Taking on More Risk: Examining the SBA's Changes to the 7(a) Lending Program Part I (House Small Business Committee hearing, May 10, 2023)

Summary

The printed record of a House Committee on Small Business hearing, Taking on More Risk: Examining the SBA's Changes to the 7(a) Lending Program Part I, held May 10, 2023, Small Business Committee Document Number 118–011. Chairman Roger Williams presided; Williams and Ranking Member Nydia Velázquez gave opening statements. The sole witness was Patrick Kelly, Associate Administrator of the SBA's Office of Capital Access. Williams frames the hearing as oversight of two rules he calls the most significant changes to the 7(a) program in decades, objecting to changed underwriting standards and the admission of more fintech companies as 7(a) lenders; Kelly says the aim is to get 4,400 banks and thousands of credit unions off the sidelines. The committee adjourned at 11:33 a.m.

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“Taking on More Risk: Examining the SBA's Changes to the 7(a) Lending Program Part I (House Small Business Committee hearing, May 10, 2023).” Original at www.govinfo.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/taking-on-more-risk-examining-the-sba-s-changes-to-the-7-a-lending-pro-dd6ad74a5b/, SHA-256 ad30e43212c0e2781377b49009c0f59ae0e09f699b77bd469113bb1a94c1c33c.

Full text

TAKING ON MORE RISK: EXAMINING THE SBA’S
CHANGES TO THE 7(A) LENDING PROGRAM
PART I

HEARING
BEFORE THE

COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION

HEARING HELD
MAY 10, 2023

Small Business Committee Document Number 118–011
Available via the GPO Website: www.govinfo.gov

U.S. GOVERNMENT PUBLISHING OFFICE
52–168 WASHINGTON : 2023
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

WITNESS
Hon. Patrick Kelly, Associate Administrator, United States Small Business
Administration, Washington, DC ........................................................................ 4

APPENDIX
Prepared Statement:
Hon. Patrick Kelly, Associate Administrator, United States Small Busi-
ness Administration, Washington, DC ........................................................ 31
Questions and Answers for the Record:
Questions from Hon. Williams and Answers from Hon. Kelly ..................... 34
Questions from Hon. Bean and Answers from Hon. Kelly ............................ 45
Questions from Hon. Chu and Answers from Hon. Kelly ............................. 50
Additional Material for the Record:
None.

(III)
TAKING ON MORE RISK: EXAMINING THE
SBA’S CHANGES TO THE 7(A) LENDING PRO-
GRAM PART I

WEDNESDAY, MAY 10, 2023

HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building, Hon. Roger Williams [chair-
man of the Committee] presiding.
Present: Representatives Williams, Luetkemeyer, Stauber,
Meuser, Salazar, Ellzey, Molinaro, Alford, Crane, Bean, LaLota,
Velázquez, Golden, Phillips, McGarvey, Gluesenkamp, Perez,
Scholten, Chu, Davids, and Pappas.
Chairman WILLIAMS. Good morning, everyone. I now call the
Committee on Small Business to order.
Without objection, the Chair is authorized to declare a recess of
the Committee at any time.
The committee is here today to hear testimony from Mr. Patrick
Kelley, the U.S. Small Business Administration’s associate admin-
istrator of the Office of Capital Access. Thank you for being here
today, sir.
And now I recognize myself for my opening statement.
I want to welcome everybody here today to today’s hearing which
will focus on the much-needed oversight of the Small Business Ad-
ministration and their proposed changes to the 7(a) loan program.
The SBA administers several programs to support small business
that encourage lenders to provide loans to main street who might
not otherwise be able to obtain financing. Their flagship 7(a) loan
program offers government guaranteed loans to eligible small busi-
nesses for short- and long-term capital needs.
The SBA is in the process of finalizing two rules that will rep-
resent the most significant changes to the program in decades.
Well, there are many more troubling aspects of these rules. The
most problematic in my opinion are the changes to the under-
writing standards while simultaneously allowing more fintech com-
panies to become 7(a) lenders. The SBA is throwing away the nine
prospective elements of underwriting that lenders have been using
for decades to determine if a borrower is eligible for a government-
backed loan. Instead, lenders will now be able to use whatever
lending criteria they see fit considering that taxpayers will go and
be the ones on the hook if a significant portion of those loans go
(1)
2

bad. We should not be loosening the criteria for lenders to give
loans.
Additionally, these rules reverse the moratorium on licensing
new Small Business Lending Companies, better known as SBLCs.
The moratorium was initially put in place in the 1980s because the
SBA recognized that they were not capable of being the primary
federal regulator of these entities. Given the unacceptable levels of
fraud that occurred in the SBA’s pandemic programs, I have seri-
ous concerns that the agency is not up to the task of taking on
more responsibility.
I am not alone in raising these concerns about the SBA’s capa-
bilities. Last month, when the SBA’s Inspector General testified be-
fore this Committee, he noted the significant challenges that the
agency will face in managing the increased loan volume going for-
ward as well as the significant shortages of staff within the depart-
ment charged with overseeing SBLCs.
There are serious concerns that these changes to the program
will be detrimental to taxpayers and small businesses alike. If
more loans start to default, the fees to the program are going to
have to be raised, or the agency will come to Congress to ask for
more taxpayer dollars to make up for the shortcomings. The policy
noticed released late last night which lays out implementation for
just one of the final rules is not sufficient and does not satisfy our
concerns.
This is an extremely important hearing as we in Congress dis-
cuss what the future of this program will look like, and what we
must do legislatively to ensure the programmatic integrity of the
7(a) program in the future. I want to thank you all again for being
here with us today and I am looking forward to today’s conversa-
tion.
And with that, I yield to our distinguished Ranking Member
from New York, Ms. Velázquez.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman, for holding this
important hearing.
The Small Business Administration’s 7(a) program is the agen-
cy’s flagship lending initiative. Under the 7(a) program, SBA guar-
antees significant portions of loans encouraging lenders to extend
credit to small businesses that might not typically be able to obtain
financing. So far in FY23, the SBA has approved over 30,000 loans
totaling more than $14.6 billion proving just how integral the 7(a)
program is to our nation’s entrepreneurial ecosystem.
7(a) loans strengthen local communities, create jobs, and move
our economy forward. Given the critical nature of the 7(a) program,
this committee must carefully consider and vet any significant
changes. Last month, SBA issued two final rulemakings that have
substantial implications for the 7(a) program. The affiliation rule
loosens lending criteria, updates loan conditions, and eliminates
various affiliation standards. While the second rule on SBLCs ends
the SBA’s longstanding moratorium on licensing new SBLCs. In
the final rule, SBA states that it can license and supervise three
new SBLCs and it is speculated that some, if not all, of these new
licenses will be granted to fintech companies.
3

SBA instituted these rules to address persistent gaps in access
to capital as part of the Biden administration’s broader economic
agenda.
Increasing access to capital for underserved entrepreneurs has
been and will remain a priority for me as the top democrat on this
committee. However, I am apprehensive about the SBA’s decision
to remove many of the longstanding guardrails and program re-
quirements on loan criteria and affiliation standards that have
served the 7(a) program well while also lifting its moratorium on
the licensing of new SBLCs.
I am especially concerned by the possibility of new SBLC licenses
being granted to non-federally regulated fintechs with no experi-
ence in 7(a) program lending.
Researchers have highlighted that fintechs facilitated most of the
significant fraud associated with the Paycheck Protection Program.
I appreciate SBA taking this situation seriously and the steps the
agency has taken thus far to hold the blatant actors responsible for
their actions.
With that said, we will be doing a disservice to American small
business owners by moving forward with changes that weaken and
destabilize a highly successful program that has helped millions of
entrepreneurs. The last thing we want is for unintended con-
sequences of sweeping changes by rulemaking without detailing ac-
companying SOPs to harm the future of this program which is an
essential tool for many small business owners and entrepreneurs.
On the matter of SOPs, I remain concerned about policy changes
being released later at night to everyone’s surprise. As many of us
on this dais have indicated, it is alarming that major programmatic
changes can come on a whim, no matter the administration. These
continued changes to the incredibly important details are the rea-
son we are taking our time to truly understand the impact they
will have.
As SBA moves forward with these rule changes, this committee
must ensure that they are responsibly implemented and do not
negatively impact the 7(a) program and individual borrowers. En-
suring that businesses owned by women, people of color, and un-
derserved groups is an important goal that I share with Adminis-
trator Guzman.
I look forward to hearing from Mr. Kelley on the steps SBA is
taking to ensure these rules do not risk the integrity of the 7(a)
program.
I remain committed to filling the gaps in the market in a bipar-
tisan and thoughtful way. The Small Business Committees in the
House and the Senate have proven that we can work together to
make a difference for our main street businesses.
Whether during a global crisis or hard fought SBIR reauthoriza-
tion, we have always come together to put politics aside and do
right by our nation’s job creators. I look forward to doing just that
again and working with the SBA and my committee colleagues in
both the House and the Senate to find a solution.
Thank you, and I yield back.
Chairman WILLIAMS. Thank you very much.
And I will now introduce our witness.
4

