Taking on More Risk: Examining the SBA's Changes to the 7(a) Lending Program Part II (House Small Business Committee hearing, May 17, 2023)
Summary
The House Committee on Small Business, chaired by Roger Williams, met on May 17, 2023 (Document Number 118–013) on SBA changes to the 7(a) loan program, hearing Tony Wilkinson of NAGGL, Ami Kassar of Multifunding LLC, Alice Frazier of Bank of Charles Town and Manuel Flores of SomerCor. Chairman Williams said the changes add unnecessary risk and threaten the program's long-term integrity, and that Associate Administrator Patrick Kelly, who testified the week before, was dismissed from the agency one day later. Chairman Williams, Ranking Member Velázquez, Chairman Cardin and Ranking Member Ernst wrote to Administrator Guzman that a permanent head of the Office of Capital Access should be found before the changes take effect.
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“Taking on More Risk: Examining the SBA's Changes to the 7(a) Lending Program Part II (House Small Business Committee hearing, May 17, 2023).”
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TAKING ON MORE RISK: EXAMINING THE SBA’S
CHANGES TO THE 7(A) LENDING PROGRAM
PART II
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
HEARING HELD
MAY 17, 2023
Small Business Committee Document Number 118–013
Available via the GPO Website: www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
52–170 WASHINGTON : 2024
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
NYDIA VELÁZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MORGAN MCGARVEY, Kentucky
MARIE GLUESENKAMP PEREZ, Washington
HILLARY SCHOLTEN, Michigan
SHRI THANEDAR, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
BEN JOHNSON, Majority Staff Director
MELISSA JUNG, Minority Staff Director
(II)
CONTENTS
OPENING STATEMENTS
Page
Hon. Roger Williams ................................................................................................ 1
Hon. Nydia Velázquez ............................................................................................. 2
WITNESSES
Mr. Tony Wilkinson, President and Chief Executive Officer, National Associa-
tion of Government Guaranteed Lenders (NAGGL), Frisco, TX ...................... 5
Mr. Ami Kassar, Founder and Chief Executive Officer, Multifunding LLC,
Ambler, PA ........................................................................................................... 7
Ms. Alice Frazier, President and Chief Executive Officer, Bank of Charles
Town, Charles Town, WV .................................................................................... 8
Mr. Manuel Flores, President and Chief Executive Officer, SomerCor, Chi-
cago,IL ................................................................................................................... 10
APPENDIX
Prepared Statements:
Mr. Tony Wilkinson, President and Chief Executive Officer, National
Association of Government Guaranteed Lenders (NAGGL), Frisco, TX .. 38
Mr. Ami Kassar, Founder and Chief Executive Officer, Multifunding LLC,
Ambler, PA .................................................................................................... 53
Ms. Alice Frazier, President and Chief Executive Officer, Bank of Charles
Town, Charles Town, WV ............................................................................. 60
Mr. Manuel Flores, President and Chief Executive Officer, SomerCor,
Chicago, IL .................................................................................................... 64
Question and Answer for the Record:
Question from Hon. Velázquez to Mr. Flores and Answer from Mr. Flores 74
Additional Material for the Record:
American Bankers Association ........................................................................ 77
California Association for Micro Enterprise Opportunity (CAMEO) ............ 82
Credit Union National Association (CUNA) ................................................... 105
National Association of Development Companies (NADCO) ........................ 107
National Association of Federally-Insured Credit Unions (NAFCU) ........... 134
(III)
TAKING ON MORE RISK: EXAMINING THE
SBA’S CHANGES TO THE 7(A) LENDING PRO-
GRAM PART II
WEDNESDAY, MAY 17, 2023
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 10:03 a.m., in Room
2360, Rayburn House Office Building, Hon. Roger Williams [chair-
man of the Committee] presiding.
Present: Representatives Williams, Luetkemeyer, Stauber,
Meuser. Van Duyne, Molinaro, Alford, Crane, Bean, Velázquez,
Landsman, McGarvey, Gluesenkamp Perez, Scholten, Thanedar,
Chu, and Davids.
Chairman WILLIAMS. I now call the Committee on Small Busi-
ness to order.
Without objection, the Chair is authorized to declare a recess of
the Committee at any time.
The Committee is here today to hear testimony about proposed
changes to the 7(a) loan program and how it will affect lenders and
borrowers.
Thank you all, again, for being here to testify today. I now recog-
nize myself for my opening statement.
I want to welcome you all again into today’s hearing, which will
focus on the Small Business Administration changes to the 7(a)
loan program. At last week’s full Committee hearing on this vital
issue with the SBA, many of our questions went unanswered. So
I hope today we can serve as a constructive conversation on how
these changes add unnecessary risk and threaten the 7(a) Pro-
gram’s long-term integrity.
Just 1 day after our hearing last week, Associate Administrator
Patrick Kelly, who testified before us, was dismissed from the
agency. While the circumstances around his departure are still not
clear, there are two logical suggestions.
First, his contempt for the basic congressional oversight was ap-
parent, and the SBA did not think his behavior was appropriate for
the agency. Or second, he submitted his resignation months ago
and the SBA decided to send someone to testify on these major rule
changes knowing that he could be parting ways with the agency
shortly after. Kind of a lame-duck witness. Whichever scenario is
accurate, both of these are extremely concerning as we do our con-
gressional due diligence over these new rules.
(1)
2
Members of this Committee on both sides of the aisle still have
unanswered questions regarding these changes and are concerned
that the SBA is continuing to move forward without the leadership
in place to help make these transitions as smooth as possible.
This concern is not only bipartisan here on this Committee, but
also is shared by our colleagues in the Senate. Yesterday, I, along
with Ranking Member Velázquez, Chairman Cardin, and Ranking
Member Ernst joined a pen letter together to Administrator
Guzman saying it is our collective belief that, at the very least, it
is best to find a new permanent head of the Office of Capital Access
before we begin these changes and before they go into effect.
Finalizing the proposed rule represents the most significant
changes to the program in decades, and I hope that we will be able
to have a productive discussion about how the changes to the lend-
ing criteria will add more risk to the taxpayer-backed loan portfolio
and how these changes will weaken the credit elsewhere test and
take the SBA away from being the lender of last resort.
In addition, I hope to discuss SBA’s capabilities as a regulator
and if they are properly equipped to take on this increased respon-
sibility, and also if the proper guardrails have been installed since
the agency let billions of taxpayer dollars be stolen from the pan-
demic loan programs.
For decades, the 7(a) program has been operating on a bipartisan
basis to help business get off the ground with their capital needs.
Unfortunately, I am afraid that these changes will lead to a greater
default rate that will rely on the program to continue to be sub-
sidized by Congress in order to remain in existence.
I am not alone in raising these concerns. The SBA’s Inspector
General himself testified before this Committee and noted that
there are significant challenges that the agency will face in man-
aging the increased loan volume going forward as well as the sig-
nificant shortages of staff within the department that oversees this
program. So we can not allow the SBA to get these rules wrong.
I will once again call on the Biden administration to slow down
until we can properly determine how these changes will work in
practice. And without objection, I would like to submit statements
for the record from ABA, QNA, and NAFCU regarding these rule
changes.
I want to thank you all again for being here with us today, and
I am looking forward to a more constructive conversation today.
And with that, I will yield to our distinguished Ranking Member
from New York, Ms. Velázquez.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman, for bringing us
back together on this important topic.
I would like to start by entering into the record the fact that
money from taxpayers was stolen because the Trump administra-
tion didn’t put in place the guardrails that were needed in order
to protect taxpayers’ money. I want to be fair in terms of that qual-
ification.
In just one week, there have been quite a few developments, so
I look forward to our discussion. As we have already detailed, the
SBA issued two final rulemakings that have substantial implica-
tions for critical lending programs. Not only do the rules make sig-
nificant modifications, the interplay between them and the pro-
3
grams to which they apply are vast and complicated. Not every pro-
gram will be impacted in the same ways.
Last week, much of our hearing focused on the 7(a) program and
rightly so because it is the agency’s flagship initiative, providing
nearly $15 billion in loans to small firms all over the nation.
Today, I am hoping to hear what these rules mean for another
program, the 504 CDC loan guaranty program, which is adminis-
tered through nonprofit CDCs. The 504 program provides long-term
fixed rate financing for major assets such as land, buildings, and
equipment.
Through a 100 percent SBA guaranty venture, the CDC provides
up to 40 percent of financing, while a third-party lender provides
at least 50 percent, leaving the applicant with at least 10 percent
of the financing. Last year, the 504 program delivered over $9.2 bil-
lion in capital access, and so far this year, it is needing $4 billion.
As one of our own Members has stated in previous hearings, the
504 program can be slow and complicated, making it right for an
improved streamline process. The affiliation rule helps bring some
improvements that I welcome by the industry and borrowers alike.
The disparity between the rulemaking’s application to the SBA
lending programs highlights just why this committee is taking a
deep dive into these policy changes. It is incumbent upon us to look
at every aspect of what the details truly mean and their potential
consequences, good or bad. SBA instituted these rules to address
persistent gaps in access to capital as part of the Biden administra-
tion’s broader economic agenda.
As I have continuously stated, increasing access to capital for un-
derserved entrepreneurs remains my top priority, but I would be
remiss in my obligation to borrowers and program integrity if I
didn’t do my due diligence. And that is why we are here again
today—to listen to the industry stakeholders and understand their
views of the rules on the programs they participate in.
Ensuring the businesses owned by women, people of color, and
underserved groups have the resources needed to succeed is an im-
portant goal, and I look forward to hearing another perspective of
SBA’s actions. I remain committed to filling the gaps in the market
in a bipartisan and thoughtful way and pledge to work with SBA
stakeholders and my colleagues on the House and Senate Commit-
tees to find a solution.
Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Thank you, Ranking Member Velázquez.
And I will now introduce our witnesses.
I will now introduce our witnesses. And it is my pleasure and
privilege to introduce our first witness, Mr. Tony Wilkinson.
Mr. Wilkinson has served as the president and CEO of the Na-
tional Association of Government Guaranteed Lenders in Frisco,
Texas for more than 30 years. And prior to joining NAGGL, Mr.
Wilkinson spent 13 years with the Stillwater National Bank as
senior vice president and was responsible for the bank’s SBA lend-
ing activities. Mr. Wilkinson is a graduate of Oklahoma State Uni-
versity, home of the cowboys, right?
And, Mr. Wilkinson, thank you for being here today. We look for-
ward to the conversation ahead.
4
I now recognize—Meuser is not here, and he was going to intro-
duce you, Mr. Kassar. So I am going to do it in a Texas way, okay?
All right.
Our next witness is Mr. Ami Kassar. Mr. Kassar is the founder
and CEO of MultiFunding LLC located in Ambler, Pennsylvania.
Mr. Kassar has dedicated the last two decades of his career to en-
suring that businessowners and entrepreneurs get the best possible
financing to grow their businesses. He knows far too well the im-
pact that poor financing choices have on the ability for a small
business to grow.
In his work as a public speaker and as a founder and CEO of
MultiFunding LLC, Mr. Kassar has helped thousands of business-
owners and entrepreneurs structure their debt to optimize growth
and in turn help to create tens of thousands of jobs. Mr. Kassar is
a graduate of Brandeis University and the University of Southern
California where he received his master’s in business administra-
tion.
Mr. Kassar, thank you for being here today, and we look forward
to the conversation ahead.
Next, our next witness is Alice Frazier. Ms. Frazier serves as
president and CEO of Bank of Charles Town in Charles Town,
West Virginia. She also has recently been appointed to the board
of directors of the Federal Reserve Bank of Richmond.
Including her current position with BCT, Ms. Frazier has over 32
years of local banking experience, including with Cardinal Finan-
cial Corporation as executive vice president and chief operating of-
ficer, BB&T as senior vice president in Loudoun County, and Mid-
dleburg Financial Corporation as chief financial officer and chief
operating officer, which is where Ms. Frazier began her banking ca-
reer. Prior to that, she worked for 4 years in public accounting with
a national and regional firm.
Ms. Frazier is a graduate of Stonier. Is that how you say it?
