Unleashing Main Street's Potential: Examining Avenues to Capital Access (House Small Business Committee hearing, January 18, 2024)
Summary
Printed record of the House Committee on Small Business hearing held January 18, 2024, Unleashing Main Street's Potential: Examining Avenues to Capital Access, Small Business Committee Document Number 118–036. Opening statements came from Chairman Roger Williams and Ranking Member Nydia Velázquez. Witnesses were Kevin O'Leary, chairman of O'Leary Ventures; Jill Bommarito, founder and chief executive officer of Ethel's Baking Company; Douglas Holtz-Eakin, president of the American Action Forum; and Everett Sands, founder and chief executive officer of Lendistry, whose answers to questions from Velázquez are printed in the appendix. Additional material includes submissions from America's Credit Unions, CAMEO, Engine, the FDIC on deposit insurance thresholds and the Small Business Investor Alliance. The committee adjourned at 12:07 p.m.
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“Unleashing Main Street's Potential: Examining Avenues to Capital Access (House Small Business Committee hearing, January 18, 2024).”
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UNLEASHING MAIN STREET’S POTENTIAL:
EXAMINING AVENUES TO CAPITAL ACCESS
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
HEARING HELD
JANUARY 18, 2024
Small Business Committee Document Number 118–036
Available via the GPO Website: www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
54–670 WASHINGTON : 2024
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
CELESTE MALOY, Utah
NYDIA VELÁZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MARIE GLUESENKAMP PEREZ, Washington
SHRI THANEDAR, Michigan
MORGAN MCGARVEY, Kentucky
HILLARY SCHOLTEN, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
BEN JOHNSON, Majority Staff Director
MELISSA JUNG, Minority Staff Director
(II)
CONTENTS
OPENING STATEMENTS
Page
Hon. Roger Williams ................................................................................................ 1
Hon. Nydia Velázquez ............................................................................................. 2
WITNESSES
Mr. Kevin O’Leary, Chairman, O’Leary Ventures, Miami Beach, FL ................. 5
Ms. Jill Bommarito, Founder and Chief Executive Officer, Ethel’s Baking
Company, Shelby Township, MI ......................................................................... 7
Mr. Douglas Holtz-Eakin, President, American Action Forum, Washington,
DC .......................................................................................................................... 8
Mr. Everett Sands, Founder & Chief Executive Officer, Lendistry, Los Ange-
les, CA ................................................................................................................... 10
APPENDIX
Prepared Statements:
Mr. Kevin O’Leary, Chairman, O’Leary Ventures, Miami Beach, FL ......... 43
Ms. Jill Bommarito, Founder and Chief Executive Officer, Ethel’s Baking
Company, Shelby Township, MI .................................................................. 45
Mr. Douglas Holtz-Eakin, President, American Action Forum, Wash-
ington, DC ..................................................................................................... 48
Mr. Everett Sands, Founder & Chief Executive Officer, Lendistry, Los
Angeles, CA ................................................................................................... 59
Questions and Answers for the Record:
Questions from Hon. Velázquez to Mr. Everett Sands and Answers from
Mr. Everett Sands ......................................................................................... 68
Additional Material for the Record:
America’s Credit Unions .................................................................................. 71
California Association for Micro Enterprise Opportunity (CAMEO) ............ 74
Chamber of Marine Commerce ........................................................................ 78
The Daily Dish .................................................................................................. 82
Engine ............................................................................................................... 83
FDIC on Deposit Insurance Thresholds ......................................................... 86
Small Business Investor Alliance (SBIA) ....................................................... 90
The Washington Post ....................................................................................... 96
(III)
UNLEASHING MAIN STREET’S POTENTIAL:
EXAMINING AVENUES TO CAPITAL ACCESS
THURSDAY, JANUARY 18, 2024
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, Van Duyne, Mann, Ellzey, Molinaro, Alford, Crane, Maloy,
Velázquez, Landsman, McGarvey, Gluesenkamp Perez, Scholten,
Thanedar, Chu, Davids, and Pappas.
Chairman WILLIAMS. Okay, it is 10 o’clock. We are right on
time.
Before we get started I want to recognize Congressman Mann
from Kansas to lead us in the pledge and the prayer.
Mr. MANN. Thank you, Mr. Chairman.
Join with me in prayer.
Dear Lord, thank you that we get to live in the greatest country
in the history of the world. We pray for all the small business own-
ers and all those that are thinking about starting a small business.
Please bless their efforts. We pray that they would be led by you,
as would everyone on this Committee. And we commit this hearing
to you and your will. Thanks that we get to all be here. In the
name of Jesus, amen.
I pledge allegiance to the flag of the United States of America.
And to the Republic for which it stands, one nation under God, in-
divisible, with liberty and justice for all.
Chairman WILLIAMS. I would also like to make mention that
you will periodically see some of our Members moving in and out.
We might have a moment where there is a lot of people. We might
have a moment where there is not so many people. Do not let it
worry you because we have got other hearings going on and people
have to be at those. So that is a normal process. So make you
aware of that.
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.
I now recognize myself for my opening statement.
I want to welcome all of you here today to the hearing which will
focus on finding solutions for entrepreneurs to more easily access
capital so they can grow their businesses.
(1)
2
I would like to start by thanking all of our witnesses for being
with us today. Thank you very much. And we know you could be
focusing on your core business operation. We greatly appreciate
your attendance and your input.
Small businesses are the backbone of our communities and the
engines of growth for our economy. Our nation’s job creators have
faced many challenges over the past few years from labor shortages
to crippling inflation, yet we still prevail. While our business own-
ers continue to face and overcome never-ending hurdles, as this
Committee heard prior, access to capital remains a top concern for
main street.
For a business to get off the ground, small business owners must
invest their time and financial resources. For most entrepreneurs,
this means going to the bank to secure a loan. This capital provides
them with the resources needed to compete in the marketplace and
contribute to the American economy.
Unfortunately, high interest rates and tightening lending stand-
ards are a significant barrier to growth for main street. We know
American entrepreneurs who are just starting their journeys and
have little credit history will be subjected to sky-high interest rates
under the current economic headwinds.
As interest rates remain high, the federal government should be
looking at other barriers that are making it more expensive to lend
money to main street. However, there is a proposal making its way
through the Federal Reserve System that will do the exact oppo-
site. And I am, of course, speaking of the proposed Basel III capital
requirements. If implemented, this rule would require the banks to
hold more of their capital on the sidelines rather than lend it out
to small businesses. This would harm small businesses with thin
credit histories. The most of this is implemented.
Main street has been playing defense since this administration
came into office, and this rule would only serve to make matters
worse. For some businesses, they do not want to go to a bank and
take on debt. These startups may turn to venture capital funds
which invest capital in exchange for equity in the business. This
is a risky undertaking for the venture capitalist betting on a
business’s success, but this type of financial agreement helped
build some of the most successful companies we have seen in our
time.
Despite these tough economic headwinds, main street still finds
its way to thrive. Just as it always does, we on this Committee are
focused on ensuring our nation’s small businesses have a fighting
chance. And I am very much looking forward to today’s discussion
as many are.
So with that I want to yield to our distinguished Ranking Mem-
ber from New York, Ms. Velázquez, for her opening remarks.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman. I would like to
thank all of the witnesses for being here today.
As both Chair and Ranking Member of this Committee, ensuring
small businesses have access to credit and investment opportuni-
ties has always been one of my top priorities. Under the leadership
of President Biden, small business growth has proved resilient.
Since he took office, 60 million Americans have filed to start new
businesses, the strongest stretch on record.
3
While economic progress continues to be made, we must do bet-
ter, and that means ensuring all of America’s small businesses
have the capital they need to succeed. Unfortunately, data pub-
lished by the Federal Reserve found that minority-owned busi-
nesses were just as likely to apply for credit in 2020 but Black,
Asian, and Latino-owned small businesses were less likely than
White-owned businesses to report receiving all of the credit that
they sought.
When it comes to venture funding, that disparity is even more
staggering. Black and Hispanic female entrepreneurs received less
than 1 percent of all venture capital investments in 2020.
SBA’s capital access programs are critical to addressing these
disparities. For example, the SBA’s Community Advantage pro-
gram has been successful at bridging this market failure, facili-
tating more than $139 million in microfinancing to underserved
small businesses last year. Democrats have developed numerous
other policies and programs to facilitate financing to women and
minority-owned small businesses but this idea has been met with
continued opposition from the majority.
The majority recently passed Congressional Review Act legisla-
tion seeking to overturn the CSBB’s Section 1071 rule which is spe-
cifically designed to ensure women and minority-owned small busi-
nesses receive access to financing on terms similar to those as
White-owned firms. This legislation was immediately vetoed by
President Biden.
Attempts to ensure our banking system is resilient and well cap-
italized and capable of supporting busineseses in both good eco-
nomic times and bad are also being met with stiff opposition from
the majority.
The proposed joint rulemaking implementing the Basel III
Endgame agreement is fully consistent with the important aim of
enhancing the ability of small businesses to access financing.
Two key points about the proposal must be made from the out-
set. First, the proposed rule is just that, a proposal. It is not final,
and on several occasions, Vice Chair Barr has reiterated his will-
ingness to meet with interested parties and hear feedback. Just
last week on my invitation, Vice Chair Barr met with Democrats
on this Committee to discuss the proposal and answer our ques-
tions.
Secondly, there are more than 4,500 banks in this country and
less than 40 percent of them will be directly affected by the rule.
Community banks—I repeat, community banks which do approxi-
mately 40 percent of the nation’s small business lending will not
be impacted by the proposal.
Small businesses remain the backbone of our nation’s economy,
and ensuring large banks remain well capitalized so they do not
create another financial crisis is critical to ensuring all main street
small businesses have access to credit and investment opportunity.
Thank you, and I yield back.
Chairman WILLIAMS. Thank you.
We will now introduce our witnesses. I will start by recognizing
my colleague, Representative Meuser to briefly introduce our first
witness appearing before us today.
Mr. MEUSER. Thank you, Mr. Chairman, very much.
4
Our first witness with us today is Mr. Kevin O’Leary, also known
as Mr. Wonderful. Many have seen him, of course, on the very suc-
cessful and long-running show Shark Tank. Mr. O’Leary is the
Chairman of O’Leary Ventures located in Miami, Florida. Mr.
O’Leary founded O’Leary Ventures in 2000 to support startups and
early-stage businesses across virtually every sector because of the
breadth of his investment portfolio. As I understand it, much of it
from Shark Tank. O’Leary Ventures has a proprietary network
that continually works to support portfolio companies. In 2007, he
joined the cast of the Canadian TV show Dragon’s Den, the inter-
national business reality show, a precursor, of course, for U.S.
Shark Tank franchise. He is also the author of a best-selling series
of books and has spoken to future entrepreneurs at Harvard, Notre
Dame, MIT, and Waterloo, among others. Mr. O’Leary also serves
on the investment committee at Boston’s prestigious 200-year-old
Hamilton Trust. Mr. O’Leary graduated from the University of Wa-
terloo where he received an honors bachelor’s degree in environ-
mental studies and psychology. That is what my son is majoring
in. There is hope for him. He then went on to attend the Ivy Busi-
ness School where he earned his MBA. Mr. O’Leary, you are known
as being a very direct, truthful, and fiscally responsible business-
man. We here on this Committee want to base our priorities on the
real world. And so from all of our witnesses, thanks for bringing
the real world to our Committee. And thank you all very much for
being here.
With that, Mr. Chairman, I yield.
Chairman WILLIAMS. The gentleman yields back.
Our next witness is Ms. Jill Bommarito. Ms. Bommarito is the
founder and CEO of Ethel’s Baking Co., located in St. Clair Shores,
Michigan. Ms. Bommarito founded Ethel’s Baking Co. in 2011 to
carry on her tradition of cooking with love but, how do yall say it—
celiac disease, a family struggle for over 30 years, often left many
disappointed with recipes tailored to exclude gluten. When she
hosted her first Christmas dinner for extended family, she made an
entire gluten-free meal, the highlight of which was the now famous
Pecan Dandy Bars. Today, along with her daughter Lily, they con-
tinue to take old-fashioned favorites catering to a modern appetite
that creates gluten-free, non-processed food in over 1,500 stores
across North America and online. Ms. Bommarito graduated from
Michigan State University, a Spartan, with a Bachelor of Arts in
communication and economics. So thank you for joining us today
and we look forward to our conversation ahead.
Our next witness here with us today is Dr. Douglas Holtz-Eakin.
Dr. Holtz-Eakin is the president of the American Action Forum lo-
cated here in Washington, D.C. Dr. Holtz-Eakin founded American
Action Forum in 2009. Prior to that he served in a variety of influ-
encing policy decisions, including chief economist of the President’s
Council of Economic Advisors from 2001 to 2002, which he also
worked as a senior staff economist from 1989 to 1990. From 2003
to 2005, he served as the sixth director of the Congressional Budget
Office assisting Congress with numerous policies, including the
2003 Tax Cuts, the 2003 Medicare Prescription Drug Bill, and the
2005 push for Social Security Reform. He was also the director of
domestic and economic policy for the John McCain Presidential
5
Campaign and then went on to serve as a commissioner on the con-
gressionally chartered Financial Crises Inquiry Commission. Dr.
Holtz-Eakin received a Bachelor of Arts in economics and mathe-
matics from Dennison University and then went on to receive his
Ph.D. in economics from Princeton University. Thank you for join-
ing us today, and we look forward to our conversation ahead.
I now recognize the Ranking Member from New York, Ms.
Velázquez, to briefly introduce our last witness appearing before us
today.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman.
