, Senator. Our program
works with small to medium-sized businesses, and what we
provide, we give them alternatives to predatory lenders,
because we, first of all, build trust, because we are local. We
build a relationship. We hope to analyze their needs in terms
of credit needs to expand or start a business, and then we
develop products based on market need. It is not generic, but
we create those products to make sure we have startup
businesses, emerging businesses, who, by less than 2 years, we
give them capital. And what we try to do is to help them with
fixed-rate loans to make sure they can plan in advance, because
in terms of budget planning, it is great for a startup to have
a fixed interest rate, and long term, to help them manage their
budget.
But second and most importantly, we have a comprehensive
technical assistance program, meaning before they access the
loans we help them understand financial management, work with
them on developing business plans, with actuals or projections,
and we help them with financial statements, to understand the
balance sheet and income statement. Someone could be great at
doing a business, but if they do not understand the growth plan
and how they can retain them, their businesses will fail.
But most importantly, after that we follow them through the
process, so it reduces the risk of default. We do post-TA,
meaning the TA is not just during the training. We call them
and we interview if there are issues to maybe give a default.
So it is labor intensive but it is needed to help those
businesses transition from small, nonbank CDFIs like us to
traditional banks.
So our products, we do loans to as low as $5,000 up to
$150,000, but it is to help with growth and also sustain them
during that period with offering the training and technical
assistance needed to survive, especially during this period.
Even with the PPP, we are doing a lot of loan packaging as well
as documentation gathering, to help them access PPP on a timely
basis. And I really appreciate your question. Thank you for
asking.
Senator Lummis. Thank you, Watchen. My next question is for
you, Joel, and I am sorry, I am using first names today. I am
being a little personal here.
The proposed State Small Business Credit Initiative
Amendments allow the Secretary of Treasury, for the first time
in history, to determine if a State's laws allow predatory
lending. Lending and usury laws have historically been the
province of State legislature. My State of Wyoming even has a
usury cap.
Isn't this another example of Washington taking away
decisionmaking power that individual States already know how to
use best?
Mr. Griffith. Yes. Thank you for the question, Senator, and
I just had a wonderful visit to Wyoming, by the way. But yes,
this is troubling. This is another example of the Federal
Government trying to determine what business practices should
be in individual States, and, of course, all of us would likely
agree on this idea of predatory lending. We would not be in
favor of it, but the details are important. What is the
definition, and States have gone to great lengths to define,
for them, what types of lending practices are prohibited. So
using this as a tool to force whatever definition the current
Presidential administration might decide, forcing that onto
States would be problematic, in addition to all the other
concerns with this program that we saw back about a decade ago.
Senator Lummis. Well, I want to thank you. I am actually
out of time. This is such an impressive panel and I would love
to ask more questions. But thank you so much, Mr. Chairman, and
thank you, panelists. I yield back.
Chairman Brown. Senator from Maryland, Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman, Ranking Member
Toomey, and let me thank all the panelists. Just very quickly
on that last point, one of the big issues we are seeing,
actually, is some of these FinTech lenders using the last
Administration's rent-a-bank rules to actually evade some of
the State caps that are trying designed to avoid predatory
lending. So if we believe that States should be able to set
these usury caps where they want, we should also make sure that
we do not allow workarounds through the national banks.
But let me just ask a question of Mrs. Bruce, and, Mrs.
Bruce, thank you for your leadership as President and CEO of
the Baltimore Community Lending CDFI. I know you have also
worked in the commercial banking sector, I believe JPMorgan,
Bank of America, PNC.
Earlier, Mr. Griffith indicated that there is only a small
percentage of small businesses seeking capital and that
essentially the market can effectively decide who deserves a
loan. Having worked for some time in the commercial banking
sector and now at the CDFI in Baltimore, is it your experience
that you are making many loans that are sound loans that would
never have been made from the commercial banks?
Mrs. Bruce. Well, thank you, my Senator. This is my Senator
from Maryland. Thank you, Senator. I do not know how to even
answer this question. Our CDFI is making an extreme difference.
Coming from a commercial bank, I am excited to work at a CDFI,
because the banks, the loans that we are making are not
bankable for the commercial banks, or, in essence, the credit
criteria are very difficult for those small business to meet.
Our products, we have credit enhancement, we have loan
officers to mitigate with, and our credit enhancement is our
TA. If we were not doing that, we would not be able to give out
loans. So maybe it is definitely other States, but in Maryland,
and in the city of Baltimore, our CDFI is meeting market needs.
We are doing exactly what businesses need to access capital.
These are businesses that would not be able to have the kind of
excellent credit that a commercial bank is offering. We work
with businesses that have minimal credit or not sufficient
collateral as well as providing TA.
So these are all nontraditional products. It cannot
compare. In my days in a commercial bank, I could not have made
these loans, because it is out of the box. But you have to
design products based on market needs. And we are making a huge
difference, and not only am I talking about predatory lending.
We have refinanced a lot of small businesses that accessed
FinTech loans because the interest rate was so high they did
not even know what they were getting into. They were getting
like 16 percent, and we have reduced the interest rate way
down, less than 6 or 7 percent, because we are disclosing our
rates and we are hoping they understand the difference between
a CDFI product or a mission-based lender and a FinTech.
So definitely we are making a lot of loans and making a
difference in our community in Baltimore.
Senator Van Hollen. Well, thank you, and as you mentioned
in your testimony, you provide that important technical
assistance, get to know your customer, and you spend that time
and invest the effort there. Back in your experience at a
commercial bank, what would be the response from the bank if
you said you had to spend all that time providing that
technical assistance?
Mrs. Bruce. Of course, I mean, it was not allowed because
of so many reasons. At a commercial bank you are there to make
credit decisions, not to provide technical assistance. So that
is another big difference between a CDFI and a commercial bank.
Size with smaller loans under $250,000, it was all credit score
and automatic credit, so you would not even talk to these small
businesses, because it was a 1-800 number. So they would not
even know the bankers. If they go to a branch it is more of a
retail.
And so this is a big difference, because small businesses
really do not know what they need. You have to help them to
structure the deals. So with CDFI, our TA helps them to
structure the deals or the loans based on their needs. So we
put a whole lot of emphasis on technical assistance before they
receive the loan, and definitely it is not allowed in a
commercial bank because of conflict. We are doing it at a CDFI
as a mitigant for the credit, and enhances the credit because
they are understanding the type of loans and products that we
are offering. So it is a big difference, and I am happy now
with our CDFI, because I have a passion for doing that, and
working with people and not just numbers or telephone.
So this is a big difference, and we need capital. We need
capital to help to provide more TA, but that is the funding
that is not available, so definitely it is like doing pro bono
services right now. So not only do we need investment capital
for loans, lending capital, we need grant capital to cover our
overhead and operations to provide more TA pre and post. So
thank you, Senator, for asking.
Senator Van Hollen. Thank you. And I will be talking to the
Chairman and Ranking Member about seeing whether we can provide
some of that capital to the nonbank CDFIs that we are providing
to the bank CDFIs.
Mrs. Bruce. That would be great. Thank you very much,
Senator.
Senator Van Hollen. Thank you.
Chairman Brown. Thank you, Senator Van Hollen. I believe
that Senator Sinema is joining us by phone, from Arizona.
Please proceed.
Senator Sinema. That is correct, and thank you to Ranking
Member Toomey for holding this hearing, and thank you to our
witnesses for joining us today.
Arizona small businesses are the backbone of our State's
economy, and before this pandemic hit, small businesses in
Arizona employed 1.6 million workers, more than half of the
State's workforce, and created $71.3 billion in annual wages
and income for those employees.
But today is a different story. The pandemic has left
Arizona's small businesses struggling to keep their doors open.
Among those hardest hit are Arizona's local and independent
restaurants. Now Arizonans know it, which is why so many of us
have stepped up and done our part to support them. Like many
other Arizonans, I try to get carryout from my favorite
restaurants a few times a week, and we do this with the hope
that they will still be there on the other side of the
pandemic, when we can safely gather, enjoy great food and
drink, and make memories with those we love.
But Arizonans expect Congress to do more than cross their
fingers and hope, which is why last June I teamed up with
Senator Wicker from Mississippi to introduce the Restaurants
Act. Our bill, which earned the support of a majority of
Senators, establishes a Restaurant Rescue Plan to provide local
restaurants the funding to rehire workers and stay afloat
during the pandemic. And I am delighted at the grassroots
momentum and strong bipartisan support we have seen behind this
important legislation.
A few weeks ago, the full Senate took a vote on our
Restaurant Rescue Plan and support it 90-10. So, Senator Wicker
and I are proud to have earned that support and achieve that
significant milestone, and we are going to keep working until
it is signed into law.
Now, Mr. DeLoss, I want to thank you for being here today.
In preparing for this hearing, I learned that your restaurants
are deliberate about providing employment opportunities to
adults who have experienced homelessness, live in poverty, or
were recently incarcerated. As a child, I experienced
homelessness, so I want to thank you for being a leader who
recognizes everyone's dignity and their ability to contribute
to society. Arizonans know that a good job is transformative in
helping people build better lives for themselves and their
family.
So, Mr. DeLoss, could you briefly summarize the business
decisions you made at the start of the pandemic and how it
affected your company financially.
Mr. DeLoss. Thank you, Senator. Yeah, you know, as I shared
in my opening statement, our priority was our team's stability.
As a business, we ultimately know that if we invest in the
personal stability of our team it will yield professional
growth and stability.
And so when the pandemic hit, although we were getting
caught and broadsided by kind of countless curve balls, just
associated with COVID and the loss of private investment
capital, we wanted to make sure that our team had someplace to
come back to. So we did choose to close down our restaurants,
and we used the discretionary resources from the product that
was still in our walk-in cooler to discretionary spending, to
ensure that we could cover our team's basic needs in advance of
assistance kicking in.
If you will all remember, at that point many people
displaced by the pandemic were waiting four to 6 weeks to
receive emergency assistance, because of the barrage of demand
that hit Federal resources and State resources.
And so we made that choice to close down and deeply invest
in our team, and to see a 90 percent recall rate upon
reopening, that was still alongside of emergency assistance,
particularly for a group of people that have so many
stereotypes and judgments about their work ethic against them,
was a huge testament to our success, and folks believe that our
team has a competitive advantage and strength.
Senator Sinema. Well, thank you. You and your team have
been through some difficult challenges. Now, as you know, our
Restaurant Rescue Plan would provide grant funding to help you
recoup some of the losses that you experienced as a result of
being closed. It would use your 2019 revenues as a benchmark.
So what possibilities would this plan enable for you, and
how would the grant empower you to advance the values of your
business?
Mr. DeLoss. For us, additional grant funding and support
allows us to get back onto the growth trajectory we were on
before. And so, you know, I spent years in my early
professional life as an investment bank analyst, studying
markets and understanding what this looked like, and the
reality of COVID is the predators were abundant. We had
multiple offers to purchase our company at about 20 percent of
the value we had pre-COVID, because there was blood on the
water.
And so for us, we lost a complete growth trajectory for
building more transformative jobs. And so additional funding
yields the opportunity for us to get back on track and make
more transformative change in the community that sustainably
moves people into livable wage rolls versus welfare rolls,
which is good for everybody.
Senator Sinema. Thank you. Mr. Chairman, I see that my time
has expired. I do have a question for Ms. Milano, but I will
just submit it. And with that I yield back. Thank you.
Chairman Brown. Thank you, Senator Sinema. Senator Ossoff
from Georgia.
Senator Ossoff. Thank you, Mr. Chairman. I appreciate it.
Thanks to our panel. Just to open, I want to express the
eagerness with which I believe many of us approach the Senate's
consideration of this COVID-19 relief package, which has
overwhelming bipartisan support among the public, the normal
partisan tone of deliberations in Congress notwithstanding.
This legislation is supported by approximately three-quarters
of the American public, as those living in the real world
recognize the vital need for direct economic relief for
households, significant investments in the public health
effort, vaccine supply and distribution. And this hearing is a
vital opportunity for this panel to hear from leaders in the
small business community and eminent scholars, thinkers, and
analysts about how we can shape policy to help small businesses
in a way that is effective, fast, and equitable.
I would like to ask you a question, please, Mrs. Bruce,
about equitable access to capital and to financial relief. Can
you please explain for the panel what are the factors that,
even in normal times, impair access to capital for Black and
minority-owned businesses, and that through this crisis have
also made it more difficult for Black and minority-owned
businesses to access emergency relief and credit. Thank you.