Stonier Graduate School of Banking and Radford University.
Ms. Frazier, thank you for being here today, and we look forward
to the conversation ahead with you.
And I now recognize the Ranking Member from New York, Ms.
Velázquez, to briefly introduce our last witness appearing before us
today.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman.
It is my pleasure today to welcome back to our committee Mr.
Manny Flores, President and Chief Executive Officer of SomerCor,
an SBA Certified Development Company located in Chicago, Illi-
nois.
In addition to making 504 loans, SomerCor is an active lender
in the SBA Community Advantage Pilot Program and a Member of
the National Association of Development Companies, or NADCO.
Mr. Flores first joined SomerCor as a Board Member in 2016 and
was appointed to his current role in 2018. Prior to SomerCor, he
held elected office as a Chicago city Councilmember and served as
Director and Acting Secretary of the Illinois Department of Finan-
cial and Professional Regulation.
We are glad to have you with us today. Welcome.
I yield back.
Chairman WILLIAMS. Thank you, Ranking Member Velázquez.
5
And we appreciate all of you, again, being here today.
Now, before I recognize the witnesses, I would like to remind all
of you that your oral testimony is restricted to 5 minutes in length.
If you see the light turn red in front of you, it means your 5 min-
utes have concluded, and you should wrap up your testimony. And
if you don’t wrap it up, I will beat on the gavel, and you will get
the idea, okay?
So with that, I now recognize Mr. Wilkinson for his 5-minute
opening remarks.
STATEMENTS OF TONY WILKINSON, PRESIDENT & CEO,
NAGGL; AMI KASSAR, FOUNDER & CEO, MULTIFUNDING LLC;
ALICE FRAZIER, PRESIDENT & CEO, BANK OF CHARLES
TOWN; AND MANUEL FLORES, PRESIDENT & CEO,
SOMERCOR
STATEMENT OF TONY WILKINSON
Mr. WILKINSON. Thank you, Mr. Chairman, Ranking Member
Velázquez, and Members of the Committee.
Let me start by saying, Mr. Chairman, I agree with your opening
statement. In the 36 years I have been NAGGL’s CEO, I have
never seen changes more sweeping and potentially damaging.
SBA is removing long-standing underwriting guardrails that
have assured prudent lending in the 7(a) program, while simulta-
neously adding an unlimited number of nonfederally regulated
lenders. Worse, SBA will serve as primary regulator for these new
entities, a role that it is not equipped for.
SBA’s stated intent for these changes is laudable, increase access
to capital for underserved markets, and streamline processes. The
lending industry wholeheartedly supports those goals, but the re-
cent rules do not achieve what SBA is setting out to do.
And the biggest change between the proposed and final rules,
SBA removed any mention of underserved markets from the regu-
latory language. SBA’s data shows that in fiscal year 2022 more
than 75 percent of all loans are estimated to be small-dollar loans,
68 percent of all loans going to underserved markets, far exceeding
SBA’s 43 percent goal, and nearly one-third of all loans going to
minority-owned businesses. There is always room for progress, but
these numbers don’t show the market failure that SBA has de-
scribed.
First, on underwriting, the rules remove guidelines that ensure
lender behavior and portfolio performance stay at an acceptable
level. SBA has described the new standard as ‘‘do what you do’’,
leaving it up to lenders to determine what is prudent. I fear that
removing these guardrails creates a race to the bottom in credit
quality.
Today’s 7(a) loans are not funded by taxpayer dollars because
current loss rates assure that the borrower and lender fees cover
the cost of loans. Removing the underwriting guardrails mean that
losses could increase, and Congress either will have to raise fees
on borrowers and lenders or provide an appropriation; otherwise,
this program shuts down. A lose-lose.
After throwing out the rule book, SBA is telling the new, nonfed-
erally-regulated lenders—presumably fintech—that they can do
6
whatever they think is prudent. SBA said in 2021 rules that it
could not be the primary regulator for more lenders because it will
lack the oversight capability and cited an increased risk to the
agency.
Just 22 months and later and with no evidence of changed capac-
ity, SBA has reversed itself. And despite SBA’s assertion that it
will add just three additional regular SBLC licenses, the truth is,
it is just three for now. The rule doesn’t have any limits. And SBA
is also adding mission lenders currently participating in the Com-
munity Advantage Pilot Program as SBLCs, which is more than
100 entities.
The capacity and resources of SBA’s oversight functions both fall
short. Funding has been stagnant for nearly 10 years. There is a
failure to even meet current oversight requirements, and the IG
identified staff vacancies of 40 percent, just to name a few con-
cerns.
But even with more resources, SBA still lacks the regulatory
framework necessary to oversee lenders on an enterprise risk level.
This is made worse because the final rule removed the restriction
that limited SBLCs to only making SBA loans, increasing the over-
sight burden significantly.
Currently, SBA does not regulate for Bank Secrecy Act or Know
Your Customer or even the most basic consumer protections. And
the rules go even further. SBA now allows a business to qualify as
small, even if it is controlled by a large business. It will be the
large business, not the small, that will be the primary beneficiary
of an SBA loan.
SBA also drastically altered the credit elsewhere to nothing more
than a check-the-box exercise, inviting fraud like we saw in PPP.
And now SBA allows borrowers with significant personal wealth to
qualify for loans, flying in the face of the statutory mandate to only
give a 7(a) loan to borrowers who could not get credit elsewhere.
Finally, politicizing SBA decisions should concern everyone.
Under the affiliation rule, the SBA administrator can now reverse
a loan denial. This change allows politics to seep into determining
SBA loans. And the biggest concern, the harm to borrowers, par-
ticularly the underserved, who would be faced with higher fees, the
possibility of receiving loans they cannot repay, and lenders who
have no federal regulator that ensures consumer protections.
This Treasury Department, Mr. Clyburn, House Oversight Com-
mittee, the IG community, and more all point out significant con-
cerns with the concepts and the underlying rules, yet SBA has not
heeded any warnings. Lenders are not concerned about competi-
tion, nor is this about being anti-fintech, but SBA is not inviting
fintech into the program we all know and trust. SBA is inviting
fintech into a very changed program devoid of guardrails.
I am profoundly opposed to imprudent changes that could harm
underserved markets and damage the 7(a) loan program. Partici-
pating in a government program requires responsible stewardship,
especially when the current portfolio is nearly $107 billion in out-
standing principal balances with the government liable for roughly
75 percent of that. Congress should require strong guardrails when
the federal government is the backstop.
7
While SBA could change course, I see little evidence it will, espe-
cially when it has repeatedly ignored congressional and industry
concerns. I implore you to legislatively act because the future of
this program might very well depend on Congress reversing these
rules. Otherwise, the program that fuels mainstream America will
be in jeopardy and our most vulnerable small businesses harmed.
Thank you.
Chairman WILLIAMS. Thank you. Right on time. I appreciate
that.
Next, I will recognize Mr. Kassar for his 5-minute opening re-
marks.
STATEMENT OF AMI KASSAR
Mr. KASSAR. Thank you for the honor of testifying today to
share my thoughts on the changes to the SBA program that deeply
concern me.
My name is Ami Kassar, and I am the founder and CEO of
MultiFunding LLC, a loan brokerage and consultancy company
based in the suburbs of Philadelphia. Since 2010, my team and I
have heard the stories of thousands of entrepreneurs over the
years. In our work, we strongly recommend the SBA 7(a) program
and have helped borrowers receive nearly $400 million of 7(a) loans
nationwide.
There are three primary points I want to leave you with today.
First, traditional SBA 7(a) lending has few similarities to the EIDL
program or the Restaurant Revitalization Fund that we heard
about last week.
Secondly, when entrepreneurs take loans without a clear path to
pay them back, there can be devastating consequences for both the
lenders and the entrepreneurs. All of the proposed SBA changes
will make it much easier to get a loan, leaving many to take loans
before they are ready for them.
And finally, if you make wholesale changes to the SBA 7(a) pro-
gram all at once, it will be impossible to understand the impact of
each change.
Let’s begin with comparing the 7(a) program to the EIDL pro-
gram and Restaurant Revitalization Fund, which was a common
thread of testimony in front of this Committee last week.
The Restaurant Revitalization Fund was a grant program. It did
not issue loans, and recipients did not have to repay the grants.
Therefore, comparing this program to the 7(a) program is nonsen-
sical to me. The EIDL program is a story that requires unpacking.
First, 378 billion was lent to 3.9 million small businesses without
proof of economic injury. The repayment data has barely started to
come in. That said, I suspect we will learn a lot from EIDL loans
about what happens when you lend money to businessowners who
don’t have a clear plan to pay it back. And this is what I fear will
happen if we simplify SBA lending.
In this spirit, I want to share a story with you. One night during
the pandemic, I was asked to teach a virtual SBA class for a female
entrepreneurship group at an African American church in Philadel-
phia. About a dozen women who were trying to get side hustles off
the ground attended.
8
As the session began, I quickly realized that the last thing these
entrepreneurs needed was a loan. You see, like many entre-
preneurs, they thought they needed more money to get started
than they did. But in every case, there were far less expensive
ways to get their concept off the ground than they thought.
One woman wanted to start a business baking desserts for res-
taurants that didn’t offer them. She was convinced she needed to
borrow $50,000 to open a kitchen. She had yet to consider that she
could prove her concept by baking in her home kitchen or renting
a kitchen during off-hours at a local restaurant to get started.
But here is the thing. If an unregulated fintech lender offered
these budding entrepreneurs an SBA loan that will land in their
bank accounts in a few days, every one of these entrepreneurs
would jump on the opportunity. Is that what we want for the SBA
program?
In today’s world, borrowers write business plans, build projec-
tions, and make business cases for their needs. They have to have
their books in order. Now, the SBA wants to throw much of this
out of the window. It is a recipe for disaster and will lead to much
higher delinquencies, in my opinion. And a delinquent debt to the
United States Government is not a good mark on a budding entre-
preneur’s resume.
I am all for change, but you take significant risk if you make too
much change too quickly. Broadening access to capital is a worthy
goal. But now the SBA proposes changing too much, too soon in an
uncontrolled environment. If all these changes go forward as it
looks like they will, I predict we will return to this room in 2 years
to try to explain the growing default rates. And the problem will
be we won’t be able to understand the root causes because of all
the vast changes being made all at once.
I remember some important lessons from science class in high
school. If you are going to try and experiment, test one variable at
a time. You cannot read the results if you try everything at once.
The checks and balances of the SBA system can be exceedingly
frustrating, but they help borrowers and lenders in the long run.
We are in the business of issuing loans insured by the U.S. tax-
payer. This is not a responsibility we take lightly. With these si-
multaneous changes, we risk blowing up a long-standing healthy
program, like the SBA, that positively impacts our economy.
I implore Congress to slow down the SBA train that has already
left the station and create a more cautious path for the SBA in the
future. Let’s evolve and grow and try new things but in a measured
and thoughtful way. Thank you very much.
Chairman WILLIAMS. Thank you. Good job on the timing.
And now, I would like to recognize Ms. Frazier for her 5-minute
opening remarks.
STATEMENT OF ALICE FRAZIER
Ms. FRAZIER. Chairman Williams, and Ranking Member
Velázquez, and Members of the Committee, I am Alice Frazier,
president and CEO of Bank of Charles Town, a $790 million com-
munity bank serving the markets of West Virginia, Maryland, and
Virginia.
9
I testify today on behalf of the Independent Community Bankers
of America where I am Chair of the Bank Operations Committee
and a Member of the Board.
My bank has been an SBA lender for over 40 years, and I am
proud to say that more than half of the SBA loans over the past
18 months were made to minorities or women borrowers. And we
share with this Committee the goal of preserving and protecting
the integrity of the SBA 7(a) program, while continuing to make
prudent loans to smaller and underserved businesses.
The new SBA rules, which were rushed through the process
without any input from Congress or industry, will undermine this
critical goal. And we recommend the agency hit the pause button,
convene a working group of existing SBA lenders to determine how
we can better align the program with the SBA mission of reaching
the smallest businesses and entrepreneurs.