I would like to take a moment to recognize Mr. Evertt Sands and
thank him for joining us here this morning. Mr. Sands is the
founder and CEO of Lendistry, a national CDFI small business
lender located in Los Angeles, California. Mr. Sands has more than
20 years of experience in banking, facilitating loans to underserved
small business owners who need access to responsible capital. Mr.
Sands has shared his experience and recommendations with For-
tune, the National Urban League, the Wall Street Journal, and
Bloomberg. He is a graduate of the University of Pennsylvania and
he is an Advisory Board Member of the Penn Institute for Urban
Research. Thank you, Mr. Sands. It is a pleasure to have you here
this morning.
Chairman WILLIAMS. Thank you. And again, we appreciate all
of you being here today.
So before recognizing the witness I would like to remind them
that their oral testimony is restricted to 5 minutes in length. If you
see the light turn red, you have got a problem, okay, in front of
you. It means your 5 minutes have concluded and you should wrap
up your testimony. And every now and then if you go over I will
remind you a little bit and so we will keep this thing moving.
So with that being said I now recognize Mr. O’Leary for his 5-
minute opening remarks.
STATEMENTS OF KEVIN O’LEARY, CHAIRMAN, O’LEARY VEN-
TURES; JILL BOMMARITO, FOUNDER AND CHIEF EXECUTIVE
OFFICER, ETHEL’S BAKING COMPANY; DOUGLAS HOLTZ-
EAKIN, PRESIDENT, AMERICAN ACTION FORUM; AND EVER-
ETT SANDS, FOUNDER & CHIEF EXECUTIVE OFFICER,
LENDISTRY
STATEMENT OF KEVIN O’LEARY, CHAIRMAN, O’LEARY
VENTURES
Mr. O’LEARY. Thank you, Chairman Williams, Ranking Member
Velázquez, and Members of the Committee, thank you for giving
me time to testify about the state of small business in American.
I am the Chairman of O’Shares, an ETF indexing firm and
Chairman of O’Leary Ventures management, a private equity and
venture investment firm. As an investor, I support entrepreneurs
at every stage of their journeys. I have dozens of family-run busi-
nesses in our investment portfolios.
My definition of a small business is a private firm, often family
owned, that employs between 5 and 500 people. These hard work-
ing men and women that basically account for 60 percent of job cre-
6
ation in America. There is no denying they are the backbone of the
economy.
For decades, the US economy has enjoyed historically low inter-
est rates. Access to capital at a low cost is always the key for fund-
ing receivables, capital expenditures, and making payroll. For
small businesses in America, the majority of these services were
provided by the network of over 4,000 regional banks. Almost a
year ago, the network began to falter. Silicon Valley Bank and Sig-
nature Bank failed, and First Republic Bank was bailed out by tax-
payers and then sold off to J.P. Morgan. This occurred while the
Federal Reserve was raising rates at an unprecedented pace from
almost 0 to the current 5.5 percent terminal rate. Regional banks
immediately faced heightened scrutiny of their balance sheets and
liquidity ratios and now bank policies are under review by their
regulators. The predictable reaction was for the banks to tighten
their loan books. This was immediately felt by hundreds of thou-
sands of small business owners in every sector and geography in
America. Not only did their rates increase, but regional bank li-
quidity dried up too. In many cases they now have to make use of
the private shadow banking market at rates of 16 to 22 percent.
At the same time, federal programs like the PPP had ended and
the Employee Retention Credit payments were suspended by the
IRS in Q4 of 2023. To date they have not resumed and the whole
ERC program is currently scheduled to end on April 15th of 2025
or even sooner.
Unfortunately, the majority of small business owners have no
idea if they qualify for any of the programs inside of the Inflation
Reduction Act (IRA), The CHIPS Act and Science Act, obviously,
and Infrastructure Act. Small businesses do not have the resources
to retain lobbyists, legal and financial advisors that interpret the
acts and manage the application process. If small businesses in
America are responsible for 60 percent of domestic jobs, why are
these acts not written to spend 60 cents of every dollar on them,
especially when their traditional sources of funding and govern-
ment support programs have ended or been suspended. Instead, it
looks to the market like the IRA, CHIPS and Infrastructure Acts
were written specifically for S&P 500 companies that have no trou-
ble accessing capital, yet only create 40 percent of jobs, many of
these in foreign subsidiaries.
I would like to suggest some recommendations to the committee.
One, create a payroll protection program to protect noninterest
paying payroll accounts in regional and community banks during
the inevitable consolidation of over 4,000 regionals down to a mar-
ket stable number. I first heard of this idea from Senator Hagarty
and think it would be helpful.
Two, work with the numerous agencies that are implementing
both the IRA, CHIPS, and Infrastructure Acts to ensure small busi-
nesses receive the fair share of these programs. Form a bi-partisan
council that advocates for small business in America that is always
at the table when new policy is being considered. This would en-
sure that new government programs and laws are actually sup-
porting small businesses and job creation in America.
Thank you very much.
7
Chairman WILLIAMS. Thank you. And I now recognize Ms.
Bommarito for her 5-minute opening remarks.
STATEMENT OF JILL BOMMARITO, FOUNDER AND CEO,
ETHEL’S BAKING CO.
Ms. BOMMARITO. Thank you. Chairman Williams, Vice Chair-
man Luetkemeyer, Ranking Member Velázquez, Committee Mem-
bers and guests, good morning.
My name is Jill Bommarito, and I am the founder and CEO of
Ethel’s Baking Company located in Metro Detroit. We are a leading
wholesale gluten-free bakery specializing in dessert bars and cook-
ies sold in grocery and specialty stores in 49 states. I am also an
alumna of the Goldman Sachs 10,000 Small Businesses program.
It is an honor to be here today, and I appreciate your invitation
and your attention to how a lack of access to capital is a barrier
for small business growth.
Ethel’s Baking Company now has annual revenue of $5 million
and 26 full-time employees. I started my business in 2011 in a
church kitchen with a $10,000 loan from my mom.
I quickly learned that accessing capital through traditional lend-
ing institutions was impossible without 2 years of profitability to
show. That barrier led me to borrow from friends and family, as
well as from our personal savings and 401k to grow the business
growth. In fact, I was not able to secure my first business loan for
over 5 years after I started the company.
We continued to grow and needed additional working capital but
a second barrier arose. I learned that traditional lenders are also
reluctant to lend to business that are growing quickly. Fast growth
equals risk.
For small business owners, this feels contrary to the American
Dream. Creating jobs, taking on the risks of starting something
new is important but we are not treated as important.
In 2019, with distribution expanding, Ethel’s had reached capac-
ity. The only way to access the capital needed to expand was to sell
equity in my company. This allowed me to build out our new
20,000 square foot facility manufacturing space to meet demand
and also allowed me to have access to working capital and start
that next level relationship with banking.
We continue to grow our customer base and receive purchase or-
ders from large retailers like Costco, Target, Whole Foods, and
more. This requires more capital.
When small business owners like me cannot access a loan, we
are faced with three choices. We deplete personal and
retirement savings. We have the option for utilizing high-interest
loans and credit cards, non-traditional lenders, and predatory lend-
ers that exploit small businesses. Or sell equity to raise capital.
My relationship with our lender is strong, but the fact is that
businesses like mine, growing quickly and in the food sector, are
deemed risky. This has led me to sell additional equity.
Here is the truth. My ability to access capital for my business is
my top concern every single day. That is true for every small busi-
ness.
It is troubling that the Federal Reserve is considering a rule, the
Basel III Endgame, that would further restrict access to capital for
8
small businesses. If enacted, this rule would not only cut off many
small businesses from accessing the capital that they need to grow,
but it will push small business owners to predatory lenders because
they will have no other choice. I come from a family of entre-
preneurs , and I have seen firsthand the consequences of predatory
lending. It is simply unconscionable.
From my perspective, I respectfully offer two things this Com-
mittee and Congress could do to help small businesses like mine:
First, oppose the Basel III Endgame. I would like to extend my
appreciation to Chairman Williams for expressing concerns about
Basel III in a letter to the Federal Reserve. I would also like to
thank Subcommittee Chair Meuser and Ranking Member
Landsman, for leading a bipartisan letter about the proposal’s neg-
ative impact on small business lending. I have joined over 3,000
small business owners from the 10,000 Small Business Voices com-
munity who signed our letter to the Federal Reserve expressing our
concerns about the impact of the Basel III Endgame.
And second, modernize the SBA through reauthorization. As you
know, the SBA has not been reauthorized by Congress in over 20
years. Small businesses would benefit from an agency that is as
nimble and can work at the speed that we work today. Through
Congressional reauthorization, the SBA could be charged with solv-
ing these capital barriers that currently exist.
Thank you for your time, and I will gladly answer any questions
Chairman WILLIAMS. Thank you very much.
I now recognize Mr. Holtz-Eakin for his 5 minute opening re-
marks.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT,
AMERICAN ACTION FORUM
Mr. HOLTZ-EAKIN. Chairman Williams, Ranking Member
Velázquez, Members of the Committee. Thank you for the privilege
of being here today to discuss access to capital and headwinds to
growth in the small business community.
I want to make three brief points and then I look forward to an-
swering your questions.
At the moment there are really two near-term threats to access
to capital. The first which has been mentioned already is the eco-
nomic environment in which small businesses are operating, an en-
vironment characterized by tight credit conditions, high interest
rates, and the prospect of slow economic growth over the interim.
This runs the risk of both a recession and limited access to capital
because of the high interest rates.
The thing that I would note about the economic conditions that
I think is most troubling is that there is a very unbalanced growth
pattern going on in the U.S. economy. We have seen some high
topline economic growth numbers but they are driven entirely by
households. Business investment in the 3rd quarter was dead flat.
It looks to be repeated in the 4th quarter. That is the issue of small
businesses not investing, not having any access to capital. And
every post-war recession pandemic was led by a downturn in busi-
ness investments. So that outlook is very important and one of real
concern to me.
9
How long the Fed remains tight is a real issue. To give you some
sense of it, the core PCE price index inflation peaked at 5.6 per-
cent. It is now at 3.2 So that is 2/3 of the way to the 2 percent tar-
get and that took almost 2 full years. So the notion that somehow
credit conditions will ease quickly I think is far from guaranteed.
That puts an emphasis on policy to provide access to capital. And
here I think the real near-term threat is the regulatory burden
being placed on businesses, and especially small businesses.
As I note in my written testimony, the Biden administration is
imposing a regulatory burden from finalized regulations that aver-
ages about $150 billion a year so far for each year in office. That
is 50 percent higher than any previous administration and well
above typical administration burdens of $40 to $20 billion a year.
That is simply an enormous headwind to growth and access to cap-
ital. That is across all agencies. The particular regulatory issue
that this one raised so far is the Basel III Endgame. This is a pro-
posed rule which is unique in that it provides no quantitative esti-
mates or justification, no benefits when we know there will be large
costs to raising capital standards by 20 to 30 percent. It would be
in the regulators’ interest to demonstrate quantitatively the im-
pacts on the economy and in particular the small business commu-
nity but we have not seen anything like that. So hopefully, the
final rule will look a lot better than the proposed rule.
In survey evidence of the small business community, the pro-
posed rule is really quite frightening. Sixty-seven percent of re-
spondents said that if it finalized they would halt their expansion.
Forty-two percent said they would be considering layoffs. And some
21 percent contemplating closing their businesses as a result. So
this is a rule that has enormous impacts on the economy.
Going forward and over the longer term, I think the biggest pol-
icy uncertainty comes from the federal budget. The federal budget,
according to the Congressional Budget Office will have $20 trillion
of deficits over the next 10 years and there is simply no question
that that kind of demand for capital by the federal government is
going to impede the private sector’s ability to get that capital and
the most easily crowded out will be the small businesses. And so
that cannot hold.
Even more important is how it gets resolved. One way to resolve
that problem is to rely extensively on tax increases, in particular,
the 2017 act will sunset in almost its entirety at the end of 2025.
To simply take away the pro-growth aspects of that act in par-
ticular or taxes in general as a way of solving our budget deficits
is not going to be a good solution. It is going to hurt the small busi-
ness community dramatically. A better solution would be to rein in
the growth of the large entitlement spending programs that are
driving those deficits. Keep the tax burden as low and efficient as
possible and provide a growth environment in which the small
business community can prosper while putting the federal fiscal
house in order.
There are many problems facing the economy. Those are the
three I think that are most important for this Committee right
now. I thank you for the chance to be here.
Chairman WILLIAMS. Thank you very much.
I now recognize Mr. Sands for his 5-minute opening remarks.
10
STATEMENT OF EVERETT SANDS, FOUNDER AND CEO,
LENDISTRY
Mr. SANDS. Committee Chairman Williams, Ranking Member
Velázquez, Vice Chairman Luetkemeyer, distinguished Members of
the Committee, thank you for your interest in my first-hand knowl-
edge.
My name is Everett K. Sands. I am honored to be invited back
to offer testimony before this Committee. I have over 20 years of
experience in lending at community banks. One of the largest na-
tional banks and founder and CEO of the only fintech community
development financial institution, Lendistry, which has taken 1.7
million applications since our history.
My message today is that main street businesses that power our
economy need small dollar loans to grow to the next level, and
right now you have an army of CDFIs that stand ready to support
them.
My written testimony outlines in detail the demand for smaller
loans and that CDFIs, including Lendistry, have proven themselves
to be the most effective capital deployers to underserved commu-
nities as a percentage of loans originated. Yet, we work with one
hand tied behind our backs due to the hurdles that made sense
when they were first enacted and no longer fit today’s financial
landscape.
In order to do our part to unleash main street, we need you to
unleash us.
My first recommendation is to fix the state-by-state licensing
model that prevents CDFIs from efficiently serving small busi-
nesses on a nationwide footprint. The current state-by-state licens-
ing requirement for CDFIs not only limits how quickly capital can
be distributed but also how effective the CDFI designation can be
as a force to deploying responsible capital and lower loan amounts.