Mrs. Bruce. Yes. Thank you, Senator, for asking that
question. Based on my 30 years' experience in the industry of
working in banking and finance for many years, some of the
issues that the Black and Brown communities experience,
especially from the traditional investment opportunities, it is
because there is just a lot of redlining. Let's be real about
this. In terms of the Black and Brown community redline, the
perceived risk is already determined before the actual
investment. And that is one.
But other issues are with small businesses you need to
create products that will cater to the needs of the market. It
is not a one size fits all. So in terms of the minority
communities, there are a lot of traditional disinvestments as
well as prejudgment on what people are capable of doing. But
also there needs to be a lot of trust. People do business with
people they trust and know, and that is what banking is. It is
more for personal relationships.
So most of the large banks do not have the relationships
with borrowers, so borrowers get turned down very fast because
the products do not really cater to their needs, which is fine.
It is a different type of institution. But in terms of us, with
CDFIs, we need to have access to those flexible, long-term
capital to lend to small businesses in the Black and Brown
communities, because we know the market and they know us. But
it is difficult for a national bank to do that, because it is a
different type of lending, which I do understand too.
But in terms of you cannot put all of the small businesses
in one box, and they have special needs because they may have
limited credit or issues because of disinvestment, and also
they need long-term products, and second, they need a lot of
equity-like investments, like the EQ2's. So this recent
project, the Emergency Capital Investment Program, that
Congress just passed, was not given to nonbank CDFIs, so we
hope that this Committee will consider reallocating resources,
but we need more flexible, long-term capital, because we are
not a bank. We need to create products to meet the needs of
small businesses.
Thank you for asking, Senator.
Senator Ossoff. Thank you, Mrs. Bruce. I appreciate it.
With my remaining time, could you elaborate a bit on what
policy measures this panel and the Congress might consider in
order to ensure that monetary expansion and fiscal stimulus
might not flow so predominantly through the largest investment
banks in the country, but the regional banks, credit unions,
and CDFIs who have those personal relations with small
businesses in the community?
Mrs. Bruce. Well, I mean, part of the policy that could be
set is making sure that you have a reporting mechanism to
report directly to the Committee or to Congress, because you
need a system in place to mitigate whatever the risks it may
take to make sure it goes on to the people that need the money.
So, of course, reporting would be important, but also if we
educate our customers ahead of time, like providing
comprehensive TA, it will help them report on the usage of the
funds. So policies are made, but it can be implemented if you
have people who are on the ground and have relationships with
the borrowers, because it is necessary in order to have the
type of trust and to make sure that we have compliance with the
reason for which the funds were given. And sometimes it is not
intentional, but things happen, but it is because of lack of
education or knowledge, and misunderstanding. So you need
systems in place to mitigate that risk.
Senator Ossoff. Thank you, Mrs. Bruce, thank you to our
panel, and thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Ossoff. Before closing I
have one more question for Mr. DeLoss. We have heard a lot of
concerns about raising the minimum wage to a living wage over a
number of years. As you know, the $15 takes effect over 3 or 4
years.
Do you agree? How would this affect your restaurant
business?
Mr. DeLoss. Yeah, of course minimum wage is a complicated
issue, as a business owner. I appreciate the sentiment of
expanding this over a multiyear period. What I can share is
what I know from my experience. We push to get people up and
over that $15-an-hour wage as quickly as we can, and in a $15
wage we are talking about, you know, $30,000 worth of gross
income a year, so it is not a tremendous rate. But the reality
is all of a sudden when you start getting people up there,
their transportation, their housing stability, their food
stability, their child care stability, all [inaudible] and our
folks can show up to work with their head in the game and do an
excellent job for us.
And so regardless of how we come to the solution, and what
a compromise looks like legislatively, I know it is in our best
interest to just keep moving people's wages up. And we have
shown it time and time again that it works at our business. And
so while I appreciate minimum wage is a very partisan issue,
poverty is far from a partisan issue, and the reality of the
cycle of poverty is that is more disruptive to a business than
really anything else we are discussing.
And whether it is in employee retention, employee
productivity, satisfaction, it is incredibly disruptive to have
a team that is turning over 100, 150 percent a year, which is
the average going rate in our industry. And so to operate as a
business that has less than 40 percent turnover on an annual
basis, we are sustaining jobs and productivity that ultimately
passes through to our customers in a meaningful way.
So I appreciate the intention and the effort around the
legislation. I know it is a complicated issue. But I ultimately
know that it is in the best interest of people to increase
their wages.
Chairman Brown. Thank you for the thoughtful answer. I know
there are success stories out there like Ms. Ritchie's, and
your success story is inspiring, and I know that the Ranking
Member thought so too. But for most Americans, the current
minimum wage is not enough to pay their rent, pay their bills,
support their families. We need to make sure every worker in
America has a living wage. If you believe in the dignity of
work, whether you punch a clock or swipe a badge or work for
tips, every worker should have a minimum wage. It is a living
wage. It is a floor, not a ceiling, so that workers can
continue to earn higher wages.
Thank you to the whole panel. For Senators who want to
submit questions for the record, these questions are due 1 week
from today, on Thursday, March 4th. For our witnesses, please
get answers to us within 45 days, to any questions you submit.
And I will just close with this. Thank you all for
testifying. Entrepreneurs like you are proving when we invest
in workers, businesses are profitable, they grow, growth
benefits the whole community. We need to get workers in
Columbus and in Butler County, Pennsylvania, Ms. Ritchie, and
all over the country back on the job safely. That we can agree
on.
We need to use every tool we have to do that, including
restarting the successful State Small Business Credit
Initiative. Thank you for your comments on that, Ms. Milano.
The money goes to States to create their support programs. It
is targeted. It goes to the hardest-hit States, based on
employment data, and gives them the flexibility to fund a range
of support programs, including venture capital. We heard from
Mr. DeLoss how important venture capital can be to small
businesses, like his in the middle of the country, often get
overlooked in places like New York and San Francisco. And we
know it has been a success. It has generated more than $8 in
private capital for every $1 in the program. Mrs. Bruce has
illustrated that with her answer to Senator Van Hollen, his
question.
We heard the same out-of-touch talking points today that we
have heard for a year. Politicians in Washington saying
everything is fine, the recovery is great, the economy is
growing, and somehow we do not need a massive response to a
massive crisis. Of course this is a big rescue plan. It is $1.9
trillion. But it is a big crisis. It is an economic crisis. It
is a public health crisis. It has effected pretty much all
aspects of everyone's lives. We are rising to meet this moment.
This panel helps us do that. We need to deliver for the people
whom we serve.
Thank you all, and the Committee is adjourned.
[Whereupon, at 11:14 a.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
One of the most important things we can do on this Committee is
give a voice to all the people who haven't had enough of one in their
Government.
Last week we began by hearing from Ohioans and witnesses from
around the country who don't have corporate lobbyists, but who
understand their communities, and who know the challenges regular
people are facing right now.
Today we will continue that work, hearing from small business
owners and small lenders from Columbus and Baltimore and Pennsylvania.
Just like American workers, these are businesses that are often left
behind or steamrolled over by the largest corporations and the biggest
banks, and their allies in Washington.
That Wall Street system too often excludes small and minority-owned
businesses, and only measures success by the stock market.
But the Dow doesn't tell us much about how a restaurant in Columbus
or an early learning center in Baltimore and their workers and their
customers are doing.
These entrepreneurs are an important measure of the real state of
our economy.
Small businesses create jobs and economic growth in our
communities--in the heartland, in Black and Brown communities, places
that often don't get a lot of outside investment.
The stakeholders in these businesses aren't nameless, faceless
shareholders--they're our neighbors, family members, the people you see
at school and at the grocery store and at church.
And we will not have a strong recovery unless we reach these
businesses, and the lenders and organizations that support them.
These businesses know how important it is to have local lenders and
institutions that understand small business needs and serve their
communities. It's the community development financial institutions
(CDFIs) and minority depository institutions (MDIs) that help them
fight to save their businesses when the big banks turn them away, or
were never an option in the first place.
People in Ohio and across the country remember how after the last
economic crisis in 2008 and 2009, the biggest corporations recovered,
while large swaths of the country were left behind.
Many of these same communities have watched for decades as
factories closed, investment dried up, and storefronts were boarded
over.
They're also often places that have never had the investment they
should--because of discrimination, because of redlining, because of
decades of policy that funneled resources and jobs away from entire
neighborhoods and towns.
In all these places, so many Americans know what it's like to wake
up one day, and realize the only jobs to be had are at a big-box chain
for rock-bottom wages, with no health care, no paid sick days, and no
power over your schedule.
We cannot allow that to be our future.
We need to invest everywhere: in the places that have seen
investment dry up, and in places that were overlooked, discriminated
against, or outright preyed upon to begin with.
If we allow another Wall Street-first recovery--where the big guys
get taken care of, while small businesses fight over the scraps--we
will end up with more hollowed-out towns and neighborhoods, and more
workers trapped in a broken corporate business model.
President Biden understands that. And his rescue plan will get help
to these businesses and the communities they support around the
country.
The number one thing we must do to support all small businesses is
to get every American vaccinated, as quickly as possible.
That's how we protect workers, and it's how we ensure customers
feel safe going shopping and going to restaurants and going to the
movies and concerts and barber shops again.
Our rescue plan will fund the massive mobilization we need to make
that happen. And it will get more financial support to these small and
minority-owned businesses, and the community lenders that support them.
In addition to continuing to fund and improve the PPP and EIDL
programs, we're going to restart a successful Treasury program that
will get more small businesses access to capital. And we will make sure
mission-based lenders like CDFIs and MDIs have what they need to serve
their communities.
Our work, though, cannot end with this emergency bill.
We need to invest in these entrepreneurs and their communities for
the long term. We need to rethink our economy, and how we value the
people and places it's made up of.
When we put communities, not corporations, at the center of our
policy, we'll get more businesses that actually value their workers,
and measure success the same way families do--not in quarterly earnings
reports. We'll get more entrepreneurs building something for the long-
term, something with roots.
People are proud of where they come from. And they want to see the
Main Streets they love thriving again.
Our witnesses today know that. They know the vibrancy and the
dynamism and the diversity of working-class towns and neighborhoods all
over this country.
We need get to work to invest in them, and ensure that those
places, America's Main Streets--not Wall Street--are at the center of
our recovery, and are the building blocks of a better economy.
______
PREPARED STATEMENT OF WATCHEN HARRIS BRUCE
President and CEO, Baltimore Community Lending, Inc.
February 25, 2021
Chairman Brown, Ranking Member Toomey, and distinguished Members of
the Committee, thank you for the opportunity to appear before you
today. My name is Watchen Harris Bruce, and I serve as President and
CEO of Baltimore Community Lending (BCL). BCL is a Community
Development Financial Institution (CDFI) located in the heart of
Baltimore with the dedicated mission to support the revitalization and
strengthening of targeted neighborhoods through innovative and flexible
financial resources. BCL's services include mini-perm mortgages and
construction loans, in addition to non-real estate small business
lending that may not require collateral.
Baltimore is home to approximately 12,500 businesses, of which
11,700 or 93 percent are small business firms with fewer than 50
employees, with 6,500 of these businesses having fewer than five
employees. Approximately 53 percent of these businesses are minority-
owned, and women own 47 percent. Prior to COVID-19, many of these
businesses faced significant challenges accessing needed capital--due
to business size, race, gender, and the inability to provide adequate
collateral. As a result, many businesses have turned to more expensive
capital resources, including but not limited to high-interest credit
cards and online lenders, many of whom are predatory and finding a
larger foothold in our city. These trends were concerning prior to the
pandemic, and COVID has exacerbated the already existing lack of
affordable capital conditions in our community.
That said, in my testimony today, I would like to address the
substantive issues and concerns facing my CDFI in Baltimore and CDFIs
like mine around the country. As an African American led CDFI, BCL is a
member of the African American Alliance of CDFI CEOs (Alliance). The
Alliance is a nonprofit coalition comprised of over 46 CDFIs covering
50 States, with the purpose of strengthening the operational and fiscal
capacity of Alliance members and empowering their organizations to
deploy solutions at scale to build sustainable wealth, equality, and
just quality of life for low- and moderate-income Black populations and
communities across the U.S. Central to the Alliance's mission is the
objective of closing the Black wealth gap--through CDFI practice and
advocacy, ensuring access to capital and continued growth of African
American businesses and the Black economy.
CDFIs can play a significant role in narrowing the racial wealth
gap and have been an effective tool in generating economic development
in low-income and African American communities. However, African
American led CDFIs have been significantly underfunded, greatly
impacting our ability to stimulate and grow local Black economies that
have consistently experienced disinvestment and underinvestment for
centuries.