Current lenders know where the challenges lie and should be
given the opportunity to craft a program that works better. We be-
lieve the SBA’s new small business lending company rule, which
would admit nonbank financial technology companies or fintechs to
the 7(a) program, is a serious threat to its integrity.
And moreover, the new affiliation rule and revisions to the SOP
appear to be specifically designed to accommodate nonbank
fintechs. Online-only lending can never be a substitute for on-the-
ground community bank lending. The business model of a nonbank
fintech that snap approval and rejection of a loan and quick dis-
bursement of funds is often not in the borrower’s best interest.
We have a client who had previously obtained two quickly-dis-
bursed fintech loans of less than $30,000 each. The fintech pro-
vided no counseling on how to put that money to good use. In fact,
he was overpaying himself, resulting in losses each year. He won
a Navy contract, but couldn’t find a lender because of his losses.
And we worked with him to help him understand what lenders look
for in reviewing a credit application. And ultimately, we were able
to secure for him a $150,000 SBA loan.
You see, the community bank model is really quite different. We
partner with our small business borrowers and are vested in the
long-term growth and success. The reality is that once the loan is
funded, that relationship has really only just begun. We provide
practical, real-world business counseling and networking opportu-
nities, particularly for start-ups, in a way that can never be
matched by an online-only lender.
The best thing for an underserved borrower is to work with a
lender that is committed to their success. A small African Amer-
ican 8(a) government contractor applied to us for a $150,000 loan.
She had recently won a couple contracts, but her low credit score
made it impossible for us to approve her loan application at that
time. And rather than just turn her away, we worked with her for
over a year and a half to increase her credit score and then cele-
brated when we were able to give her an SBA loan. I cannot imag-
ine a nonbank fintech lender standing by a loan applicant for a
year and a half.
We are committed to working with this Committee and the SBA
to ensure the 7(a) program is reaching the smallest underserved
borrowers. But I also think we should appreciate what the program
10
is already achieving. For example, according to the SBA’s own
data, 68 percent of the loans in fiscal year 2022 were made to un-
derserved borrowers. This far exceeds the agency’s target of 43 per-
cent. And also in fiscal year 2022, one in three 7(a) loans were to
minority-owned businesses.
I fully expect nonbank fintech loans to have a higher default rate
and higher incidents of fraud, similar to the results of the Paycheck
Protection Program. The cost associated with more defaults and
fraud will drive fees higher and make the program more costly and
less accessible.
We urge this Committee to exercise robust oversight on the 7(a)
program with the goal of safeguarding its integrity. Thank you,
again, for this opportunity to share my perspective, and I am
happy to answer any questions you may have.
Chairman WILLIAMS. Thank you very much, Ms. Frazier. Good
job.
I now recognize the witness, Mr. Flores, for his 5-minute opening
remarks.
STATEMENT OF MANUEL FLORES
Mr. FLORES. Chairman Williams, Ranking Member Velázquez,
and distinguished Members of the Committee, thank you for hav-
ing me today.
My name is Manuel Flores, and I am the president and CEO of
SomerCor, a Certified Development Company based in Chicago, Il-
linois, a Member of the National Association of Development Com-
panies. I am honored to represent the CDC industry to discuss rule
changes affecting the lending programs at the Small Business Ad-
ministration.
CDCs are nonprofit organizations certified by the SBA who meet
our economic development mission through the delivery of the
SBA’s premier economic development program, the 504 loan pro-
gram, as well as the 7(a) Community Advantage Pilot Program, the
microloan program, and other federal and state initiatives.
My comments today will focus particularly on the affiliation and
lending criteria as it relates to the 504 program. The 504 loan pro-
gram is a prime example of the successful public-private partner-
ship with a loan structure that pairs the CDC—which provides up
to 40 percent of the financing for an eligible project through 100
percent SBA-backed venture—with a banking partner, typically,
which provides 50 percent of the financing, thus requiring only a
10 percent down payment from the small business borrower.
The program finances commercial real estate, including construc-
tion costs and equipment, with terms of 10, 20, and 25 years at a
fixed below-market interest rate. An important cornerstone and
differentiator of the 504 loan program is its economic development
mission. To be eligible for a 504 loan, the project must create jobs
or meet a public policy or community development goal.
The result is a zero-subsidy program that has served more than
175,000 small businesses, provided more than $100 billion into
ventures, and leveraged private sector financing for an estimated
total investment of more than $250 billion in local economic devel-
opment, all at no cost to the taxpayers.
11
In addition, the 504 programs have a collective performance of a
0.5 percent charge-off rate over the last decade. This is in part a
result of the multi-stop underwriting and approval process that in-
cludes loan review by the CDC, a third-party lender, and the SBA.
Combine the extensive oversight of CDCs by the SBA with the un-
derwriting and approval process of the 504 program, and it be-
comes clear why it performs so well.
Unfortunately, despite some of the program’s successes, the 504
program can be weighed down by a complex approval process that
can adversely affect the borrower. The CDC lending industry has
advocated for regulatory changes to create efficiencies in the ap-
proval process for over a decade, including many of the adjust-
ments to affiliation and underwriting included in the recent final
rule.
Now, NADCO largely supports the intent of these changes, which
will provide CDCs the flexibility to be reasonable while continuing
to use prudent underwriting practices that focus on ensuring re-
payment ability.
As you consider congressional action in response to these rules,
I offer the following recommendations. First, there are several lend-
ing programs that the SBA impacted by these rules who operate
differently, and a one-size-fits-all approach is not the best way to
expand small business lending. It is important to continue differen-
tiating the programs and approaching their implementation
through this lens.
Second, while Congress continues to weigh the rules and their
impact, the CDC lending industry and our banking partners need
time and open communication with the SBA to understand these
changes. Trainings, open dialogue, and a collaborative approach is
integral for industry participants to understand and adapt to the
rule changes without fear of being penalized.
Finally, I would like to also draw attention to a program change
initiated by Congress, but for which the SBA has not yet published
a final rule. The Economic Aid Act enacted in 2020 made integral
changes to the 504 Debt Refinance Program. It is critical the SBA
remove administrative barriers that restrict borrower access to the
program and release a final rule as soon as possible.
These changes made in the Economic Aid Act are particularly
important in the current interest rate environment where the lower
fixed rate of the 504 program can provide enormous cost savings
to small businesses.
The CDC lending industry cares deeply about maintaining our
role as a trusted partner for small business success. We will con-
tinue to focus on our collaboration and communication with the
SBA and Congress to meet our collective goal of making lending
programs like the 504 easier, faster, and more secure in support of
a strong small business ecosystem nationwide.
I appreciate the opportunity to testify this morning. I look for-
ward to answering any questions.
Chairman WILLIAMS. Thank you very much. Good job. Plagia-
rism is an evil thing.
Mr. FLORES. I was inspired, Chairman.
Chairman WILLIAMS. Well, I thank all of you. Good job.
12
And we will move now to the Member questions under the 5-
minute rule, and I recognize myself for 5 minutes.
Mr. Wilkinson, given your extensive experience with the SBA
programs, I wanted to start off by asking you to quickly clarify a
few statements that former SBA official Patrick Kelly made at our
hearing last week.
He said that the changes to the 7(a) lending program are not ter-
ribly new but would simply put the program in line with the SBA’s
Express loan program.
So, Mr. Wilkinson, can you describe why this comparison by the
SBA is not accurate?
Mr. WILKINSON. Until recently, the SBA Express program has
been limited to $350,000 in size. The expansion of doing what you
do up to a $5 million loan size is a vastly different approach.
I would also add that we would have a little bit of a concern
about the loss rate that has been seen in the Express portfolio. It
has got a 50 percent guaranty, so you would intuitively think you
would have a lower loss rate, and that has not been the case. It
is running about two times the loss rate that the regular 7(a) pro-
gram is.
Chairman WILLIAMS. Okay. He also claimed that as part of
their oversight of small business lending companies, they give lend-
ers guidance on how they should be compliant with the Bank Se-
crecy Act and other anti-money laundering laws.
So have any of your Members received guidance on how to fulfill
these requirements from the SBA?
Mr. WILKINSON. No.
Chairman WILLIAMS. Okay. And finally, Mr. Wilkinson, can
you clarify what would need to happen to keep the program oper-
ational if loan defaults were drastically increased?
Mr. WILKINSON. Well, we are hopeful that this Committee will
address that through legislation, putting back in the guardrails
that have been there for decades to make sure that the under-
writing guidelines stay in place and we keep lenders between the
lines.
Chairman WILLIAMS. Don’t try to fix what is not broken.
Mr. WILKINSON. Correct.
Chairman WILLIAMS. Thank you for those answers.
I also sit on the Financial Services Committee, as several of us
do here, and for the last few weeks, we have been discussing the
recent wave of bank failures.
So, Mr. Kassar, can you describe the similarities you see with the
fall of Silicon Valley Bank to what the SBA is attempting to do by
increasing access to capital to small businesses that might not be
ready for prime time? And you have talked about that.
Mr. KASSAR. I have seen a lot of term sheets from Silicon Valley
Bank over the years. And for the life of me, I don’t understand how
they make the loans that they do. I don’t know other lenders who
could match them.
So a loose credit culture, I believe, is part of what the problem
was, that cultural program at Silicon Valley Bank, and I am con-
cerned that a loose credit culture at the SBA will lead us sadly to
think about SBA and SVB in the same sentence in a couple years
if we completely loosen so many of the guardrails.
13
Chairman WILLIAMS. All right.
Now, yesterday, the Ranking Member and I sent a letter along
with Chairman Cardin and Ranking Member Ernst in the Senate
to the SBA asking for them to pause on attempting or imple-
menting these rules until a full-time head of the Office of Capital
Access is installed.
Ms. Frazier, you touched on that. But do you think this would
be a good idea given the expected—unexpected departure of the
former associated Members who sat in that seat last week? And
can you describe outstanding questions you still have about the
new rules?
Ms. FRAZIER. Thank you. Well, given that the new rules were
rushed and just recently put out, many of us as lenders are still
trying to absorb what is in them and how would they be affected.
So the pause—not only a pause would be necessary, but I think
also gathering existing lenders together that have experience with
the current SBA rules and reflect upon what could be changed to
make it simpler, but maintain prudent lending standards.
And I would also recommend not only the pause, but should the
changes go into—any changes go into effect, give it time for the
current lenders to process and absorb them and see the impact be-
fore we allow any more small businesses lending companies into
the program.
Chairman WILLIAMS. Thank you very much.
I now recognize the Ranking Member for 5 minutes of questions.
Ms. Velázquez.
Ms. VELÁZQUEZ. Yes.
Mr. Flores, your testimony demonstrated it is important to dif-
ferentiate the 504 and the 7(a) loan programs, which are both im-
pacted by the rules we are discussing today, and you yourself stat-
ed that in your opening statement.
The 504 loan program is an economic development program with
job creation goals. Can you walk us through the 504 underwriting
process and why you believe the changes in the affiliation rule will
benefit 504 loan borrowers?
Mr. FLORES. So, Ranking Member Velázquez, thank you for
your question. Thank you for your question.
The 504 loan underwriting process is unique because it includes
three different parties and multilayers of underwriting and exam-
ination, all with a goal of ensuring borrower solvency.
So you have the Certified Development Company with staff who
has expertise in underwriting also governed by policies and proce-
dures, risk weighting, and concentration tracking, all which have
to meet SBA requirements, which also includes independent loan
review by a loan committee as well as the board.
In addition to the CDC, you have a lending partner, typically a
bank, that will also have to follow its own loan procedures, safety
and soundness, prudent lending. I need not remind this Committee
here that banks are also regulated by banking regulators. I was a
former banking regulator for State-chartered institutions. And then
you also have the SBA that also reviews the loans for the purposes
of, again, underwriting and then also eligibility requirements.
Ms. VELÁZQUEZ. I have a lot of questions, so please be brief.
Mr. FLORES. Oh, apologies.
14
So a very thorough process, Ranking Member.
Ms. VELÁZQUEZ. Okay. Thank you.
As lenders, borrowers, and even those of us here in Congress try
to get up to speed on the details of these two rules on the SOP,
I understand mistakes will be made.