Applying a universal licensing model similar to residential lend-
ing, nationwide mortgage licensing system will bring about three
clear benefits.
One, CDFI’s can move faster to deploy capital when it is needed.
Two, CDIs can easily attain the risk management benefits of geo-
graphical distribution.
And three, more lenders will be motivated to attain a CDFI des-
ignation which would significantly increase the supply of capital
provided on responsible terms and through market forces make
predatory lending businesses less economically viable.
My second recommendation is to increase the access to Federal
Home Loan Bank and grant access to the Federal Reserve Bank for
CDFIs. The elements that go into determining a loan’s interest rate
are broken down simply in my written testimony. But to get right
to the point, the cheaper the capital is for CDFIs, the more savings
are passed down to borrowers in the form of lower interest rates.
Interest received on small loans simply does not add up to enough
to keep the CDFIs in business or innovate. So if a CDFI does not
have low-cost sources of liquidity and has not received adequate
capital, lending capital from banks, it has to make the decision to
either leverage high-cost capital resulting in higher rates for bor-
rowers or just not provide small loans at all.
11
Allowing access to CDFIs to the FRB and FHLB would again
have three main benefits.
One, additional sources of liquidity, which means CDFIs could
provide more loans to underserved communities.
Two, access to lower cost of funding will immediately decrease
the interest rate CDFIs provide to their customers.
And three, as Mr. O’Leary said, private lending capital has de-
creased pretty significantly and the government needs CDFIs to
keep the playing field both responsible and equitable.
The third recommendation is to form a taskforce to analyze pro-
grams on an ongoing basis and implement adjustments to make
sure they remain catalytic and responsive. As evidenced by PPP,
SSBCI and the many programs implemented to provide pandemic
relief, our government can rise to the occasion to deploy assistance
and save small businesses. From the capital deployer’s perspective,
government support is best when it is catalytic to help new indus-
tries, like renewable energy, thrive and innovate, and responsive.
Capital deployment should be considerate of current market condi-
tions like inflation.
Programs should also be built with processes in place for ac-
countability and reporting and adjusting based on those findings.
This means that though a great deal of money is pushed towards
states to support small businesses via programs, there is no system
in place to make sure programs continue to fit market conditions
or to measure their effectiveness in relation to their missions. In-
stead of adjusting current programs to keep them effective, we cre-
ate new programs.
In closing, Congress has taken great strides in recent years to in-
crease access to capital for borrowers and remove roadblocks from
most of our effective lenders. For mission-led lenders, part of the
Endgame is disruptive and predatory firms by offering accessible,
responsible alternatives. In my experience, knowledge, as well as
innovation are most powerful when execution. It is my hope that
with the information gathered in this room from myself and my fel-
low witnesses swift action will follow. Only then can main street’s
potential truly be unleashed.
Thank you for your time.
Chairman WILLIAMS. Thank you very much.
I now recognize myself for 5 minutes.
Ms. Bommarito, it is inspiring to hear the story of how you grew
your business from a kitchen in a church to currently shipping
your products to 49 states across the country. I want to congratu-
late you on this incredible accomplishment and hope you are proud
of what you have built.
Ms. BOMMARITO. Thank you.
Chairman WILLIAMS. You mentioned in your testimony that
you were not able to get your first business loan until 2016 when
you used a building you purchased the prior year as collateral.
Since this time your capital needs have changed as you have indi-
cated since your business has grown.
So my question is for the other entrepreneurs that might be lis-
tening to this hearing can you talk about how your capital needs
have changed through the lifecycle of your business?
Ms. BOMMARITO. Thank you, Chairman Williams.
12
Yes, they have. When we started you need basically money to be
able to build your inventory and cover your receivables. As you
grow that grows exponentially and will continue to do that. With
that you are also seen as a higher risk as you are growing. Any-
thing over 10 percent is considered risky from what I have been
told from banks. And you know small businesses often do grow
more than 10 percent a year. It is the large organizations that are
happy with the 2 percent or a 5 percent increase in profits in
growth. And it changes over time. It will continue to change. We
need to have the access at the local level from our community
banks in order to grow our businesses.
Chairman WILLIAMS. Thank you.
Now, many young people were first exposed to entrepreneurship
through a TV show called Shark Tank. It is hard to watch that
show and not think about using your own background and
strengths to create a product that solves a unique problem in the
marketplace. However, having an idea might be the easiest part of
someone’s entrepreneurship journey. There is a lot of work to turn
an idea into a business plan and then to successfully execute it. I
believe Congress could help many of these small businesses by sim-
ply making it easier to access federal dollars, and the government
is one of the largest customers in the world and we should allow
small businesses to understand and compete for the funds without
the need for an entire legal department.
So Mr. O’Leary, you have a lot of experience advising small busi-
nesses. So when you see Congress pass some of these bills, how do
you advise small businesses if they want to compete for the incen-
tives? And how do you believe they have a fair shot?
Mr. O’LEARY. I think many of these bills were authored with-
out, in my view, without any consideration of small business. They
obviously, in my view, were built for companies that came here to
Washington, could afford lobbyists, talked about sectoral needs like
infrastructure, spending, or CHIPS Act for giant behemoth compa-
nies that make these semiconductors and, you know, obviously
when these were crafted there was nobody at the table for small
business. I read these acts. I look for where small business is con-
sidered. I do not see a single line. I am sorry. That is just the way
it is. And my job is to be an advocate for these men and women
of which there are millions in America, every small business is
going to be a big business if it is successful one day. Every behe-
moth started small but today we have tilted our support. When we
write these acts, why is 60 cents on the dollar not given to small
business? Because those are the next generation of companies that
will create the jobs and keep a competitive economy. A global com-
petitive economy.
My job here in Washington, I am spending a lot more time, is
going up and down the halls banging a gong saying what about my
guys? I do not get this. Where is our piece of this? There is none.
And so I think that is bad policy. I think there is every reason to
ask why we are not being considered.
On top of that, and you brought this up in your question, I thank
you for it, the regulatory environment, when you pile on the federal
regulations onto state regulations have made it so difficult to start
a business in the first place.
13
And again, to be candid, I do not invest in California or New
York or Massachusetts anymore. I cannot do business there. It is
not my fault. I put my money into North Dakota, West Virginia,
Florida, Texas, where the path of least resistance is found. And
that is okay. The competition of states. But if this is not obvious
to people that you can actually regulate yourself out of business,
check out California. Thank you.
Chairman WILLIAMS. Thank you very much.
And for the time that I have remaining, real quickly, as officials
of the U.S. Federal Reserve are considering possible adjustments to
the Basel III proposal, Mr. Holtz-Eakin, do you have any insight
on its cost-benefit analysis?
Mr. HOLTZ-EAKIN. They have displayed no public cost-benefit
analysis, and I think it would be important in the final rule to have
that analysis included.
Chairman WILLIAMS. All right. I now recognize the Ranking
Member for 5 minutes of questions.
Ms. VELÁZQUEZ. Yes. Thank you, Mr. Chairman.
Mr. Sands, the Paycheck Protection Program highlighted racial
disparities in banking. As a national CDFI, can you explain how
Lendistry is trying to bridge this gap and provide access to credit
to small businesses in underserved communities?
Mr. SANDS. Yes. Thank you for the question.
As CDFIs, we have a responsibility really and it breaks down
into three things. The first is providing access to capital to all un-
derserved, undercapitalized businesses. That is what we do.
The second thing is to be able to take in data and basically prove
that the small businesses have the ability to pay back. It is a per-
ceived risk that minorities are not able to pay and so we do our
best to work on that.
Ms. VELÁZQUEZ. Can you explain how SBA programs, like the
7(a) and Community Advantage programs, have helped your orga-
nization bridge this gap?
Mr. SANDS. Yeah. As you heard, even from the small business
today, it is hard when they are in the beginning stages. And so pro-
grams like SBA, SSBCI, allow us to bridge that gap by taking addi-
tional risk and those guarantees effectively help us to take that
risk and then prove that they can pay back and grow.
Ms. VELÁZQUEZ. There have been several attempts to perma-
nently authorize the Community Advantage Program but those at-
tempts have proven unsuccessful. How will permanently author-
izing this program facilitate more lending to small businesses?
Mr. SANDS. So authorizing Community Advantage is important,
and permanently authorizing it is something that must be done.
What we need to consider also is that the lenders look very much
like their small businesses. Microlending program, Community Ad-
vantage are for the smaller lenders. CA SBLC is for the medium
lenders. And SBLC is for the larger lenders. I would ask us to
think about that as we move forward.
Ms. VELÁZQUEZ. Thank you. I understand Lendistry recently
decided to seek an SBAC license from the SBA and that decision
was predicated at least in part by the passage of the Inflation Re-
duction Act (IRA) and the equity financing incentives it provides.
Can you provide us with a little more perspective on that decision?
14
Do you think the incentives provided in the IRA will increase ven-
ture funding to small businesses more generally?
Mr. SANDS. Absolutely. I mean, it is unfortunate that some-
times you have to be surgical in terms of looking at these bills as
Mr. O’Leary mentioned but one of the benefits of IRA was that it
does allow for the SBIC program to be expanded. Lendistry is al-
ways looking for patient capital. We are always looking for ways
that we could lend to underserved businesses and that need is
growing and larger loan amounts are required in this day and age,
especially to participate in programs like what we are trying to do
with renewable energy, et cetera.
Ms. VELÁZQUEZ. Thank you.
Ms. Bommarito, the government guarantee provided by the SBA
in the 7(a), the 504, and the other capital access programs enables
lenders to offer more affordable loans with more advantageous re-
payment terms than they otherwise would. Would that help small
businesses better overcome many of the economic pressures we are
discussing here this morning? Have you utilized any of the pro-
grams that I mentioned?
Ms. BOMMARITO. Thank you very much for that question. And
yes, my first loan was an SBA loan. But if I can be very frank, I
started conversations when I started the company over 12 years
ago. Every single bank I have been in front of has not wanted to
do an SBA loan because of the paperwork, the time it takes, and
have pushed me to do a non-SBA in every circumstance. So I
pushed and pushed and pushed and they had to end up doing the
SBA loan and I am so thankful that we were able to do that. But
I do believe that——
Ms. VELÁZQUEZ. Okay, my question is if you have ever utilized.
Ms. BOMMARITO. Thank you.
Ms. VELÁZQUEZ. Some of the programs will provide better
terms.
Mr. Holtz-Eakin, this is the rule, the Basel III Endgame. You
just stated here that the rule is more than 300 pages and more
than 50 plus pages have an economic analysis, the Fed’s analysis.
For you to come here and state that the rule was written without
any economic analysis is not true. I invite you if you have not read
it to read it and then we can discuss whether or not you might find
that that is insufficient but to state that it has not done an eco-
nomic analysis is not correct.
And then the banks, the Basel III impact over banks over 100—
I still have, oh, I am over. Most of the changes associated on the
rule are related to market trading, not credit risk.
Chairman WILLIAMS. Time is up.
Ms. VELÁZQUEZ. I yield back, Mr. Chairman.
Chairman WILLIAMS. Thank you.
I now recognize Representative Luetkemeyer from the great state
of Missouri for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
You have got a great panel today. Congratulations on putting
this together.
Mr. Holtz-Eakin, let me start with you. In testimony before the
Banking Committee, which I sit on, and Ms. Velázquez does as
well, Vice Chairman Barr, whose proposal is basically this Basel
15
proposal, has responded to the question from me personally, have
you had an economic analysis of this said no. So I think your an-
swer is correct. I do not know where she is getting her information
from but even the Fed Vice Chair of regulation who proposed the
rule said there is no economic analysis which is horrible from the
standpoint of proposing rules and understanding the effect on this
economy.
It reminds me of the old debate about Cecil—if you want to go
there.
But anyway, Mr. Holtz-Eakin, this Basel rule, proposal in my
mind, is a disaster from the standpoint we have just come through
the COVID situation and our banks performed admirably. Had a
hiccup this spring but that was our own fault not because of the
economy. So I would just like your opinion on this rule as a former
banker and a former regulator. When they say that this is only
going to affect the top group of banks, these things roll downhill.
Even your community banks at some point, the regulators are
going to sort of wink and nod and say this is a really good idea.
You need to be implementing this.
What is your thought process on this rule and its effects on cap-
ital access to small business?
Mr. HOLTZ-EAKIN. So the financial markets are by definition
interconnected. And so to impose these capital requirements, I sup-
pose you would say like the operations risk, my discontent with the
proposed rule is there is no quantification of how large is oper-
ations risk. There is no quantification of the benefits to holding
particular amounts of capital against operations risks. It is just
hold this and we will assign it to operations risk. I think they could
do a better job in defending the proposal.
Costs are costs. That is not going to be confined to operations.
They are going to have to raise the revenue to cover those costs.
That means all credit will get more expensive. This is going to get
embedded across those banks’ pricing structures. And the smaller
banks often by and large are banks for funding needs of various
maturities and it will spill over to the smaller banks. You cannot
isolate it in just the largest banks.
They also extended it beyond what Basel III required them to af-
fect regional banks in ways that I did not understand. And do not
address Silicon Valley or Signature or any of the things that went
on. And so this is an implementation of Basel III that does not hue
to the necessary implementation. It has a lot of new, undocu-
mented capital requirements that are costly but without dem-
onstrated benefits, and it will affect the entire financial sector.
Mr. LUETKEMEYER. Thank you for that. And I appreciate your
comment with regards to about $150 billion worth of new rules and
regulations of cost compliance each year. That is a huge driver of
inflation when you add that as a cost that has to be embedded into
the price of the product or services, especially a small business.