It is my privilege today to introduce our witness, Mr. Patrick
Kelley. Mr. Kelley is the associate administrator for the Office of
Capital Access at the Small Business Administration. At the SBA,
Mr. Kelley leads the agency’s Office of Capital Access and has been
leading the charge for the rules change we speak of. Mr. Kelley is
a graduate of Colgate University and Boston College Law School.
In a previous stint at the SBA, Mr. Kelley served as deputy chief
of staff, deputy association administrator, and senior advisor at the
agency and also worked at the U.S. Department of Commerce. In
between his time at the SBA, Mr. Kelley served as the executive
vice president for channel partnerships at Live Oak Bank where he
primarily worked for the bank’s corporate strategy and develop-
ment team.
Mr. Kelley, I want to thank you for joining the Committee today
and I am looking forward to today’s important conversation.
So with that I now recognize Mr. Kelley for his 5-minute opening
remarks.
STATEMENT OF THE HONORABLE PATRICK KELLEY, ASSO-
CIATE ADMINISTRATOR, UNITED STATES SMALL BUSINESS
ADMINISTRATION
Mr. KELLEY. Chairman Williams, Ranking Member Velázquez,
Members of the committee, it is a pleasure to be here on behalf of
President Biden, Vice President Harris, and Administrator
Guzman. As Chairman Williams noted, I have been the associate
administrator for the Office of Capital Access since March 1, 2021.
During that time I have been responsible for the CARES Act pro-
grams, as well as the Restaurant Revitalization Program which
was a part of the American Rescue Plan, and then also in July of
2021, I took over responsibility for originations for the disaster loan
programs. Historically the Office of Capital Access has overseen the
post-close servicing of those assets.
With respect to the core programs that have been highlighted by
the Ranking Member’s statement, as well as the Chairman’s state-
ment, I also oversee the 7(a) loan program, the 504 program, the
SBA Microloan program, and the Surety Bond program.
Since March 1, 2021, under Biden-Harris and when Adminis-
trator Guzman came on board at the latter part of March, we have
focused like a laser on the outstanding issues that we inherited
with respect to fraud, waste, and abuse associated with the Pay-
check Protection Program, as well as the COVID EIDL program.
During the 2-year period that I have overseen these programs, we
have reviewed close to 42 million, 41.9 million applications across
those programs. We have approved across those programs 21 mil-
lion applications for close to $1.2 trillion. We have identified $6.7
million suspicious loans. We have done that through automatic
screenings, as well as data analytics or supervised learning tools
that the GAO and the Inspector General have highlighted are best
practice with respect to identifying suspicious activity.
There have been close to 3.8 human-led reviews which have re-
sulted in referrals to the Office of the Inspector General, and we
estimate that a million loans that were disbursed across the PPP
program and the COVID EIDL program represent $41 billion of
total fraud undisbursed. The estimated number of fraud prevented
5

is north of $100 billion. And there was $500 billion that was never
allowed to move forward as an application through the automated
screening.
In the coming days, Administrator Guzman will be releasing a
white paper report detailing all this, as well as the detailed steps,
the automated screening, the supervised learning model that we
deployed, as well as the human-led reviews and the referrals to the
Office of the Inspector General.
President Biden’s budget lays out a request for $100 million for
the Office of the Inspector General as a result of this. They cur-
rently have processed 776 indictments. They have testified before
this Committee to be working on 500 open case files, but certainly,
the numbers that we have referred, that the SBA has referred to
the Office of the Inspector General, the so-called bad guys that we
believe they should go after need resources.
With respect to the lessons learned from this and how we will
handle the issues and concerns that were highlighted by Chairman
Williams and Ranking Member Velázquez’s opening remarks, we
will be moving forward as we did for phase three of the Paycheck
Protection Program and as we did for the Restaurant Revitalization
Program with a regulatory compliance and fraud framework pre
etran authorization and that process will validate not only know
your customer or fraud issues like OFAC and other issues but it
will also identify alerts and flags with respect to eligibility.
The core of eligibility is a for-profit company domiciled in the
U.S., an operating company considered small by SBA size require-
ments with no character issues and legal resident status. All of
those indicators were vetted in the Restaurant Revitalization Pro-
gram and it is important to understand that we did not need to
make the tradeoff in 2020 between speed and certainty. We were
able to stand up a program in 30 days post-passage, disburse $28.6
billion to 101,000 restaurant and related entities, and we were able
to do that with certainty that there would not be fraud or ineligible
folks.
So I look forward to taking questions and I appreciate the oppor-
tunity to address any concerns. Thank you.
Chairman WILLIAMS. Thank you.
We will now move to the Member questions under the 5-minute
rule. We need direct answers, not long answers if you would do
that for us, please.
Mr. KELLEY. Yes.
Chairman WILLIAMS. I recognize myself for 5 minutes.
Last week, the White House put out their Small Business score-
card that states the SBA saw a record volume of lending in Fiscal
Year 2022. This includes $43 billion in capital approved for small
businesses across SBA products and an increase in small loans
under $150,000 in the SBA 7(a) loan program.
Now, this is the opposite of everything that the SBA has been
saying to justify these rule changes and different than what you
told our staffs regarding the need to bring more lenders into the
program.
So my first question, Mr. Kelley, so who is not being truthful, the
SBA or the White House?
6

Mr. KELLEY. Neither is not being truthful. What we have stated
is that over a 5-year period there is a 40 percent, or 50 percent de-
cline in the number of loans and dollars lent under $150,000. So
what we are reporting in those numbers is a year over year in-
crease. So since the Biden-Harris administration took over, and as
Ranking Member Velázquez referenced prioritize making small dol-
lar loans an issue, we have seen improvements in year over year.
There is still a stark decline in the access of capital for the loans
under $150,000.
Chairman WILLIAMS. So the SBA’s Office of Inspector General
has found that many nondepository lenders in the 7(a) program
were subject to limited oversight until a default occurs and identi-
fied significant issues within the agency relating to lender over-
sight. The Inspector General also noted a failure of the SBA to con-
duct regularly scheduled examinations over high-risk lenders. In
short, the OIG has reported on many issues that questions the
agency’s ability to be a regulator. And I share these serious same
concerns.
Last night, the SBA released the policy notice for just one of the
final rules to lenders that will help implement these new rules. It
appears that for loans under $500,000, the agency removed almost
all underwriting criteria and lenders are allowed to give out loans
however they see fit to anybody. In carving out smaller loans from
any standard underwriting requirement is one of the worst ways
to mitigate risk and will increase the changes of predatory lending
on small businesses and taxpayers. So the agency is bringing on
more lenders and diminishing underwriting standards at a time
when the agency is already failing to conduct all the necessary
oversight over the risk lenders. You do not need to be bigger; you
need to be smaller. And this is a recipe for disaster.
So Mr. Kelley, what percentage of the current loan portfolio is
under $500,000? And how will the SBA monitor the many different
underwriting models that will be used by the lenders since you
took away the uniform standard?
Mr. KELLEY. So, two things. First, the reports you reference
from the Office of the Inspector General reference high-risk lenders
based on a quarterly rank order that the agency and the Office of
Credit Risk Management does to all of its assets. We rank each
outstanding loan as high risk, medium risk, and low risk, and then
based on the percentage of a lender’s portfolio, we schedule super-
vised oversight as a result. That report does not single out a type
of lender. It speaks to all lenders. And the overwhelming majority
of lenders that the IG has reviewed in its sample set are, in fact,
regulated entities, banks and credit unions. So that is number one.
Number two, with respect to the underwriting standards, since
2004, and under a Republican Congress and under President Bush,
the program SBA Express, has existed. And for 20 out of 23 years,
when you compare a term loan originated by those lenders under
that program versus a term loan with a standard 7(a) referencing
the nine criteria that previously enumerated in the reg, the term
loans with the standard consistent with your similarly sized non-
SBA policy has outperformed in terms of default rate and loss rate.
So what I would say to Chairman Williams, and I think we can
all agree, is that letting the marketplace lenders and removing red
7

tape has demonstrated in that program which was originally a pilot
program that a Republican administration started. In addition, a
Republican administration expanded that exact same criteria to
Patriot Express for veteran-owned loans and Community Express
to attack the very same problem that was identified under Bush
which is the dearth of small dollar loans going to sole proprietors.
The rough order of magnitude of loans under 50,000 in terms of
units is somewhere between 40 to 45 percent annually, and 60 per-
cent of those units have been originated in the SBA Express pro-
gram because that standard allows the lenders to follow their cred-
it and collateral policies and it has performed better.
Chairman WILLIAMS. Okay. In a letter my Senate colleagues
sent you, you stated that the SBA has the same standards as all
the other federal regulators including the Bank Secrecy Act and
the other Know your Customer anti-money laundering require-
ments. Now, I have been told this simply is not true. So I would
like you to set very quickly the record straight. Can you confirm
that the SBA does, in fact, require all SBLCs to comply with the
FPSA and KYC regulations, and where can I go to see the guidance
that you gave to lenders on how to comply with these require-
ments?
Mr. KELLEY. You can go to the SOP and the letter clearly states
that all lenders participating, and it should be noted, and you
noted it in your opening remarks, Chairman, that while there has
been a moratorium for 40 years, those SBLC licenses could always
be purchased by any type of lender. And in fact, 61 times were pur-
chased and approved. And there has not been an issue with the
Committee in that 40 years regarding those 61 transfers.
With respect to the oversight——
Chairman WILLIAMS. Our time is——
Mr. KELLEY.—of those entities, it is exactly the same across all
entity type.
Chairman WILLIAMS. Thank you.
I now recognize the Ranking Member for 5 minutes of questions.
Ms. VELÁZQUEZ. Thank you, Mr. Kelley, for being here today.
The rules are set to go into effect within the next week; correct?
Mr. KELLEY. That is correct.
Ms. VELÁZQUEZ. Yet, the SBA did not release any information
about the implementation of either of these two rules until late last
night and SOPs still have not been published. Can you explain why
the SBA has waited so long to release any guidance when it knew
the rules were going into effect this week?
Mr. KELLEY. Yes. So as has been noted by Ranking Member
Velázquez and Chairman Williams, I have participated in the
Obama administration. I also, as Chairman Williams noted, partici-
pated for a large SBA lender for 6 years in the private sector.
There is nothing about the implementation with respect to the
posting of procedural notices that precede SOP publication post
rules becoming final. As you know, we are in the 30-day window
before the rules become final. We wanted to get the procedural no-
tice out before the rule becomes final. We achieved that and the
SOPs will follow. The language that is reflected in those procedural
notices will be reflected in the SOP.
8