What has your interaction with the SBA been like? Have they
tried to explain the details of the rules to your organization in
order to help you comply?
Mr. FLORES. So a lot of the changes that we are seeing, frankly,
have come from years of communication with the SBA in engage-
ment with the CDC industry. And just as recently as last week, we
had a number of meetings with the SBA leadership and other
Members to reflect upon some of the changes.
That being said, I do believe, Ranking Member Velázquez, that
it is prudent that the SBA continue to gauge the industry. I agree
with the notion of openness, transparency, and collaboration in
making sure that all of the stakeholders understand the changes
so that we can do our jobs in helping small businesses access these
amazing programs.
Ms. VELÁZQUEZ. Thank you. Thank you.
Mr. Wilkinson, I am sure you are aware I have been advocating
for more small-dollar loans, those from 50- to 150,000. There has
been a decline, about a 50 percent decline in those type of loans.
My question is, why is it that lenders are not making these
loans?
Mr. WILKINSON. Well, I think from where we sit, you know, 50
percent of our loan approvals by number of loans are $150,000 or
less. So those are small-dollar loans.
In any given year, based on economics or lender business models,
those numbers changes. They fluctuate. And if you go back 5 years,
we had a couple of major SBA Express lenders exit the program,
so you saw a decline in small-dollar loans at that point in time.
But if you go look today, you’ll see our small-dollar loans are
coming back up. I think the fee waivers are playing an important
role.
Ms. VELÁZQUEZ. We have issues with the data, right, that is
coming to us from SBA itself.
What would you say to those that say that this is simply about
market competition? How do you respond to that?
Mr. WILKINSON. It couldn’t be further from the truth. Banks
can enter this program today, leave tomorrow. We get banks enter-
ing all the time.
Ms. VELÁZQUEZ. In terms of myself as Ranking Member of this
committee and as Chair of this committee for 30 years now, I have
been advocating for the smaller of the small businesses. And for
those small loans from 50- to 150,000, the truth of the matter is
that there is a decline. I want to make this effort a reality to get
loans to underserved businesses who need it the most.
My question is, how can we achieve this goal using the rules as
a framework?
Mr. WILKINSON. Well, first of all, I was starting down the path
of—the fee waivers are working right now. We are seeing an uptick
in small-dollar loans. We are seeing an increase in $150,000 and
under. We are running ahead of last year’s pace by—goodness, we
15
are 25 percent ahead of last year’s pace on loans of $150,000 and
under. So we are making progress.
We could expand the microloan lender network because they are
specifically focused on loans of $50,000 and under, and they add
the technical assistance component. And then perhaps if we gave
lenders some credit in their PARRiS reviews if they did a specific
percentage of loans under 150,000.
Ms. VELÁZQUEZ. Thank you.
I yield back.
Chairman WILLIAMS. Thank you very much.
Next, I now recognize Mr. Luetkemeyer from the great State of
Missouri for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Welcome to the panelists.
Mr. Wilkinson, let me start with you this morning. I have got in
front of me this morning a copy of the Federal Register which pub-
lishes rules and regulations that are promulgated by different
agencies.
The particular pages I have in front of me are with regards to
the Small Business Administration, and they say—and I quote, the
SBLCs are nondepository lending institutions authorized by SBA
only to make loans pursuant to section 7(a) of the Small Business
Act and loans to intermediaries and SBA’s microloan program,
which says only those kind of loans.
But then it says later on that SBA agrees with the previous
paragraph, which mentions that they are going to do away with
that, and it says, we will revise the paragraph by removing the
word ‘‘only’’ to make it clear that SBLCs and Community Advan-
tage SBLCs may participate in other lines of business in addition
to 7(a) lending or making loans to intermediaries.
Mr. Wilkinson, what is the impact of that?
Mr. WILKINSON. Well, I have huge concerns about that because
this change—as you note, there is now nothing in the regulation
to prohibit an SBLC from making other types of loans or engaging
in other business products.
More importantly, this change significantly would add to the
SBA’s oversight burden, since when it is evaluating institutional
safety and soundness, they would now have to be up to speed on
all the other related lines.
Mr. LUETKEMEYER. What is the mission of an SBLC?
Mr. WILKINSON. Mission of an SBLC?
Mr. LUETKEMEYER. Yeah.
Mr. WILKINSON. Well, currently, the SBLCs are standalone
separate corporations that only do 7(a) loans.
Mr. LUETKEMEYER. Okay. So what they are going to do is they
are going to make these mini-banks. Is that where we are going to
be? Is that another way to frame it?
Mr. WILKINSON. That is another way to frame it.
Mr. LUETKEMEYER. So, Ms. Frazier, you are a banker. Do you
like this competition? Having the SBA be the new bank lender in
your community for small businesses, when they are supposed to
be the lender of last resort, and now they are your main competi-
tion. How do you think about that?
Ms. FRAZIER. I don’t think very highly of it, quite frankly.
16
As I testified before, when the direct lending was being proposed
from that perspective—is that what you miss and what many—
what many of us are saying here is the relationship and the coach-
ing and the counseling many of these borrowers need in this proc-
ess—and they need the education towards their financials—and to
create an online process that scored, and the decision is made
against a few metrics or factors, you don’t achieve what I believe
is what everyone desires as a successful entrepreneurship and busi-
ness.
So I am not excited about that kind of competition, only because
I think it diminishes really what the SBA is trying to achieve.
Mr. LUETKEMEYER. Well, it would seem to me that what
would happen is you will turn somebody down because they are not
creditworthy or they have got a problem, and they are going to run
across to an SBLC who now has no criteria.
Last week, we talked about this with Mr. Kelly. And they don’t
have Know Your Customer stuff. We don’t have all these other
things in place that, during the PPP program, really differentiated
between the banks and the fintechs and how they were able to get
the funds out the door and be able to do this.
We found that the fintechs were basically the problem children
with the PPP program with the way that they did not do the over-
sight that they really needed to do with regards to their customers.
So it looks to me like we have got a real problem with direct
lending here, especially when at the SBA—when the EIDL pro-
gram was fraught with fraud. And so now we are going to make
them a direct lender in multiple areas.
Ms. FRAZIER. Right. Not a good thing because the relationship
isn’t long-standing. It is, package up a portfolio, sell it, service it,
and you miss the opportunity to really develop business and help
with economic success.
Mr. LUETKEMEYER. Mr. Kassar, would you like to elaborate a
little bit on that? I think you said a minute ago something about
loose credit culture. This, to me, is our whole problem.
It is that SBA does not know how to do direct lending. It is prov-
en by the programs that they have, the losses they have sustained.
They don’t do their due diligence on underwriting. And now, sud-
denly, they want to expand those programs and be in direct com-
petition with the banks who we already know do it right. And so
now, it looks to me like we are going to wind up putting a big bur-
den on the taxpayers to underwrite this whole situation.
Would you like to comment on that?
Mr. KASSAR. Absolutely. In addition to the prior point you are
making, if these new SBLCs can do any other kinds of loans, if for
whatever reason a borrower does not qualify for an SBA loan, they
can quickly move the mover to a high-interest, very expensive loan
that many—not all, but many of these fintechs are doing that cre-
ates a high-speed debt treadmill, which is——
Mr. LUETKEMEYER. One more quick question.
Where are the SBLCs going to get their funds to loan? If they
are going to expand their loan program, where do they get the
money for that?
Mr. KASSAR. They might get them from private lines from
banks.
17
Mr. LUETKEMEYER. I yield back. Thank you, Mr. Chairman.
Chairman WILLIAMS. Next, I now recognize Mr. McGarvey from
the great State of Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman.
Thank you all for being here today and talking about this incred-
ibly important issue.
Last Congress, after an extensive investigation into the Paycheck
Protection Program, the House’s Subcommittee on the Coronavirus
Crisis found that fintech and other nondepository institutions failed
to establish systems that would stop obvious and preventable fraud
and profited off of processing fees for each loan they completed,
leaving little incentive to find the fraud.
The Subcommittee issued a report in December recommending
that, quote, any plans by SBA to again open 7(a) to fintechs and
other unregulated, nondepository institutions must be accompanied
by a well-defined, more rigorous, and better-resourced initial re-
view process, and that such entities should be subject to continuous
monitoring to confirm their adherence to SBA rules.
Mr. Wilkinson, you talked a little bit about this in your opening
statement. I just want to go a little bit more in depth with you on
it.
Do you feel that the rule changes proposed by the SBA are just
that: Well-defined, more rigorous, and provide a better-resourced
initial review process?
Mr. WILKINSON. No, they’re not. They are devoid of any guard-
rails. SBA lacks the capacity to be the prudential regulator for the
new SBLCs. So, no, I disagree that they have done a good job here.
Mr. MCGARVEY. What do you think should be happening?
Mr. WILKINSON. Well, there is a whole long list. First of all,
many of the guardrails should remain in place.
I would tell you that when the fintech group came to lobby us,
they asked for higher interest rates. They asked for the ability to
charge higher fees. They got that. It is in the new SOP. They asked
for the ability—and I am sorry. Mr. Luetkemeyer just left—they
asked for the ability to sell 100 percent of the loan, not just the
guaranteed piece.
So there is a program underway at SBA to allow fintechs to sell
a significant portion of the loan. That is where they are going to
get their funding. And they asked for us to help them get rid of
the credit elsewhere test. And at that point in time, we knew we
were not going to be on the same page with these folks. So the
fintech groups that are trying to get in right now have a vastly dif-
ferent idea of what this program should look like than we do.
Mr. MCGARVEY. And tell me, what is the practical effect of
that, to people looking for SBA loans?
Mr. WILKINSON. Well, I suspect that there will be more folks
that will get the loans, many of whom probably shouldn’t. It is
going to be down to an algorithm that is done online.
And the practical effect for us sitting in this room is you are
going to see significant increases in loss rates, which is going to put
an upward pressure on the cost of the program. And we will all be
right back in here talking about how we are going to raise fees on
borrowers and lenders, or are we going to be able to come up with
an appropriation, with the discussion being—you are doing riskier
18
lending. Why should you guys appropriate money? And that is
going to be a hard one to defend.
But rest assured, losses are going to significantly increase with
these rule changes.
Mr. MCGARVEY. I appreciate your input and insight into that.
And obviously one of the things I am concerned about—you have
heard Ranking Member Velázquez talk about this—is making sure
that people who need these loans, particularly the smallest of the
small businesses, the people who are underserved, the people who
have not had access to capital get that type of access to capital.
It is clear that fraud was an issue with the fintechs. So we have
established that. I don’t think you are seeing a debate in this Com-
mittee. But we also know they did reach more women and minori-
ties than traditional lenders did.
So, Mr. Flores, what changes do you think are out there that you
would propose to current rules to allow for lenders to serve more
diverse and underserved populations while also protecting bor-
rowers?
Mr. FLORES. You know, that is what makes the Certified Devel-
opment Company network very unique, is that we are about eco-
nomic development. So our charge is to make sure that not only are
we informing and educating the public about small business lend-
ing, but in particular, also providing technical assistance and part-
nership with other organizations.
And our mission is to make sure that we not only promote the
SBA lending programs, but that we do it in a way where the bor-
rower is able to actually derive the whole benefit of that loan.
So a lot of work goes into engagement and communication, and
it is done in partnership with the Small Business Administration
and individual CDCs, other economic development organizations.
I just—again, I would hearken back to the comments that I made
as a former banking regulator as well, is that the Small Business
Administration working with the industry is critical in making
sure that we are able to track the performance of these programs
objectively and also to not lose sight that, at the end of the day,
while we may have deep concerns about, you know, whether or not
the new guidelines may impact certain types of loans, that we not
forget about the need—the gap that exists with regard to access to
capital for minority-owned businesses and rural-based enterprises.
We have small businesses that need this access to capital, and
I think we can balance both prudence with increased access to
groups that have been historically left behind in terms of access to
capital.
Mr. MCGARVEY. Thank you very much. I would love to ask
more questions. I appreciate the conversation that we are having
here today. But I am out of time.
So, Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you very much.
I now recognize Ms. Van Duyne from the great State of Texas for
5 minutes.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman, and
thank you for holding this important hearing highlighting how this
proposed rule change will be detrimental to small businesses across
19
the country and will lead to an increased risk to the American tax-
payer.