Mr. O’Leary, thank you for being here. Great to see you again.
This morning I saw an article that said there is about $8.8 tril-
lion in CDs and money market funds that is available and probably
going to shift to the equities market as a result of interest rates
coming down. That is both wonderful and not so hot at the same
time. It is a two-edge sword. It is a bad deal from the standpoint
16
that a lot of those dollars are there for the banks to be able to loan
money to small businesses. If those flow out that means they have
fewer dollars to invest. But it is also a good deal from the stand-
point there may be some more venture capital dollars available for
small business.
Would you give me your opinion on that, please?
Mr. O’LEARY. First of all, the assumption that interest rates are
going down, I am not so sure. As we all know, the Fed mandate
is 2 percent inflation. Not 2-1/2, not 3, not 3.2. I assume, they will
stay the course at 5.5 terminal rate until they actually see 2 per-
cent in sight which is nowhere near in sight for a whole bunch of
infrastructure reasons. In addition to a lot of new capital coming,
fresh capital, I call it helicopter money from infrastructure, CHIPS,
and science, and from IRA. That is inflationary. I know we called
it the Inflation Reduction Act. Any time you print money it is infla-
tionary, period. There is no other way to interpret it.
And so I think that is the pressure. It is sucking and blowing at
the same time. A bit of a problem. But it has been 2 generations
of people that have never seen money in a bank or in a short-term
CD or short-term Treasury, make over 5 percent. And now they
have seen it for the first time. the market gives you 7 to 9 percent
over a long period of time. And so some portion of that money is
going to stay exactly where it is because the typical portfolio pre-
pandemic was kind of 60 percent equity, 40 percent fixed income,
of which now Treasury is very attractive.
So I would agree with you. There is going to be some pressure
in terms of keeping that capital in a form that banks can lend it
out.
But I have to speak to this Basel III issue from a different per-
spective. It is bad policy and here is why. Today, our banks, the
money center banks compete with New York, Zurich, and Abu
Dabi. Those are the other——
Chairman WILLIAMS. The gentleman’s time is up.
Mr. O’LEARY. Sorry.
Mr. LUETKEMEYER. Thank you. My time is up.
Chairman WILLIAMS. I now recognize Representative Pappas
from the great state of New Hampshire for 5 minutes.
Mr. PAPPAS. Thank you very much, Mr. Chairman. I thank our
panel for their comments here today as we think about some of the
barriers our small business faces in accessing capital and some of
the threats on the horizon, too.
Mr. Sands, if I could start with you. As you know, rural small
business and entrepreneurs have long faced undue barriers with
respect to accessing capital. According to a 2021 SCORE report, 40
percent of rural small business owners have trouble accessing cap-
ital. Most end up using their personal savings as we heard about
earlier in terms of finding that funding source to be able to grow
and thrive.
The Expanding Access to Capital for Rural Jobs Act is a bill that
I helped introduce last year. It would expand the office of the Advo-
cate for Small Business Capital Formation to include Rural small
businesses and help ensure that their concerns and priorities are
heard by SBA. I am wondering if you have other thoughts about
this specific sector, rural small businesses, what we can do to im-
17
prove access to capital for those main street businesses that we
know are underserved and face struggle in terms of finding the
capital they need.
Mr. SANDS. Thank you for the question.
I think ultimately, what it comes down to is the deployers of cap-
ital are missing in states like New Hampshire. And so I think
there needs to be some investment in terms of trying to bring more
responsible capital deployers not only to New Hampshire but also
to all rural areas and think about programs that can support bring-
ing those capital deployers to the state. Likewise, I also mentioned
about the state-by-state licensing. If you take someone like us at
Lendistry who are in California and we are trying to go into New
Hampshire, there are actually barriers for us being able to lend in
your state.
Mr. PAPPAS. Thanks for that. I am wondering if you wanted to
add anything to the discussion around Basel III. We know that this
would impact banks with over $100 billion in assets specifically but
this is a very significant and complex regulatory proposal. There
are a lot of concerns. I hear them from my main street business
sector, my lending community, that it could have potential down-
stream impacts in terms of access to capital. So we know that
banks and CDFIs like you do more than 40 percent of the small
business lending. What would you expect the impact would be in
terms of your organization’s lending capacity if this program is im-
plemented? And do you share some of the concerns that have been
voiced today?
Mr. SANDS. Yeah. I think we all want prudent banking, and we
all want banks to have the right amount of equity in order to func-
tion. Likewise, we do not want at risk any of your deposits. That
being said, we should recognize that we are in an inflationary envi-
ronment. We should recognize that the rule is a proposal but it is
not ready for the current environment that we are in today. So my
actual recommendation would be to postpone Basel III as it stands
today because as others have indicated, it will start at the top
banks. It will then trickle down into community banks. It will then
trickle down into community development financial institutions.
And afterwards it would then obviously go to small businesses.
Mr. PAPPAS. Well, I appreciate those comments.
Ms. Bommarito, if I could turn to you. And thanks very much for
talking a little bit about your business history. We know that in
addition to capital, the most precious resource you have is your
time. So being here and giving voice to these concerns is really very
much appreciate and something we hear from folks in our own dis-
tricts.
You mentioned SBA reauthorization, the need to take a look at
this. Can you be more specific in terms of some of the thing that
this Committee should consider as we look at either a wholesale re-
authorization or pieces of SBA that need to be modernized to meet
the needs of businesses like yours?
Ms. BOMMARITO. Absolutely. And thank you for this question.
As a small business, when I started, you do not feel you matter.
And we cannot singly. We need a centralized organization, the
SBA, that represents us so that we can have that voice together.
And the modernization by reauthorization is so important and it al-
18
lows us to have more communication, to be able to utilize the sys-
tem in a way that we are used to working with technology, to be
able to understand these bills in a better way, and to be able to
find out how we can access them. Because as it stands today, I do
not have the time to even begin to read through those and find a
way to be successful, take advantage of that for our business, and
to be able to grow in a better way.
Mr. PAPPAS. Well, thanks for that. We certainly hope to con-
tinue to hear the voices of our main street small businesses as we
move forward on this Committee. Thank you for all of your com-
ments, and I yield back my time.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Stauber from the great state of
Minnesota, for 5 minutes.
Mr. STAUBER. Thank you, Mr. Chair, and Ranking Member
Velázquez for holding this hearing.
You know, my home state of Minnesota has a rich history of en-
trepreneurship. These businesses are the cornerstone of our econ-
omy. And having been a business owner for 31 years it was tough
at times. Yet, for all their efforts, the grit and determination, too
many small businesses struggle to access the capital they need to
survive. Small businesses have struggled under this administra-
tion, whether it is rising inflation due to Bidenomics, supply chain
issues, or workforce shortages, they should not have the additional
struggles due to lack of access to capital which translates to lost
opportunities, unfulfilled potential, and ultimately missed contribu-
tions to our economy. Even alternative methods to funding such as
venture capital are feeling the pressures of Bidenomics.
Mr. O’Leary, despite what the Biden administration claims, infla-
tion remains high and it has recently started to tick up again. How
has inflation impacted venture capital lending?
Mr. O’LEARY. Dramatically. In the last 24 months, it has seen
a 39 percent decline in funding. And so the typical VC firm today
is not worried about new deals. They are trying to determine in
their portfolios which ones should survive and which ones they are
going to let die. It is extremely difficult to raise capital for any
company today from the traditional VC model as a result of this
rapid change. It is almost unprecedented to go from zero to 5.5 per-
cent terminal rate and not expect it to be like a jolt through the
economy and now you are starting to really see it. And so there are
some methods by which equity crowd funding, which is part of the
CARES Act from way back that is actually working. I think over
308 million were raised last year using that. And that is a different
form of financing. But that is a drop in the bucket compared to the
billions required to fund growth through venture capital.
I would go as far to say right now venture capital is dead and
it is just waiting to see what the outcome is on these changes to
the bigger bank environment. Because remember, they partner
with a lot of other capital, too.
Mr. STAUBER. And that was, my next question is what dif-
ferences are you seeing in the VCs from entrepreneurs that are try-
ing to pitch their business?
Mr. O’LEARY. Well, if you are a startup you are in trouble. If
you are just in your first round you are in trouble. If you have al-
19
ready got a VC backing you for a first, second, maybe AB round,
they are going to look at you closely to decide if you are one of the
ones that are going to survive. You have a chance. But if you miss
that window, which was basically 36 months ago, this is a very dif-
ficult time. And probably the best measure of this is the Shark
Tank index. You should see the deals we are getting now because
they cannot get money anywhere else. That is what happens.
Mr. STAUBER. Right. Right. Right. Thank you, Mr. O’Leary.
You know, as small business run into issues with access to cap-
ital, Basel III, it has already been mentioned, you know, it sounds
reasonable until you realize the consequences of it which will
squeeze access to critical financing for the businesses that drive
our communities.
Mr. Holtz-Eakin, raising capital requirements will likely create
barriers to growth. How could the Fed modify a Basel III source
workable to help small businesses?
Mr. HOLTZ-EAKIN. I think the first and most important obser-
vation is that the banks are well enough capitalized at present so
the Fed’s stress test, they have been demonstrated to be well cap-
italized. The scenarios they can put through could be modified. So
the overall need for capital has not been demonstrated by the Fed.
If they want to tailor the capital charges they should be taking
things off and adding the new risk charges. That is probably the
biggest sort of framework that they could follow in doing the Basel
III.
And I do not see the benefit to extending it to the smaller banks,
the regional banks. There is nothing in Basel III that addresses the
difficulties that presented First Republic, Signature, Silicon Valley.
Those are different phenomenon.
Mr. STAUBER. Thank you.
And then we heard that this adminsitratino has placed $150 bil-
lion of additional regulations on small businesses. Is that a good
thing, Mr. O’Leary?
Mr. O’LEARY. No. That is insane.
Mr. STAUBER. Ms. Bommarito?
Ms. BOMMARITO. Anything that creates more paperwork for us
and more money is detrimental.
Mr. STAUBER. Mr. Holtz-Eakin, putting additional $150 billion
on small businesses a year, is that a good or bad thing?
Mr. HOLTZ-EAKIN. It is a real headwind to growth. And it is
unprecedented in previous administrations.
Mr. STAUBER. Mr. Sands?
Mr. SANDS. I would concur. The number is just too large consid-
ering where we are at in a macroeconomic environment.
Mr. STAUBER. Yeah. And I would say, too, we are hearing, in
this Committee we are hearing small business men and women
come before us all the time and talk about the regulations. It is sti-
fling the growth for their company and we can change that with
a different administration. I yield back.
Chairman WILLIAMS. I now recognize Representative McGarvey
from the great state of Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman. I appreciate every-
body being here today, and particularly talking about an issue that
20
obviously this Committee cares about a lot, which is access to cap-
ital for our small business owners.
One thing we have not hit a lot on today which I want to touch
on is also the lack of access and the disparity in access to capital
for minority and women-owned small businesses in this country.
The data demonstrates this gap without question. I can also tell
you from going around my district in Louisville, Kentucky, and
talking to many successful entrepreneurs that women-owned busi-
nesses, that Black-owned businesses, other minority small busi-
nesses, it confirms it. They have trouble getting access to the cap-
ital they need to keep their businesses going and growing.
So I am glad to have that opportunity to discuss some of the
SBA’s critical programs. Some of their successful initiatives even,
like 7(a), like 504, like the Community Advantage programs, as
well as get into the Fed’s Basel III proposal.
So you know, Mr. O’Leary said something; he does not see
enough legislation and things talking about getting money to small
businesses. I just want to put in a plug for a bill I have introduced
that would create a position within the SBA that specifically is tar-
geted toward getting money to small businesses, particularly our
minority-owned small businesses because we do need to make sure
that capital is flowing and we need to be intentional in our policy
decisions about it.
Mr. Sands, your institution, 60 percent of your loans are with mi-
nority and women-owned borrowers. So I know that Lendistry
would not be directly affected by the Basel proposal but I have
heard concerns at home that changes to capital requirements could
change the relationship between the banks targeted by the rules
and the smaller financial institutions they do business with and in-
vest in. Do you foresee your relationship with the larger banks or
the relationships of your peers at community banks and MDIs
changing as a result of the Basel proposal, and are you concerned
that large banks will reorient away from institutions like yours and
partner with CDFIs less often?
Mr. SANDS. Yeah. I mean, one of the reasons why I mentioned
that maybe we should postpone it is because I do think that there
should be a step back in saying how can we leverage rules like
CRA reform and other rules so that we can make sure that the
CDFIs and small businesses are not necessarily affected. But there
is always the potential that the larger institutions will stop lending
to us and as a result of obviously the ratio, the financial ratios they
will have to succumb to. Most of them are extremely prudent, and
so therefore, whatever the rule passes they are going to try to be
even more efficient in terms of that.
Mr. MCGARVEY. I guess part of what the Basel proposal is is
assigning a higher risk weight to the small or medium businesses
that are not publicly traded than they would to a publicly traded
one. What do you think? Do you think that the small businesses
are more risky than the larger, more publicly traded ones when
you are talking about providing capital from a lending institution?
Mr. SANDS. No. I think that the answer is that as long as we
leverage data and we look at the information that is within those
loans, there is a perceived risk out there. But leveraging that data
21
using the credit enhancements of SBA, SSBCI, et cetera, we have
been able to prove that that risk is not actually a reality.
Mr. MCGARVEY. So you do not think this would put an unnec-
essary burden on private businesses trying to access capital?
Mr. SANDS. I think there is always the potential that it does.