According to a recent study conducted by the Hope Policy Institute,
covering the period between 2014 to 2017, the assets of White led CDFIs
grew by $21.8 billion, while the assets of minority led CDFIs grew by
just $682.5 million. \1\ Another study found that when nonprofits
provide support within Black communities, agencies headed by Black
executives experience a 24 percent smaller organizational budget than
nonprofits led by White executives. \2\
---------------------------------------------------------------------------
\1\ Closing the CDFI Asset Gap, Hope Policy Institute (2020).
\2\ ``Nonprofits Led by People of Color Win Less Grant Money With
More Strings (Study)'', Chronicle of Philanthropy (2020).
---------------------------------------------------------------------------
This is an unfortunate result and directly impacts capital
liquidity and our ability to successfully fund businesses and economic
development in the communities we serve. Data show that when lenders,
technical assistants, business coaches, housing and credit counselors,
loan officers, and community lenders reflect the identities and
experiences of their non-White potential clients, the rate of funding,
professional support, loan flexibility, and positive economic outcomes
increase dramatically. \3\
---------------------------------------------------------------------------
\3\ Lyons-Padilla Sarah, Markus Hazel Rose, Monk Ashby,
Radhakrishna, Shah Radhika, Dodson IV Norris A., Eberhardt Jennifer,
Race Influences Professional Investors' Financial Judgments (2019).
---------------------------------------------------------------------------
In the recent COVID relief packages passed by Congress, this body
ensured that the CDFI Fund (Fund) received additional appropriations,
which is a big step in the right direction. However, in passing the
Emergency Capital Investment Program (ECIP), a program which provides
$9 billion in investment capital targeting minority led CDFIs, low-
income communities, and areas of persistent poverty, the legislation
excluded nonbank CDFIs, leaving many of our organizations still void of
needed investment capital. We believe it was the original intent that
nonbank CDFIs not be excluded, and we ask that you consider opening
additional authority and appropriations, specifically targeting
minority led nonbank CDFIs, low-income communities, and areas of
persistent poverty. Inclusion of nonbank CDFIs such as members of the
Alliance and other CDFIs of color is needed and essential to
implementing ECIP and will lead to greater program success. While
minority-owned and other depository institutions and credit unions are
a conventional start in reaching African American, low-income and
underserved communities, nonbank CDFIs, particularly those led by
communities of color, have consistently proven our ability to reach and
successfully deploy capital with those communities that need it most.
That said, I would also ask that you look to the New Markets Tax
Credit Program as another mechanism for directly reaching minority led
CDFIs. As a former reviewer of the Program, I am concerned that many
minority led and smaller CDFIs/CDEs may be excluded from receiving
awards, not due to their lack of experience or ability, but because the
Program scoring system prefers larger more tenured applicants. In
theory, all other factors being equal, an applicant with 8 years of
experience will score higher than one with 5 years of experience, and
therefore receive the award. Many minority led and smaller CDFIs/CDEs,
while having significant experience and capacity, may have less time in
practice and will always lag in time when compared to older applicants.
A possible solution for the Committee to consider is whether the Fund
should preserve a portion of each allocation cycle for emerging
qualifying CDFIs/CDEs. Greater participation of emerging CDFIs/CDEs and
allocatees would directly impact underserved and low-income communities
in rural and metropolitan areas when considering that CDFIs/CDEs
embedded in targeted communities are often best positioned to
understand the needs and priorities on the ground.
Thank you for the opportunity to provide testimony and share my
views on these important issues. This Committee has consistently
supported CDFIs and community and economic development in our Nation's
rural and urban regions. We look forward to our continued work together
and developing solutions for small businesses, affordable housing, and
job creation. Thank you.
______
PREPARED STATEMENT OF JOE DELOSS
Founder and CEO, Hot Chicken Takeover, Columbus, Ohio
February 25, 2021
Thank you Chairman Brown and Ranking Member Toomey for inviting me
to testify before the Senate Committee on Banking, Housing, and Urban
Affairs. My name is Joe DeLoss, I am the founder and CEO of Hot Chicken
Takeover; a small fast-casual restaurant chain based in Columbus, Ohio,
and growing throughout the Midwest.
Though our business has an absolutely ridiculous name, it was built
with a serious, transformative mission. I founded Hot Chicken Takeover
to provide employment to those who've experienced significant adversity
in their lives. Ranging from incarceration, to homelessness, to
addiction, and to many things in between, our team is a diverse cast of
players, all working collaboratively to be a best-in-class restaurant
chain. We currently have 5 restaurants open and a sixth under
construction. Our team will be approaching 200 people by year end.
This introduction, especially including mention of our employees'
pasts, often garners warm, sympathetic responses from listeners. With
that in mind, it's very important for me to distinguish that Hot
Chicken Takeover is very far from a charity or cause--our business is
strong because our people are strong. Though they have been overlooked
by the greater employment market, our team has led Hot Chicken Takeover
to countless awards, national exposure, and private investment by some
of the greatest innovators in our industry. Hot Chicken Takeover is a
for-profit business demonstrating the positive economics that can be
generated from deeply caring for and investing in your team.
When COVID-19 struck in the United States, our leaders immediately
concerned themselves with the stability of our team and community. With
fear that restaurant sales would dry up completely, we made a choice to
temporarily close our restaurants and move our team onto emergency
assistance and unemployment benefits. This transition was far from
smooth, leading our remaining team to build a makeshift case management
practice to ensure our team members' needs could be met through our own
discretionary resources while the Government unburied itself from such
immense service demand. The other large consequence of the pandemic was
the loss of $2M of committed private investment capital, set to close
the last week of March 2020.
Our remaining small team of leaders jumped into action to pivot our
concept and ready ourselves for reopening. This effort included
everything from safety and sanitation initiatives, to menu
reconfigurations, to employee benefits, and to new technology
integrations. Along the way, we were able to secure the first round of
PPP funding, EIDL dollars, and several sympathetic investments from
existing business partners. Without these supports, Hot Chicken
Takeover would be a likely casualty of the crisis.
Thankfully, our restaurant concept was well positioned to serve a
post-COVID customer and we began reopening locations in May 2020. With
dining rooms closed to ensure the safety of our team and guests, we
doubled down on carry-out and delivery business, doing our best to
avoid the predatory fees and poor service models of many third-party
vendors in our industry. We successfully recalled 90 percent of our
team upon reopening and began hiring others displaced by the pandemic
to accommodate our increased demand. Hot Chicken Takeover has since
been able to stabilize financially with additional private industry
investment and is cautiously approaching growth, intent on creating
more transformative and meaningful jobs.
The COVID crisis is far from over for our company but we finally
see a path forward for the concept and our team. And though Hot Chicken
Takeover and it's team have glimmers of growth on the horizon, we
represent a small segment of an utterly decimated industry.
Assistance for our small businesses and employees remain critical
for our communities to move forward.
Thank for this opportunity to share testimony. Thank you all for
your service and leadership.
______
PREPARED STATEMENT OF JESSICA MILANO
Board Member, Small Business Majority
February 25, 2021
I would like to thank Chairman Brown, Ranking Member Toomey, and
all of the distinguished Members of the Committee for inviting me to
testify today.
I am currently a member of the Board of Directors of Small Business
Majority, a national small business advocacy organization that empowers
America's entrepreneurs to build a thriving and equitable economy, and
a Senior Advisor to Calvert Impact Capital, a mission-driven financial
services firm that has played a key role in helping structure several
small business recovery funds since the pandemic began. I previously
served as Deputy Assistant Secretary for Small Business, Community
Development, and Housing Policy at the U.S. Treasury during the Obama
administration where I oversaw the Small Business Lending Fund (SBLF)
and the State Small Business Credit Initiative (SSBCI) programs
responsible for providing credit to Main Street businesses after the
financial crisis. I am appearing today as a private citizen and the
views expressed here are my own and should not be attributed to any of
the organizations I just mentioned.
Given my background, my testimony today focuses on the critical
role small businesses play in our economic recovery. Small businesses
are the foundation of our communities and the largest single source of
new job growth in our economy. Over the last two decades, small and new
businesses have been responsible for creating 2 out of every 3 net new
jobs. \1\ Importantly, these jobs are often the high-quality, higher-
paying jobs that provide pathways to the middle class. Fully half our
country's private sector workforce works for a small business. The
pandemic has had a profound impact on communities across America but
has been especially challenging for small businesses, particularly
those owned by people of color, women, and immigrants. Pandemic
restrictions and the decline in consumer demand has pushed many small
businesses to the brink of failure and beyond. Rebuilding an inclusive
economic recovery means ensuring small businesses have the tools and
resources they need to come back stronger than before.
---------------------------------------------------------------------------
\1\ Small Business Administration, ``Frequently Asked Questions'',
June 2016.
---------------------------------------------------------------------------
In my testimony today, I wish to discuss three important points:
Many of the communities hardest hit by the pandemic have
been communities of color;
Despite significant Federal support, minority-owned
businesses continue to experience challenges accessing capital;
and
Congress should reauthorize the State Small Business Credit
Initiative to address these market gaps.
Let me discuss these in turn.
Many of the communities hardest hit by the pandemic have been
communities of color.
Small businesses are the foundation of healthy, vibrant
communities. They are the places we gather to share a meal and they
provide the critical services we could not live without like the small
local grocer, dry cleaner or neighborhood coffee shop. Whether in rural
towns, urban neighborhoods, or middle class suburbs, thriving
successful small business owners serve as role models in their
communities and mentors to the next generation. They are an important
source of jobs and provide tangible examples of the diverse pathways
that can be taken to achieving the American dream. It is impossible to
discuss economic opportunity in America without addressing how to
support small businesses.
The effects of the pandemic on small businesses amid forced
closings, modified reopenings, and weakened demand, are well documented
and well understood by this Committee. I would however like to draw
attention to the disproportionate impact the pandemic has had on
communities of color. Many of the communities hardest hit by the
pandemic have been communities of color. Research from the NY Fed
released in August found Black-owned businesses are more likely to be
located in counties with higher incidence of COVID-19 and also are
highly concentrated in retail, restaurants, and other service
industries most affected by shutdowns and social distancing. \2\ To
make matters worse, these businesses often had weaker cash positions
and weaker bank relationships before the pandemic leaving them
particularly vulnerable to the economic shock that followed. \3\
---------------------------------------------------------------------------
\2\ Mills, Claire Kramer and Jessica Battisto, ``Double Jeopardy:
COVID-19's Concentrated Health and Wealth Effects in Black
Communities'', Federal Reserve Bank of New York, August 2020.
\3\ Ibid.
---------------------------------------------------------------------------
While the first round of the Paycheck Protection Program (PPP) is
estimated to have reached up to 74 percent of small businesses
nationally, \4\ ``these loans reached only 20 percent of eligible firms
in States with the highest densities of Black-owned firms, and in
counties with the densest Black-owned business activity, coverage rates
were typically lower than 20 percent.'' \5\
---------------------------------------------------------------------------
\4\ U.S. Census Bureau, ``Small Business Pulse Survey: Tracking
Changes During The Coronavirus Pandemic'', Data as of January 10, 2021,
available at: https://www.census.gov/data/experimental-dataproducts/
small-business-pulse-survey.html.
\5\ Mills, Claire Kramer and Jessica Battisto, ``Double Jeopardy:
COVID-19's Concentrated Health and Wealth Effects in Black
Communities'', Federal Reserve Bank of New York, August 2020.
---------------------------------------------------------------------------
Given this data, it is unfortunately not surprising that more
entrepreneurs of color report they may close their business in the next
3 months. According to recent polling from Small Business Majority,
nearly 1 in 3 Black and Latino business owners report they may be
forced to temporarily close compared to 21 percent of White business
owners.
An additional 18 percent of Black and Latino entrepreneurs report
they are likely to permanently close their business in the next 3
months, compared to 14 percent of White small business owners. \6\
---------------------------------------------------------------------------
\6\ Small Business Majority, ``Scientific Opinion Poll: Small
Businesses Continue To Face Closures in 2021'', January 27, 2021.
---------------------------------------------------------------------------
The impact of losing these businesses is two-fold: first on the
business owner themselves, and second on the communities they serve.
While vaccines have brought hope social distancing restrictions may
ease this year, it is hard for Main Streets to come back to the
bustling centers they were before the pandemic when so many businesses
have shuttered permanently. Preventing this means addressing the market
gaps that exist in accessing capital.
Despite significant Federal support, minority-owned businesses continue
to experience challenges accessing capital.
The Federal Government's most significant source of relief to small
businesses during the crisis has been the Paycheck Protection Program
(PPP), which provides low cost, forgivable loans to support payroll
initially but today can be applied to other qualified business expenses
as well. This relief surely helped prevent higher unemployment and
helped many larger, employer small businesses survive the last year.