Ms. VELÁZQUEZ. Okay. When do you expect the SOP to be pub-
lished?
Mr. KELLEY. I think it will be published, if not today, this week.
Ms. VELÁZQUEZ. When you went to the Senate you stated that
it will be released on May 3.
Mr. KELLEY. Yes.
Ms. VELÁZQUEZ. Why did you not release it on May 3?
Mr. KELLEY. Chairman Velázquez, could I——
Ms. VELÁZQUEZ. Ranking Member. Soon to be Chairwoman.
Mr. KELLEY. Sorry, sorry, I apologize. Sorry. Sorry, Chairman
Williams. Sorry. Apologies. Apologies. I gave you a promotion
there.
So, I, too, would like a promotion. I would like to be able to de-
liver timelines——
Ms. VELÁZQUEZ. Okay. My question then is, you know, you say
May 3. It did not happen. How is the SBA expecting lenders to
comply with the rule without the SOP?
Mr. KELLEY. So as a person that worked for the nation’s num-
ber one SBA lender by dollars lent in the private sector, when rules
were changed, so, for example, in 2018, 2017, rules were promul-
gated by the Trump administration. The order of operations that
we are following is exactly consistent and prior——
Ms. VELÁZQUEZ. That does not make it right.
Mr. KELLEY. Well, it makes it necessary in terms of there is an
order of the way that APA and our procedures call for in terms of
you pass the rule, the rule becomes final, you cannot operate until
the rule has become final. If you want to give the guidance before
the rule becomes final, which we have done, and then you do not
want to proceed or create confusion that lenders can operate before
the rules become final.
Ms. VELÁZQUEZ. Have you considered delaying the rules in
order to give lenders and borrowers more time?
Mr. KELLEY. No, because the changes in the rules, specifically
the underwriting criteria, all remove red tape and bureaucracy that
banks and credit unions in my 13 years of being exposed to this
have asked for repeatedly and routinely over every year.
Ms. VELÁZQUEZ. Okay. The final rule changed the definition of
an SBLC from what was proposed in the rule. The proposed rule
stated that an SBLC was ‘‘only to make loans pursuant to the 7(a)
and Microloan program.’’ But in the final rule, SBA deleted the
word ‘‘only.’’ By removing the word ‘‘only,’’ was the intent to allow
SBLCs to begin making non-SBA loans?
Mr. KELLEY. Well, today, all of our lenders make non-SBA
loans. We are responsible for overseeing the loans that they make
within our program. And as the IG has highlighted in its Manage-
ment Challenges Report, the key areas that we are responsible for
oversight are eligibility and reasonable reassurance of repayment.
And so, we are responsible for overseeing that.
I cannot speak to the exact clause that you are talking about but
the intent has always been an SBLC——
Ms. VELÁZQUEZ. Right here. Right here. Small business lend-
ing companies. It is a nondepository lending institution that is SBA
licensed and is authorized by SBA to—and what was proposed in
9

the proposed rule, in the draft, only to make loans pursuant to sec-
tion. The word ‘‘only’’ was deleted.
My question to you is, if SBLCs were to begin issuing both SBA-
backed loans and non-SBA loans, are you concerned that these
lenders will prioritize their private issuances over their SBA port-
folio defeating our goal to increase access to capital for the smaller
loans?
Mr. KELLEY. Yes. So, and feel free to engage with lenders on
this point. But one of the things that happens today is non-bank
lenders or competitors make loans that are subordinate to senior
debt or SBA loans today. So it is the case today that small business
owners seeking working capital seek out additional capital if they
can get it.
With respect to the issue that you are speaking to, we dealt with
this issue, for example, in the Community Advantage Program
where a community advantage lender, a CDFI, was originating
loans on an interim basis and then refi-ing them into the Commu-
nity Advantage loan program.
Ms. VELÁZQUEZ. What I do not understand is why did you
make the deletion? Why did you delete ‘‘only’’?
Mr. KELLEY. Yes. I am happy to follow up with your staff.
Ms. VELÁZQUEZ. Okay.
Mr. KELLEY. Because while I a lawyer——
Ms. VELÁZQUEZ. My time has expired.
Mr. KELLEY.—I have to take a look at the actual citations that
you are citing. Yeah.
Chairman WILLIAMS. All right. Thank you.
I now recognize the Members for 5 minutes.
And I first recognize Mr. Luetkemeyer from Missouri for 5 min-
utes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Welcome, Mr. Kelley.
When you opened your remarks you said you are here rep-
resenting the president and vice president of the United States.
Have you spoken to them recently?
Mr. KELLEY. No. I am a political appointee and so I work at the
pleasure of the——
Mr. LUETKEMEYER. But you are representing them you said.
Mr. KELLEY. Of course.
Mr. LUETKEMEYER. Okay. Do you talk to the White House ad-
ministration at all about——
Mr. KELLEY. Yes. Yes.
Mr. LUETKEMEYER.—the programs?
Do you know if Ms. Guzman ever talks to the White House?
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. Does she talk to the president?
Mr. KELLEY. Yes. She was with the president Monday, last
Monday.
Mr. LUETKEMEYER. Well, that is a first because I can tell you
we have asked that question multiple times of her in this Com-
mittee and we never got an answer from her. That may be the first
time she has ever met with him as far as we know.
Mr. KELLEY. It was a publicly attended event in the Rose Gar-
den——
10

Mr. LUETKEMEYER. Was it about small business issues?
Mr. KELLEY. It was for National Small Business Week. Yes.
Mr. LUETKEMEYER. Okay.
Mr. KELLEY. And it was celebrating the nation’s small busi-
nesses.
Mr. LUETKEMEYER. Well, I hope she talked about some of
these programs and how they are——
Mr. KELLEY. She did.
Mr. LUETKEMEYER.—negative affecting the small business
community because that to me is what needs to be done.
Okay, Mr. Kelley, how many people are at the SBA?
Mr. KELLEY. I think——
Mr. LUETKEMEYER. In the office here in D.C.?
Mr. KELLEY. In the office here in D.C.? I am not sure what the
total head count for the agency is I think something around 2,000-
plus. And then it goes up and down.
Mr. LUETKEMEYER. How many people are in your depart-
ment? Let’s put it that way.
Mr. KELLEY. So there are 300 FTE in the historically defined
Office of Capital Access. We——
Mr. LUETKEMEYER. Okay. How many people showed up for
work today?
Mr. KELLEY. All of them.
Mr. LUETKEMEYER. In this building, in your SBA building,
how many of them showed up today?
Mr. KELLEY. I do not have a head count of who showed up
physically today. As you know——
Mr. LUETKEMEYER. Are they all required to show up to work
every day?
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. I am not talking about off campus being
qualified work. I am talking about physically being in your office.
Mr. KELLEY. They are complying with what they have been
asked to do.
Mr. LUETKEMEYER. That is not what I asked. I am sorry; that
is not what I asked.
Mr. KELLEY. I understand that but that is how I am answering
your question.
Mr. LUETKEMEYER. I asked a question of whether they are ac-
tually showing up in the office that you work in——
Mr. KELLEY. Yes. I understand——
Mr. LUETKEMEYER.—every day.
Mr. KELLEY. I understand your question. And civil servants are
complying with what they are asked to do. They serve——
Mr. LUETKEMEYER. No, you are not answering my question.
Mr. KELLEY.—on behalf of the public and they are responsible
to comply with what they are asked——
Mr. LUETKEMEYER. Okay. So they are not showing up at your
office is what you are saying because——
Mr. KELLEY. They are doing their job as they were required by
their position descriptions and as their supervisors——
Mr. LUETKEMEYER. Okay. So you are telling me that they are
not which that goes to the point——
11

Mr. KELLEY. Well, it is no different than any of the private sec-
tor entities that are doing exactly the same thing.
Mr. LUETKEMEYER. I am not talking about the private sector,
Mr. Kelley. I am talking about your office that you are in charge
of. The people are not showing up personally to sit at a desk in
your office building to do their work. You are allowing them to do
it from home which that is fine if you want to do that but the next
question is whenever you have, well, in 2019, the inspector general
claimed that the Office of Credit Risk Management failed to per-
form effective oversight over the OCRM, only conducted 108 of its
planned 358 reviews of high-risk lenders. COVID-19 only exas-
perated this issue as oversight staffing levels decreased by an addi-
tional 38 percent. Despite this, the SBA has lifted the SBLC mora-
torium allowing for more nondepository entities who are purely
regulated by the SBA rather than federal regulators to enter the
market. So it goes to the point that the inspector general said you
need more oversight and you have less people to do it and they are
not even at the office to do it themselves. This is a problem. It is
a big problem.
So, you know, I guess the rational is how do you expect to get
anything done whenever you do not have anybody in your office?
Mr. KELLEY. Well, judging by the fact that the agency sup-
ported $1.2 of lending and grant activity over a 2-year period
where the entire agency was teleworking, I think we have dem-
onstrated that we will do our jobs.
Mr. LUETKEMEYER. Well, thanks to the banks and credit
unions that were able to put that all out, which goes back to the
point I was wanting to make here a little bit ago. You talked about
I think $1.2 billion that went out the door which was great. And
you talked about one million applications I think it was, $41 billion
in fraud.
Mr. KELLEY. Yep.
Mr. LUETKEMEYER. What percentage of that is EIDL versus
PPP?
Mr. KELLEY. It is roughly 45-55 PPP to COVID EIDL. So, for
$46 billion we paid the lenders to——
Mr. LUETKEMEYER. Okay. So the EIDL program——
Mr. KELLEY.—instances of fraud.
Mr. LUETKEMEYER. The EIDL program was roughly $400 bil-
lion and they had about $20 billion worth of fraud. And then the
PPP program was about $800 billion and they had about less than
$20 billion in fraud.
Mr. KELLEY. Or we paid the lenders $46 billion in servicing fees
for a 4 percent fraud rate.
Mr. LUETKEMEYER. So it goes to the point though that the
PPP program was highly successful and most of the fraud, accord-
ing to the IG report, was in the fintech fraud.
Mr. KELLEY. That is not what the IG report——
Mr. LUETKEMEYER. Mr. Ware was sitting in that seat about
a month ago.
Mr. KELLEY. He did not say that. He did not say that.
Mr. LUETKEMEYER. And that is what he said. So it is hard for
you to dispute that, sir.
Mr. KELLEY. It is easy to dispute——
12