Depending on how the banks react, they are going to swing the
pendulum completely to the right and they are going to be over
conservative. I do not necessarily think that there is $150 billion
in terms of additional regulation. I think what we are using ex-
tremes here. I think banks have an opportunity to be more effi-
cient. I think that they have an opportunity to raise equity appro-
priately and they have an opportunity to make sure that they pro-
tect all of our depositors which is the U.S. citizen.
Mr. MCGARVEY. The last question I will go to Mr. Holtz-Eakin.
You have argued that increased capital requirements result in ei-
ther, (1) the banks making fewer loans to smaller businesses, or (2)
that the loans they do make become more expensive. Obviously,
something we are concerned about as a Small Business Committee.
Mr. HOLTZ-EAKIN. Right.
Mr. MCGARVEY. Last spring in this Committee, we heard from
a professor at NYU, Kathryn Judge, that higher capital require-
ments actually lead to more lending. When a bank has more capital
it lends more. This is borne out in the data when you look at the
data between the years 2013 and 2019 after Dodd-Frank. Two
economists made the same point last week I saw in the Wash-
ington Post. So this is not a gotcha question. It is a sincere ques-
tion. Why do you think that information is wrong? And is that a
correlation or is it more causal?
Mr. HOLTZ-EAKIN. I think it is a correlation. And if you com-
pare 2013 and 2019, you are comparing the entire economic and fi-
nancial environment in 2013 with 2019. A lot of things going on
there. My statement is about hold everything else constant, change
Basel III in isolation. What happens if you do not change anything
else to generate better lending opportunities and you just make it
more expensive? The banks are either going to cut down on their
risk or they are going to raise their return. And so they will cut
people off or they will charge more.
Mr. MCGARVEY. Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Now I recognize Representative Meuser
from the great state of Pennsylvania for 5 minutes.
Mr. MEUSER. Thank you, Mr. Chairman. Thank you to all our
witness. This is an excellent exchange. We really appreciate it.
So I spent over 20 years helping grow a small business into a
large business and that is why I am very happy to be on this Com-
mittee so we can advocate as well as, in fact, lobby for small busi-
nesses to the best of our abilities. From taxes, regulations, infla-
tion, workforce shortages, what occurred with COVID in many
states, shutdowns, access to capital, all challenges far more for
small businesses as I think we all agree than for the larger busi-
nesses. And with some of these new ideas of restrictions on access
to capital we have data that shows only 20 percent of small busi-
nesses feel they have adequate access to capital that does not keep
them from being able to sleep at night. And yet, we have this Basel
III proposal that clearly we are talking about.
22
You know, the United States very simply has been a place, the
most competitive place to grow a business. We are a country of en-
trepreneurs . That is what grew our country. In fact, 45 percent
larger economic growth from 1945 to 2000 than the EU because we
are an entrepreneurial country. But since 2000, it has been equiva-
lent to the EU because of largely regulations and added taxes and
such.
So Mr. O’Leary, I want to bring up, you brought up the Payroll
Protection idea.
Mr. Chairman, for the record, Representative Luetkemeyer and
I wrote a letter to FDIC Chair Gruenberg on this exactly, the TAG
program, which would raise the Payroll Protection up to a million
dollars from the 250. So I want to let you know we are working
on that, and actually, Mr. Luetkemeyer has a billon that as well
that we will pursue if we cannot get the FDIC to strongly consider
it.
But let’s talk about Basel III right now, Mr. O’Leary. From Brian
Moynihan to Jamie Dimon, all big names but certainly to Ms.
Bommarito and most small businesses, and everyone here on the
panel feel that the Basel III will restrict. And clearly, when 20 to
30 percent of the large banks’ reserves need to be increased, busi-
nesses are going to go to smaller banks, community banks. They
will have more customers, more requests for loans, but that will
limit the loans to small businesses. It is not so much the commu-
nity banks are going to be hurt by it. It is the small businesses
that will be hurt by it. So, Mr. O’Leary, if you would expand upon
that.
Mr. O’LEARY. Yeah. I think everybody has an opinion about
this. Mine is let’s look at the loan book itself. If Basel III was im-
plemented as it stands, unchanged, it would shrink loan books in
America in my view between 500 billion to 800 billion in the first
year. But that is not the worst part of this bill or this idea or this
policy. It is the competition between money centers. So let’s do a
use case. Right now every state wants its own AI data center.
Those projects are $1.2 billion. And you have to go get capital for
that. And after the Ukrainian War everybody figured out, wait a
second, where is my data? Well, let’s make it domestic. Let’s make
sure we know where it is and it is protected. So those projects are
popping up all over the states and all over the world.
Now, if you have to fund 1.2 billion, you have to go to a money
center bank to get some portion of that in debt and then look to
the markets for equity. If we implemented this, we would be less
competitive than what is going on in Abu Dhabi or in Zurich or in
London. Why would we do that to ourselves? Why not look at their
regulation and say what is the level playing field here to make sure
that it is competition at its best? The American banking system
with all of its volatility has proven over 200 years the economy that
we have today, the envy of the whole world. Why would we ever
put ourselves in a situation where we are less competitive than a
bank in Abu Dhabi? Who would do that? Why would you do that?
Does that even make sense? Is that even American? That is my
question.
Mr. MEUSER. Sure. Okay. Terrific.
23
Quickly on taxes, the Tax Cut and Jobs Act, R&D tax credit,
bonus depreciation, small business tax cut, all will be phased out
frankly if we do not work that through and frankly have a new ad-
ministration in order to assure that we remain competitive. How
much of a hindrance would it be on small businesses if those
tax——
Mr. O’LEARY. Well, it is a horrible time to do that because obvi-
ously the stress in the system we all have been discussing for the
last hour is showing up and manifesting itself mostly in community
and regional banks where the loan books are very tight and there
is a lot of liquidity. You are just taking away more tools, survival
tools from a small business. They need every tool they can get and
they need to be recognized in new policy every time it is written.
I say 60 cents out of every dollar always goes to small business and
that has never happened here. Maybe we should start thinking
about that.
Mr. MEUSER. Thanks.
Mr. Chairman, just quickly, Mr. Holtz-Eakin wrote an essay on
Basel III——
Chairman WILLIAMS. The gentleman’s time is up.
Mr. MEUSER. I yield back.
Chairman WILLIAMS. He yields back.
I now recognize Representative Landsman from the great state
of Ohio for 5 minutes.
Mr. LANDSMAN. Thank you, Mr. Chair. And thank you for
being here with us, all four of you.
I want to start with Mr. O’Leary and Mr. Sands. Mr. O’Leary,
you talked about a small business council. And I am hoping that
you might say a few words about it. What I took from your com-
ments was we are investing all of these dollars across multiple ini-
tiatives and in having a small business council, some infrastructure
with leadership mostly from the small business world I suspect and
lending partners would be there to ensure that the policies, the in-
vestments are flowing to small businesses as well as larger busi-
nesses. And, you know, minority-owned businesses, too. Can you
just say a word or two about that?
And Mr. Sands talked about a taskforce, too. I am curious about
your thoughts on how that could happen and advice to us on build-
ing that into our work but also the administration’s work.
Mr. O’LEARY. Well, first, the work at hand on existing act is to
find ways to interpret them so some of that capital can flow to
small business. Now, they do not have any representation up here
in my view.
Mr. LANDSMAN. Yeah.
Mr. O’LEARY. And they do not have the millions that you re-
quire each year to hire advisors and lobbyists. So this is something
that I am very fortunate from my portfolio I can afford to hire
these people and I work very hard on The Hill to get my companies
their fair share if you want to call it that. But what about the other
millions of small businesses? That is number one.
And I am very fortunate this afternoon I will be meeting with
the Secretary of Commerce to go specifically over the CHIPS and
Science Acts. I have got a bunch of analysts behind me here coming
with me. Show us where the 7 to 9 billion you claim is available
24
in that act for small business. I will find a way to get it to small
business. If it is there I will do it.
I would like to get the same support in the IRA and anything to
do with infrastructure. I am willing to invest in that. But this idea
of having a seat at the table on new policy that this would not ever
happen again that is the infrastructure I am asking all of you to
consider. That the next time you write an act put me in the room.
Mr. LANDSMAN. Yeah. Thank you for——
Mr. O’LEARY. Or somebody like me.
Mr. LANDSMAN. Yeah. Thank you for that.
Mr. Sands, any additional comment? It seems like you are on a
similar trajectory.
Mr. SANDS. Yeah. I will just give you a real world example.
SSBCI is for credit enhancements, money that went to states.
Mr. LANDSMAN. Yeah.
Mr. SANDS. Several of the states are now listening to the small
business and lending community and saying maybe instead of just
a credit enhancement we will do a loan participation.
Mr. LANDSMAN. Yeah.
Mr. SANDS. The net effect is a blended rate that is taking rates
down to borrowers. We need some kind of current thinking as we
think about things like Basel and other things about how we are
going to actually implement this and hedge against obviously infla-
tionary pressures.
Mr. LANDSMAN. I think you are both getting at something that
I would suspect would have bipartisan support from this Com-
mittee and hopefully something that emerges from this conversa-
tion, that building that infrastructure with you all. And I cannot
imagine that there is going to be much disagreement up here. And
so hopefully we can come together and work on this with all of you
and others.
The same I think is true for the federal licensing suggestion, that
there has got to be more because that does cut through some of the
state regulatory issues and creates a universal process. So I would
love to work on that with my colleagues.
Ms. Bommarito, you have participated, as you mentioned, in the
10,000 Small Businesses work. We have a program in Cincinnati,
at Cincinnati State. I participated. The folks who graduated have
been really successful and I have gotten to spend a lot of time with
them.
Advice. I am particularly interested in this sort of infrastructure,
building out this infrastructure where small businesses are at the
table. Based on your experience, what would you want to see?
Ms. BOMMARITO. Thank you for that question.
First, I have to say the Small Business Administration is really
important and I am really thankful. But having access to the sys-
tems and being able to use the services and products can be chal-
lenging. Please bring us in and let us help be part of the solution
and take our ideas as an innovation center. We will help and we
can help everyone make it a better and more prosperous environ-
ment for us as small businesses truly.
Mr. LANDSMAN. Thank you. And I yield back.
Chairman WILLIAMS. The gentleman yields back.
25
I now recognize Representative Mann from the great state of
Kansas for 5 minutes.
Mr. MANN. Thank you, Mr. Chairman. And thank you all for
being here today.
I represent the Big 1st District of Kansas which is 60 primarily
rural counties in the western and central parts of Kansas. My dis-
trict is the number one beef producing district, the number one
wheat producing district, and the number one milo producing dis-
trict in the whole country. We have 60,000 farms, ranches,
feedyards, and other small businesses mostly in the agriculture
space.
The folks in my district know all too well that their livelihoods
often depend on forces outside of their control which are droughts,
floods, geopolitical advancing conflicts can directly impact the mar-
kets that impact them. That is why for decades, small business end
users like farmers and ranchers have used derivatives to hedge
against volatility. Hedging common risks takes volatility out of the
market for them. It also helps them manage interest rate fluctua-
tions and input cost increases that are vital for them to maintain
their business.
Unfortunately, the new bank capital requirements from the Fed-
eral Reserve’s Basel III Endgame—and by the way, it has been
called Basel, Basel, Basel. It seems like it is all bad, Mr. Chairman,
for the district, for the small businesses in my district. But the
Endgame proposal threatens access to critical risk management
tools for the Ag industry and the small businesses in my district.
These sweeping proposals will make it costlier for banks to cen-
trally clear derivatives, leaving commodity producers with higher
prices and less ability to hedge these risks. These tools allow Ag
producers more predictability in their day-to-day operations, ulti-
mately showing up in prices we all pay at the grocery store. Simply
put, when banks face new capital hikes, farmers, ranchers, and our
small agribusinesses pay more to hedge that risk.
My first question would be for you, Mr. Holtz-Eakin. It appears
the federal regulators have done minimal economic analysis on the
downstream effects that these requirements will have on our agri-
culture end users that are far outside of the major urban financial
centers, especially small businesses like grain elevators and family
farms. How can we better ensure the federal regulators account for
the interests of all of our American communities, our rural Ag pro-
ducers included?
Mr. HOLTZ-EAKIN. Well, first I will just note that there is a bi-
partisan letter from Members of Congress to the regulators about
this issue of derivatives hedging which Mr. Meuser signed. And I
do not know if you signed. I recommend that letter to you. It sort
of spells out the problem very clearly.
The second thing I would say is I am not a lawyer so my under-
standing of the Regulatory Flexibility Act is that it was passed by
Congress to make sure that all the regulators were cognizant of the
direct and indirect costs they placed on small businesses. And it
seems that with great regularity nobody pays attention to the di-
rect and indirect costs that people place on small businesses. It has
happened in both administrations and both parties for a long time.
26
I would suggest you take a close look at the Regulatory Flexi-
bility Act and see where it can be tightened up to make sure that
that analysis actually gets done and that failure to do it makes the
rule nonviable. And that does not seem to be the case right now.
Mr. MANN. I agree.
Mr. Chairman, I appreciate you often highlight on this Com-
mittee, you know, our small businesses are also our farmers and
ranchers who feed all of us but are often left out of the discussions
and I believe are left out of the regulators when they think about
these rules and how they will be impacted.
Second question will be for you, Mr. O’Leary. What are the big-
gest things you think the federal government ought to do to sup-
port our businesses and our rural smaller communities across this
country?