What we learned from PPP is that businesses that were underbanked
prior to the pandemic had trouble accessing these loans. Non-employer
firms, like the self employed, and small business owners of color were
much less likely to have a business banking relationship prepandemic--
31 percent of Black-owned businesses, 28 percent of AAPI-owned
businesses, and 26 percent of Latino-owned business owners lacked
business banking. When the pandemic hit, emergency programs \7\
implemented by the SBA favored national 7(a) lenders and their clients.
While well intentioned, smaller community lenders that had not
previously done a high volume of SBA loans found it confusing or
difficult to utilize the program, leaving their clients shut out. And
businesses without strong banking relationships precrisis were even
further at the back of the queue. \8\
---------------------------------------------------------------------------
\7\ Small Business Majority, ``Scientific Opinion Poll: Small
Businesses Struggling To Access Capital, Harming Their Financial
Recovery,'' February 17, 2021.
\8\ Wall Street Journal, ``PPP Small Business Loans Left Behind
Many of America's Neediest Firms'', June 17, 2020.
---------------------------------------------------------------------------
According to Small Business Majority's polling, roughly 4 in 10
small business owners had not obtained any capital prepandemic like
loans or lines of credit from any lending institution including 31
percent of Black-owned businesses and 38 percent of Latino owned
businesses. These loose ties to the banking sector meant relatively few
small business owners surveyed by Small Business Majority were able to
secure funding through Federal small business relief programs. While
roughly 1 in 3 applied for a PPP loan, only a third received the full
amount requested, and the number was even lower for minority-owned
businesses--23 percent of Black-owned businesses, 23 percent of AAPI-
owned businesses and 27 percent Latino-owned businesses received the
full amount. \9\
---------------------------------------------------------------------------
\9\ Small Business Majority, ``Scientific Opinion Poll: Small
Businesses Struggling To Access Capital, Harming Their Financial
Recovery'', February 17, 2021.
---------------------------------------------------------------------------
This data is not a criticism of PPP but highlights the challenges
policymakers face in helping capital reach businesses and communities
historically underserved and underbanked by traditional lenders. PPP
also does not support new businesses. Because of the program's initial
focus on reducing unemployment and supporting businesses impacted by
the pandemic, new businesses formed in the last year are not eligible.
However, a silver lining of the pandemic has been the number of new
business starts.
According to data from the U.S. Census Bureau, compiled by Economic
Innovation Group, ``In 2020, there was an explosion in new business
applications, reaching nearly 4.5 million by year's end--a 24 percent
increase from 2019 and 51 percent higher than the 2010-19 average.''
\10\ It is too soon to tell how many of these 10 small businesses will
survive but the data is encouraging because it reverses a decades long
decline in new business formation and shows how entrepreneurship can
help lead the way out of the crisis.
---------------------------------------------------------------------------
\10\ Economic Innovation Group, ``The Start Surge? Unpacking 2020
Trends in Business Formation'', February 8, 2021.
---------------------------------------------------------------------------
The next phase of the recovery will be to move beyond the short-
term relief PPP provided to focus on small business support that
complements PPP by helping to address these credit gaps and provides
incentives for innovative private financing and flexible local support
to help build vibrant small business ecosystems that are stronger than
before.
Congress should reauthorize the State Small Business Credit Initiative
to address these market gaps.
As the Committee hears proposals to help rebuild Main Street small
businesses, I'd like to recommend reauthorization of the State Small
Business Credit Initiative (SSBCI) and share my experience working on
the program. SSBCI complements other Federal programs by filling market
gaps these programs do not cover, such as guaranteeing loans from
CDFIs, financing nonprofits, and supporting equity financing for high-
growth potential businesses. It also helps build local lending and
investment capacity to help support historically underserved
businesses.
SSBCI was funded with a one-time authorization of $1.5 billion
through the Small Business Jobs Act of 2010. It was a new program and a
true experiment borne of the need to jump start small business lending
and investment during the financial crisis. The program worked by
allowing States to set-up their own small business support programs
targeted to local economic needs. It was so flexible there were just
two primary requirements: (1) States had to establish at least one from
a list of 5 possible credit or equity programs; and (2) States had to
provide a plan for leveraging $10 of new private sector small business
financing for every $1 of SSBCI funds expended.
Unlike other Federal programs, like those administered by the Small
Business Administration for example, it was not a one-size-fits-all
approach with uniform national requirements. Some communities chose to
target microbusinesses while others targeted manufacturers or high-tech
companies. Each State has its own needs and, with them, developed a
unique set of partners to administer the programs. In total SSBCI
funded 154 programs nationwide, over 80 of them new, and dedicated $1
billion to lending programs and over $400 million to venture capital
programs targeting investment in early stage businesses. \11\
---------------------------------------------------------------------------
\11\ U.S. Department of the Treasury, ``State Small Business
Credit Initiative: A Summary of States' 2016 Annual Reports'', July 24,
2017.
---------------------------------------------------------------------------
The program succeeded in providing capital to very small and young
businesses. Eighty percent of SSBCI loans or investments supported
businesses with 10 or fewer full-time employees and nearly half the
supported businesses were less than five years old. It also addressed
capital needs in low- and moderate-income (LMI) areas, 42 percent of
SSBCI loans or investments were were made to businesses in LMI
communities. \12\
---------------------------------------------------------------------------
\12\ Ibid.
---------------------------------------------------------------------------
This was achieved because the program partnered with often smaller
community lenders and community development financial institutions
(CDFIs) that exist to meet the unique needs of historically underbanked
communities. The CDFI industry has operated for more than 40 years to
serve these businesses with capital and advisory services. Today, CDFIs
are on the front lines of the current health and economic crisis and
are often the first touchpoint for a struggling local business owner
seeking help.
During the last year, some States have sought to leverage CDFIs
ability to reach historically underbanked and minority-owned small
businesses by capitalizing their own small business support programs.
In May New York launched the New York Forward Loan Fund, a $100 million
fund managed by Local Initiatives Support Network (LISC), a CDFI that
works with other New York-based CDFIs to provide low cost working
capital loans to small businesses and nonprofits with fewer than 50
employees and that have been negatively impacted by the pandemic. And
in November California followed with the California Rebuilding Fund, a
public-private partnership that drives capital from private,
philanthropic and public sector resources to CDFIs so that they can
extend affordable, flexible capital to small businesses they serve.
Both programs are leveraging CDFIs target market and mission to reach
small businesses that were unable to access other Federal assistance
programs.
To date, the programs have reached over 1,000 of the hardest to
reach small businesses across their States, with 77 percent loans to
businesses either located in a LMI census tract or owned by a
historically underbanked population including businesses owned by women
and people of color. These businesses are the smallest of the small; 76
percent of businesses that have received loans have 5 or fewer full-
time employees and 21 percent of businesses are sole proprietorships.
The current proposal to reauthorize SSBCI at $10 billion in funding
would help make these programs available in more States and help more
small businesses access affordable loans beyond March 31, 2021, when
PPP is set to end. Also, by providing flexible working capital and
other forms of small business credit and investment products SSBCI
would address the gaps left by PPP and help more small businesses keep
the doors open so when restrictions are lifted they are ready to
welcome back customers and are stronger and more resilient than before.
Conclusion
The pandemic has touched all of our lives and many of us look
forward to the day we can gather together and enjoy the interaction of
a crowded Main Street again. In order to build the communities we want
to live in and support economic opportunity and inclusivity for
ourselves and our neighbors, we need to support our small businesses
and ensure they have the resources to retool, reopen, and thrive.
______
PREPARED STATEMENT OF JOEL GRIFFITH
Research Fellow, The Heritage Foundation
February 25, 2021
Thank you Chairman Brown, Ranking Member Toomey, and other Members
of the Committee for the opportunity to testify today. My name is Joel
Griffith. I am a Research Fellow in Financial Regulations at The
Heritage Foundation. The views I express in this testimony are my own
and should not be construed as representing any official position of
The Heritage Foundation.
This testimony will briefly examine economic conditions stemming
from the COVID-19 pandemic and the economic shutdowns before examining
the proposed latest round of COVID relief. This legislation provides
for billions more of Federal loans and grants despite the fact that
billions of previously approved aid remains available. Some of these
funds will flow to a program--the State Small Business Credit
Initiative--with a history of problems. This Federal aid crowds out
private sector investment and ignores the fact that small businesses by
and large do not report a drying up of credit. The legislation also
provides for a doubling of the minimum wage which would harm small
businesses and slow economic recovery. Reopening the economy is the
best relief for small businesses, as evidenced by the divergent
economic results from State to State.
The data certainly bear out the economic decline stemmed from
Government-mandated closures and people responding to what they heard
from some public health officials.
For the first time in our Nation's history, Governments
intentionally suppressed the supply of goods and services. Likewise,
restrictions on consumer activity artificially suppressed demand. An
historic plunge in the production of goods, provision of services, and
private investment resulted in the second quarter of 2020. \1\
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\1\ The Nation's economy in the second quarter of 2020 shrank at a
31.4 percent annualized rate. Personal consumption dropped at a 33.2
percent annualized rate. Consumption of personal services dropped 41.8
percent annualized. Table 1.1.1, Bureau of Economic Analysis, https://
apps.bea.gov/iTable/
iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
(accessed February 24, 2021). By the middle of 2020, the economy had
contracted by 10.2 percent from its peak. Federal Reserve Bank of St.
Louis, Series GDP, https://fred.stlouisfed.org/series/GDP (accessed
February 24, 2021).
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The robust recovery of the third quarter and the much slower growth
in the fourth quarter closed more than two-thirds of the sharp economic
contraction. But much damage remains, with 9.9 million fewer
individuals employed \2\ and hundreds of thousands of businesses closed
forever, including more than 100,000 restaurants. \3\
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\2\ Federal Reserve Bank of St. Louis, Series PAYEMS, https://
fred.stlouisfed.org/series/PAYEMS (accessed February 24, 2021).
\3\ ``Restaurant Industry in Free Fall; 10,000 Close in Three
Months'', National Restaurant Association, December 7, 2020, https://
restaurant.org/news/pressroom/pressreleases/restaurant-industry-in-
free-fall-10000-close-in (accessed February 24, 2021).
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It's not for want of Government spending that the economy still has
not fully recovered. The Federal Government borrowed, printed, and
spent trillions of dollars in an effort to cushion the economic
downturn. Total Federal spending of $6.551 trillion in fiscal year 2020
exceeded the prior year by $2.1 trillion \4\--an enormous increase of
more than $24,000 per family of four. \5\
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\4\ Congressional Budget Office, ``Historical Budget Data'',
February 11, 2021, https://www.cbo.gov/system/files/2021-02/51134-2021-
02-11-historicalbudgetdata.xlsx (accessed February 24, 2021).
\5\ State and local governments increased spending by 15.4 percent
from 2015-2020 and in the depths of the recession in Q2 of 2020
actually spent 1.2 percent more than the prior year. Federal Reserve
Bank of St. Louis, Series SLEXPND, https://fred.stlouisfed.org/series/
SLEXPND (accessed February 23, 2021).
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Rather, Government-mandated closures and public perception of the
crisis continue to deter investment and suppress economic activity. The
skyrocketing Federal debt and rapidly expanding central bank balance
sheet creates the additional risk of a monetary crisis.
Congressionally Approved Aid Remains Unused
Congress has already approved more than $1 trillion in aid intended
for smaller businesses, including more than $800 billion through the
Paycheck Protection Program (PPP).
Much of this aid is still available. Of the additional $284 billion
provided for PPP in the December stimulus package to be disbursed
through March, only 36 percent had been obligated as of February 7. \6\
Likewise, the December package provided $12 billion to Community
Development Financial Institutions (CDFIs) and Minority Depository
Institutions (MDIs) to lend.
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\6\ U.S. Small Business Administration, ``Paycheck Protection
Program (PPP) Report: Approvals through 2/15/2021'', https://
www.sba.gov/sites/default/files/2021-02/PPP-Report-Public-210215-
508.pdf (accessed February 24, 2021).
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This legislation provides $15 billion more for the Targeted
Economic Injury Disaster Loan Program. But as of February 12, none of
the $20 billion appropriated for Economic Injury Disaster Loans had
been obligated. \7\
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\7\ U.S. Small Business Administration, ``COVID-19 EIDL Loans
Report 2021'', February 16, 2021, https://www.sba.gov/document/report-
COVID-0919-eidlloans-report-2021 (accessed February 24, 2021).