Mr. LUETKEMEYER. So the problem is that you are trying to
make up your own set of facts——
Mr. KELLEY. I am not.
Mr. LUETKEMEYER.—which are not verified by the Inspector
General Report.
So, again, whenever you go back to the compliance of KYC, BSA,
how do you get the fintech companies to be able to comply with
that? Because this is where the problem is. This is where, and now
you are expanding to the fintech companies. It really begs the ques-
tion of do you know what the hell you are doing? Because it is put-
ting the fox in charge of the hen house again. You are allowing the
very people who are the problem children to be involved in the pro-
gram and continue to do things without any oversight. This is
crazy.
Mr. KELLEY. It is not. And as I mentioned in my opening state-
ment, and as we demonstrated in the Restaurant Revitalization
Program as well as Phase 3 of PPP, we have and will place in front
of etran authorization our fraud——
Mr. LUETKEMEYER. Were those sort of oversight principles in
place during the PPP program?
Mr. KELLEY. Yes.
Mr. LUETKEMEYER. And they were not adhered to and this is
why the fraud——
Mr. KELLEY. They were not in place during 2020 under the
Trump administration. They were in place under the Biden-Harris
administration.
Chairman WILLIAMS. Time is expired.
Mr. LUETKEMEYER. So we put fraud controls——
Chairman WILLIAMS. Your time has expired.
I now recognize Mr. McGarvey from Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman.
Mr. Kelley, thank you for being here today and for providing in-
sight of the SBA’s intentions with these proposed rules. I know a
lot of small businesses would not be where they are today without
the SBA’s support including from the 7(a) program. It is critical
that we have 7(a) remain an effective program so that small busi-
nesses have this, particularly minority-owned businesses, busi-
nesses that would struggle without access to capital.
Under the affiliation rule, the SBA is eliminating standardized
underwriting requirements for loan issuance and replacing them
with a system that considers lending criteria like a borrower’s cred-
it score and history and their business’s earnings and cashflow.
Under the policy noticed that were released late last night and
kind of surprised everybody here on the Committee, the SBA is
now clarifying that loans over $500,000 still have some semblance
of underwriting requirements.
It still seems that the SBA is requiring the bare minimum of
prudent lending standards even though the procedural notice from
last night indicates underwriting standards applied to larger loans.
Can you explain to us why some mandatory underwriting require-
ments were left untouched and if this could have the potential to
affect the SBA’s ability to protect small businesses from inappro-
priate loans and the 7(a) program from significant loan losses?
13

Mr. KELLEY. Yes. So as I mentioned in my opening statement,
the criteria for underwriting and collateral for loans under
$500,000 has been used historically since 2004 and before that in
a pilot program. So we can look at the default and loss rate history
for, and incidentally, 5 out of 10, in some cases 6 out of 10 loans,
each fiscal year from 2004 to 2023, were originated with that cri-
teria. So we have performed subsidy calculations and managed to
zero subsidy in nearly all of those years with the exception of the
Great Recession and a few exceptions during the Trump adminis-
tration to zero subsidy. So we do not have to guess whether or not
that criteria works or what its impact will be because we can look
at the last 23 years of its performance.
Mr. MCGARVEY. I appreciate that but at the same time as it
is removing standard underwriting requirements, the SBA is lifting
the SBLC moratorium. And I think potentially that is opening the
program to non-federally regulated lenders through the SBLC rule.
So, do you think the combination of these two rules could create
a loan evaluation environment where federally regulated lenders
that have stricter requirements will be forced to compete with non-
federally regulated lenders not subject to the same underwriting
requirements?
Mr. KELLEY. No, because the 2004 SBA Express pilot program
was created with advisory under the Bush administration with
banks, for banks. And it is the banks that have historically used
that. So the top 25 depository institutions have credit score loans
in the SBA Express program, the Community Express program, the
Patriot Express program for years. Credit scoring is used by every
bank on the consumer side and it is used to a varying degree, de-
pending on loan size, in the commercial sector. This is not a new
development. You heard Deputy Inspector Sheldon Shoemaker in
the Senate hearing speak to that fact towards the end of the hear-
ing. It is in the transcript where he reflects on the fact that finan-
cial technology, including credit scoring, is used by banks and cred-
it unions today. It is the banks and credit unions who have made
up the majority of our lending year in, year out, will continue to
do so, and they are the ones that have sought out the changes that
we have put in the SOP. Now, as depository institutions, do they
want additional competition from nonbank lenders? No, they do
not. But in terms of the actual eligibility and underwriting criteria,
these are changes they have asked. The National Association of De-
velopment Corporations, which represents the 504 CDCs of which
there are over 200 in the country, have been working on eligibility
issues since 2011 in the Obama administration where they called
for the elimination of the personal resource test, as well as the af-
filiation rule change that we have made final.
So these are things that have long been understood as necessary
to remove red tape and bureaucracy to get small dollars out of the
loan. It impacts not just the size of the loan but it impacts every
gap in the marketplace. So, for example, in rural America there is
a dearth of construction financing. There is a dearth of loans to
businesses with no collateral. All of these issues are why this pro-
gram exists, and why lenders are looking to make the core product
more cost-effective.
14

Mr. MCGARVEY. I appreciate that. And obviously, you know, for
our small businesses we want to have less red tape and bureauc-
racy that we can have access to capital in our small businesses.
But this is still a piecemeal approach of regulatory and procedural
changes often that do not have enough guardrails in them. They
often come at the last minute. Do you think that the SBA is risking
confusing lenders and borrowers about the actual rules by which
they are expected to comply?
Mr. KELLEY. No, because the rules that are reflected in those
procedural notices exist today and what is piecemeal is their appli-
cation. What has made the agency, so what has made lending for
SBA hard is you have to hire a nerd like me to figure out all of
the different variations within the SOP. What this administrator
has done is said you do not have to hire a nerd like Patrick Kelley.
Chairman WILLIAMS. Time is up.
Mr. KELLEY. You can harmonize the rules to optimize the out-
come.
Chairman WILLIAMS. I now recognize Mr. Meuser from the
great state of Pennsylvania for 5 minutes.
Mr. MEUSER. Thank you, Mr. Chairman.
Mr. Kelley, earlier when Mr. Luetkemeyer was asking you about
the number of employees in the office you dodged, you hid the an-
swer. That is a big difference in the private sector. If you ask that
question to a private sector company and I ask them often they will
say, yeah, 50 percent of our customer works remotely, 50 percent
tech service works remotely. You would not answer the question.
You were embarrassed by it. And you——
Mr. KELLEY. I said, I said, no, sir. I said——
Mr. MEUSER. There is no question. I take back my time.
Mr. KELLEY.—100 percent, I said 100 percent, no, sir——
Mr. MEUSER. Repeatedly today, you know, something, you
might do what you want in your bureau. We have oversight here
and you are going to follow the rules of this Committee.
The SBA has the 7(a) rules, have caused great concern among
both Republicans and Democrats. Mostly everyone I speak to feels
that you are hell bent on rushing these rules without any concern
for Democrats and Republicans, ignoring the final rule. Why is
that?
Mr. KELLEY. It is not the case.
Mr. MEUSER. We believe it is based upon the facts of the situa-
tion and the fact that you are just blowing off any recommendation
or question. But you just state that is not the case and that is that?
Mr. KELLEY. Would you like me to elaborate?
Mr. MEUSER. Well, by moving the program, the 7(a) portfolio to-
wards a more subjective underwriting method for loans under
$500,000, how does that protect taxpayers from losses, the OIG has
concerns, and you have actually used language, maybe not you, to
do what they do for loans under $500,000, which is 75 percent of
all the 7(a) loans, how does that instill confidence in us?
Mr. KELLEY. The standard that you are speaking to consistent
with similar size non-SBA loans and the euphemism that was ex-
plained at a bank trade association conference, do what you do, has
been around for over 2 decades and is reflected in every budget
that has been passed since then with respect to the subsidy cal-
15