Mr. O’LEARY. It is to focus on the liquidity right now at regional
community banks particularly around payroll. That Wednesday
night is crucial. So if you think about what they draw down from
the banks and have for 100 years plus is they need capital for plant
and equipment, that is longer term loans. They need to factor their
receivables. If you are selling widgets to a big box retailer and they
are paying you in 90 days, you need that cash in 30. And obviously,
payroll. And so immediately I think the 4,000 banks will probably
consolidate down to 3,000 or something in the next 5 years. During
that consolidation period there is going to be a lot of instability in
the bank that is being merged or acquired or whatever. Right now
the way the rules are it is cheaper to let a bank fail right now be-
cause the government bails out the bank. Then you go buy the as-
sets. That is kind of nuts. That should be fixed. Let the market be
the market. But there is going to be a consolidation. And I think
supporting payroll during that time would be number one. And just
this regulation right now being contemplated, they are in gridlock.
They do not know what the liquidity requirements are going to be
so they do not loan anything. I mean, it is pretty bad. I am glad
you are having these hearings. That is the right question. But this
has got to be scrutinized at the regional level now. The big guys
are having no problems at all. Plus, you are about to give them an-
other $2 trillion because there is none of it for small guys. I bring
that up one more time with feeling. Thank you.
Mr. MANN. Thank you. With that I yield back the balance of my
time which I do not have any more of. So thank you, Mr. Chair-
man. I appreciate it.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Chu from the great state of Cali-
fornia for 5 minutes.
Ms. CHU. Mr. Sands, thank you for being here and for high-
lighting in your testimony the persistent gaps in access to capital
faced by underserved small businesses.
Since 2011, the Community Advantage program has been very
successful in closing the gap in terms of being able to lend to un-
derserved communities and has been far more successful than the
SBA’s traditional 7(a) loan program in that regard and has been
successful in making loans. Just last year made 791 loans valued
at $140 million. And that is why I have worked for years to make
the program permanent. I urge my Republican colleagues on this
27
Committee to join me as I work to introduce legislation to make
this proven program permanent once and for all.
I understand that Lendistry has participated in the Community
Advantage program in the past. Can you talk about your experi-
ence as a Community Advantage lender and how participating in
the program allowed Lendistry to better reach underserved small
businesses? If Congress makes the program permanent, what im-
pact would that have on mission lenders’ ability to continue meet-
ing underserved businesses’ needs in closing the gap and capital
access?
Mr. SANDS. Thank you for the question.
So we leveraged Community Advantage, one, to be, as you men-
tioned, to be able to lend to underserved communities. It allowed
us to have a program, quite frankly, that offered us a couple
things. One, the ability to scale as we build our own internal infra-
structure. Two, it gave us the ability to have strong risk manage-
ment at leveraging government programs to get there. And then
three, there was liquidity that could be created in the SBA sec-
ondary market. Community Advantage should be permanent. I
would also encourage us to make sure that we do not try to trade
operational efficiency for permanency.
Ms. CHU. Okay. Well, I would like to ask about the necessity for
CFPB’s section 1071 rule which requires financial institutions to
collect demographic information on those applying for small busi-
ness loans. There are significant gaps in access to capital. The gaps
were made particularly clear during the Paycheck Protection pro-
gram. For example, in 2021, there was a shocking L.A. Times re-
port showing that minority communities in the L.A. area received
far fewer PP loans than White majority communities despite
Congress’s clear intent that PPP should prioritize the underserved.
Compounding that issue was the lack of data in the program.
Three-quarters of the PPP loans issued in 2020 included no demo-
graphic information because the initial PPP application did not ask
for that. And in fact, because of that lack of data, the L.A. Times
had to cross reference census track data to reach their conclusions.
I believe that what happened here is why we need the demographic
data transparency in small business lending that CSBB section
1071 rule provides.
So Mr. Sands, can you speak to the lessons of the PPP and why
data transparency like the kind required in section 1071 is needed
to both understand small business lending and the disparities?
Mr. SANDS. Sure. So first of all, we use data primarily for three
things. One, it is to market and understand how we should market
and where we should market to help underserved communities.
Two, it is to decide what is the appropriate risk management that
we should be taking. Even though an SBA loan might offer up to
75 percent that may or may not be the appropriate amount. And
then the third thing is we use it obviously as a tool in terms of
being able to, again, disrupt a perceived risk in terms of lending
to small businesses.
PPP was very interesting and the fact that it showed that banks
actually can provide the data, it does need to be in a structured en-
vironment, and we were able to actually release data on a weekly
28
basis coming out of SBA’s office in terms of who the lending went
to.
The other thing I will mention to this body is there is something
called the Corporate Transparency Act in which we are trying to
make sure that we understand who the small businesses are so
that we do not have issues like, obviously, financing of terrorism.
If you were to take what happened in PPP and you take the Cor-
porate Transparency Act, those two things could be combined to ac-
tually execute on 1971 which does need to be enacted.
Ms. CHU. And I want to ask you a particularly important ques-
tion about the effort needed to comply with rule 1071. We have
heard from some of the rule’s opponents that financial institutions
do not have the resources to comply with the rule. But I under-
stand you are a CDFI with a small compliance staff and that you
were able to collect this data. Can you tell us about your experience
with it?
Mr. SANDS. Yeah. So first of all, as a former banker, whenever
you open a bank account they collect the data already. So the data
is already there. Second, I will say as an institution that did
200,000 PPP loans, it is not as hard as it might seem. Now, there
has to be a focus on actually delivering the results and making the
data available. But it is possible.
Ms. CHU. Thank you.
Mr. SANDS. Thank you.
Chairman WILLIAMS. I now recognize Representative Ellzey
from the great state of Texas for 5 minutes.
Mr. ELLZEY. Thank you, Mr. Chairman. Thank you all for being
here.
This is a fascinating hearing. And Chairman, thank you for doing
this. As you all well know, he is a car dealer and a very good one
from the Dallas-Fort Worth area. He knows about business so it is
extremely important that we are holding these hearings.
I think that the name Basel III Endgameis exactly the right de-
scription of this, although their marketing might want to go back
and take a look at that. There is no regulation that this adminis-
tration will not find overseas that harms American businesses and
adopt it. That is the bottom line.
Much like Tracey, I am from a very rural district and I come
from a community banking family. The big guys can do anything
they want and get bailed out. And then the hammer of the govern-
ment comes in and treats everybody like they are the same size
nail and they hammer the same regulations into FirstBank South-
west of Amarillo, Community National Bank of Waxahachie as if
they are the big boys. When they do these regulations they harm
people like Ms. Bommarito with her family business. And then it
sends them to somebody like Mr. O’Leary who has made a great
business and I am so glad you are here to speak the truth the way
you do. It is very enlightening, Mr. O’Leary. But you do not want
to send your business or sell a part of your heart and soul, Ms.
Bommarito, to somebody like Mr. O’Leary. You want to access that
capital in a much better way because you are giving away, you
know, you are going to sell him your leg. You no longer have access
to that leg with your business. And he might let it die. He said it.
He said it. They have to decide if they are going to let you die or
29
not. If you have access to capital in a much better way you do not
have to worry about that because that is your business.
Now, there is a market for that and I am not trying to disparage
the VC community. However, small businesses, 60 percent of Amer-
ican business are like yours, an entrepreneurial spirit that you
named after your grandmother. You do not want to go to VC. You
want to have access to this capital that folks like us up here who
write these laws, most of the folks who write the laws do not own
a business and have never run one.
Government jobs exist to stay in business. They do not do that
by throttling back on regulations. They have to justify their exist-
ence with more regulation.
So I am willing to bet that the cost of your bars has probably
gone up because of the cost of production because you have to buy
pecans from farmers who are having to get the nitrogen from
Ukraine. So anybody who says that a war in Ukraine does not have
a strategic impact on this country is wrong.
So with the remainder of my 2-1/2 minutes though, because as
you said earlier, Mr. O’Leary, why would we do this to ourselves,
I am going to yield the next 2 minutes and 24 seconds to you to
finish that thought about Abu Dhabi.
Mr. O’LEARY. Yeah. There is a competition in the world today
for capital. And it does not have a nationality. It looks for the path
of least resistance and it goes to the place of greatest safety.
The unique situation of America is if you have a project, and I
referenced this earlier, like a data center which pencils out at 11
to 15 percent return for 20 years, where are you going to put that,
in Ukraine? No. You are going to put it somewhere in the United
States where it is safe. If you can get the permits and the regu-
latory environment is good and the state taxes are competitive and
you can get the customer, like an Amazon or a Microsoft or the IRS
or a government agency, these are huge projects. And normally,
you would go to the domestic money center bank to say I have got
a 1.2 billion project here penciling out at 11 to 15. I have got lots
of interest in it. But I need a banking partner. Well, you stick this
Basel thing in here, we are not going to be talking to New York.
We are going to talking to Abu Dhabi. That is what is going to hap-
pen. Why would you? I mean, think about that. Why do more peo-
ple not think about that? You want everybody to say are we in a
competitive football game here? That is what we need. Every single
rule in that telephone book has to be the same rule everybody else
is playing with because we are talking about trillions of dollars
here looking for returns. It has got to be the same playbook.
And that is what regulators’ job is to do. To make sure that we
do not put a ball and chain on an American money center banks
or businesses large or small. It is that simple. That is what they
really should be focusing on. Not paragraph 86(b) and one line. As
an aggregate, does this policy make us less competitive, in addition
to the fact that we are going to lose 500, 800 billion of loans. This
is horrible policy. It is horrible. There is nothing good about it.
Mr. ELLZEY. Mr. Chairman, I yield.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Alford from the great state of
Missouri.
30
Mr. ALFORD. Thank you, Chairman Williams, and Ranking
Member Velázquez, for holding this. This is a very important hear-
ing that we are having today, as is each one of these hearings we
have before the Small Business Committee because it is really
dealing with the fabric of America. And I am so glad you are here.
Thank you for coming here today.
As a previous small business owner, I know just how important
capital is. Not just to start a business but to maintain it. I also un-
derstand that access to capital can be a challenge, especially in dis-
tricts like mine. In some parts of our district it is a banking desert
if you will.
Today, businesses are already struggling under rampant infla-
tion, ongoing supply chain issues, workforce shortages, and burden-
some regulations. Basel III Endgame proposal would add additional
pain to our small businesses by shrinking their access to capital.
As we have heard today, it would force banks to increase the
amount of capital that they hold by an estimated 20 percent on av-
erage. This proposal will hurt banks. It will force banks like the
Community Bank of Raymore where I bank to keep more money
on the sidelines, shrinking capital costs for our small businesses
which are most vulnerable. These increased costs would force
banks to either lend to fewer customers or to increase the cost of
lending to businesses at a time when small businesses need this
capital, and more importantly, as was pointed out here, they need
the relationship with the community bankers.
However, the Biden administration is more focused on falling
into line with international regulatory guidelines rather than pro-
tecting American small businesses.
Mr. Douglas Holtz-Eakin, according to a study done by your col-
league, Dan Goldbeck, there are currently an estimate $616 bil-
lion—$616 billion in total cost of this administration’s 365 proposed
rules. Does the $616 billion figure include indirect costs from regu-
lations?
Mr. HOLTZ-EAKIN. No. Those are simply the direct costs as
measured by the circular and the OIRA at the Office of Energy and
Budget.
Mr. ALFORD. Anyway to estimate, guestimate, give us your best
figure of what those indirect costs might be.
Mr. HOLTZ-EAKIN. I will be happy to get a number back to you,
a heroic estimate of this. But I will just note that in my written
testimony I catalogued some of the studies that have been done
about the impact of these regulatory costs on the growth environ-
ment, on the growth in the economy. That is the indirect cost that
matters the most. The bottom line and the ability of firms to ex-
pand. And the reason I am so concerned it at this moment is that
to say you do not have access to capital is you are constrained by
your cashflow. And so certainly, access to capital is a direct solu-
tion to that. But if you are eating up more of your cashflow com-
plying with regulations you made the problem worse. If you are
eating up more of your cashflow to pay taxes because expensing is
gone. You are now depreciating capital or R&D, you made the prob-
lem worse. In every way the environment is stacked against being
able to suvive on your cashflow.
31
And so I think the Committee certainly should be looking at the
Basel final rule but it needs to look at the environment in its en-
tirety.
Mr. ALFORD. Mr. O’Leary, in your remarks you mentioned that
large government programs like the Inflation Reduction Act and
CHIPS Act are written specifically for large companies. How can
Congress better support small businesses which employ the major-
ity of Americans?
Mr. O’LEARY. Yeah, 60 percent. So right now given that those
are already passed and they are effectively law, it is helping those
of us who work for small business, help us interpret these acts in
a way where we can access them because what my role is in my
portfolio company and there are many people like me, is we have
the resources to hire the professionals, the lawyers, the account-
ants, and the lobbyists even, if we could figure out how to interpret
it so that we could make these applications and guide them
through the process. I am working hard at that now. I am spending
more time in Washington than I ever have trying to figure out
CHIPS and Science, specifically, and IRA because I have, myself,
a database of 80,000 small businesses. They rely on me to come
here and find out what is going on. Then I tell them. And we are
very fortunate to do this. And then for those that can apply, we will
manage that process for them. We hire the accountants and the
lawyers. We do all that. And that has become a huge business. And
for all of the criticism of PPP, it is a blunt instrument, but it saved
so many companies. So even if only 70 percent of it was used wise-
ly, it really worked. The same for the ERC program which is going
to end probably next week. But that was used widely. And I under-
stand the criticism and everything but it did save businesses. So
now that those are gone, give me something else to work with is
what I am asking.
Mr. ALFORD. Thank you, sir. We are out of time.
Mr. O’LEARY. Yeah.
Mr. ALFORD. I yield back, Mr. Chair.
Chairman WILLIAMS. The gentleman yields.
I now recognize Representative Gluesenkamp-Perez from Wash-
ington for 5 minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Chairman. And
thanks to our witnesses for being here today.
Ms. Bommarito, I really appreciate you being here to speak to
the Committee as a small business owner. And I appreciated your
testimony about the difficulties you had in accessing capital to
start and expand your business.