Just 4 weeks ago, we had the SBA Inspector General in this
room, where he shared the same concern we are hearing today. It
is clear that the SBA is in no position to take on additional respon-
sibilities.
From allowing fraud to run rampant in pandemic relief programs
to this unprecedented weakening of lending standards in the 7(a)
lending program, I am deeply worried by the Small Business Ad-
ministration’s pattern of incompetence and seemingly disdain for
taxpayers.
One major concern with this rule is the change to credit available
elsewhere, which requires that a lender look elsewhere for credit
before looking at the SBA for funding. As for this proposed rule,
SBA eliminated the requirement of providing the reason and is in-
stead moving towards a loan volume over loan quality.
So, Mr. Wilkinson, I appreciate you being here, and I appreciate
the testimony that you have provided so far in your answers to a
number of questions. But I am the Co-chair of the Congressional
Franchise Caucus, and I am particularly concerned by the impact
of this rule on our franchised small businesses, which are a vital
part of our economy, especially in North Texas.
Seeing as the SBA is going to stop publicizing the franchising di-
rectory that allowed lenders to quickly reference whether an entity
qualifies for an SBA loan, are you concerned that this will make
lenders more hesitant to lend to franchisees?
Mr. WILKINSON. It absolutely will. And you are correct that the
Franchise Directory is no longer being maintained on the SBA
website. We instructed our lenders to download the latest list of ap-
proved franchisors the day before they discontinued it so lenders
could still review—go back to that Directory to see who would still
be eligible.
But correct. There is going to be a lot of lenders who are going
to be very hesitant based on the new rules to engage in franchise
financing.
Ms. VAN DUYNE. I appreciate that.
In the recently-issued SOP, which takes effect on August 1, SBA
revised the requirements regarding what a lender has to do to
prove that the loan complies with what the statute requires, which
says a borrower can’t get a 7(a) loan if they can obtain credit else-
where.
Mr. Wilkinson, what did SBA change about credit elsewhere, and
why do we need to know about these changes? What do we need
to know about these changes?
Mr. WILKINSON. Two important changes.
First of all, every time you make an SBA loan today, you have
to have a narrative in the credit file to specifically say why that
borrower cannot obtain credit elsewhere. It has got to be detailed
out.
The rule change has been made, in my opinion, to benefit the
fintech group, who wants a computer-driven algorithm low-touch
program, so they have made this a check-the-box exercise. So all
you have to do is, as the lender, is check a box, and it is done.
20
Secondly, they have changed the personal resources test. Before-
hand, if a borrower had significant personal wealth, that would be
a source of funds that we would say had to be tapped first before
borrowing through a SBA loan. That has been changed. So personal
wealth is no longer an issue. So, yeah, rich people can get 7(a)
loans.
Ms. VAN DUYNE. I appreciate you saying that.
Mr. Kassar, you had mentioned earlier that not everybody who
applies for a loan needs a loan.
If we are going to turn to basically just checking a box now, do
you think that the SBA or that these fintech lenders are going to
able to provide the same type of quality of service that you can by
walking through everybody who applies for a loan, whether or not
they need it, the level that they need it, and whether they can pay
it back?
Mr. KASSAR. Absolutely not. Remember that SBA lending, it is
a work of passion, often more art than science. So it is underserved
or served borrowers across the spectrum.
The first thing you have to really ask them and understand is,
what is this money for? What do you want to do with it? What is
your plan? How do you propose to make more money with this loan
than it is going to cost you to service?
Ms. VAN DUYNE. So you are saying you don’t treat everybody
the same?
Mr. KASSAR. I am not saying you don’t treat everyone the same.
What I am saying is that you have to have a thoughtful conversa-
tion with a borrower to begin to understand what is the root of
their ask. Do they have a good reason for not needing this money?
And if they don’t, you have to counsel them to take some time and
do some planning and some thinking, and then come back to the
table when they are ready.
Ms. VAN DUYNE. So you think that the personalized service is
of a greater value than just checking the box——
Mr. KASSAR. 100,000 percent.
Ms. VAN DUYNE. Do you think that actually helps people not
have to borrow beyond their means?
Mr. KASSAR. 100,000 percent.
Ms. VAN DUYNE. Do you think that actually helps them to be
better small businessowners?
Mr. KASSAR. 100,000 percent. If you borrow too much money too
quickly or without a plan, you get into trouble.
Ms. VAN DUYNE. And do you think that the SBA is actually
providing that with this change in service?
Mr. KASSAR. Absolutely not. They are trying to streamline it
and make it quick, fast, and automated.
Ms. VAN DUYNE. I appreciate that.
I have one quick question. During my Oversight hearing with IG
Weir, Mr. Weir shared his concerns with self-certification, and now
the SBA is moving forward with self-certification for the credit
elsewhere test.
Mr. Wilkinson, how do you think this effect will—how do you
think this will affect lender behavior?
Mr. WILKINSON. Well, it is going to make it much easier for
fraud to enter the program.
21
I think—we are instructing our lenders to—when SBA says ‘‘do
what you do’’, we are telling them do what you should do because
there is going to be a point in time in the future——
Chairman WILLIAMS. Time is up.
Ms. VAN DUYNE. All right. Thank you very much.
I yield back.
Chairman WILLIAMS. I now recognize Ms. Gluesenkamp Perez
from the great State of Washington for 5 minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Mr. Chair. Mr. Flores,
thank you for being with us today. I know this is a hearing nomi-
nally on the 7(a) program, but I want to first address the 504 lend-
ing program.
So before I came to Congress, I actually own a small business
and got a 504 loan. It took me a year to do. It was about the size
of a phonebook. I know you share of my goal of creating efficiencies
in the 504 program to streamline the process for small
businessowners. The affiliation rules changes the underwriting cri-
teria for both the 7(a) and 504.
So am I correct to say that there are multiple layers of under-
writing and examination of the 502 program?
Mr. FLORES. So, Congresswoman, if you recall from the process,
you were dealing with a certified development company, a third
party lender, and also the SBA. The SBA actually had to review
all the work that was done and then ultimately decide whether or
not it was a worthy loan. So there are multilayers just by virtue
of the structure of the program, which is very unique. And, again,
I want to reenforce the differentiates—the 504, it is a differentiator
between the 7(a).
But beyond that, as you recall, and I do want to reference, you
know, you referred to just the process that there are certain com-
plexities built in that we believe that with some of these changes,
it will make it easier for that borrower to access this amazing pro-
gram without, again, compromising any level of integrity or over-
sight over the loan program.
Again, we want to make prudent loans. It is everyone’s best in-
terest to make sure that the 504 loan program continues to succeed
as it has and to provide greater access to capital for small busi-
nesses.
Ms. GLUESENKAMP PEREZ. So how exactly do the affiliation
rule reforms fit into the multiple layers of the 504 program ap-
proval process and streamline it for small businesses?
Mr. FLORES. So a couple of things. I reference one particular
story where you had relatives who were given the opportunity to
own a couple of the restaurants—actually, the father started. Ulti-
mately, then, a couple of the siblings wanted to move forward on
a particular project, and the third sibling did not want to share
particular financials that were required under the SOP.
And it ultimately led to a particular situation where the project
couldn’t go forward because one of the siblings did not—who was
not involved in this other new venture wanted to put forth finan-
cials.
Ultimately, the family got together and cooperated. But, again,
that was a situation where you had this very unique complex proc-
22
ess that didn’t really apply to that particular situation. It almost
deprived that family from being able to access the 504 loan.
With regards to franchises, again, one of the challenges that a
lot of franchisees have to manage is getting—showing, dem-
onstrating that the franchise is not going to have some level of
ownership in the particular business going forward.
So now where you have that removal, there is no issue with re-
gards to control. Now, it makes it easier for that small business to
move forward if it is a franchisee.
So the whole notion here is to make sure that we are providing
guardrails, but guardrails that apply to what is really happening
with regards to the small business needing the capital for their
particular business need and moving forward.
Again, I would say that the process in place with CDC working
in partnership with a third party lender and the SBA, you have
layers of oversight to protect the integrity of the program.
Ms. GLUESENKAMP PEREZ. Thank you. Mr. Wilkinson, it is go
to see you again. Could you speak to how the 7(a) programs struc-
tures differ from the 504 program?
Mr. WILKINSON. So our structure is a guarantee program. So
the lender makes the loan with a percentage of that loan guaran-
teed by the SBA. But the lender actually funds the entire loan.
Ms. GLUESENKAMP PEREZ. So is it safe to say that the re-
forms that benefit one SBA program may not work for another SBA
program?
Mr. WILKINSON. They may not.
Ms. GLUESENKAMP PEREZ. Yeah, and thank you for that in-
sight. I agree that we should not being painting these with an over-
ly broad brush. In this last minute, I would love to hear some in-
sight on what we can do to streamline the 504 and make sure that
those dollars are getting to small businessowners that need it. Ms.
Frazier, if you have thoughts on that.
Ms. FRAZIER. Thank you. I think the reference to the
phonebook is quite adequate. And I think it is overwhelming at
times from borrowers who are maybe not as sophisticated and have
borrowed money for commercial real estate and their property be-
fore.
So I think anything we can do to help streamline but not lose
prudent underwriting standards in the process would be helpful.
Even the documentation, getting that down to something that folks
can absorb and understand, and it is simplified, and I think those
types of things would be helpful from the process.
Ms. GLUESENKAMP PEREZ. Thank you. Mr. Chair, I yield
back.
Chairman WILLIAMS. Thank you very much. I now recognize
Mr. Bean from Florida, the great state of Florida for 5 minutes.
Mr. BEAN. Thank you very much, Mr. Chairman. Good morning
to you. Good morning, Small Business Committee. Good morning,
panelists, we are glad to have you here. I have only been here 22
weeks. I am a new guy, 22 weeks, and I have discovered that this
place is crazy town. It is crazy town. Because only in crazy town
can a government agency come and have an abysmal record of los-
ing taxpayer money, and then come and say, Hey, we want more
23
money, and we want to ease the standards of giving it away more
frequently.
Yesterday, in crazy town, I was on a committee and spent 4
hours listening why it is a great thing that we would give away
taxpayer moneys in the form of student loans; why that is a great
thing. And then even finding out—and this was in crazy town—a
big sizable part of those student loans didn’t even go for tuition,
they want for trips and cars and stereos. How about that? But that
is what happened in crazy town.
So and as a former banker—I know there is some bankers up
there—it is just unfathomable that we would ever forgive a loan
after the person agreed this is the terms of the agreement without
even trying back. So it is a toss-up for the panelists. Are we in
crazy town? Who wants to answer that question? Are we in crazy
town? Is this crazy town?
Mr. WILKINSON. I would love to take that question.
Mr. BEAN. Jump in, my friend. Welcome to crazy town.
Mr. WILKINSON. Well, thank you for that question. I would tell
you that over the last several decades that I have been involved
with this program, we have taken steps as we have seen lender be-
havior—and borrower behavior as well—to put guardrails in place
at SBA to make sure that this program operates on a sound basis.
We view this as a three-legged stool with the lenders, the bor-
rowers, and the federal government representing the taxpayer. We
need it to work for all three of us.
And so I would say over the last, especially the last two decades,
you can go look at our performance, and it has been really, really
good. In the last probably five fiscal years, our charge-off rates
have been running under a half a percent. I think it is a very well-
managed program. It is working for the taxpayer, it is working for
the borrower, and it is working for the lender.
So I think in this being particular case, the 7(a) program, as the
Chairman said, it is not broken. It is working just fine.
Mr. BEAN. So to make these moves, we wouldn’t be going to
crazy town? Is that your testimony today before we are going to
crazy town making these changes?
Mr. WILKINSON. I believe these changes will lead to signifi-
cantly higher losses in the 7(a) program.
Mr. BEAN. Very good. Mr. Kassar, you have been sitting there.
I want you to jump in. I want you to jump in because it used to
matter, criteria used to matter. And I made loans myself a small
bank in northeast Florida. And it used to matter, could the cus-
tomer pay us back? That was the number one question my boss
and my committee—can they pay us back? That was important. I
had to answer that. But it seems the SBA is less concerned about
getting paid back, but is that what they do in crazy town? Mr.