culation. So, lenders came, banks, credit unions, came to the SBA
and said back in the 2000s under the Bush administration there
is too much red tape associated with small dollar loans, loans at
that time under $350,000, and then this body raised the threshold
for Express from $350,000 to $500,000. That standard has been in
existence. The lenders know this. I understand that they are upset
about three additional non-depository institutions potentially be-
coming SBA SBLCs and they have equated that with fintech and
that is why we are discussing the concerns, which are legitimate.
Safety and soundness is terribly important.
I have been a part of the agency’s creation of the Office of Credit
Risk Management since 2010. I was involved with the regs that
were put forward to create the Paris framework——
Mr. MEUSER. Thank you.
Mr. KELLEY.—the smart framework.
Mr. MEUSER. ON April 20th, we sent you a letter. Chairman
Williams, Vice Chair Luetkemeyer, Chairwoman Van Duyne, my-
self, about the ability of SBA to be able to handle this, these new
responsibilities related to the concerns of IG Ware. It was April
20th, 3 weeks ago, basically. You have never responded. Any rea-
son you did not respond or can we expect a response sometime in
the future?
Mr. KELLEY. Yes, you can expect a response.
Mr. MEUSER. Okay. Any time? Can you tell me when?
Mr. KELLEY. In short order. The process goes through an agen-
cy clearance process.
Mr. MEUSER. Okay. April 12th, press release, the SBA stated
that these new rules will utilize modern technology to make lender
oversight and borrower protection stronger. Can you tell us what
the technology is to make borrower protection stronger?
Mr. KELLEY. Yes. So, the way that Bank Secrecy Act laws are
complied with today is the use of third party databases where you
take a unique identifier from each applicant. So in our case we are
dealing with TIN, tax ID number for business, applicant, and then
owners of 20 percent or more, or in banking vernacular, beneficial
owners. We run that against databases to create alerts and flags
across 19 different screening categories which traverse eligibility. I
mentioned the eligibility criteria earlier. And also, run them
against lists like OFAC and other fraud issues. So for the first time
in the agency’s history, and what is highlighted in the IG’s report
is that delegated lenders have historically not had anything pre-ap-
proved prior to obtaining etran authorization. So, under this ad-
ministrator we are instituting this not just in our CARES Act pro-
grams but in the general business loan programs, including 7(a)
and 504.
Mr. MEUSER. When I was revenue secretary in Pennsylvania
we implemented something similar. Do you know how much it
costs? And is it ready and when will it be ready to be implemented?
Mr. KELLEY. Yes. The great aspect of this from a cost perspec-
tive, and this is something we should all celebrate, is that the over-
sight fees beginning in 2017 can be charged to all the lenders and
are on a pro rata basis. And we are able to use other contract vehi-
cles based on a performance base to institute the technology.
Mr. MEUSER. Thank you.
16

Chairman WILLIAMS. Time is up.
Mr. MEUSER. Thank you.
Chairman WILLIAMS. Thank you.
Next, I recognize Ms. Chu from the great state of California for
5 minutes.
Ms. CHU. Associate Administrator Kelley, I want to thank you
and Administrator Guzman for partnering with me to provide a
disaster declaration for my community of Monterey Park, Cali-
fornia, in the aftermath of the tragic mass shooting in January
that took the lives of 11 people. The eligibility for these disaster
loans will truly help our small businesses surrounding that shoot-
ing site tremendously. So, thank you for that.
I also want to thank you and the administrator for your focus on
increasing lending in underserved communities and your 4-year
partnership in making the new Community Advantage SBLC pro-
gram as effective as possible for lenders and small businesses.
I was pleased to see in SBA’s recent notice on May 1st that the
Community Advantage SBLC will, indeed, be required to make 60
percent of the loans in underserved markets, as in the current
Community Advantage program. I also want to thank you for clari-
fying in the notice what loan loss reserve requirements these lend-
ers will face and for modeling these requirements after legislation
that I introduced last Congress. These loan loss reserve require-
ments will ensure that these small, nonprofit lenders who have
been making Community Advantage loans for more than 5 years
will have greater flexibility and more capital to do even more lend-
ing.
However, the May 1st notice does not address the capital re-
quirements and oversight fees that the new Community Advantage
SBLCs can expect. The current Community Advantage pilot pro-
gram lenders do not have capital requirements which is important
because these are small, nonprofit lenders with far less cash on
hand than larger financial institutions like banks. Regular SBLCs
currently have a capital requirement of $5 million which would be
extremely prohibitive if applied to these mission lenders.
Additionally, the regular SBLCs face much higher oversight fees
than current CA pilot program lenders, and would again be cost
prohibitive if applied to the new Community Advantage SBLCs.
The lack of clarity on these questions is especially concerning be-
cause the final rule goes into effect on Friday.
We have heard that a standard operating procedure is forth-
coming and will cover these details, but can you confirm that the
upcoming SOP will clarify that the oversight fees and capitalization
requirements within the Community Advantage SBLC program are
to remain unchanged from what Community Advantage pilot pro-
gram lenders currently face?
Mr. KELLEY. Yes. And with respect to capital requirements, as
you mentioned, there is a capital requirement threshold for for-
profit SBLCs. The capital requirement for the Community Advan-
tage pilot program had historically been applied not on a balance
sheet but on a per loan basis because of the issues that you high-
light for the nonprofit lenders. It has historically been 10 percent
based on your bill and Chairman Cardin’s bill. And working with
the community, the threshold has been established at 5 percent
17

with a sliding scale for trialing portfolio performance that is good
over 36 months to come down. So, there is no ambiguity. The cap-
ital requirement has always been applied through the loan loss re-
serve on the individual loan in the Community Advantage pro-
gram. That is what the procedural notice lays out.
For the entire pilot program, Community Advantage lenders, like
all lenders—SBLC, credit unions, banks, CDCs, all lenders—are
subject to oversight and oversight is charged on a pro rata basis.
So the reason that the Community Advantage lenders do not pay
as much oversight as for example, Live Oak Bank would have paid,
is because in 12 years, together, all 100 plus entities have origi-
nated 7,000 loans over a billion dollars. Whereas, for example, Live
Oak does close to $2 billion in 1 fiscal year.
So what will continue is on a pro rata basis we will apply over-
sight to all lenders.
Ms. CHU. Well, the most important question is will that be in
the SOP?
Mr. KELLEY. Yes. It is in the SOP today. That is how Commu-
nity Advantage lender oversight has been applied. I know there
has been confusion created in the marketplace by a single voice but
I can assure you they have always been charged a pro rata basis
and will continue. And that is true for all lenders.
Ms. CHU. And then the high fees. There was a question of the
other SBLC lenders having high fees and then the Community Ad-
vantage program lenders cannot hardly afford them.
Mr. KELLEY. So I am not sure what that references but let me
see if I can just clarify.
So, fees charged to borrowers are universally applied across all
lenders and interest rates are capped and universal to all Mem-
bers. So that was true. What historically was true in Community
Advantage pilot——
Chairman WILLIAMS. Time is up.
Mr. KELLEY. Sorry.
Chairman WILLIAMS. Time is up.
Mr. KELLEY. Okay.
Chairman WILLIAMS. Next, I now recognize Mr. Stauber from
Minnesota for 5 minutes.
Mr. STAUBER. Thank you, Mr. Chair.
As a former small business owner, I understand how important
it is for small businesses to have access to affordable credit without
loan programs that enable our small businesses. They will not be
able to grow, support jobs, and help countless Americans achieve
that American dream.
The Small Business Administration’s, including the 7(a) loan pro-
gram had been a huge success in my opinion and an important tool
to small businesses across our great nation.
Like many of my colleagues here today, however, I am troubled
by the rules that were finalized last month by the Biden adminis-
tration addressing the 7(a) program. While I support allowing flexi-
bility for our small businesses and lending institutions, we must
ensure the necessary guardrails are place to protect this program.
I have heard from 7(a) lenders and businesses in my district, in-
cluding community banks and local credit unions that are worried
that these rules will jeopardize the future of the 7(a) program.
18

Mr. Kelley, annually, about how many investigations or reviews
did the SBA conduct into high-risk lenders?
Mr. KELLEY. I think it is in the order of magnitude, depending
on the fiscal year of $300,000, $400,000.
Mr. STAUBER. Okay. The SBA’s inspector general reported that
the SBA failed to conduct 108 of the 358 planned review of high
risk lenders in the Fiscal Year 2020. That is a third of the high-
risk lenders that the SBA missed.
Under the new rules, the SBA will be lifting the moratorium on
new licenses and grants for small business lending companies.
With the lifting of this moratorium, what do you estimate will be
the increase in new loan activity?
Mr. KELLEY. So I do want to clarify something that has been
mentioned regarding the IG report. What the IG report speaks to
is that is levels of supervisory review on site, offsite. And so what
it references is that those reviews were conducted. They were just
conducted at a different level of review in terms of procedure. So
I just want to clarify that.
The second thing that I want to speak to with respect to the esti-
mate, so the estimate was included in the proposed rule and the
final rule. And so at cruise altitude, typically SBLCs contribute
about 450 loans per fiscal year. For example, we have three SBLCs
today that are in the top 10 of SBA lending. And as I have men-
tioned, these licenses have changed hands over the last 40 years
61 times. And the agency has been responsible for approving who
becomes an SBLC. So, we review their safety and soundness, their
portfolio of performance. And if we do not want to grant a license,
we have the discretion not to do so.
Mr. STAUBER. Do you think the SBA has the capacity right now
to do the oversight?
Mr. KELLEY. Yes.
Mr. STAUBER. Okay. Do you think lenders and financial institu-
tions need to have proper regulator oversight in order to protect
consumers, yes or no?
Mr. KELLEY. Yes.
Mr. STAUBER. Do you believe the Small Business Administra-
tion has the capacity, expertise, or bandwidth to be the sole regu-
lator of any financial institution?
Mr. KELLEY. Yes. And what I would like to clarify on that point
because it is important, the use case for what we oversee is loan
assets. And it is a simpler use case to stand in than it is for OCC
or FDIC because, for example, with FDIC or OCC, they have first
order problems that they need to address. Let’s say the loan port-
folio, commercial estate is underperforming. They have second
order of concerns, which is the depositors. So if a bank goes under,
are we going to honor deposits?
Then they have third order, which is the impact of that in the
local marketplace. We have shown throughout the SBA’s history
that if a lender comes and goes and dissolves, we can transfer the
book of assets to another SBA lender and it does not create the dis-
ruption or the need for intervention on the part of the federal gov-
ernment. So those loan portfolios can be transferred. They are con-
forming assets, which means they are easy to underwrite from a
diligence perspective. We have a rank order of the quality of the
19