So before coming to Congress I ran an auto repair and a machine
shop with my husband. And I have been in your shoes. You men-
tioned resorting to borrowing money from friends and family and
dipping into your personal savings to fund business growth. I, on
my bookshelf at home have a book. No in-law wants to see How
to Borrow Money from Friends and Family from Nolo Press. And
so I feel that distinctly. But I will say when you are able to pay
back your family with an appropriate market level interest rate
you are building generational wealth for you and your community
and not shipping it off elsewhere. So I think there are advantages
to your position.
32
Here on the Small Business Committee we have oversight of the
Small Business Administration. I think it is important for us to dig
into how SBA loan programs, which are meant for people like you
and I, function or more frequently do not function. And my hus-
band and I actually bought the building our shop operates out of
with a 504 loan. And I have an undergraduate degree in economics.
It took me a year to navigate and fill out that paperwork. One of
the sellers like had a heart attack during the environmental re-
view. The whole thing almost collapsed. Like it is burdensome. And
then you think about, you know, I do not know in your case but
like if I were doing the business on my own, right, you are running
HR, you are doing all these things that really limit your capacity
to navigate a bureaucracy. And I understand this has been a pop-
ular line of questioning but I am wondering if you could talk about
what a more nimble program would look like. Like, what do you
see as things we should pull out or not?
Ms. BOMMARITO. Thank you for this question, Congresswoman.
And I feel your pain.
The SBA has their heart in the right place and that is a fact.
And we know that. Being able to access the documentation and
have it make sense and have it work appropriately as you are fill-
ing it out, when you are punching in those letters, it is challenging
and it does not work the way that we are used to working with
technology today. And I would love to see an app that goes along
with this. And I would love it to interface more seamlessly with the
lending institutions. And hold them somewhat accountable. So
there are a lot of things that we could do and do together. And I
would like you to involve us, the SBA to involve us in this process.
We are entrepreneurs . We have the ideas. We can help make it
a more nimble and interactive system. We want the SBA to be suc-
cessful and modernizing by Congress would help.
Ms. GLUESENKAMP PEREZ. Yeah. Absolutely.
You mentioned the need to reauthorize and reform the SBA. I
think we agree that both Congress needs to do a better job of mak-
ing entrepreneurs more aware of these resources but also making
the programs more accessible for actual small business owners
whose most valuable resource is your time.
So I am curious, how did you find out about the availability of
504 loans? I mean, just the universe of information that is avail-
able to people in your capacity. Like, how do we enable more small
businesses like us to access and hear about them? Because that is
the first step.
Ms. BOMMARITO. That is a great question. A variety of ways.
You know, the Goldman Sachs 10,000 Small Business program
brings people in together to speak to this. Local lending institu-
tions would come and visit me. Our local government came and
shared what lenders were highlighting SBA loans. So I do feel like
in general the business community and government community are
aware and try to make it accessible. I just think it is a little wonky
as we are going through the process.
Ms. GLUESENKAMP PEREZ. Yeah. The access information is
really concerning to me. Right? If you do not know about the pro-
gram you are not going to access it. And I think that basic informa-
tional hurdle is immense.
33
I have also seen a lot of difficult like I remember there would be
these meetings at, you know, 11 a.m. on the other side of town.
Right? Like, who can leave your business at 11 a.m. on a workday
to get to this meeting? And so having actual small business owners
at the table when these structural decisions are made I think is a
critical facet you were pointing to.
And so thank you to all of our witnesses so much for spending
our time here today. And I yield back.
Chairman WILLIAMS. The gentlelady yields.
I now recognize Representative Molinaro from New York for 5
minutes.
Mr. MOLINARO. Thank you, Mr. Chairman. And thank you, Ms.
Bommarito, for giving face to the challenges that small businesses
have interfacing with not only federal regulators and agencies but
state and local.
And Mr. O’Leary, I want to get to you in a moment about the
great state of New York, or the once great state of New York. But
nevertheless, in rural communities like the ones I represent in Up-
state New York, we certainly recognize the need to access capital
is even more pronounced. Add those challenges to already a local
economy squeezed by inflation and the access to workforce and sup-
ply chain issues and communities like ours continue to struggle.
There are as we have all acknowledged a slew of new laws and reg-
ulations coming into place that we know will impact community
banks and smaller businesses, including Basel III, some of the new
SBA lending rules, and new CRA rules, among others. Even Chair
Jerome Powell acknowledged that raising capital requirements also
increase the cost of and reduces access to credit. We acknowledge
these things. My local banks, community banks, are struggling to
keep faith with their mission, serving small businesses and invest-
ing in their communities.
So Mr. Holtz-Eakin, I am going to start with you and just, if you
would, reinforce to us or for us, obviously, how to maintain essen-
tial credit flow to small businesses. What would you reinforce?
Where would we begin in the rescinding of or reorganization of spe-
cific regulation for small business, small banks to access and make
those capital investments?
Mr. HOLTZ-EAKIN. Well, I mean, certainly the issue of the mo-
ment is the Basel III proposal. And they have a chance to finalize
the rule in a very different form. And one hopes that the regulators
have taken the public comments on it to heart and we see a very
different——
Mr. MOLINARO. So emphasize for the few people from Upstate
New York who are watching me right now, I want them to hear
those very specific reforms.
Mr. HOLTZ-EAKIN. They would not raise the overall level of
capital as dramatically as they propose and would not do it right
now. Remember, there are all sorts of other things impinging. Ac-
cess to capital, whether it is the restrictive monetary policy, the
slow growth in the economy, this is going to be a tough environ-
ment to begin with. Has already been because we have seen the
end of the easy money on the credit side. So financial conditions
have tightened considerably. This would add to that. So defer it.
Make it more sensible directly for the banks involved where you
34
add new charges that are legitimate and documented, reduce oth-
ers that are unnecessary. I think they can do that. And do not ex-
tend it to the regional banks. I do not understand that. There is
no need to. And your folks would be much more dramatically im-
pacted by that. So that is the most important thing.
Then more generally, look at the regulatory environment and
recognize that that is something that disproportionately impacts
small businesses. And this regulatory environment is
unprecedently expensive at a time when expenses are a big issue.
Mr. MOLINARO. I appreciate that.
Mr. O’Leary, I just, one, want to thank you not only for partici-
pating today but emphasizing in New York State the challenges
that we have. We lead the nation in outmigration. More people
leaving the state of New York than any other state in the nation.
We shoulder the highest burden of taxation of any people in the
country. And because of it we see the hollowing out of our commu-
nities. We could spend certainly more than 2 minutes on that. And
I thank you for highlighting those challenges.
Your testimony today touches on the collapse of Silicon Valley
and Signature Banks and the touched conditions that regional
banks faced with rapidly rising interest rates. Of course, we recog-
nize the Fed messaging a decrease in interest rates over the next
year. What do you believe is necessary for the long-term stability
of our banking and venture capital sectors? And quite simply, what
behaviors from before need to be corrected moving forward?
Mr. O’LEARY. Those three cases studies you pointed out to in
my personal opinion are examples of idiot management. So they
are unique in that respect. And they deserve to be dead. That is
how our system works. We get rid of bad managers.
But right now because of them it has tripped off a whole scrutiny
at the regional bank level of the regulatory environment which has
cascaded all the way up to Basel III. So we are going to make these
regional banks very hard to operate profitably if this continues.
That would be the first thing I would want to fix is try to say, look,
let’s make sure for the next 36 months that these banks are not
in a situation of uncertainty. Because that is what they are right
now. The reason you do not loan to this wonderful bakery is they
do not have the certainty to know what the rules are going to be.
So that has got to get cleared up. These are within our control. And
so we should implement that immediately.
I think Basel III is incredibly bad policy and the best thing to
do with bad policy is keep looking at it until everybody agrees it
is bad policy. I would keep looking at it. It is horrible.
Mr. MOLINARO. I appreciate your subtle and reserved nature.
And with that, Mr. O’Leary, I, Mr. Chairman, yield back.
Chairman WILLIAMS. The gentleman yields.
I now recognize Representative Scholten from Michigan for 5
minutes.
Ms. SCHOLTEN. Thank you, Mr. Chair. Thank you so much to
all of our witnesses for taking the time to be here today. This is
an incredibly important hearing.
Small businesses throughout the country navigated an economi-
cally unpredictable pandemic. And with stabilizing the economic
factors those still operating face a cautiously optimistic future. My
35
state of Michigan is home to nearly 1 million small businesses who
employ nearly half the state. Over 80 percent of our businesses in
Michigan are considered small. Even larger share in my district,
Michigan’s 3rd Congressional District. It is not an overstatement to
say they truly are the lifeblood of our economy.
Many of these businesses are owned by women, minorities, mem-
bers of the LGBTQ community, veterans who face steep hurdles in
accessing capital. Access to capital is the number one obstacle that
we continue to hear about.
My first question is for Mr. Sands. What data do regulators use
to avoid discriminatory policies? And are the tools missing that pre-
vent financial regulations from fully accounting for the range of
livelihoods that are impacted by the rulemaking?
Mr. SANDS. Yeah. The answer today is that you do not have the
tools. But if you look back at PPP when you did have the tools,
Congress appropriately, in a bipartisan way reacted and made it so
that more small businesses could get access to capital.
I would like to also say that SBA just made 40 rule changes in
August. We should actually give ourselves a chance to see if those
rule changes actually work because I think they are going to pro-
vide more access to capital for small businesses including like the
bakery here for Michigan.
Ms. SCHOLTEN. How much time would you anticipate we would
need to see if they worked?
Mr. SANDS. I think you could generally give somewhere between
12 and 24 months to start to see. If you look at the numbers, we
had our largest lending in terms of SBA to African Americans, His-
panic Latinos, and women as of September 30, 2023, with Hispanic
Latinos and African Americans both eclipsing $1 billion for the first
time in SBA’s history. So the numbers are already headed the right
way.
Ms. SCHOLTEN. Thank you.
Keeping on the theme of access to capital, again, number one
issue cited by small businesses as well as hiring talent and growing
revenue, the businesses in my state share these concerns and these
struggles along with others throughout the country. Despite these
well-known challenges, in June of last year, applications for new
businesses started to surge to the highest levels that we have seen
in 2 years. Again, cautiously optimistic as I mentioned in my open-
ing remarks.
For any of the witnesses or even all of you, what more can Con-
gress do to equip the next generation of small business owners and
entrepreneurs to take on these issues that we are facing the 21st
Century and get ahead of the challenges of tomorrow?
Mr. SANDS. I will start. I think the first thing is obvious, which
is that we need to do better marketing of the programs and prod-
ucts that are out there for small businesses. It is quite alarming
to hear that some of the small businesses are not finding the pro-
grams or they have to go across town or anything like that in order
to get information. We live in a digital age where Chipotle texts
you if you need a burrito. So we should be able to actually get in-
formation out about programs pretty readily and pretty conven-
iently.
Ms. SCHOLTEN. I could not agree more.
36
Mr. HOLTZ-EAKIN. I worry most about the environment in
which they are going to have to operate and would encourage Con-
gress to put the fiscal house in order. The future is one in which
the federal government will increasingly consume the capital econ-
omy with the deficits that will run. And the resolution of those
deficits is going to put an enormous uncertainty about the business
environment in which they will operate. You can take all of that
off the table by just putting the fiscal house in order.
Ms. BOMMARITO. And I second what Mr. Sands said. But we
are talking a lot about Basel III and being an obstacle to lending
and capital. It has been historical. That has been one of our biggest
issues. Not adding anything else but also holding the banks ac-
countable. And there is a lot to be said about everyone supporting
small business and being in our corner. But being accountable in
all ways and being able to share that information is really impor-
tant.
Ms. SCHOLTEN. Right.
Mr. O’LEARY. I would say one of the greatest challenges for any
of the work being done here is to communicate it to the recipients
that deserve it. And most small businesses have no idea that these
programs are even available. So if you look at the private sector
how they solve that problem, they have really gone to social media
in a big way. And so to get a bigger presence, Hi, are you a busi-
ness in Michigan with 50 employees? We have a program here in
the federal government and this is how you can apply for it. That
is a 15-second commercial. That should be on Facebook, LinkedIn,
X, everything. And REMnant cable. That is how we advertise in
the private sector, and somehow that is not being done federally,
which is a mistake.
Ms. SCHOLTEN. Thank you for your very responsive and helpful
answers. I yield back.
Chairman WILLIAMS. The gentlelady yields.
I now recognize Representative Maloy from Utah for 5 minutes.
Ms. MALOY. Thank you. This has been a great hearing. It has
been really informative, and most of the things that I planned on
asking about have been very thoroughly covered so I am going to
switch gears just a little bit. Hang in here with me.
Utah is a very entrepreneurial state. We have a lot of small busi-
nesses. A lot of people want to start up something of their own.
And we also have a lot of rural and mid-size markets that struggle
to get access to capital. And also to the kind of resources we have
just been talking about. Our universities are doing a good job. They
are working to fill that gap setting up departments to help small
businesses. But I was recently approached by somebody in Utah
about an SBIC style program within the SBA that they think
would be a good model where larger, more successful businesses
can help finance and mentor new, smaller starting businesses. And
I just want to know, I know this is not what you are expecting, but
starting with Mr. O’Leary and work our way down, do you think
there is room in the SBA for that? And if so, what would this Com-
mittee and Congress need to do to create the sort of regulatory en-
vironment that would be able to make that successful?
Mr. O’LEARY. That would work if you gave a tax incentive to do
that because you are taking valuable time and resources from a
37
company and going into a mentorship program. What they would
obviously do is find companies they wish to acquire if they were
growing successfully in their sector. So they would probably be, if
you gave a program like that and said, look, it is a 100 percent
write off in the year that you spend it, or whatever it is you are
going to do, I would go look for companies that I want to buy and
I would invest in them and try and mentor them up to growing and
then I would acquire them. I would use it as a tool to grow. It
would work.