Kassar, welcome.
Mr. KASSAR. Thanks for having me. Listen, one of the things I
have loved about SBA lending, being involved in it for the last al-
most decade and a half is that it hasn’t felt like crazy town until
now.
So to the point, we have had a balancing act, and it has worked
for all the parties involved. And it has helped tens of thousands or
hundreds of thousands of businessowners and entrepreneurs. But
24
it feels like crazy town when you say we are going to throw it all
up, we are going to change it all up all at once. That feels like
crazy town to me.
Mr. BEAN. And then you got to add this to the mix. After their
horrible report card, and it is just—they do it with a smile and say,
okay, we have done such a horrible job, give us more, and let us
ease the standards so we can get more taxpayer funded programs
out the door. And then, like I said, in the committee yesterday, let’s
just forgive all debt. But that is what they do in crazy town.
Mr. KASSAR. I think it is super important to note, though, the
conventional SBA 7(a) lending that has been around for decades is
not the EIDL program, we are not the PPP, we are not the res-
taurant revitalization fund. And that is starting to get a little crazy
town when you are comparing them, because you are comparing
dramatically different programs. And you have to be really careful
to separate those guardrails.
Mr. BEAN. Gotcha. Typically, Ms. Alice, it would matter if the
borrower could pay us back, but we are in crazy town. So should
it matter that the borrower could pay us back, Ms. Alice?
Ms. FRAZIER. It should always matter. And one of the things
that you know as a former banker that you are looking for some
skin in the game from the borrower as well. And that is part of the
new rules is there is no necessary reason to show any skin of the
game from that perspective. And that is part of paying it back from
that perspective. I would also say to become a preferred lender, you
have to prove yourself trustworthy and to be trusted with what the
government is allowing you to do on their behalf. And in that point
we all take that very pridefully. And to remove these rules, it is
not the same anymore.
Mr. BEAN. Amen. Ladies and gentlemen, thank y’all so much for
coming forward. And welcome to crazy town. Mr. Chairman, I yield
back.
Mr. MEUSER. [Presiding.] The gentleman yields back. I now rec-
ognize Ms. Scholten from Michigan for 5 minutes.
Ms. SCHOLTEN. Thank you so much, Mr. Chair. And thank you
to all of our witnesses for coming today. We truly appreciate your
testimony. I said this last week to Mr. Kelley, but, of course, it
bears repeating today, that these rules are nuanced. And now that
the SBA has finalized them, it is up to Congress to do the nec-
essary oversight of the SBA to make sure that they are imple-
mented correctly. And we do have concerns, as you have heard
today.
So my first question is for Mr. Frazier. In your testimony, you
state that the best thing for an underserved borrower is to work
with a lender that is committed to their success. I completely
agree. I have seen this first hand. I have heard from financial insti-
tutions in my district about their concerns regarding Fintechs that
may become authorized SBA lenders under this new finalized rule.
One of the top concerns I have heard about.
What services does your bank offer underserved borrowers that
a Fintech cannot? And what guardrails do you think the SBA
should have in place to ensure predatory lenders are not allowed
to participate in the SBA program?
25
Ms. FRAZIER. For our bank, I will speak for us, is we are in-
volved with a number of initiatives locally. Through chambers,
there are typically some programs focused on women and minority
borrowers to help educate them. We also work closely with the
NAACP organizations, et cetera. And then we also have education
programs that we hold for our, you know, local clients and the
prospects. But I don’t think that I am unique in that. I believe
most of our community banks across the nation do the same thing
because we are committed to the communities we serve overall.
And I am concerned from the Fintech perspective, it is not about
what you are doing to actually help the economics and help the
businesses grow, and help them use the money appropriately and
to get the right size loan that is appropriate that they don’t go too
far into debt. And in that situation, this is where the banker be-
comes more of a partner to them than necessarily just a place to
get money. And that partnership lasts for a long time and can
serve all very well.
Ms. SCHOLTEN. Okay. Thank you. I apologize for saying ‘‘Mr.’’
at the outset. Or maybe you didn’t hear me.
Ms. FRAZIER. I will just let that slide.
Ms. SCHOLTEN. Good for you. I get called ‘‘Mr.’’ all the time,
actually. I don’t mind. So I have a second question, another concern
that I have heard from financial institutions in institutions in my
district is changes to the underwriting criteria the SBA is making
in the affiliation rule. This is also a topic that Mr. Kelley discussed
at length last week.
Ms. Flores—I am kidding—Mr. Flores, my question is for you. In
your testimony, you express support for the intent behind the
SBA’s changes to the underwriting standards. From your perspec-
tive, how significantly do you think the underwriting standards
will change because of the affiliation rule? How will these changes
to underwriting criteria impact the level of consistency in local
evaluating and processing?
Mr. FLORES. Thank you. So from our perspective, we are going
to continue to use our prudent lending practices. We have guide-
lines, we have policies and procedure that we have to vet from our
own internal loan committee board of directors as well as the SBA.
We are still going to be using the five Cs of credit, capacity, capital,
collateral, conditions, character. And, frankly, the three, you know,
there has been discussions of moving from nine to three various
credit factors.
But if you take a look at the actual SOP, the language of the
SOP. And I quote: Lenders and CDCs must use appropriate and
prudent generally acceptable commercial credit analysis, processes,
and procedures consistent with those used for their similarly sized
nonSBA guaranteed commercial loans. Lenders, CDCs, SBAs may
use the business credit score model.
When we read that, we are looking at, okay, also our banking
partner has to make sure that they are following their rules and
procedures. They can’t run afoul those procedures because they will
get in trouble or banking regulator. The SBA itself, OCRUM. We
are going to have to be—we are going to be measured and gauged
by whether or not we are following our own policies and proce-
dures, and if we are also being prudent in our lending.
26
Now, the streamlining here is to, in my opinion, and the opinion
of many in the CDC industry here is how do we make it easier and
less burdensome on the small businessowners so that they don’t
have to come in with a telephone book, as it was just described ear-
lier, and where it frankly doesn’t have to take a whole year? Think
about what happens in the real world. You have small businesses
who want to make investments. And sometimes—and at the end of
the day, time is money, and time is opportunity. But here with the
504 program, it is not just about what is in the best interest for
that small business, it is also about the impact that we have in cre-
ating more jobs, bringing the local investment. So it is in every-
one’s best interest to make sure that the 504 loan program gets in
the hand of the small business borrower in a shorter timeframe re-
sponsibly. And then the benefit here is you are also seeing more
investment in our communities and greater access to minority-
owned businesses and rural-based enterprises.
Ms. SCHOLTEN. Thank you. I appreciate that testimony. I yield
back the reminder of my time. Thank you.
Mr. MEUSER. The gentlewoman yields back. I now recognize
myself for 5 minutes. I thank you all again for being here.
Chairman Williams mentioned the letter earlier that was just
sent, I believe in the last couple of days, also signed by Ranking
Member Velázquez and the Ranking Member and Chairman from
the Senate to the SBA stating that this program needs to be needs
to be delayed due to the lead person on this Patrick Kelley no
longer being with the SBA. We are all sitting here stating, and
your concern is that potentially unworthy businesses will be receiv-
ing loans and will increase your subsidy rate for the program, and
among other things, obviously.
So clearly this is a bipartisan understanding that they are mov-
ing forward in real serious haste, which could have real serious
ramifications on taxpayers as well as yourselves. Is there anything
about this that you find reasonable? Is there anything about this
initiative that could work for you that you think actually can be
a positive thing? Anything at all? I am going to ask you, Ms.
Frazier.
Ms. FRAZIER. Well, certainly. Thank you for that question. But
certainly there are pieces in there that could help smooth the proc-
ess, make it easier to get credit there. But I think taken as a
whole——
Mr. MEUSER. Right.
Ms. FRAZIER.—it is too much risk.
Mr. MEUSER. Okay.
Ms. FRAZIER. And so it needs to be dissected. You need to get—
I really recommend as part of the ICBA, bring lenders in and dis-
sect it——
Mr. MEUSER. Right.
Ms. FRAZIER.—and pick the best parts——
Mr. MEUSER. Right.
Ms. FRAZIER.—so that we remain prudent. That we keep—safe
the monies that are put out there and do the right things for the
borrowers.
Mr. MEUSER. Good. Absolutely. Then and I am absolutely favor-
able to that, and that is exactly how we should proceed.
27
Mr. Kassar, good to see you. Thanks for making the trip down
from Pennsylvania. I make that route quite a bit myself. You stat-
ed that the SBA is focused on a misguided solution in your testi-
mony, broadening access to capital, and burdening future genera-
tions of taxpayers with the fallout. You seem to have some existen-
tial concerns about the 7(a) program due to this initiative. Could
you expand on that?
Mr. KASSAR. Sure, again, I think there are many elements that
could be terrific. I think there should be some role for Fintech. It
is very careful to put Fintech in one category. Fintech is a broad
industry with different players, with different philosophies. Better
use of technology in the program at different stages is good. What
is dangerous here is doing it all at once.
Mr. MEUSER. Yeah.
Mr. KASSAR. And because—I don’t know if the SBA has pro-
duced any forecasts about what will happen to default rates——
Mr. MEUSER. Right.
Mr. KASSAR.—as a result of these changes, and if they have
one, I don’t know how they did it. So if we say we are going to try
this for this quarter, and then we will be able to measure it, and
then we will add this element next quarter, and this element next
quarter, you will start to see and understand what is working or
not. To say that the SBA program shouldn’t evolve and innovate
and change or leverage technology——
Mr. MEUSER. Sure.
Mr. KASSAR.—I think is irresponsible. But to do it all at
once——
Mr. MEUSER. Right.
Mr. KASSAR.—like the big crazy science experiment——
Mr. MEUSER. Right.
Mr. KASSAR.—I think creates a lot of risk.
Mr. MEUSER. And as businesspeople and entrepreneurs, I can
understand that you all would have that sentiment.
Mr. Wilkinson, let me ask you this, the 7(a) loan program statis-
tics looked like for smaller dollar loans and underserved market
loans, the SBA stated that the 7(a) program does not succeed in
underserved market lending. Do you want to comment on that? Is
the 7(a) program working as effectively as it should be right now.
Mr. WILKINSON. Well, you know, we can always do more, but
we have got just over 50 percent of our loans and loans under
$150,000, and with SBA’s new definition of small-dollar loans being
at $500,000, about three-quarters of our units. That is a significant
portion of our portfolio are in small-dollar loans. You also have to
keep in mind that it is the larger transactions that pay the cost for
the smaller ones. And so we got to have a pretty good mix of both.
Mr. MEUSER. Right. Okay. And last week the former Associate
Administrator Patrick Kelley told the committee that all the con-
cerns amounted to a lot of fuss that has been made about banks
being upset about three Fintech companies being included in the
program. What do you have to say about that comment.
Mr. WILKINSON. Well, we welcome in lenders to this program
all the time. We would be happy to have quality lenders who are
capitalized, who understand the rules and regulations of the SBA
program, and who are appropriately regulated.
28
Mr. MEUSER. Sure.
Mr. WILKINSON. What we don’t want is lenders who don’t know
what they are doing that aren’t appropriately regulated abusing
program. But I would echo Mr. Kassar’s comments about Fintech.
We have a number of Fintechs that work with our lenders today.
We have a Fintech who is a lender. They went out, and they
bought a bank. They are capitalized, they are regulated by OCC,
and they are a good corporate partner.
Mr. MEUSER. Thank you. Mr. Flores, I want to ask you some-
thing quick. Your testimony described the 504 program as success-
ful public, private partnership. What did you mean by that, and
you have got one second to elaborate.
Mr. FLORES. Banks, private lenders, CDCs, SBA with a support
of Congress. That is winning calculation.
Mr. MEUSER. All right. Thank you very much. I yield back.
I now recognize Ms. Chu from California for 5 minutes.