credit profile on a quarterly basis. And as a result, a willing buyer
will take that asset portfolio.
So if we decide that someone is not participating in lending as
we do on a quarterly basis through the Loan Oversight Committee,
we can remove their delegated authority.
Mr. STAUBER. Okay.
Mr. KELLEY. The director of OCRM can suspend them at her
complete discretion for up to 2 years pending an investigation. And
we can ultimately debar the lender from participation.
Mr. STAUBER. Thank you for that explanation.
At the end of the day I have two main concerns. First, the SBA’s
track record in protecting against fraud, most recently during our
PPP leads me to conclude that the SBA does not have the capacity
to carry out its oversight rule over an expanded 7(a) program, let
alone act as a chief regulator of any financial institution.
Second, I am deeply concerned that local community banks and
credit unions in Northern Minnesota will have more oversight,
scrutiny, and regulation put on them than the Silicon Valley
fintech startups. We must protect the 7(a) program. And I yield
back.
Mr. PHILLIPS. Mr. Chairman, before Mr. Stauber leaves I think
we should wish him a Happy Birthday.
Chairman WILLIAMS. Well, I do not know if he wants us to or
not.
Mr. LUETKEMEYER. Mr. Chairman, I second that.
Mr. PHILLIPS. I withdraw my motion.
Mr. STAUBER. I am celebrating my 39th birthday 19 times,
Dean.
Chairman WILLIAMS. Okay. I now recognize Ms. Davids from
Kansas for 5 minutes.
Ms. DAVIDS. Thank you, Chairman. And thank you, Mr. Kelley
for joining us. I think that this has probably been one of the more
lively Small Business Committee hearings I have been in. But it,
I think, reflects how imperative oversight is as it relates to pro-
tecting our small businesses and then, of course, as Mr. Stauber
said, the integrity of the 7(a) program.
I want to jump right into a follow up actually to some of the
questions that Mr. Stauber was asking which is around the regula-
tion of the lenders. Can you like share a bit about where you be-
lieve the SBA’s statutory authority comes from to examine what
would normally be the core requirements of a lending institution
or depository institution that has the variety of assets that you
were describing earlier, whether it is capital requirements, liquid-
ity, risk management. Can you share where you believe the statu-
tory authority comes from for SBA to be able to do that?
Mr. KELLEY. Yes. Under the Trump administration there was
a law passed with the Republican Congress outlining and detailing
the role and responsibility of the Office of Credit Risk Management
located in the Office of Capital Access to do all of those things
which has historically been understood to be authorized under our
administration of the program from the Small Business Act, section
7(a), which requires that we determine reasonable reassurance of
repayment and eligibility for the program. So in order to determine
reasonable reassurance of repayment——
20

Ms. DAVIDS. I am sorry; your reasonable reassurance of repay-
ment is not the same thing as ensuring that you have the ability
to fully examine the allocation of assets, liquidity requirements,
and risk management overall of an entire entity in the same way
that depository institutions are.
Mr. KELLEY. So, if you are talking about asset allocation, like
long-term dated Treasuries with respect to deposits, agreed. And
that is not what we do. If you are talking about assets generated
in our program and their ability to be repaid to the taxpayer with-
out the guaranty being honored then we do have the authority.
Ms. DAVIDS. Okay, so I want to, I also want to follow up on
some of the questions that Mr. McGarvey was asking because I will
give you the benefit of the doubt. I think that you were responding
to his question about lenders by talking about the borrowers and
the need to reduce red tape, both on the borrower’s side and on the
lender side. Could you expand a bit on what you mean when you
talk about the reduction of red tape? Because the request for less
red tape from lenders is not the same thing as opening up the pro-
gram for additional lenders that are not being regulated or over-
seen in the same way that depository institutions are. And I just
want to make sure that I am fully understanding your response
and real quick, because I have a feeling you will use the rest of the
time, when it turns red, if you could just stop and make sure that
it would not be more appropriate to follow up with a written re-
sponse to the question you might find that the rest of the hearing
will go a little bit smoother.
Mr. KELLEY. Agreed. And I want to apologize to Mr. Meuser for
my Irish coming up, and I understand that we will be able to an-
swer questions as we normally do, so. I am passionate about de-
fending civil servants and the role that they have played in the
pandemic, so I apologize.
So, with respect to your question about lenders, so what I am de-
scribing, and this is I guess important and I hope to leave you all
here where we are in agreement is that for time in memorial, the
subsidy calculation has incorporated the underwriting and collat-
eral criteria and all that we have done is harmonize across a stand-
ard 7(a) small loan with an SBA Express term loan, that standard
that more lenders have used historically every fiscal year. And so
if the object of the exercise is to engage, for example, the 4,500
community banks more meaningfully. So it has been reported that
83 percent of those same 4,500 community banks did not make a
single 7(a) loan in the 2 previous fiscal years prior to 2020 Pay-
check Protection Program. So if we want them to meaningfully be
available in their communities, we need to optimize the responsibil-
ities——
Ms. DAVIDS. Can I stop——
Mr. KELLEY.—the criteria that they need.
Ms. DAVIDS. Can I stop you there? I absolutely recognize that.
I just will add that some of the fintechs that we have been talking
about are not subject to all of the rules and regulations in oversight
that our community banks have been adhering to for a very long
time.
With that, I will yield back.
21

Chairman WILLIAMS. I now recognize Mr. Ellzey from the great
state of Texas for 5 minutes.
Mr. ELLZEY. Thank you, Mr. Chairman.
Mr. Kelley, thank you for being here. Howdy. How are you doing?
Thank you for being here.
You have got a long history of service as a civil servant, and I
understand that you want to defend the folks that you work with.
That is highly admirable, and I understand that you went to
Colgate and then BC Law. So you are an immensely talented man.
You worked at a bank and, you know, Mr. Williams has been in
business for, oh, a couple of eons, I think. But he has been a small
business man for many, many years. My colleague from Missouri
has as well been in business for a long, long time.
I have never heard Mr. Luetkemeyer get upset before and some-
how you managed to do that. And I am not sure if I heard the an-
swer or not but it is kind of a proforma question that we have been
asking in all of our Committee hearings after the declaration that
the COVID catastrophe is over. How many folks are going to work?
Because it does not matter the Committee that we are on. You look
across the street at a government building and there is generally
not a whole lot of people there and the parking lots are empty, and
I think that that goes directly to the service that the taxpayers who
are paying for these services are receiving and oftentimes it does
not really matter the agency that it is in. And you have got your
rice bowl that you are worried about and not worried about any
others. It does not matter if we ask DHS, HHS, or anybody else.
We ask how many people are at work? Because Mr. Williams can-
not run a car dealership if half of his people are not showing up.
They cannot work remotely. And I do not think people get a good
service if folks are not showing up to work.
So, when that question comes up, just understand it is not aimed
at you or anybody else but the question as the oversight authority
for all of these agencies, as the funding authority is Congress’s for
all of these agencies, the simple question is, how many people are
at work? And it may be a different answer. You are clearly a tal-
ented attorney. Maybe the question is, what is the policy on how
many people get to show up? I will let you answer the question,
but my policy is I have to show up at work. We are not doing re-
mote anymore. I do not think any of the other agencies in our gov-
ernment should be remote anymore because we are seeing a dec-
lination of service to the taxpayer.
So you have the floor now. What is the policy on how many peo-
ple have to show up to work?
Mr. KELLEY. Yeah. So the policy is you have to—so I under-
stand that we disagree with what I am about to characterize. But
you have to show up to work. So every single federal employee has
to show up to work. As far as telework, and telework policy, Chair-
man Williams mentioned that I worked at the Department of Com-
merce at the U.S. Patent and Trademark Office. That is a distrib-
uted workforce as well and has long had a telework policy in place
in processing trademarks and patents.
We have a distributed workforce. Folks show up to district of-
fices, loan production centers, as well as headquarters. And the pol-
icy today is that for each 2 week, biweekly period, you physically
22

need to come into the office 3 days out of that period. And so, for
example, I worked at a bank that Chairman Williams suggested,
and we did something unconventionally where we did not have
branches. Most banks have branches across the country. We chose
not to use branches which is a physical presence in a physical foot-
print, to lend money. And that has served Live Oak as a compara-
tive advantage in terms of its cost structure to become the nation’s
number one small business lender.
So there are many different approaches to performing and opti-
mizing how you deliver your service and your products. And so
what I am arguing on behalf of the civil servants is that they are
working hard I can attest to you. And as has probably been dem-
onstrated and as you reflected, I expect that people perform as well
as myself.
Mr. ELLZEY. Well, BC Law is a good law school. It is a simple
question. It really is. Virtual presence is actually absence. When
you are a civil servant you need to be in the office because other-
wise you cannot be supervised properly. I do not care what busi-
ness it is. I know some airlines I will call up the customer service
line and I will hear dogs barking in the back and I know they are
not at work and I am not getting good service. I think it is expected
by the taxpayer that civil servants be exempted from a private
company. They are not like a private company. A private company
can do whatever it wants. Civil servants need to be showing up for
work. So is there a percentage in your policy that says how many
people have to be at work every day? Does it exist or not?
Mr. KELLEY. One hundred percent of policy without supervisor
approval of leave of absence, you know, scheduled vacation, sick
days, et cetera, have to show up to work. And there is a telework
policy in place which I have explained the contours of.
Mr. ELLZEY. All right.
Mr. KELLEY. And you need to comply with that.
Mr. ELLZEY. Okay. Well, I am almost out of time so I am not
going to get the answer but, you know, folks need to be showing
up in the office at work. We are seeing across the government an
inability to effectively accomplish the job on the part of the tax-
payer. But I thank you for your time and I yield back.
Chairman WILLIAMS. Thank you.
I now recognize Ms. Gluesenkamp Perez from the State of Wash-
ington for 5 minutes.
Ms. PEREZ. Thank you, Mr. Kelley, for joining us here today.
As a former small business owner, who successfully applied for
a 504 Loan, I know that small business owners want streamlining
when it comes to SBA programs. We do not have time to waste
reading SBA regs.
As part of the new SBA affiliation rule, the rule removes the de-
tailed list of factors that the SBA currently utilizes when deter-
mining whether a loan applicant is credit worthy. Could you speak
to the intent behind this rule?
Mr. KELLEY. Yes. So the thing I would like to clarify, too, is af-
filiation is used for two purposes in underwriting alone historically
at the SBA. And in the conventional commercial market affiliation
is used solely for reasonable reassurance and repayment. So the
impact of any affiliates to cashflow. Okay?
23