Ms. MALOY. Okay. Thank you.
Ms. BOMMARITO. Working within your community and working
collaboratively makes great sense and is very efficient working
with the organizations that we are familiar with. I do not see a
downside to it but there has to be an incentive to make sense. And
I think that it would be a great asset to the community to be able
to do that.
Ms. MALOY. Thank you.
Mr. HOLTZ-EAKIN. Put me in the O’Leary camp. There is noth-
ing to stop them from doing that now. And so to get them to do
some things that are not yet in their interest you are going to have
to provide some sort of financial incentive and then you could
produce the program.
Ms. MALOY. Okay. Thank you.
Mr. SANDS. I will just give two points of reference. One, the
Goldman Sachs 10,000 Small Business program which we sit as a
moderator on is something that you could use to model it after.
Second, the state of Utah has state small business credit initiative
money and a portion of that has been allocated toward venture cap-
ital. So maybe you can use that as your leverage to give that incen-
tive that was already mentioned.
Ms. MALOY. Okay. Thank you. You all answered that a lot fast-
er than I expected you to so I am going to ask another question.
I am also hearing that a lot of startups cannot qualify for loans
because they do not have 3 plus years of operational costs, the ex-
isting collateral, or strong personal credit history. I am going to do
the same thing, just run down the panel. Are those the appropriate
standards or do we need to update those in the business world?
Mr. O’LEARY. They might have been 60 years ago but they are
not today. I mean, that is the problem. A lot of these regulations
were formed in different economies and so they should be modified.
Those are to onerous and too punitive and they obviously are not
working. They have to be changed.
Ms. MALOY. Okay. Thank you.
Ms. BOMMARITO. I second that. But I also wanted to just share
a small business survey.
Goldman Sachs’s 10,000 Small Business Voices surveyed our
small businesses. And 78 percent of small businesses are just con-
cerned about their ability to raise capital and have access to it.
Only 29 percent said that they could afford to take out a loan. So
that is another really important piece which goes to the point of in-
terest rates. And 85 percent said access to capital continues. If it
tightens it is going to impact growth of business which I will come
back to being able to access it before your 3 years in business and
down the road.
38
Ms. MALOY. Yes. Thank you.
Mr. HOLTZ-EAKIN. So in the end this is about measuring risk
and the risk associated with the loan. And there is nothing magic
about those metrics of risk assessment. Certainly, things have
changed over time. And Mr. Sands is the business of finding situa-
tions where the risk assessment is wrong and helping both himself
and the customer as a result. So usually you get locked into old
risk assessment metrics because regulations require them.
Ms. MALOY. Yeah.
Mr. HOLTZ-EAKIN. And the laws require them. And so that is
the flexibility you need. To allow people to use a risk assessment
makes sense on the ground that is appropriate for that situation.
Mr. SANDS. I would just say there is a mismatch between the
business and the lender. There are community development finan-
cial institutions that do not require that at all.
Ms. MALOY. All right. Thank you.
I yield.
Chairman WILLIAMS. The gentlelady yields.
I now recognize Representative Crane from Arizona for 5 min-
utes.
Mr. CRANE. Thank you, Mr. Chairman. Thank you all for show-
ing up today. It is an honor to have Kevin O’Leary, AKA Mr. Won-
derful appear before the Small Business Committee today.
Back in 2014, I took my garage born, Made in the USA company
on Shark Tank with my wife, Jen, who is in the audience today.
I thought I had prepared for everything, for every question that
any Shark might ask about any given topic. One thing that I did
not prepare for was to have Kevin O’Leary make the first offer to
invest in my company, Bottle Breacher. I guess I did not prepare
for it because I believed that Kevin O’Leary would hate my com-
pany and my product. I thought he might say something like, ‘‘Let’s
take this behind the barn and shoot it,’’ something that he often
says on television. I am honestly very grateful that he did make
the offer. I am even more happy that Jen and I accepted the offer.
We learned firsthand why he is called Mr. Wonderful. Despite the
fact that he is often portrayed as a complete hammer on television,
every entrepreneur that I know that made a deal with him abso-
lutely loves him and appreciate him. He works very hard to make
sure his companies are successful, and I know he talked me off
many ledges several times. Thank you, Kevin, for all you do for the
small business owners of this country.
My questions to you, sir, are less about access to capital but as
somebody who I know studies economics. My questions to you, sir,
about the dangers to our small business community and our na-
tional economy alike because of our federal government’s lack of
fiscal responsibility.
Mr. O’Leary, are you aware that we have a national debt of
about $34 trillion?
Mr. O’LEARY. Yes, I am. This issue seems to get kicked down
the road one administration after the other regardless of party.
Mr. CRANE. Yes, sir.
Mr. O’LEARY. And it will come home to roost one day. I do not
know what that day is. But as a percentage of GDP, which I think
is the right way to look at this, it is getting perilously high to al-
39
most post-Second World War. So this is going to be a concern. And
to the extent that you bring this narrative up, I can see you are
one of the people here on The Hill that cares about this.
Mr. CRANE. Yep.
Mr. O’LEARY. There is not enough of you. That is the problem.
Mr. CRANE. No, there is not, sir. And I do want to acknowledge
this is a Democrat and Republican issue. I am in the meetings on
our side all the time and there is very little appetite to quit spend-
ing money we do not have.
And I just want to ask you, sir, when this house of cards col-
lapses, because it is going to collapse. This is not sustainable. You
know it. I know it. And anybody that studied history knows that
no country in the history of the world can continue to run up defi-
cits and debt like we are. What do you think happens to small
businesses when this finally collapses?
Mr. O’LEARY. It will not be just small businesses. When the cost
of capital gets to the point where more than half of the govern-
ment’s budget is servicing interest, which is the disaster scenario
you are talking about, it wipes out every business in America. It
does not matter what size it is. Because if there is no more working
capital, basically, you start taxing people. I mean, there are exam-
ples. There is Britain when it decolonized the world. Their tax
rates were 80 percent. They were just trying to fund everything
through the government and it really did not work. The French
tried that, too. That would be a horrible outcome for America,
which is the bastion of capitalism on earth. I am glad we are talk-
ing about it but your job is to get half this place talking about it.
Mr. CRANE. Yeah. Absolutely.
Mr. O’LEARY. It does not matter what party they are in.
Mr. CRANE. No, you are absolutely right.
Mr. Douglas Holtz-Eakin, do you have anything to say on this,
sir?
Mr. HOLTZ-EAKIN. I have been talking about this for 20 years.
I was the CBO director beginning in 2003 and there has been noth-
ing done to change the trajectory which is fundamentally
unsustainable and represents simply a self-inflicted wound. And
the day at which it matters is today. It is already harming the eco-
nomic environment in the United States. Every time you take a
dollar from the private sector and put it into the best government
investment you lose rate of return. So every one of those transfers
lowers the standard of living. And we are doing that right now. It
is just a little bit each year and we do not notice. But if you add
it up we are going to have less growth in the standard of living,
more stagnation, more discontent.
Mr. CRANE. Sir, why do you think nobody up here seems to
care?
Mr. HOLTZ-EAKIN. It is someone else’s problem; right? I have
got to get to the next election that is, you know, 9 months away.
I am not going to talk about these hard issues. I am going to let
the next guy deal with it. And the result has been a bipartisan fail-
ure for 20 years to stop the increase in the debt relative to GDP.
We have never seen it before where it did not stabilize in some
way. It has just gone up. It is an unprecedented error and it is a
dangerous one.
40
Mr. CRANE. Thank you, sir.
I yield back, Mr. Chairman.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Van Duyne from Texas for 5 min-
utes.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman.
When people think of access to capital, they often do not think
of the tax code. But through the Tax Cut and Jobs Act we were
able to allow businesses, especially small businesses, to keep more
of their money and incentivize reinvestment into their business.
And I have spoken with many business owners in North Texas that
have been able to significantly expand the last few years thanks to
provisions of the TCJA.
Last year, my Ways and Means Committee colleagues and I held
field hearings in cities and towns across the country to hear di-
rectly from people and small businesses about the challenges that
they are experiencing. The overwhelming message that we have
heard is that TCJA spurred economic growth and competitiveness.
Unfortunately, these pro-growth provisions included as part of the
TCJA have already expired, including full and immediate expens-
ing for research and development, full expensing of investments in
new equipment, machinery, and technology, and business interest
deductibility, which makes it easier for small businesses to access
capital.
Extending these tax provisions will empower our job creators to
grow, expand their workforce, and reinvest funds in their workers
rather than using those funds to pad the coffers of IRS bureau-
crats. Without these tax provisions, we are ceding our competitive
advantage to countries like China, which is the exact opposite of
what we saw through TCJA. Restoring these provisions would up-
lift American workers, strengthen the U.S. economy, create Amer-
ican jobs, and help us better compete on the global stage.
I would once again like to thank the Chairman for holding this
hearing and look forward to future hearings on this subject later
this year, particularly how private equity provides an alternative
to traditional lending avenues and increases opportunities to access
new capital investments.
Mr. Holtz-Eakin, what would happen to capital access for small
businesses if we allowed the 2017 Tax Cuts to expire?
Mr. HOLTZ-EAKIN. I think it would be a dramatic impact on
small businesses, in particular the economy in general.
Ms. VAN DUYNE. Anything more detailed than that?
Mr. HOLTZ-EAKIN. Well, those are pro-growth provisions that
incentivize investments in physical capital, innovation, and the
workforce that put it on a level playing field from a tax prospective.
You can deduct all of them. It is the right thing to do.
The overall pace of the economy would slow. You are not going
to lend to people whose companies are not growing very fast, so it
is going to restrict it in that way. And as I mentioned before, the
small business community is very cashflow constrained and these
are about being able to invest up front and maintain your cash flow
because you get full deductibility. It is a crucial part of the small
business environment.
41
Ms. VAN DUYNE. So as we see interest rates and traditional
lending methods become more expensive and harder to attain,
where do you see private equity coming into play?
Mr. HOLTZ-EAKIN. I do not have a particular button I would
push but I have great confidence in the entrepreneurs who are out
there in the financial sector, whether fintechs or private equities or
any other non-bank lender to step in and provide capital where
there is a return. And making sure that the regulatory environ-
ment supports that and does not impede it I think is the primary
objective.
Ms. VAN DUYNE. So do you think the primary objective for
businesses when they are looking in banks, when they are looking
to actually invest should be on the ROI or that should be on what
people look like, where people are located, and how much money
they make?
Mr. HOLTZ-EAKIN. I am a big fan of ROI.
Ms. VAN DUYNE. I appreciate that.
Mr. O’Leary, you have been holding back today and I would like
you to tell us what you really think. I appreciate the work that you
have done with small businesses versus large businesses. I have
been trying to introduce a number of pieces of legislation that rec-
ognize the fact that when we add all these regulatory burdens on
to our small businesses it affects them in ways unseen in large cor-
porations. When we are talking about incentives—I know that you
were talking about specifically adding incentives to small busi-
nesses—every time we do that we seem to grow the federal govern-
ment. Four hundred seventy-five billion dollars is what we spent
in 2022 on servicing our debt alone. That is expected to go to $1.4
trillion in less than 10 years, by 2032. Every time that we add in
another program we are increasing the size and we are increasing
the scale and increasing the regulatory burden on small businesses.
Have you ever heard a small business say they want more regula-
tions?
Mr. O’LEARY. No. I never have. Your state, actually, is an exam-
ple of what has occurred post-pandemic on the competition between
states because what we all learned as investors was most compa-
nies now, whether they are large or small, only get 40 percent of
their staff to work in headquarters. So we realized right away, and
this has been happening very quickly, we can move it to Texas. We
can move it to Florida. We can move it to North Dakota, West Vir-
ginia, Oklahoma, where we never thought about doing that. And
get the benefits of policy, less regulation, more competitive tax
rates, and then employ people in any other state. I have got people
working for me that were headquartered in Florida but they work
in Massachusetts. Why they choose to do that I have no idea but
we are paying our taxes in Florida because that is where we are
HQ’d. Texas was the main beneficiary of that because they had the
benefit of the tax but also the most progressive and less obstructive
restrictions and regulations. You are the example of what every-
body has to try and copy. I mean, good for you guys. But my job
every day is to deploy capital. I go to the path of least resistance
and one of those states is Texas. So congratulations.
Ms. VAN DUYNE. So you are saying policy matters?
42
Mr. O’LEARY. Well, yeah. Are you kidding? You know, you do
not have to loan as much money to small business if you reduce
the regulation. Because that is their cost. You give them money,
then you regulate it back. Like that is kind of nuts. Just get rid
of the regulations. You do not have to loan them money in the first
place.
Ms. VAN DUYNE. I appreciate it very much.
I yield back.
Chairman WILLIAMS. The gentlelady yields back.
We now will be closing out this hearing. We want to thank the
witnesses very, very much for your testimony. It was very, very in-
teresting and worthwhile, and more than that I think important for
both sides of the aisle to hear how the issues facing small business,
the importance of small businesses, and the idea that we have got
to provide small businesses everything they need to be competitive,
to actualy make a profit. Because the more profits that a company
makes the more tax revenues actually come in. And so both sides
of the ledger win.
Without objection, Members have 5 legislative days to submit ad-
ditional materials and written questions for the witnesses to the
Chair which will be forwarded to the witnesses. We ask the wit-
nesses to please respond promptly.
If there is no further business, without objection this Committee
hearing is adjourned.
[Whereupon, at 12:07 p.m., the committee was adjourned.]
43
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