Ms. CHU. Mr. Flores, I want to make it clear that I share many
of the concerns raised today particularly around unregulated enti-
ties being able to make loans when there is still questions regard-
ing fraud and PPP. But I also want to ensure that a response to
these rules is nuanced and recognizes the positive impact these
rules will have on lending in underserved communities.
For example, you testified that the affiliation and lending criteria
rule implements some welcome changes to the 504 Community De-
velopment Program. And, in fact, CDCs had specifically asked for
these changes to be applied to the 504 program after they were
first applied in April of last year to Community Advantage Lend-
ers. As a CDC that makes both 504 and community advantage
loans, can you discuss how the changes to the affiliation in lending
criteria will help lenders like you better fulfill your mission of
reaching underserved businesses? And, in fact, you have an exam-
ple in your testimony about a specialty food brand that you had
loaned to for the property, and then 10 years later they sought ad-
ditional financing, but they had grown and had 40 affiliates. And
the burden of providing documentation on 40 different affiliates,
many with no direct ties to the business seeking financing was too
arduous to close a loan. So how would it be different with these
rules?
Mr. FLORES. What it does is it makes it, it loosens up. Again,
not loosens it—it makes it easier in a more streamline efficient way
for us to determine whether or not the borrower is meeting the
spirit of being able to access the 504 loan program. Knowing that
we are providing some very favorable terms to that borrower; to
provide that access to capital; to create job to make local invest-
ments. And the particular story that you just referenced, it was sad
to see here a very successful business operator who had a dream.
We provided an SBA 504 loan. That individual continued to grow
their business, meet other unrelated investments. But because of
those older rules had to—was asked about all of these other unre-
lated essentially entrepreneurial endeavors. And then now, the in-
dividual said, you know, I just simply have no time to comply with
all these requests. I am talking away. I do not have time in order
to be able to make additional investment. And that was a real lost
opportunity.
29
I just want to reinforce, again, that we are talking about—you
know, that is why it is important to differentiate between the 7(a)
and the 504 loan program. And I want to make that clear here.
And that differentiation is important so that as we are thinking
through of how to apply the rules, we have to look at them from
the perspective of the difference between the two programs.
Again, I want to also reinforce just the customer service experi-
ence and how critical that is. If you have customers who don’t have
faith in the program, they are not going to come to the SBA for the
504 loan. They are going to say, hey, I am going to look for a more
expensive, more—a different option because it is easier. You know,
and what does that mean? It also has a negative effect, frankly, on
our lending partners. If our lending partners or the bankers or
other private lenders believe that it is too onerous to do a 504 loan,
they are not going to help us promote the 504 loan. They are going
to say to their borrower, hey, you should do something else because
it is going to be easier and faster for you.
Ms. CHU. Mr. Flores, your testimony also urges sufficient time
and communication from SBA so that lenders could understand
and implement all the changes to the two rules. As we know, since
the final rules came out in April, the SBA has released a number
of agency notices laying out various lender and program require-
ments in a piecemeal fashion. There has been a lot of twist and
turns in this. And then last week the SBA released a 400-plus page
SOP, which lenders have to review and comply with by August 1.
So that takes only 2 months away.
So do SBA lenders, particularly, smaller mission-based lenders
like CDCs, which may have fewer resources to navigate various
program changes, do they need more time from SBA to implement
these new rules? And what specific additional resources do you
need from SBA as you seek to become compliant with these new
rules.
Mr. FLORES. So as a former regulator, when I dealt with banks
and other financial service institutions that were impacted by
changes that we were making as an agency, engagement with the
industry was always part of the process. I do give the SBA some
positive remarks in terms of some of the already engagement that
they have undertaken with us. However, I do think that we still
need a continuous open dialogue. I think we need to continue to
have actual meetings, technical assistance, and providing that a
reasonable on-boarding ramp—and not just for certified develop-
ment companies, but also for our lending partners.
Ms. CHU. Thank you. I yield back.
Mr. MEUSER. The gentlelady yields back. I now recognize Mr.
Alford from Missouri for 5 minutes.
Mr. ALFORD. Thank you, Mr. Chairman, and Ranking Member
Velázquez for holding this important hearing today. And thank you
to our witnesses for coming in today. I really appreciate it.
One of this committee’s core functions is to conduct oversight as
a small business administration. I am glad to be hear today with
my colleagues to continue that and discuss the Biden-Harris ad-
ministration SBA’s disastrous rules that really compromise the
soundness of the 7(a) program and puts taxpayers and small busi-
30
nesses at risk. Like many of my colleagues, I am worried that the
SBA is not able effectively regulate this space and this activity.
As a previous small business owner, I know how important cap-
ital is to small business, and I also understand access to capital
can be a challenge especially in districts like mine which really has
banking deserts. So let me be clear, I am not anti-Fintech, but I
am against the rules that decrease standards and increase risks
threatening the integrity of the current system and leaving tax-
payers on the hook when something goes wrong. The SBA released
procedural notices about these rules the night before last week’s
hearing, the night before, leaving us zero time to review them.
I am here to tell you today, Americans deserve better than that.
They deserve better than the fly-by-night Biden-Harris SBA, which
is why I am pleased to learn that the departure of the SBA official
chiefly responsible for these rules who is with us last week. Mr.
Kelley’s blatant disrespect to this committee and its Members last
week showed a disregard for Congress, and it showed a disregard
for small businessowners. It also underscores the importance of
congressional oversight. So and unelected bureaucrat cannot
shamelessly advance an agenda.
Now, with no one at the helm of the SBA’s Office of Capital Ac-
cess, adding to the vacancy the offices already have, which are
many, the Biden-Harris administration must put a pause on these
rules and do it today.
Mr. Wilkinson, if you Google federal financial regulators, the
SBA does not show up, nor does the SBA show up in a March 2020
congressional research service report titled: Who regulates whom,
an overview of the U.S. Financial Regulatory Framework. The SBA
is not a financial regulator. But if a Fintech only participates in a
7(a) lending program, you will be sole federal regulator. Fintechs
facilitated so much PPP fraud as well.
Mr. Wilkinson, given your experience and perspective with 7(a),
should this committee and taxpayers trust the SBA as the sole fed-
eral regulator of Fintechs in this program, why or why not?
Mr. WILKINSON. At this point in time, no. I am a fan of the
job, the effort, the folks in the Office of Credit Risk Management
at SBA are doing, but they are understaffed they are under-
resourced. They are 40 percent understaffed right now. They have
got so many vacancies. It will be hard for them to catch up. I think
the will is there to be a regulator, but they are not given the re-
sources to do so. But they also don’t have the framework to be the
prudential regulator like an OCC or FDIC. SBA is really good at
looking at transactional risk, looking at the loan, but they are not
looking at the capitalization and the interest rate risk and the
other interest bucket that will be looked at by a prudential regu-
lator.
Mr. ALFORD. Mr. Wilkinson, we have been told that this is a
Biden-Harris administration effort. But Joe Biden said he wants to
increase regulations for banks while at the same time this rule re-
moves most underwriting and prudent lending standards. What
reason is the FBA giving for saying something that directly con-
flicts with the White House.
Mr. WILKINSON. That is an interesting question, because most
of the other warning signals are coming up are warning to go slow
31
with the addition of Fintech. Yet SBA is, I guess, hanging their hat
on the PPP program where they are saying that Fintechs were able
to reach down into more underserved markets. But the PPP pro-
gram was not a loan program; it was a grant program. It was
very—there was no underwriting to it. It was if you made your
payroll, you got your loan forgiven. End of story. This is a vastly
different program. You have got to underwrite it to see whether the
borrower can be paid and then service it going forward. Probably
not something that would be high on the Fintech list.
Mr. ALFORD. Thank you. Mr. Frazier, I am greatly concerned
SBA is not prepared to handle this. The Inspector General report
published March 21 just a few weeks ago noted oversight staffing
levels in the Office of Credit Risk Management decreased from 42
to 26 employees, 38 percent. This staff reduction could affect SBA’s
fiscal 2023 goals for oversight reviews which helps ensure lending
compliance with program requirements.
How do questions surrounding the SBA’s competency affect what
lenders do and the small businesses that rely on these loans?
Ms. FRAZIER. As we talked about many times already today,
there is a necessity to gain that access to capital for the businesses
in a timely fashion, but not at the risk of prudent underwriting and
not at the risk of doing things. But, however, if their office is not
appropriately staffed, it does put the whole process into great risk.
Mr. ALFORD. Thank you. We are out of time. Again, I call on
the Biden administration to put a pause on these rules today. Mr.
Chairman, I yield back.
Mr. MEUSER. The gentleman yields back. The Chair now recog-
nizes Mr. Thanedar from Michigan for 5 minutes.
Mr. THANEDAR. Thank you, Chairman. According to Federal
Reserve Bank of Chicago, the small businessowners in my district
are routinely denied loans due to lower credit scores, lack of suffi-
cient collateral, and lacking access to banking services.
In 2022, two out of three businessowners who sought credit did
not receive the full amount they requested. To that end, I believe
small businessowners should have access to more responsible lend-
ers.
My question to Mr. Flores is the SBA has spoken at length about
the need to increase lending opportunities for underserved small
businesses as the reason for these two rules. But nowhere in either
of these rules does it state a requirement to lend to small busi-
nesses in underserved markets. How do you guarantee that smaller
loans are being made and targeting the small businesses in the
communities we are all trying to reach? Mr. Flores.
Mr. FLORES. Thank you. Again, I reference the Certified Devel-
opment Company and its framework and its mission as an eco-
nomic development set of organizations is our commitment to en-
sure access to capital, and not only to work with businesses that
had been operating for a few years and have a track record, but
also for those who are trying to get there. And so what that means
is being very proactive and engaged, working with the small busi-
ness development centers that are also part of the SBA network—
organization such as score—and also local chambers of commerce
and other units of government, locally, that are focused on pro-
viding programs that help grow that small business ecosystem. The
32
Community Advantage Loan Program is one such program, as well
as others.
So, you know, a number of Certified Development Companies,
our community advantage lenders, we are committed to continuing
that program in our organization, and we believe that there is an
opportunity here to continue to grow that initiative. We are obvi-
ously open to other ideas. And, obviously, there is a very robust de-
bate here and concern. And I appreciate that. I think that there is
a way for us to balance risk and at the same time prioritize that
access to capital to folks who had been historically left out and also
rural-based enterprises. There are folks in central and southern Il-
linois, for instance, who have less opportunities. How do we make
sure that those entrepreneurs aren’t left behind? We think pro-
grams like the premier advantage program can be effective.
Mr. THANEDAR. Thank you. Now, most of the fraud that offered
during the PPP loan scheme undertaken by the SBA came from
Fintech companies. I feel without strong oversight regulations, bad
actors might fraudulently take advantage of small businessowners
seeking loans.
Ms. Frazier, in your testimony you state nonbank Fintech lend-
ing is no substitute for community bank lending. Can you expand
on the statement? What services does your bank provide that a
Fintech cannot?
Ms. FRAZIER. Well, on the basis of a Fintech is through the web
and through the internet. And, oftentimes, there may not be even
someone to speak to. Answers are given all electronically. As noted
by many of us here, you know, it is about the business plan; it is
about being able to sit with the borrower and to speak with them
about what are the plans; how do you see this growing; what hap-
pens if you don’t reach those goals; how will you pay the loan back?
And I think that those elements are missing. And I believe, in a
community bank world, that personal relationship is there and is
guiding them. And if things go south for a business, and they do,
the bank is able to work with them to really help them through
those troubled times. And I think that is where the difference be-
longs.
Mr. THANEDAR. Thank you, and I yield back.
Chairman WILLIAMS. Next, I now recognize Mr. Crane from the
great state of Arizona for 5 minutes.
Mr. CRANE. Thank you, Mr. Chairman. Thank you all for com-
ing today. Last week I asked Mr. Patrick Kelley, I raised a concern
that these rule changes would leave taxpayers on the hook to bail
off the SBA. Along those same lines, Mr. Kassar, you mentioned
default rates to Mr. Meuser. Do you believe these rules will lead
to more or fewer defaults on government-backed loans?