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The State Small Business Credit Initiative (SSBCI): A Troubled Program
From the Past
On top of all the prior spending--including the hundreds of
billions of approved aid which remains to be spent--this legislation
proposes $10 billion to restart the State Small Business Credit
Initiative (SSBCI). This State Small Business Credit Initiative (SSBCI)
funds State programs that provide Government loan guarantees and
Government loan purchases to businesses defined as ``small.'' \8\ Like
the PPP program, a small business can include those with 500 full-time
employees. This Government favoritism based on company size and
business sector partially replaces decisions over allocation of capital
made by individuals and investors with the preferences and dictates of
bureaucrats often for the benefit of the politically favored.
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\8\ U.S. Department of the Treasury, State Small Business Credit
Initiative, https://www.treasury.gov/resource-center/sbprograms/Pages/
ssbci.aspx (accessed February 24, 2021).
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Numerous problems plagued this program in the past. \9\ For
instance, the Treasury's Office of Inspector General (OIG) identified
noncompliant expenditures related to California's SSBCI loans which
``constitute a `reckless' misuse of funds.'' \10\ The OIG also
identified ``reckless misuse'' of funds and ``conflicts of interest''
within the New York program related to one of the venture capital firms
participating in the State's SSBCI program. \11\ These States were not
alone. The OIG found only four States to be in full compliance with the
program.
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\9\ Congressional Research Service, ``State Small Business Credit
Initiative: Implementation and Funding Issues'', April 23, 2018,
https://www.everycrsreport.com/reports/R42581.html (accessed February
24, 2021).
\10\ U.S. Department of the Treasury, OIG, ``Small Business
Lending Fund: California Needs To Improve Its Oversight of Programs
Participating in the State Small Business Credit Initiative'', May 24,
2012, p. 3, https://oig.treasury.gov/sites/oig/files/Audit-Reports-and-
Testimonies/OIG-SBLF-12-003.pdf (accessed February 24, 2021).
\11\ Congressional Research Service, ``State Small Business Credit
Initiative: Implementation and Funding Issues'', April 23, 2018, p. 41,
https://www.everycrsreport.com/reports/R42581.html (accessed February
24, 2021).
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Is this Government-provided capital actually filling a funding need
of small businesses not already met by the market? The data strongly
suggest no. The $1.5 billion in SSCBI funds in the Small Business Jobs
Act of 2010 was expected to generate $10.5 billion in new small
business financing by State Government lending programs. This is just a
small fraction of the total value of the $644.5 billion small business
loans outstanding in 2019 (the most recent year available). \12\
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\12\ U.S. Small Business Administration, Office of Advocacy,
``Small Business Lending in the United States'', September 2020,
https://cdn.advocacy.sba.gov/wpcontent/uploads/2020/09/10092858/Report-
2019-Small-Business-Lending-Report.pdf (accessed February 24, 2021).
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By the time SSBCI delivers these resources, the economy will be
even further rebounded. Indeed, that seems to be the entire point.
Under this legislation, SSBCI would not be limited to the duration of
the pandemic. Instead, SSBCI funding would be available for years after
the expected duration of the pandemic. This operates as a slush fund
for politicians across the Nation--a purpose detached from combatting
the economic fallout from the shutdowns.
Small Businesses Are Being Serviced by the Credit Markets
It's a misnomer that credit markets are not providing funds to
small businesses. Most small businesses are saying they are generally
not looking for more credit. \13\ Only 3 percent of respondents in a
recent National Federation of Independent Business (NFIB) survey
reported their borrowing needs were not satisfied. The survey also
reported the following; ``Twenty-six percent reported all credit needs
met (up 1 point) and 60 percent said they were not interested in a loan
(up 2 points). A net 3 percent reported their last loan was harder to
get than in previous attempts (up 1 point).'' \14\ Small business
credit conditions in December--based on the percentage of businesses
reporting ``easier'' lending conditions vs. ``harder'' lending
conditions--were identical to conditions one year prior, months before
any COVID-19 impact began. \15\ This stands in stark contrast to the
Great Recession more than a decade ago where credit conditions
according to the same index plunged, taking years to recover to their
prerecession levels. \16\ In fact, obtaining financing is the reported
top concern of just 1 percent of small business owners. \17\ In past
economic crises, 37 percent have reported financing and interest rates
as a top concern.
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\13\ William C. Dunkelberg and Holly Wade, NFIB Small Business
Economic Trends, NFIB Research Center, December 2020, https://
assets.nfib.com/nfibcom/SBETDec-2020.pdf (accessed February 23, 2021).
\14\ Ibid.
\15\ Ibid.
\16\ Ibid.
\17\ Ibid.
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More Federal Government Lending to Businesses Crowds out the Private
Sector
More Federal funding of private enterprise crowds out private
capital from the credit market. Our credit markets serve an important
function of efficiently allocating resources across the economy.
Usually, businesses and projects must compete with each other to obtain
limited amounts of capital in order to secure the resources needed to
function. Interest rates or return on equity serve as important price
signals--and also determine which businesses ultimately will obtain the
capital. The flow of capital from the Federal Government to private
businesses alters this equation. By delivering capital at submarket
interest rates or sometimes in the form of outright grants, businesses
which otherwise may not secure funding in a competitive environment
from an investor find it possible to obtain capital--and to continue
consuming limited resources.
The Small Business Administration (SBA) loan guarantees now secure
more than 50 percent of all outstanding loan balances as of Q3 2020--up
from less than 10 percent at the beginning of 2020. \18\
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\18\ Federal Reserve Bank of Kansas City, ``kcFed Small Business
Lending Survey'', Chart 2, December 21, 2020, https://
www.kansascityfed.org//media/files/publicat/research/indicatorsdata/
smallbusiness/2020/small%20business%20lending%20survey%
20template%203rd%20quarter%20-%2012212020v2.pdf?la=en (accessed
February 24, 2021).
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A $15 National Minimum Wage Disproportionately Harms Particular
Individuals, Businesses, and Locales
A one-size-fits-all $15 Federal minimum wage fails to take into
account that the cost of living in Iowa is less than half that of
Hawaii. \19\ In these more affordable locales, these mandates can be
expected to far more negatively impact businesses and jobs
opportunities. It's effectively a Red State tax. The unintended
consequences loom large.
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\19\ Missouri Economic Research and Information Center,
``Composite Cost of Living Index 2020 Quarter 4'', https://
meric.mo.gov/data/cost-living-data-series (accessed February 24, 2021).
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A $15 Federal minimum effectively excludes those who produce less
than $36,000 per year (the payroll cost of employing one full-time
worker) from participating in the U.S. labor market. This would destroy
jobs and opportunities for those who most need it, such as the 26
million Americans who did not graduate from high school. Young adults
seeking their first jobs, people living with disabilities, and those
reentering society after incarceration will be amongst the first to be
priced out of the jobs market. This can alter the life trajectory for
these individuals.
Expect larger businesses to stave off insolvency by outsourcing and
automation. Many others, particularly in low-margin sectors such as
fast food, will simply close their doors. The Congressional Budget
Office now estimates that a $15 minimum wage would destroy 1.4 million
jobs. For every 2 people estimated to be lifted out of poverty, the CBO
estimates 3 will lose their jobs. \20\
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\20\ ``The Effects on Employment and Family Income of Increasing
the Federal Minimum Wage'', Congressional Budget Office July 2019,
https://www.cbo.gov/system/files/2019-07/CBO-55410-MinimumWage2019.pdf
and ``The Budgetary Effects of the Raise the Wage Act of 2021'',
Congressional Budget Office, February 2021, https://www.cbo.gov/system/
files/2021-02/56975-Minimum-Wage.pdf.
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A Heritage Foundation report estimates the $15 Federal minimum wage
will cause childcare costs to soar by 21 percent. In many States--
including Georgia, South Carolina, Iowa, and Louisiana--costs could
rise well in excess of 30 percent. This is untenable for many low- and
middle-class families. Families with two children could see costs rise
by more than $5,000 in Nevada, Kansas, Oklahoma, Wisconsin, Louisiana,
and Georgia and by more than $6,000 in Iowa and Indiana. \21\
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\21\ Rachel Greszler, ``The Impact of a $15 Federal Minimum Wage
on the Cost of Childcare'', Heritage Foundation Backgrounder No. 3584,
February 11, 2021, http://report.heritage.org/bg3584.
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The bottom line: a one-size-fits-all $15 minimum wage will destroy
jobs, hamper economic growth, close businesses, and increase costs for
everyday families. Instead of mandates that reduce productivity,
policymakers should seek real and lasting wage gains that come from
workers' creating more value, such as the reduced regulations and taxes
that freed up resources for businesses to invest in workers and
contributed to a 14.6 percent increase in the incomes of the lowest
10th percentile of workers from 2016 to 2019. \22\
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\22\ The median usual weekly earnings of workers at the 10th
percentile of the wage distribution--those making about $10 to $11 per
hour--increased by 14.6 percent (from $397/week to $455/week) between
2016 and 2019. Data available for download from U.S. Bureau of Labor
Statistics, ``Data Retrieval: Labor Force Statistics--Table 5.
Quartiles and Selected Deciles of Usual Weekly Earnings of Full-Time
Wage and Salary Workers by Selected Characteristics, Not Seasonally
Adjusted'', https://www.bls.gov/webapps/legacy/cpswktab5.htm (accessed
February 1, 2021).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Reopening the Economy Is Saving Small Businesses
Full economic recovery does not stem from stimulus checks or
bailouts from Washington. Rather, it's largely a result of individuals
and businesses safely and legally interacting with others. The historic
economic rebound this summer proves that those properly informed of the
actual risks of the virus and the appropriate mitigation measures are
enthusiastically participating in this reopening.
Nationally, economic growth in last year's third quarter smashed
all prior records--growing at a stunning 33.4 percent annual pace. \23\
Record growth occurred even as Government transfer payments and
Paycheck Protection Program expenditures dropped by 20 percent in the
quarter. \24\
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\23\ U.S. Bureau of Economic Analysis, ``National Economic
Accounts, Table 1'', January 28, 2021, https://www.bea.gov/sites/
default/files/2021-01/gdp4q20-adv.xlsx (accessed February 16, 2021).
\24\ U.S. Bureau of Economic Analysis, ``Effects of Selected
Federal Pandemic Response Programs on Personal Income'', https://
www.bea.gov/sites/default/files/2020-10/effectsof-selected-federal-
pandemic-response-programs-onpersonal-income-2020q3-adv.xlsx (accessed
February 16, 2021).
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The pace of the recovery varies widely across the Nation due to
lockdown restrictions--ostensibly implemented to contain the spread of
the virus.
The Federal Reserve State Coincident Indexes--an approximation of
State GDP--vividly illustrates how variant the economic recovery is
based on States. \25\ This index suggests economic output at the end of
2020 was actually greater than prepandemic in Utah, Missouri, Idaho,
Nebraska, Alaska, South Dakota, Mississippi, and Georgia--notably
States without crushing, longlasting shutdowns. The economies in
Hawaii, Michigan, Rhode Island, Massachusetts all remain more than 10
percent smaller. Meanwhile, States like New York, Hawaii, and Illinois
remain mired in severe recessions. Only this month did Gov. Andrew
Cuomo (D-NY) and Chicago Mayor Lori Lightfoot (D-IL) admit that their
shutdowns of the service sectors may need to be relaxed.
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\25\ Federal Reserve Bank of Philadelphia, ``State Coincident
Indexes'', https://www.philadelphiafed.org/-/media/frbp/assets/surveys-
anddata/coincident/coincident-revised.xls (accessed February 16, 2021).
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In El Centro, California, 17.7 percent are unemployed, Los Angeles
suffers from 9.9 percent unemployment. Across New York City, draconian
restrictions and an army of compliance officers continue to push tens
of thousands of businesses out of business, resulting in 8.4 percent
unemployment. \26\
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\26\ U.S. Bureau of Labor Statistics, ``Unemployment Rates for
Metropolitan Areas'', preliminary for December 2020, https://
www.bls.gov/web/metro/laummtrk.htm (accessed February 23, 2021).
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Meanwhile, unemployment in numerous communities in Alabama, Idaho,
Iowa, Nebraska, South Dakota, and Utah is at 3 percent or less. The
statewide unemployment rate of under 4 percent in Alabama, Iowa,
Kansas, Nebraska, South Dakota, Utah, and Vermont contrasts sharply
with rates at least twice as high in California, Colorado, Connecticut,
Hawaii, Illinois, Nevada, New York, and Rhode Island. \27\ Overall, in
December, the 10 States with the fewest restrictions in place \28\
averaged 4.7 percent unemployment--while the 10 States with the most
restrictions averaged 7.1 percent unemployment. \29\
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\27\ U.S. Bureau of Labor Statistics, ``Unemployment Rates for
Metropolitan Areas'', preliminary for December 2020, https://
www.bls.gov/web/metro/laummtrk.htm (accessed February 23, 2021).