In our programs today, tomorrow, and forever, the impact of an
affiliate to cashflow remains and will continue to be the responsi-
bility of lenders to look at. With respect to eligibility, which is a
uniquely government requirement that the business be a small
business based on SBA’s size requirements, historically the agency
took the position which we believe weas a red tape bureaucratic po-
sition which is the business needs to be independently owned and
operated and it chose to construe independently owned and inde-
pendently operated as two separate clauses as opposed to, say, a
non-severable clause like cruel and unusual punishment.
So what we are applying and what we saw work in the Res-
taurant Revitalization Program and the COVID EIDL program to
a varied degree in the Paycheck Protection Program is a standard
ownership test. So you know who owned your business. If I asked
in the community who owns your business they would tell me to
see you and the buck would stop with you. What was happening
with the affiliation is that a subjective criteria of totality of the cir-
cumstances to determine whether third party management agree-
ments that you entered into, you the small business owner enter
into, creates negative control deemed by a federal government em-
ployee. So the federal government will tell you who controls your
business based on the agreements that you have entered into with
a third party.
We believe that that is wrong. And so we took the position that
independently owned and operated should be viewed like cruel and
unusual punishment as a nonseverable cause for the purpose of de-
termining eligibility because size standards, meaning total number
of employees for certain NAICS codes, revenue standards for oth-
ers, and in the loan program since 2010 when Ranking Member
Velázquez passed the Small Business Jobs Act, includes the alter-
native size standard. And we found in both the government con-
tracting division and in these loan programs is that even account-
ing for affiliates in eligibility, the businesses are still considered
small.
So if the definition of removing red tape and bureaucracy is to
remove that, that is what we are doing. But with respect to wheth-
er or not we will get paid back as taxpayers, the requirement for
affiliated analysis remains as it always has been.
Ms. PEREZ. Thank you.
Mr. Kelley, if a small business owner is denied a loan they can
request reconsideration?
Mr. KELLEY. Mm-hmm.
Ms. PEREZ. The affiliation rule extends the list of people who
can consider the reconsideration request and make a final decision
to include the designated director of the Office of Financial Assist-
ance and the SBA Administrator. Are there guardrails in place to
ensure that these changes were not subjected in the consideration
process?
Mr. KELLEY. Yes. But I think what we should understand is
that that rule was exactly responding to public concerns on the
part of both lenders and borrowers that the process, by requiring
it go all the way to the top of the House each time led to, you
know, delays. And so this gives us the discretion to let the folks
who, you know, we have talked a great deal about, the civil serv-
24

ants at work, to make those decisions based on their experience. So
you will get a faster response.
But in terms of the process, there are second look processes. You
know, to the extent that people are trying to influence things, there
is, as you all know, anonymous hotlines for tips to the IG and so
forth. And those are all, you know, functional.
Ms. PEREZ. Sorry. So could you describe those guardrails a little
bit more in detail?
Mr. KELLEY. Yeah. So the process as outlined, so for example,
when the IG talks about its risk management challenges for any-
thing, it starts with are there identified roles of who is responsible?
What steps have to take place? Did those steps take place? And
was there a second look process to ensure that there is not the dis-
cretion of a single individual. And those processes are outlined in
the SOP. The roles, the whole, and then the second look aspects of
it.
Ms. PEREZ. Okay. Thank you.
Mr. Chairman, I yield back.
Chairman WILLIAMS. Also, let me remind all Members to turn
their mics on when they need to.
I now recognize Ms. Salazar from Florida for 5 minutes.
Ms. SALAZAR. Thank you, Mr. Chairman. And good to talk to
you, Mr. Kelley. My name is Maria Salazar. I represent the City
of Miami where SBA is like the crown jewel. People really think
that this agency is really cool.
And ever since I got to the Committee 2 years ago, my first term,
I had the honor of taking Administrator Guzman to my district. I
am not sure if you are aware of that trip. I took her to Eighth
Street. She was able to see, although, small businesses, the dry-
cleaner’s, and the flower shops. And people that look at the SBA
as the crown jewel.
You said that you are a political appointee, so that means that
you know what the private sector looks like and how it works. And
you said that you were a nerd. So nerds in the private sector usu-
ally do well meaning that they have, they can make a good name
for themselves.
So I just want to share a couple of ideas and then ask you three
questions. We are very disappointed with the SBA. And we are try-
ing to figure out how we can make this agency better for the aver-
age American small business owner. So I am going to ask you a
couple of questions and I want you to answer me as if I were that
let’s say Indian American who wants to set up this drycleaners and
he needs a small little help from the SBA because, you know, that
is the American dream. And he tells you, look, I have called 10
times. The online service does not really work. I have uploaded my
information seven times. Every time I call I talk to somebody else
and it is very difficult for me, the Indian American wanting to set
up this drycleaner’s to get to the finish line and get the money. You
are telling me and from the information we have is that now the
SBA has 30 percent less personnel. When I spoke with Adminis-
trator Guzman she told me that she was going to improve the on-
line services, the people, the operators, the people on the other
side. That it was going to be streamlined and that service was
going to look beautifully.
25

My question to you is this. Tell me one thing that you are proud
of in this last 12 months that you and Administrator Guzman have
established and instituted to help this Indian American to get his
loan so he can open up that drycleaner’s in simple terms.
Mr. KELLEY. Yes. So first, I just want for your use case because
I assume it is a constituent. That constituent should find a dif-
ferent lender because we work through third-party lending inter-
mediaries. So if you are seeking a small business loan in either the
7(a) or the 504 program and you are having those issues that you
have described, there are plenty of banks and credit unions across
the state of Florida, I am sure in the city of Miami and certainly
nationally, that they should go to.
Ms. SALAZAR. But sometimes they do not want to touch that
person and that person needs to go straight to the federal govern-
ment. The SBA, that is what we are there for.
Mr. KELLEY. Yes. So——
Ms. SALAZAR. So let’s suppose that he does not want to be
touched because he is too small. We have to provide a good service
and we are not. So go back. So do you agree with the fact that the
agency that you are helping to run is not providing the service that
the average small business owner believes; yes or no?
Mr. KELLEY. So are you recommending that the Office of Cap-
ital Access and SBA take advantage of the authority we are af-
forded until the Small Business Act, section 7(a) to do direct loans
as a final chance credit not available elsewhere?
Ms. SALAZAR. Sometimes that is the last resort that person has.
Mr. KELLEY. Okay. So in order to do, so the Agency has not
done direct loans in its 7(a) program or general business——
Ms. PEREZ. But I am talking about what you are proud of is
what I am saying. What is it that you have in the last 12 months,
along with Mrs. Guzman established in order to redress some of
the problems that I just mentioned which are endemic?
Mr. KELLEY. Yes. So what we would be proud of is the rules
that we have talked at great detail in this conference because to
the extent that the use case you are describing is struggling with
their bank or credit union or nondepository lender and having that
terrible experience that you described, we want to take off the side-
lines more credit unions and banks. So, for example, credit unions
are thousands of depository institutions across this country——
Ms. SALAZAR. I am sorry I am interrupting. So you are telling
me that they are going through your online system, when they are
going through your computer system, when they are going through
your staff——
Mr. KELLEY. That is what I am trying to clarify. The way that
the program is set up, there is a waterfall under Section 7(a) of the
Small Business Act which says that you should seek a conventional
loan first. If you are not able to seek credit not available elsewhere,
you can go to a participating lender for a loan guaranty. And so
we work through that lending—all of the interactions, all of the on-
line, the call center that you are describing, the experience is gov-
erned by the individual lender. If we were to use our authority for
direct lending which we have under Section 7(a)——
Chairman WILLIAMS. Your time is up.
26

Ms. SALAZAR. We will get back to you on that because that is
not my experience. Thank you.
Chairman WILLIAMS. I now recognize Ms. Scholten from the
great state of Michigan for 5 minutes.
Ms. SCHOLTEN. Thank you, Mr. Chair. And thank you, Mr.
Kelley. Hillary Scholten from Michigan’s 3rd Congressional Dis-
trict. Wonderful small businesses throughout the region.
I think that the theme of today is oversight. And the importance
of providing oversight to these nuanced rules. A lot of my questions
and concerns have been covered here today so I am not going to
repeat them but I do want to add my voice to those saying just how
critical it will be for our Committee to continue to provide the nec-
essary oversight. I have heard from financial institutions again and
again just how concerned they are about the implementation of
these rules.
My question for you is, the SBA has repeatedly said that these
rules will increase small dollar loans and expand access to capital
for underserved communities. Can you go more in depth on the
success of the Community Advantage Program and why the SBA
chose to create this new type of SBLC and what sort of was the
genesis there? Thank you.
Mr. KELLEY. Yeah. So, if we build off of your colleague, Rep-
resentative Salazar’s example where in that case she was describ-
ing an Indian American drycleaning small business seeking a small
dollar loan amount and being frustrated by the third party lender’s
customer service experience, et cetera. We need a wider distribu-
tion channel so that that person does not have to rely solely on one
lender. They can go to the entire marketplace. And historically, cer-
tified development financial institutions were not eligible to partici-
pate in the 7(a) programs. So beginning in 2011, under the Obama
administration, we temporarily lifted the moratorium so you are al-
lowed under pilots to waive regulations. So we lifted the morato-
rium, issued temporary licenses. And we did that to experiment for
safety and soundness reasons, but to experiment that those lenders
who were embedded in communities where, for example, there are
1,700 banking deserts across rural and urban areas where there is
not a bank branch within a 10 mile radius but there are CDFIs.
And so the theory was if we have a diverse array of distribution
channels, using the same core product that is ultimately beneficial
to the lender and borrower. It is beneficial to the borrower because
they get a fixed rate, they get a capped rate product and longer re-
payment terms with no prepayment penalties. That longer repay-
ment period is good for the lender as well because it qualifies more
loans. And then the backstop of the government guaranty in the
secondary market helps them manage liquidity.
So 7,000 loans have been made during that pilot for a billion dol-
lars, and the distribution for underserved, including rural,
HUBZone, veteran, small business, a business startup in business
less than 24 months, that criteria for underserved has been met,
you know, I think 60, 70 percent of the time.
And incidentally, as was mentioned in the Senate hearing, our
core product, whether it is a dollar loan or a $5 million loan over
indexes in comparison to the commercial market to that same defi-
nition of underserved but we have seen a gap for women-owned
27