Mr. KASSAR. It is hard to imagine a scenario where these would
lead to significantly higher defaults because of the complete loos-
ening of controls. And the danger is we won’t understand what le-
vers created them. Because so many levers are being pulled and
changed at the same time.
Mr. CRANE. Yeah, you mentioned that a couple of minutes ago.
If that is the case, sir, who will eventually be on the hook to bail
out the SBA?
33
Mr. KASSAR. The taxpayers or the small businesses we will levy
heavier fees against them to continue the program.
Mr. CRANE. Mr. Frazier, how would you rate the SBA’s cus-
tomer service? Is it easier to get in contact and receive answers
from them when a problem arises? Ms. Frazier, I am so sorry. We
are not playing some sick joke on you, ma’am. I apologize.
Ms. FRAZIER. All good here.
Mr. CRANE. There are long weeks up here.
Ms. FRAZIER. I completely understand. Thank you. You know,
I believe that having the right relationships within the SBA helps
facilitate quick and easy answers, but it can be difficult at times
just given the current staffing situations.
Mr. CRANE. Thank you, ma’am. Mr. Kassar, finally, are you con-
cerned these rule changes could allow lenders to focus more on
maximizing their own fees by increased loan volume rather than fo-
cusing on quality of loans given?
Mr. KASSAR. Absolutely.
Mr. CRANE. Thank you. You know, Mr. Kassar, you said a sec-
ond ago, you are talking about this crazy science experiment if we
are doing this smartly as an entrepreneur would do it, we would
take one step at a time, and then we would evaluate it. Is that cor-
rect?
Mr. KASSAR. Yeah, though, sometimes entrepreneurs are crazy
scientist.
Mr. CRANE. That is true. We are. But I think the reason that
we take one step at a time if we are being wise and smart and a
little bit of cautious is so that we don’t sink the boat. Is that cor-
rect?
Mr. KASSAR. A hundred percent. Lending is a carefully—you
have to think very carefully. There are a lot of levers.
Mr. CRANE. You know why they don’t care how many elements
we take on at one time, right?
Mr. KASSAR. I have my theories.
Mr. CRANE. Because it is not their money. It is the American
people’s money. They don’t care. It is obvious. That is one of the
things I have noticed since I have been up here, they could care
less. It is so easy to spend somebody else’s money. That is why this
administration just put out a budget, it was another, close $7 tril-
lion.
And that is the thing that bothers me about this. My colleague
over here, Mr. Thanedar, we just came from Homeland Security to-
gether, and he was talking about, hey, some of my constituents,
they don’t have enough capital or collateral. Well, maybe they don’t
need a loan then. Maybe they need to be working on their business,
their business plan to get to a point where they can actually have
enough capital, enough collateral where they can actually secure a
loan. Because that is one of the things going on in this country, we
live in such an entitlement country now where it is like people
don’t feel like they need to pay anything back. And who is always
on the hook for it.
Mr. KASSAR. There is another element to this program which is
part of the vicious cycle, which is many borrowers today, particu-
larly, underserved have opportunities on the internet to get money
in their bank in 24 to 48 hours. And it is so enticing. Many of them
34
come from Fintech lenders. We have to be careful not to call
Fintech all at once. And so sometimes they will get one, and they
will get another, and they will get another, and it becomes a vi-
cious cycle. And then they come to us because—and it is—often it
is too late to help. So some of the issues that has to be thought
about in my opinion by Congress about serving entrepreneurs is
what is happening on the other side of the coin? Where are they
getting their money today, and often times are going to the other
side because it is simpler and faster. And that also leads to dev-
astating consequences.
Mr. CRANE. Well, what I will tell this panel is I represent Arizo-
na’s Second Congressional District. It is a very rural district. We
have a lot of hardworking folks in my district. You know, so I know
that they probably don’t have the same access to capital that some
of these more metropolitan districts do. But all I will say is as a
country when you are $32 trillion in debt, there needs to be a re-
turn to fiscal responsibility. And I just don’t see that with this pro-
gram. I don’t see that with these rules changes. And for that rea-
son I don’t support it. Thank you Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you very much. I next recognize
Mr. Molinaro from the great state of New York for 5 minutes.
Mr. MOLINARO. Thank you, Mr. Chairman. Thank you all for
being here. I am happy that I was here for Mr. Crane’s comments
because it does, in fact, set up what I think is ultimately the prob-
lem. I am old enough—although I may not look it—to remember
when we were all living fat and happy and encouraging access to
capital for home purchasing to underserved communities. A noble
and important goal that led to a mortgage crisis that we have not
rebounded from since. And I couldn’t think of a less apt organiza-
tion than the SBA to manage a less restrictive and more irrespon-
sible set of new rules. And this is not me being political. I spent
the last 12 years as a county leader, lived through COVID and
PPP, and I can absolutely say, local chambers of commerce, local
business organizations, they all share the exact same concerns that
we are voicing today. The SBA, despite its relationships, despite
partnerships for not for profits and partners in the community just
is inadequate to do and to manage what they are proposing in
those rule changes. And so I want to start, in fact, with the under-
served populations. Because I think actually the SBA does a rea-
sonably good job partnering to provide access to capital to under-
served communities.
And so, Ms. Frazier, you spoke a little bit about the 7(a) lending
program demonstrates strong lending patterns already to under-
served borrowers. One in three 7(a) loans were to minority-owned
businesses. So with the SBA’s complete overhaul of the program,
would you give us some idea how these rules could negatively im-
pact what we already do somewhat successfully to serve those un-
derserved populations? What is the risk that we open with these
rule changes?
Ms. FRAZIER. Thank you. And I am going to go back once
against that oftentimes another loan or a loan is not what the bor-
rower needs or what the new businessowner needs. Oftentimes,
they need coaching, they need counselling, they need to have a bet-
ter business plan and work through that. And I don’t believe
35
unleashing very loose credit standards is going to be effective to en-
suring the integrity of the program, but also ensuring economic via-
bility for the underserved.
Mr. MOLINARO. And so despite coming from New York State,
meaning most people think it is an urban place—I represent rural
communities all throughout upstate New York, and access to cap-
ital is a concern. And we do have difficulty, small businesses, ac-
cessing. So your point what the SBA is doing is eliminating all of
or basically throwing out the guide rails that would protect us in
the case of fraud and abuse.
And, Mr. Wilkinson, you and I spoke yesterday. So thanks for
that conversation. To avoid what we know or to help avoid the cir-
cumstances of fraud and abuse here, what protections or rules
should the SBA keep in order to provide the appropriate integrity
7(a) lending? And I kind of asked this of you yesterday. What are
some of the rules that do make sense that this should not be
thrown out.
Mr. WILKINSON. Sure. There is a list of eight or nine criteria
that were in regulation that have been taken out. We would sug-
gest that those be put back in statutorily. But I want to go back
to the previous question and just note that year to date we have
got about 24 percent of our borrowers who do not note on their loan
application a particular race. So our loans to minorities are most
likely underreported. We probably have a much better track record
than the numbers present.
Mr. MOLINARO. So SBA doing a better job in recording, report,
and then transparency. I know Mr. Chairman believes, as we do as
a committee, the SBA should be more forthcoming with much of its
data. And, by the way, I would say out loud the SBA should be
more forthcoming in its interaction with the industry and the de-
velopment of these rules, which does lend us to some concern and
certainly frightens us.
Mr. WILKINSON. A conversation just like this before the rules
were implemented would have been very helpful.
Mr. MOLINARO. Yeah, I am concerned about the conversation
that the SBA may have had with the folks who benefit from the
rule changes before the rule changes. But I am just saying that as
a happenstance. Perhaps it may or may not have occurred.
Before I finish up, Mr. Kassar, is it a fair assessment to say that
without the appropriate regulations and clear defined require-
ments, it will ultimately be extremely difficult to determine if bor-
rowers are acting in good faith or not? There are bad actors. They
will act badly. That is a known fact in humanity.
Mr. KASSAR. A hundred percent.
Mr. MOLINARO. Thank you, Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you. Next, I want to recognize Mr.
Stauber from great state of Minnesota for 5 minutes.
Mr. STAUBER. Thank you very much, Mr. Chair. I want to
thank the panel for joining us today as well as for the important
role that you play in supporting our small businesses. Like you, I
have serious concerns over the misguided 7(a) loan program rules
that the Biden administration has put forth. As I shared during
last week’s hearing, the 7(a) loan program has been instrumental
in helping to grow small businesses, which I believe are the en-
36
gines of innovation in our economy. I am committed to upholding
the integrity and fiscal solemnness of this program. Information
shared by the SBA and the supplemental guidance and its final
SBLC rule indicated that the SBA only intends licences to three
new SBLCs, and that it expects these three new SBLCs to make
a total of 425 loans over the next 4 years. However, the final SBLC
rule does not contain any limit on the number of new SBLCs that
can receive a license.
Mr. Wilkinson, how many license for nonfederally regulated lend-
ers do you think the SBA will actually grant?
Mr. WILKINSON. Well, that is unknown. In the narrative, they
said they were only going to do three, but in the actual regulatory
language, there is no limit.
Mr. STAUBER. What do you expect these new lenders, loan ac-
tivity to be? Do you think the figures provided by the SBA are ac-
curate?
Mr. WILKINSON. No, sir, I do not. I think they are low by a sig-
nificant amount.
Mr. STAUBER. Thank you. Ms. Frazier, approximately, how
many financial industry regulators oversee the operations of a com-
munity bank like the Bank of Charlestown.
Ms. FRAZIER. I actually have three. I will speak for myself. We
have the state regulator, West Virginia and the FDIC. And then
our holding company also has the Federal Reserve. So for most
community banks, two to three. As well as aside from that, the
SBA does come in and do their own oversight and regulation of
what we have done by looking at the loans.
Mr. STAUBER. Do you believe the Small Business Administra-
tion has supervision and regulatory expertise and bandwidth on
power of the comptroller of the currency, FDIC, or Federal Re-
serve?
Ms. FRAZIER. No, I don’t believe they are prepared for that.
Taking on not only just reviewing the credit files for whether or not
they agree with the SOPs, but understanding the whole processes,
controls, and the way, the company, the capital, and the things re-
lated to any company and nonbank Fintech would have.
Mr. STAUBER. You know, during our hearing last week, when
I pressed Mr. Kelley, he tried to explain that the SBA will have
the ability to provide the necessary supervision and oversight to
the nonfederally regulated Fintech companies that will flood the
7(a) program under the Biden administration’s new rules. This is
even as new loan activity far outpaces the unrealistic figures the
SBA has provided.
Just yesterday, I sat down with a group of small community
bankers from across northern Minnesota who shared their concern
that the SBA is not capable of overseeing these Fintech companies
in the 7(a) program, particularly given the SBA’s track with PPP.
And you all know it is approaching $900 billion in fraud and count-
ing.
I trust my local community banks to be responsible 7(a) lenders
due in part to the layers of supervision and scrutiny that they face
from several different financial industry regulators. They also live
and work in the communities they serve and have deeply personal
37
relationships with the small businesses they help grow and sup-
port.
I, unfortunately, cannot say the same of Fintech companies. I
agree with my local lenders in Minnesota and worry that the un-
even lax oversight of Fintech sector entering the 7(a) program will
put the entire program at risk. And I want to thank the local com-
munity banks who kept us afloat during the pandemic. Had it not
been for our community banks, I believe this nation will be in dire
straits today. Thank you. Mr. Chair, I yield back.
Chairman WILLIAMS. Thank you very much. And while we
have a minute to go, I just want to reinforce what my colleague
said about the community banks. We have talked about this, but
I compare what you all did to what our bomber plants did and our
manufacturing plants did in World War II. They turned it around
overnight and got our country going. Y’all did the same thing, get-
ting money injected in the economy that actually brought a return
on investment back to America. So I want to thank you for that.
I also want to thank the witnesses, all of you today, for being
here and appearing before us. Without objection, Members have 5
legislative days to submit additional materials and written ques-
tions for the witnesses to the Chair, which will be forwarded to the
witnesses. So I ask the witnesses to please respond promptly when
that happens. And if there is no further business, without objec-
tion, the committee is adjourned.
[Whereupon, at 11:55 a.m., the committee was adjourned.]
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