\28\ Adam McCann, ``States With the Fewest Coronavirus
Restrictions'', WalletHub, January 26, 2021, https://wallethub.com/edu/
states-coronavirusrestrictions/73818 (accessed February 4, 2021).
\29\ U.S. Department of Labor, ``Bureau of Labor Statistics'',
Local Area Unemployment Statistics Data Series, December 2020, https://
www.bls.gov/web/laus/laumstrk.htm (accessed February 4, 2021).
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A full recovery requires a safe reopening rather than more fiat
currency, borrowing, and Government spending. Only then will we see
both investment and consumption return in full force.
In December, 13 percent of small business owners reported poor
sales as the single most important problem--this was more than twice
the number of a year ago. \30\ Businesses don't need Government
largesse. And workers do not need more Government mandates. What our
Nation needs is a continued reopening.
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\30\ Ibid.
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Continued Fiscal Imprudence Threatens Our Economic Security
The Federal Reserve currently enables this explosion of spending by
digitally creating dollars and using those to purchase Government bonds
from the Treasury, which prevents the debt market from being
overloaded.
In under a year, Federal Reserve banks have more than doubled the
amount of U.S. Government debt it owns (printing money to buy debt),
leaping from $2.4 trillion to $4.9 trillion, nearly all of this coming
during the COVID-19 crisis. \31\
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\31\ Federal Reserve Bank of St. Louis, Series FDHBFRBN, https://
fred.stlouisfed.org/series/FDHBFRBN (accessed February 24, 2021).
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This allows politicians to distribute large sums of money without
immediately raising taxes or overloading credit markets, a process that
simply cannot go on forever.
Future generations will bear the brunt of the consequences.
Inflation is a growing concern. Eventually the Federal Reserve will
have to reverse its actions and sell the bonds back to the public, or
else risk stoking even higher inflation.
What would happen at that point? Nobody really knows, but it could
be a disaster. \32\ Since mid-March, the dollar has lost approximately
10 percent of its value relative to other currencies. \33\
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\32\ Norbert Michel, Paul Winfree, and Doug Badger, ``Potential
Long-Term Economic Consequences of the Federal Response to the COVID-19
Lockdowns'', Heritage Foundation Backgrounder 3498, June 4, 2020,
https://www.heritage.org/sites/default/files/2020-06/BG3498.pdf
(accessed February 24, 2021).
\33\ Daily FX, ``U.S. Dollar Index (DXY)'', https://
www.dailyfx.com/us-dollar-index (accessed February 24, 2021).
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Masking this economic misery by racking up trillions more in debt
and instructing the central bank to distribute trillions more to
favored interests might be politically expedient. However, it's
irresponsible. Economist Larry Summers, former director of the National
Economic Council for President Obama, recently warned that the current
plan under consideration could generate ``inflationary pressures of a
kind we have not seen in a generation, with consequences for the value
of the dollar and financial stability.'' \34\
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\34\ Larry Summers, ``The Biden Stimulus Is Admirably Ambitious.
But It Brings Some Big Risks, Too'', The Washington Post, February 4,
2021, https://www.washingtonpost.com/opinions/2021/02/04/Larry-summers-
biden-covid-stimulus/ (accessed February 24, 2021).
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The bottom line: We will pay for this through the visible burden of
direct taxation, the hidden tax of inflation, higher borrowing costs,
or some combination of the three. This will be a long-term drag on
economic growth. The notion that Congress--or the Fed--simply will be
able to fine-tune taxes and inflation without any consequences is a
fantasy. It is time for our leaders to take the national debt
seriously. With this in mind, any additional Federal relief measures
should focus on providing legal protections for businesses to reopen
and tailoring aid to meet the health crisis. \35\
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\35\ Public health represents less than 10 percent of the spending
in this package.
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______
PREPARED STATEMENT OF DANI RITCHIE
Owner/Stylist, Studio Alchemy, Harmony, Pennsylvania
February 25, 2021
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you for the invitation to testify today and allowing
me to share my story.
My name is Dani Ritchie. I am a hair salon owner and part-time
service worker from New Castle, Pennsylvania. My hair salon is located
in Harmony, Pennsylvania. I opened the door to my business in 2016,
only a year after graduating cosmetology school.
Harmony, is a quaint, little historic town in Butler County, with a
declining population of 2,500.
In addition to working as a hairstylist in my salon, I work part-
time as a server and bartender. Working in the restaurant industry
while attending college, I could pick up extra shifts when I was low on
cash, and my flexible schedule allowed me to go to school while still
making an income. I've worked in the restaurant industry for 18 years
now, 10 of them at North Country Brew Pub, in Slippery Rock,
Pennsylvania, where I am still currently employed part-time.
Being a server and bartender at the brewery is what allowed me to
pursue my passion of becoming a cosmetologist and open my very own
salon. The flexible hours allowed me to attend school, and the generous
tips are what helped me to save and open my salon without having to get
a loan.
When Pennsylvania first imposed business shutdown orders in March
of 2020, I had to close the doors to my salon for over 3 months, while
still having to pay rent and utilities for an unoccupied building. I
was also unable to work at the brewery at that time because it was
temporarily shut down. Luckily, when the brewery was finally permitted
to open back up on a limited basis to provide take-out and delivery
orders, I was able to pick up work there.
The owners of North Country Brewing Company, Bob and Jodi
McCafferty, are incredible people who have worked so hard to provide
not only one, but three unique, sustainable businesses in Slippery Rock
and Harmony. All three locations have provided secure employment for
206 people, that is until the Government put in place coronavirus
restrictions for restaurants.
During the first round of shutdowns, they could only keep 23 active
employees on payroll (which means 183 were laid off). And during the
second round of shutdowns, there were only 39 active employees on
payroll (leaving 106 laid off). It's heartbreaking to see the
astronomical number of restaurants and other small businesses that have
suffered financially and, in some cases, had to close permanently
because of the economic hardship caused by Government shutdowns and
restrictions.
Given these challenging circumstances, I am deeply concerned by the
proposal to raise the national minimum wage to $15 an hour and
eliminating the tip credit. This proposal would be financially
devastating to restaurants and other small businesses and many of their
workers.
Servers at the brewery where I work are paid $3 an hour plus tips.
Our tips provide us with an income that surpasses a $15 an hour minimum
wage. Asking Bob and Jodi to increase the majority of their front of
house staff to $15 an hour is asking them to give a 400 percent raise
to most of their employees. That would be a severe increase in
expenses, at any time, but will be especially difficult given that
COVID shutdowns and restrictions have caused an enormous hit to sales.
Jobs will be lost, and menu prices will sky-rocket to cover the
mandated raises, which will undoubtably deter customers from wanting to
go to any restaurant. The restaurants and small businesses that have
been lucky to keep their doors open after being ravaged by COVID
restrictions are going to have an incredibly hard time surviving if
they're forced to pay these wages. That's not to mention the hit to
service industry, tip reliant, workers like me. We take jobs at
restaurants knowing that we're signing up to make $3 an hour, and we
work hard to provide great service to our customers with the hope that
they will compensate us with tips for the ``above and beyond'' serviced
received. We're not asking for a flat rate of $15 an hour, which will
be a major cut in our income.
The restaurant industry has been running on this model for over 80
years now, and it isn't broken. The majority of people fighting for
this so-called ``one fair wage'' have never worked at a restaurant at
day in their lives and don't understand that we make a good living with
our tips. We aren't asking for their help, and they're actually doing
us way more harm than good.
What restaurants, other small businesses, and their workers need is
for the economy to fully reopen. Many Government-imposed business
restrictions, such as the 25-50 percent capacity, are unnecessarily
harmful and need to be lifted as soon as possible. These capacity
restrictions do not make sense for many, if any, businesses, including
my hair salon. With what we know, and are continuing to find out about
the virus, I believe we can safely accommodate 100 percent capacity
with modifications that allow for proper social distancing and mask
wearing. Businesses should be given the flexibility to accommodate
customer attendance and safety, and it should be up to the individual
to decide if they want to go to an establishment or stay home.
Afterall, we are supposed to have freedom of choice here, in America.
Thank you for your time and for listening to my story as a small
business owner of 5 years and a tipped service worker for 18 years.
Please hear my words as someone who has been blessed to earn a more
than fair income in the restaurant industry with the wage model set in
place, as is. And, also as a small business owner, negatively affected
by Government restrictions imposed as a response to this pandemic.
Piling on more requirements for businesses will only hurt business
owners and employees who have already been through enough. We need to
move forward from this before it completely crashes our economy and
crumbles small, locally owned businesses.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM WATCHEN HARRIS BRUCE
Q.1. According to the Census Bureau, 46 percent of small
businesses surveyed in late February 2021 expect it will take
more than 6 months for their operations to return to normal
levels, and 8 percent do not believe their business will ever
return to normal levels of operations--an increase from the
start of the year. \1\ What supports do you believe small
businesses in your community will be most in need of in the
coming months, and what supports do you believe the workers
employed by small businesses in your community will most need?
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\1\ Census Bureau, Small Business Pulse Survey, accessed March 3,
2021, https://portal.census.gov/pulse/data/.
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What supports do you believe small businesses in your
community will be most in need of in the coming months?
A.1. Grant funds separate from the PPP to cover 6 months of
fixed overhead cost, such as facility/office and equipment
rental, telephones, website hosting for online sales and
promotions, equipment, insurances, vehicle leasing, and
gasoline, etc., to offset the loss in business revenue due to
economic uncertainty in the marketplace and the rise in COVID-
19 variance impacting the younger workforce.
Extension on loan repayment requirements for the SBA EIDL
loan until the market fully recovers from the COVID-19
Pandemic.
Assistance from banks with line-of-credit products that
address the needs of Small Black and Latino businesses--
relaxing requirements such as collateral, debt/revenue ratios,
negative net-income on balance sheets, and recent declines in
credit scores resulting from the COVID-19 Pandemic and
subsequent market volatility.
Small business developers will need help securing materials
and skilled labor for projects' flow to completion. Problems
with the supply chain and materials manufacturing, and the
housing boom, have placed significant impacts on material cost
and availability.
Landlords will need cash flow assistance with tenants
unable to make rent payments.
Most small businesses that survived 2020 will need
additional free or low-cost patient capital to cover expenses
while they return to normal levels of operation.
Rent is one of the biggest concerns we hear about. (PPP
helped with employee wages, but many small businesses are sole
proprietorships that are ``mom & pop'' shops with no
employees.)
Most small business stories are influenced by the industry
in which they work. Wholesalers and retailers who currently
have products manufactured overseas are having difficulty and
delays importing their products. They will need help moving
this process along or be given incentives and support for using
American manufacturing if possible.
In addition to financial support, these small businesses
could use free, targeted counseling and coaching on critical
small business subjects, such as pivoting to online sales,
modifying business models, business financial projections and
planning, new space designs for businesses, working at home,
cost-benefit analysis, finding new manufacturers, etc.
For those small businesses that deal with the public,
consistent guidelines--based on sound medical and scientific
advice--for the safest way to conduct business and strong PR
encouraging public cooperation to keep small business owners
safe.
The current health and economic crisis brought attention
and focus to the plight of small businesses in this country,
from the Government, from big banks and foundations, and from
consumers who see the importance of a strong small business
ecosystem. But small businesses, especially those minority and
women-owned, have been struggling for years and without
fundamental change, the struggle will continue.
Without diligence, this investment in small business now
will soon work its way back up to large corporations dominated
by White male owners. Rights for small businesses in Government
tax and regulatory programs must be continuously championed.
And most of all, we must make systematic changes to the small
business financial ecosystem that will lay the foundation for
an equitable future.
Q.2. What supports do you believe the workers employed by small
businesses in your community will most need?
A.2.
Living Wage--comparable to unemployment
Guaranteed number of work hours per week
Employer-sponsored affordable health care
Financial assistance for educational pursuits
Proper equipment to work from home, when necessary
High-risk pay incentives for on-site employment
As the economy rebounds, I think small business
employees will need time to restabilize their financial
conditions--cash flow and savings. Those impacted by
the pandemic economy may need further foreclosure and
eviction moratoriums for an additional period to catch
up.
Opportunities for skills training and job placement
in IT, electrical and plumbing skills, medical
technology, even small business training, may help some
employees find new career paths.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JOE DELOSS
Q.1. Have you ever considered franchising your brand?
A.1. We have considered franchising on several occasions
throughout our 7 years of operations. These considerations,
however, have always been brief, as we do not believe our
prototype is prepared sufficiently to be handed off to a
franchisee. As we continue to sophisticate our model, we
anticipate franchising to be a more viable consideration as a
growth vehicle. That said, our current ambitions are defined
with more exclusive corporate-owned growth.