businesses who make up a sizeable percentage of sole proprietors
and yet, a single digit percentage of loans received through the
SBA program. And it is in part because the census shows that
those businesses are overwhelmingly sole proprietors, which means
they are seeking very small dollar amounts, loans less than
$150,000. And when you talk to a community advantage lender,
you talk to a bank like JPMorgan, Chase, TD or large banks and
you ask them why is there a disconnect? The disconnect is the cost-
effectiveness of being able to underwrite and close the loan. And so
we have responded by addressing the red tape that they have iden-
tified so that they can make a more cost-effective offering because
we believe, and we take them at their word, that they will find
these customers in their marketplace.
Ms. SCHOLTEN. And have the results been borne out?
Mr. KELLEY. Well, yes, in terms of, so the community advan-
tage programs results over index in the underserved category even
in comparison to a high number. And then with respect to minori-
ties and women, it performs better. So, yes.
Ms. SCHOLTEN. I yield back my remaining time.
Chairman WILLIAMS. I now recognize Mr. Crane from Arizona
for 5 minutes.
Mr. CRANE. Mr. Kelley, thanks for joining us today. You prob-
ably do not know this. I am a small business owner myself so I
definitely understand how tough it is to start a small business, pay
employees, you know, deal with an everchanging economy. Do you
know how I got my startup capital for my business, sir? I sold my
motorcycle. Yeah. One of the best decisions I ever made.
Sir, are you aware that Pew Research shows that 20 percent of
the American people do not trust the federal government?
Mr. KELLEY. I am not.
Mr. CRANE. Okay. Well, they do not. And I think that if you
polled this cross section of our citizens today you would probably
see something similar.
Sir, are you aware, yes or no, does the American taxpayer fund
the SBA?
Mr. KELLEY. Yes.
Mr. CRANE. Okay. Does the American taxpayer—hold on. Hold
on a second. Does the American taxpayer fund your salary, sir?
Mr. KELLEY. It does.
Mr. CRANE. Okay. Mine, too, as well; right?
Mr. KELLEY. Yes.
Mr. CRANE. All right. So, sir, Mr. Kelley, who is on the hook if
these loans are defaulted on?
Mr. KELLEY. So that is what I was going to explain with my
exception. So, with respect to supporting the loan programs, and
this is a really cool thing for you and all of the folks that might
be——
Mr. CRANE. Real quick, sir. Real quick. My time is running.
Mr. KELLEY. The fees and the collection from liquidated collat-
eral creates a profit for the federal government that enables us to
waive fees for the borrowers and lenders and not ask for appro-
priate dollars at SCORE in order to support the 7(a) and 504 pro-
grams.
28

Mr. CRANE. Hold on a second. All right. First of all, the federal
government does not make a profit. I think most people here are
smart enough to know that. Do you guys know how much national
debt we are in right now, anybody? Almost $32 trillion of national
debt. Okay. So this government does not make a profit. As a matter
of fact, it continues to spend money, upon money, upon money that
we do not have. It just continues to print money that we do not
have. And that is my problem here, Mr. Kelley. This town, these
administrations that make up this town, the lobbyists, the special
interests, are notorious for being poor stewards of the American
taxpayer dollars. And now you are trying to implement changes to
these loan programs to make it easier to lend people money that
we do not even have. That is the problem. And it is for that reason,
and because of the debt, the times that we live in, in our history
in this town, in this government of showing zero fiscal responsi-
bility that I do not support these changes and I do not think they
are appropriate.
I yield back my time. Thank you.
Chairman WILLIAMS. Okay. I now recognize Mr. Phillips from
Minnesota for 5 minutes.
Mr. PHILLIPS. Thank you, Mr. Chairman.
Welcome, Mr. Kelley. I want to start by thanking you. I know
there are lots of things you could be doing with your life other than
this, and I want to thank you for your service.
I do a series in Minnesota called On the Job with Dean where
I visit small business and work a shift for 2 or 3 hours and have
learned a ton, the good, the bad, the ugly about the SBA. But most-
ly the good as a resource, as a provider of capital, and also
mentorship. And I want to thank you for what you do.
Just last week I was in Eden Prairie, Minnesota visiting the Asia
Mall, which is a converted big box store, an extraordinary place.
Administrator Guzman and a second gentleman came to visit. I
worked a shift as a stockboy and a cashier and once again saw SBA
loans creating a wonderful story of success in my district.
And I also am a deep believer in shared success, in employee
ownership. And have been trying to push both this Committee and
my colleagues to look at ways where we can build bridges to more
shared ownership. Our Ranking Member has a wonderful bill. I
will be introducing one next week as well, and I want to focus on
that. I know some of the changes, at least in the recent past, the
7(a) has only financed about five employee ownership changes in
control. I know under the affiliation lending criteria rule now par-
tial buyouts will be allowed under 7(a). So if you could just speak
to how you think that might increase access to capital for employee
ownership and any comments you might have.
Mr. KELLEY. Yes. And not to pour salt in the wounds, but the
forthcoming SOP will have delegated authority for ESOP trans-
actions. So I did want to mention that.
So with respect to partial buyout, the reason that this was put
in here is to affect employee ownership. And historically what is
challenging about an ESOP is that it is a formal process that re-
quires role-based compliance. So, a fiduciary, a designated em-
ployee to take time away from, you know, doing the duties of a
29

stockboy as you suggested to perform their roles to stay in compli-
ance with the regulations governing that.
So it works for a certain size company. It does not work for what
President Biden has characterized as the Mom and Pops or the
smallest of the small. So, what partial buyout does is it builds off
of a process that has worked well for 7(a) lenders, which is change
of ownership. A third of all SBA loans are either full partner
buyouts or full stock or asset purchases today. This is a transaction
that they do a lot of. And so now, today, an existing ownership can
dilute their common stock ownership to their employees and the
business’s cashflow can pay for that transaction. And of course, all
parties with 20 percent or more of stock in the company will re-
main on the hook with an unconditional personal guaranty.
So we believe this transaction will be cost-effective. It will be one
familiar to our core lenders and they will originate more details
that way.
Mr. PHILLIPS. Okay. Are there any other structural barriers
that you think could be addressed to further increase availability
of resources for ESOPs?
Mr. KELLEY. So, we looked at ESOPs when I was lending, so
I built out a lending division prior to the last role that was ref-
erenced and did about a half billion of lending. And we looked at
ESOP transactions. They actually have very favorable benefits if,
for example, you are a defense contractor. Okay? So, cost plus and
things like that for reimbursement. But for the core businesses
that are in your districts, the transaction costs were too high for
the seller and the time it took to affect the transaction meant for
a lender that, you know, we needed to move on to originate more
loans. And really, everything about a lender, and this is good or
bad or however you want to look at it, is I have got to meet my
quota for that quarter and I have got to hit that bonus at the end
of the year. And so I have to move on a timely basis.
Mr. PHILLIPS. Okay. I appreciate it. A couple of quick ques-
tions.
With turmoil in the banking sector, have you noticed any hesi-
tancy amongst lenders in recent weeks, months, as it relates to
7(a)s?
Mr. KELLEY. Well, it was cited that, you know, the lending is
on track for about $14 billion today. I think there is no question,
the Fed has reported this, it is in whatever periodically you con-
sume each day, that there is going to be a tightening of the credit
box. Now, in SBA lending, a tightening of the credit box normally
means that this is a tool that becomes, you know, more handy,
right, for the lenders. And the challenge, and I really want to reit-
erate why we are doing all these changes. In 7(a) lending today
there are 20 lenders doing 50 percent of the lending nationwide
every year.
Mr. PHILLIPS. Can you say that again?
Mr. KELLEY. Twenty lenders do 50 percent of the lending. So,
a nation that has 33 million small businesses, because of the red
tape and bureaucracy that we are removing but historically has
been in place, has supported 20 lenders. And, you know, I have
called myself a nerd here so I will take another. It needs nerds like
me at the bank to comply with the rules. So we are trying to level
30

the playing field so that we can get 4,400 banks and thousands of
credit unions off the sidelines into using these programs.
Mr. PHILLIPS. Thank you. My time is expired so I yield back.
Thank you, Mr. Kelley.
Chairman WILLIAMS. Okay. I would like to thank our witness
for your testimony today, for appearing before us today. I think you
see this Committee is bipartisan. We want the best service out of
the SBA that we can get.
Without objection, Members have 5 legislative days to submit ad-
ditional materials and written questions for the witness to the
Chair which will be forwarded to the witness.
I ask the witness to please respond promptly, and you have been
asked to do that today.
So if there is no further business, without objection, the Com-
mittee is adjourned.
[Whereupon, 11:33 a.m., the committee was adjourned.]
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