Q.2. Do you have concerns about how some businesses sell their
brands as franchises?
A.2. I do have concerns with how many business operators
franchise their brands. Often, I believe franchising is done
prematurely with inadequate business processes to support a
franchisee's success. In these instances, the sales almost
exclusively benefit a franchisor while a franchisee is left
with a business that fails to meet the sales claims previously
made.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM JESSICA MILANO
Q.1. The CFPB is finally making progress towards collecting
demographic data for small business lending, as required under
the Dodd-Frank Act. Why it is important for this data to be
collected? What do we gain from having this information?
A.1. The implementation of Section 1071 of the Dodd-Frank Act
has the potential to transform the small business credit market
in the same manner that Home Mortgage Disclosure Act (HMDA)
data collection impacted the housing market. HMDA data has
allowed researchers and policymakers to study the demand for
mortgages and lending practices to better understand market
gaps. This transparency supports fair lending and more nuanced
analysis of market gaps so that policymakers can effectively
address structural challenges that impact home ownership in
minority communities.
Similarly, Congress enacted Section 1071 to facilitate
enforcement of fair lending laws and enable communities,
governmental entities, and creditors to identify business and
community development needs and opportunities for women- and
minority-owned small businesses. Researchers currently have a
patchy and incomplete picture of the small business credit
market. On the supply side, the primary data source is loan
originations on FFIEC call reports. Banks report small business
lending based on the size of the loan, not the size of the
business. Any loan amounts less than $1 million that were
secured by nonfarm or nonresidential real estate or as
commercial and industrial loans, and ``loans to small farms''
as originated loans with loan amounts less than $500,000 are
considered small business lending even if these loans are not
made to a small business. On the demand side, we do not have a
complete data set on who is applying for credit and who is
receiving loans until Section 1071 is implemented. The best
proxy we have is survey data of small business owners such as
the Federal Reserve Bank of New York's annual Small Business
Credit Survey which surveyed 15,000 small employer firms in
2020, a fraction of the Nation's nearly 30 million small
businesses, on their experiences applying for credit. According
to the NY Fed 2020 survey, only 37 percent of small businesses
that applied for credit received the full amount sought
suggesting there is a considerable gap between demand and
supply. \1\
---------------------------------------------------------------------------
\1\ Federal Reserve Bank of New York, ``Small Business Credit
Survey, 2021 Report on Employer Firms''.
---------------------------------------------------------------------------
The data collection required under Section 1071 will enable
researchers to connect the demand for small business credit
with the supply of credit to create a fuller picture and
understanding of who is applying for credit, in what amounts,
and where they are located with who is receiving credit. We
cannot know what this data will say until it is released but
this level of transparency is the first step to facilitating
fair lending and supporting opportunities for all small
business owners.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JESSICA MILANO
Q.1. In your written testimony, you noted that businesses that
were underbanked prior to the pandemic had trouble accessing
Paycheck Protection Program (PPP) loans.
Describe the consequences of a business not having access
to the financial system.
A.1. Business ownership is often a critical pathway to the
middle class for minority and low income families. Research
finds that business ownership is a critical component of wealth
building for low income families. African American business
owners have more than $52,000 in total wealth compared to just
over $7,000 for non-business owners. \1\ The same holds true
for Hispanic business owning households, which have more than
$41,000 in total wealth on average compared to $16,000 for non-
business owners. \2\ Wealth building benefits both business
owners and their communities. Greater savings helps families
weather financial setbacks like the pandemic and provides
opportunity to move up the economic ladder.
---------------------------------------------------------------------------
\1\ Center for American Progress, ``A Progressive Agenda for
Inclusive and Diverse Entrepreneurship'', October 2016.
\2\ Ibid.
---------------------------------------------------------------------------
Challenges accessing capital can mean less resiliency to
weather financial setbacks. Businesses owned by entrepreneurs
of color were less likely to secure low-interest Government
loans in 2020 and more likely to shut down permanently. From
February 2020 to April 2020, the number of active business
owners in the United States declined 22 percent--the largest
drop on record. \3\ Black, Latino, Asian, and female business
owners were all more likely to close their doors for good.
---------------------------------------------------------------------------
\3\ Fairlie, Robert W. (2020), ``The Impact of COVID-19 on Small
Business Owners: Evidence of Early Stage Losses From the April 2020
Current Population Survey'', SIEPR Stanford Institute for Economic
Policy Research.
Q.2. Community Development Financial Institutions (CDFIs) are
able to leverage their connections in minority and underserved
communities to provide capital to small businesses within these
communities. What are some ways Congress can continue to
support CDFIs and ensure they continue to provide funding to
---------------------------------------------------------------------------
minority-owned businesses?
A.2. CDFIs are a diverse set of mission-driven organizations
that provide financial services in communities historically
underserved by traditional lenders. CDFIs can be banks, credit
unions, loan funds, venture capital firms, and both for-profit
or nonprofit entities. Support for CDFIs can take different
forms based on the characteristics of the CDFI.
Congress can support CDFI depositories and MDIs with
programs like the Emergency Capital Investment Program. These
capital investments work to strengthen the balance sheets of
these institutions and are modeled on successful programs that
worked during the financial crisis to help these institutions
continue to lend and grow to support economic recovery. Through
the power of leverage every dollar of Tier 1 capital investment
can support up to $10 in loans to underserved borrowers and
low-income communities.
Nonprofit CDFI loan funds cannot have equity investors but
can use CDFI financial assistance awards in much the same way
as patient, equity like capital on the balance sheet of the
organization enabling the CDFI to scale lending to underserved
communities. An important source of capital for these
organizations is the CDFI Fund awards. In order to support the
continued growth of the CDFI sector between crises so they are
there for our communities when we need them most we should
continue to maintain the recent expansion of funding for the
CDFI Fund at $3 billion.
Q.3. Aside from supporting CDFIs and the CDFI Fund, what are
some other steps the Federal Government can take to connect
minority-owned businesses to the banking system?
A.3.
1. Remove Barriers to Credit--For many self-employed, sole
proprietorships, and would be entrepreneurs applying
for a business loan is closely tied to personal credit.
For many low income and minority borrowers, weak credit
histories and debt can create a significant barrier to
starting and growing a business. In some States and
cities, business owners are even required to prove they
do not owe debts to the Government prior to obtaining
or renewing a business license even if the debts are
unrelated to the business. This can make fines and fees
like parking tickets and other civic fines a barrier to
credit. A 2017 study by the U.S. Commission on Civil
Rights found these practices disproportionately impact
low income and communities of color. \4\
---------------------------------------------------------------------------
\4\ ``America's New Business Plan'', Start Us Up Coalition,
Available at: https://www.startusupnow.org/anbp.
2. Improve Digital Connection--The pandemic has shown that
without access to fast, reliable broadband it can be
difficult for businesses to continue to operate,
connect with customers, and apply for credit online.
However, disparities accessing broadband continue to
persist. In 2020, only 77 percent of Americans living
in rural areas and 72 percent living on tribal lands
had access to broadband compared to 98 percent living
in urban areas and approximately 18 percent of Black
American households lack access to home broadband
subscriptions. \5\ Congress should create and deploy a
national broadband plan that includes geographic access
where coverage is lacking and subsidy for low income
households to level the playing field for small
businesses in these communities.
---------------------------------------------------------------------------
\5\ Ibid.
3. Make Credit Safe--Congress should pass legislation
extending the Truth in Lending Act's disclosure
requirements to small business loans or credit
products, understanding that communities of color are
often targeted by predatory lenders. Similarly, Small
Business Majority recommends promoting responsible
lending practices by lenders and brokers as set forth
---------------------------------------------------------------------------
in the Small Business Borrowers' Bill of Rights.
4. Support technical assistance to borrowers to understand
how to get credit ready, financing options, and
appropriate amount of debt for business
Even with the above changes, some borrowers will need
assistance building a business plan, applying for credit, and
understanding financing options for their business. This is
where business advisory services can play an important role in
getting a business credit ready and on a path to success. The
American Rescue Plan Act includes funding for technical
assistance providers as part of a reauthorized State Small
Business Credit Initiative.
Q.4. Do you have recommendations for how the PPP or future
small business relief programs could be restructured to ensure
that funds are accessible to underbanked businesses? If so,
please provide them.
A.4. Yes, target Federal relief programs to the lenders that
serve historically underbanked businesses. Programs like the
CDFI Fund and State Small Business Credit Initiative (SSBCI)
are proven to reach more minority and underbanked businesses by
supporting the lender ecosystem of CDFIs, MDIs, and smaller
community banks that serve these borrowers best.
Prior to the pandemic, roughly 30 percent of SBA 7(a) loans
went to women-owned and minority-owned businesses. \6\ By
contrast, CDFI's must serve a target market of 60 percent or
greater low-to-moderate income communities or minority
population. In order for non-depository CDFI's to be able to
scale small business lending in a crisis, they need three main
things: (1) operational support to increase lending volume, (2)
capital to support their ability to take new risk, and (3)
affordable liquidity to make affordable loans. In the next
crisis, a portion of relief funds could be set aside for SBA to
provide capital to CDFI loan originators and purchase the
guarantee portion of the loans back from the CDFIs so that
CDFIs can focus on what they do best--leveraging their unique
experience to underwrite and work with underserved borrowers--
and by retaining the unguaranteed portion of the loans on
balance sheet helps ensure market driven underwriting.
---------------------------------------------------------------------------
\6\ https://www.sba.gov/sites/default/files/2019-12/WebsiteReport-
asof-20191227.pdf
Q.5. Recent reports suggest that efforts to study and evaluate
the efficacy of the PPP have been frustrated by a lack of
demographic data about borrowers. \7\ According to SBA, 75
percent of PPP loan recipients did not report their ethnicity
on their applications and 58 percent did not report their
gender. \8\
---------------------------------------------------------------------------
\7\ Politico, ``Tracking the Money: Bid To Make Business Rescue
More Inclusive Undercut by Lack of Data'', Zachary Warmbrodt, March 2,
2021, https://www.politico.com/news/2021/03/02/businesses-inclusive-
coronavirus-relief-money-data-472539.
\8\ Id.
---------------------------------------------------------------------------
In what ways has a lack of detailed demographic data about
PPP loan recipients inhibited the Government's ability to
improve the program and address inequities?
A.5. Without demographic data about credit applications and
originations it is difficult for policymakers to determine if
there is systemic lending discrimination and how to address it.
The National Community Reinvestment Coalition conducted studies
in April and July of 2020 which found disparities in how Black-
and White-owned businesses were treated when applying for PPP
funding, with White-owned businesses being preferred. \9\ This
suggests that more robust data collection could be useful to
SBA and to policymakers to help identify if there are disparate
outcomes in applying for Federal relief programs and if there
are, if those outcomes are based on programmatic issues that
could be changed (such as the calculation for self-employed
discussed in a previous question) or if related to lender
practices and enforcement of fair lending laws.
---------------------------------------------------------------------------
\9\ ``Lending Discrimination Within the Paycheck Protection
Program'', The National Community Reinvestment Coalition.
Q.6. Do you believe systemic data reporting on borrower race
and gender would have resulted in more minority-owned small
businesses receiving PPP assistance, particularly in later
---------------------------------------------------------------------------
rounds of the program?
A.6. Yes, I believe had this information been available in real
time during the early rounds of PPP it would have been much
easier to adjust program guidelines to ensure fairer access to
the program. Systemic reporting of demographic data has led to
better enforcement of fair lending and greater opportunities
for home ownership among minority borrowers. The implementation
of Section 1071 of the Dodd-Frank Act has the potential to
transform the small business credit market in the same manner
that Home Mortgage Disclosure Act (HMDA) data collection
impacted the housing market. The Dodd-Frank Act passed in 2010,
it is time for the Consumer Financial Protection Bureau (CFPB)
to finalize rules for Section 1071 so that it can be enforced.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JESSICA MILANO
Q.1. Since the beginning of the coronavirus pandemic, small
business owners of color have experienced additional barriers
to participating in Federal rescue programs. The Small Business
Majority's own research shows that nationally only one in three
Black and Latino small business owners applied for a Paycheck
Protection Program (PPP) loan, and only 23 percent of Black and
27 percent of Latino small business owners received the full
amount requested. Arizona is home to over 120,000 minority
owned small businesses. How can Congress improve participation
rates, and ensure Black and Latino business owners have equal
access, to Federal relief programs?
A.1. Improving participation in Federal relief programs
requires expanding access to programs like PPP through greater
access to financial services for underbanked businesses--
``opening more doors''--and removing barriers to credit that
can disproportionately impact minority-owned businesses.
In February 2021, the Biden administration took steps to
expand access to the program by establishing an exclusive 2-
week window for business with fewer than 20 employees to apply
for PPP loans in addition to steps the SBA has taken to
increase the share of funding distributed through Minority
Depository Institutions (MDIs) and Community Development
Financial Institutions (CDFIs) which have deep experience
working with traditionally underbanked borrowers.
In terms of removing barriers, Small Business Majority
recommends extending PPP applications for self-employed
businesses and clarifying that program guidelines do not
require a credit check for PPP loans. Both of these hurdles
disproportionately impacted minority-owned businesses in
earlier rounds of PPP applications.
According to SBA data, minority-owned and women-owned
businesses are more likely to be nonemployer firms \1\ but the
original PPP loan calculation did not offer much assistance to
self-employed and sole proprietorships. PPP loans were
originally calculated using net profits, which deducts business
expenses. As a result, the net profit for a self-employed
individual or sole proprietor was often very low after
accounting for these deductions. A survey of Small Business
Majority's network found that while 60 percent of self-employed
respondents did receive a PPP loan, nearly one in three did not
receive the full loan amount they requested, including
virtually all of the Black self-employed entrepreneurs
surveyed. Under the Biden administration, SBA has made changes
to these calculations to address this issue. To encourage
program participation and ensure adequate time for these
business owners to apply, PPP could be extended for this group.
---------------------------------------------------------------------------
\1\ U.S. Small Business Administration, ``Nonemployer Fact
Sheet'', Available at: https://www.sba.gov/sites/default/files/
advocacy/Nonemployer-Fact-Sheet.pdf.
---------------------------------------------------------------------------
Second, although the CARES Act does not require a minimum
credit score to apply for a PPP loan, small businesses surveyed
by Small Business Majority have indicated that they were
declined for PPP funding because of their credit history.
According to the survey, 9 percent of respondents were told by
their lender there were issues with their credit when they
applied for PPP. This could have discouraged participation by
minority-owned businesses in the program. According to a
separate study by Experian, a credit reporting company,
minority-owned small businesses have lower average credit
scores than the general U.S. small business credit population.
\2\ SBA should do more public outreach direct to borrowers
letting them know there is no minimum credit score to qualify
for PPP loans in order to encourage broader participation in
the program.
---------------------------------------------------------------------------
\2\ ``Minority Business Owners: An Experian Data Study'',
Available at: https://www.experian.com/business-information/landing/
minorities-data-study.
Q.2. Lower PPP participation rates for Black and Latino
business owners may be partially attributed to the fact that
many small business owners of color lacked a business banking
relationship prior to the pandemic. How can Congress improve
access to business banking for Black and Latino business owners
---------------------------------------------------------------------------
across the country and in Arizona?
A.2. Access to financing is often one of the biggest hurdles
small business owners face, particularly for the smaller loan
amounts many new or very small businesses seek. Seventy-six
percent of all businesses in the United States have average
annual receipts less than $100,000. \3\ For minority-owned and
woman-owned businesses, that figure is even higher: 86 percent
of minority-owned businesses and 88 percent of woman-owned
business bring in less than $100,000 per year. \4\
---------------------------------------------------------------------------
\3\ Consumer Financial Protection Bureau, ``Key Dimensions of the
Small Business Lending Landscape'', May 2017.
\4\ Ibid.
---------------------------------------------------------------------------
Historically, community banks were the foundational source
of relationship lending to small businesses but that is not
always the case today. From 1997 to 2015, community banks'
share of originations less than $100,000 declined from 82
percent to 29 percent in less than 20 years. \5\ As a result,
access to credit for new businesses, very small businesses,
minority- and women-owned businesses was a challenge even
before the pandemic. According to the Federal Reserve Bank's
2016 report on minority firms, only 40 percent of firms owned
by people of color received the full amount of capital sought,
compared to 68 percent of nonminority firms. \6\ Ultimately,
these disparities in accessing capital undermines the
trajectory of our small business ecosystem and their
contributions to our overall economy.
---------------------------------------------------------------------------
\5\ Federal Reserve Bank of Chicago, ``Small Business Lending
After the Financial Crisis: A New Competitive Landscape for Community
Banks'', March 2016.
\6\ Federal Reserve Bank of Cleveland, ``Small Business Credit
Survey, Report on Minority-Owned Firms'', November 2017.
---------------------------------------------------------------------------
The pandemic has highlighted these opportunity gaps in our
country and the challenges accessing PPP have helped
policymakers learn about the experiences of underbanked
businesses trying to access Federal relief programs. The silver
lining in this experience is the spotlight it has shown on the
extraordinary work of CDFIs and MDIs to reach underbanked
businesses.
CDFIs are a diverse set of mission-driven organizations
that provide financial services in communities historically
underserved by traditional lenders. CDFIs can be banks, credit
unions, loan funds, venture capital firms, and both for-profit
or nonprofit entities. Support for CDFIs can take different
forms based on the characteristics of the CDFI.
Congress can support CDFI depositories and MDIs with
programs like the Emergency Capital Investment Program. These
capital investments work to strengthen the balance sheets of
these institutions and are modeled on successful programs that
worked during the financial crisis to help these institutions
continue to lend and grow to support economic recovery. Through
the power of leverage every dollar of Tier 1 capital investment
can support up to $10 in loans to underserved borrowers and
low-income communities.
Nonprofit CDFI loan funds cannot have equity investors but
can use CDFI financial assistance awards in much the same way
as patient, equity like capital on the balance sheet of the
organization enabling the CDFI to scale lending to underserved
communities. An important source of capital for these
organizations is the CDFI Fund awards. In order to support the
continued growth of the CDFI sector between crises so they are
there for our communities when we need them most we should
continue to maintain the recent expansion of funding for the
CDFI Fund at $3 billion.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOK
FROM JESSICA MILANO
Q.1. Ms. Milano, can you elaborate on the additional challenges
minority-owned small businesses have faced in getting the
capital they need during the pandemic?
A.1. While the first round of the Paycheck Protection Program
(PPP) is estimated to have reached up to 74 percent of small
businesses nationally, \1\ ``these loans reached only 20
percent of eligible firms in States with the highest densities
of Black-owned firms, and in counties with the densest Black-
owned business activity, coverage rates were typically lower
than 20 percent.'' \2\
---------------------------------------------------------------------------
\1\ U.S. Census Bureau, ``Small Business Pulse Survey: Tracking
Changes During The Coronavirus Pandemic'', Data as of January 10, 2021,
Available at: https://www.census.gov/data/experimental-data-products/
small-business-pulse-survey.html.
\2\ Mills, Claire Kramer and Jessica Battisto, ``Double Jeopardy:
COVID-19's Concentrated Health and Wealth Effects in Black
Communities'', Federal Reserve Bank of New York, August 2020.
---------------------------------------------------------------------------
What we learned from PPP is that businesses that were
underbanked prior to the pandemic had trouble accessing these
loans. Non-employer firms, like the self-employed, and small
business owners of color were much less likely to have a
business banking relationship prepandemic--31 percent of Black-
owned businesses, 28 percent of AAPI-owned businesses, and 26
percent of Latino-owned business owners lacked business
banking. \3\ When the pandemic hit, emergency programs
implemented by the SBA favored national 7(a) lenders and their
clients. While well intentioned, smaller community lenders that
had not previously done a high volume of SBA loans found it
confusing or difficult to utilize the program, leaving their
clients shut out. And businesses without strong banking
relationships precrisis were even further at the back of the
queue. \4\
---------------------------------------------------------------------------
\3\ Small Business Majority, ``Scientific Opinion Poll: Small
Businesses Struggling To Access Capital, Harming Their Financial
Recovery'', February 17, 2021.
\4\ Wall Street Journal, ``PPP Small Business Loans Left Behind
Many of America's Neediest Firms'', June 17, 2020.
---------------------------------------------------------------------------
According to Small Business Majority's polling, roughly 4
in 10 small business owners had not obtained any capital
prepandemic like loans or lines of credit from any lending
institution including 31 percent of Black-owned businesses and
38 percent of Latino-owned businesses. These loose ties to the
banking sector meant relatively few small business owners
surveyed by Small Business Majority were able to secure funding
through Federal small business relief programs. While roughly 1
in 3 applied for a PPP loan, only a third received the full
amount requested, and the number was even lower for minority-
owned businesses--23 percent of Black-owned businesses, 23
percent of AAPI-owned businesses and 27 percent Latino-owned
businesses received the full amount. \5\
---------------------------------------------------------------------------
\5\ Small Business Majority, ``Scientific Opinion Poll: Small
Businesses Struggling To Access Capital, Harming Their Financial
Recovery'', February 17, 2021.
---------------------------------------------------------------------------
The consequence of this is that minority-owned businesses
were more likely to fail. From February 2020 to April 2020, the
number of active business owners in the United States declined
22 percent--the largest drop on record. \6\ Black, Latino,
Asian, and female business owners were all more likely to close
their doors for good.
---------------------------------------------------------------------------
\6\ Fairlie, Robert W. (2020), ``The Impact of COVID-19 on Small
Business Owners: Evidence of Early Stage Losses From the April 2020
Current Population Survey'', SIEPR Stanford Institute for Economic
Policy Research.
Q.2. Ms. Milano, when the pandemic response bill has passed
later this month, many will try to turn the page and view
Congress' work in this space as done. I understand that this
needs to be a continuing effort to assist our small businesses
as they weather a once in a lifetime crisis. Can you talk about
the need for Congress and the Administration to keep working
with our businesses, including those in Georgia, after the
---------------------------------------------------------------------------
pandemic response bill is signed into law?
A.2. In Georgia, many small businesses continue to struggle. A
recent survey by Small Business Majority highlights the extent
to which the COVID-19 crisis has pushed Georgia small
businesses to the brink: 6 in 10 have been negatively affected,
and the same number say their revenues declined last year
compared to the previous year. More than half of those whose
revenue declined report it will take more than 6 months for
their business revenues to return to prepandemic levels, and 7
percent say they will never fully recover. As these findings
reveal, many Georgia small businesses are still struggling to
keep the lights on and their employees on payroll as a result
of the economic downturn.
Although the American Rescue Plan will allocate more
capital for small businesses, there will be continued need for
the Federal Government to support stronger small business
ecosystems to expand access to capital, ensure financing is
safe and affordable, and level the playing field for all
entrepreneurs:
1. Remove Barriers to Credit--For many self-employed, sole
proprietorships, and would be entrepreneurs applying
for a business loan is closely tied to personal credit.
For many low income and minority borrowers, weak credit
histories and debt can create a significant barrier to
starting and growing a business. In some States and
cities, business owners are even required to prove they
do not owe debts to the Government prior to obtaining
or renewing a business license even if the debts are
unrelated to the business. This can make fines and fees
like parking tickets and other civic fines a barrier to
credit. A 2017 study by the U.S. Commission on Civil
Rights found these practices disproportionately impact
low income and communities of color. \7\
---------------------------------------------------------------------------
\7\ ``America's New Business Plan'', Start Us Up Coalition,
Available at: https://www.startusupnow.org/anbp.
2. Improve Digital Connection--The pandemic has shown that
without access to fast, reliable broadband it can be
difficult for businesses to continue to operate,
connect with customers, and apply for credit online.
However, disparities accessing broadband continue to
persist. In 2020, only 77 percent of Americans living
in rural areas and 72 percent living on tribal lands
had access to broadband compared to 98 percent living
in urban areas and approximately 18 percent of Black
American households lack access to home broadband
subscriptions. \8\ Congress should create and deploy a
national broadband plan that includes geographic access
where coverage is lacking and subsidy for low-income
households to level the playing field for small
businesses in these communities.
---------------------------------------------------------------------------
\8\ Ibid.
3. Make Credit Safe--Congress should pass legislation
extending the Truth in Lending Act's disclosure
requirements to small business loans or credit
products, understanding that communities of color are
often targeted by predatory lenders. Similarly, Small
Business Majority recommends promoting responsible
lending practices by lenders and brokers as set forth
---------------------------------------------------------------------------
in the Small Business Borrowers' Bill of Rights.
4. Support technical assistance to borrowers to understand
how to get credit ready, financing options, and
appropriate amount of debt for business--Even with the
above changes, some borrowers will need assistance
building a business plan, applying for credit, and
understanding financing options for their business.
This is where business advisory services can play an
important role in getting a business credit ready and
on a path to success. The American Rescue Plan Act
includes funding for technical assistance providers as
part of a reauthorized State Small Business Credit
Initiative.
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- Original
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