[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
SBA'S 7(A) LOAN PROGRAM: A DETAILED REVIEW
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 17, 2017
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-020
Available via the GPO Website: www.fdsys.gov
__________
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25-400 PDF WASHINGTON : 2017
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
TRENT KELLY, Mississippi
ROD BLUM, Iowa
JAMES COMER, Kentucky
JENNIFFER GONZALEZ-COLON, Puerto Rico
DON BACON, Nebraska
BRIAN FITZPATRICK, Pennsylvania
ROGER MARSHALL, Kansas
RON ESTES, Kansas
NYDIA VELAZQUEZ, New York, Ranking Member
DWIGHT EVANS, Pennsylvania
STEPHANIE MURPHY, Florida
AL LAWSON, JR., Florida
YVETTE CLARK, New York
JUDY CHU, California
ALMA ADAMS, North Carolina
ADRIANO ESPAILLAT, New York
BRAD SCHNEIDER, Illinois
VACANT
Kevin Fitzpatrick, Majority Staff Director
Jan Oliver, Majority Deputy Staff Director and Chief Counsel
Adam Minehardt, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Ms. Linda Rusche, Director, Office of Credit Risk Management,
Office of Capital Access, United States Small Business
Administration, Washington, DC................................. 3
Mr. William Manger, Associate Administrator, Office of Capital
Access, United States Small Business Administration,
Washington, DC................................................. 5
APPENDIX
Prepared Statements:
Ms. Linda Rusche, Director, Office of Credit Risk Management,
Office of Capital Access, United States Small Business
Administration, Washington, DC............................. 23
Mr. William Manger, Associate Administrator, Office of
Capital Access, United States Small Business
Administration, Washington, DC............................. 27
Questions and Answers for the Record:
Question from Hon. Blaine Luetkemeyer to Mr. William Manger.. 31
Additional Material for the Record:
CUNA - Credit Union National Association..................... 33
SBA'S 7(A) LOAN PROGRAM: A DETAILED REVIEW
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WEDNESDAY, MAY 17, 2017
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 11:00 a.m., in Room
2360, Rayburn House Office Building, Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Luetkemeyer, Brat,
Radewagen, Knight, Kelly, Blum, Gonzalez-Colon, Fitzpatrick,
Estes, Velazquez, Evans, Clarke, Espaillat, and Schneider.
Chairman CHABOT. The Committee will come to order.
I want to thank everyone for being here today.
Around here we use the term ``access to capital'' a lot. It
is an issue as old as entrepreneurship itself, coming up with
the funds to get started. Even if we had a perfect economic
environment with growth beyond our wildest dreams and
overregulation a thing of the past, finding willing partners to
finance a risk is one of the most significant hurdles a new
small business must cross. The Nation's entrepreneurs and small
businesses continue to experience a difficult lending
environment, which is, at best, stagnant. Getting a loan to
actually grow a business and create new jobs can be very
challenging.
With limited options, small businesses are turning to the
Small Business Administration 7(a) Loan Program in record
numbers for their financial needs. The 7(a) Loan Program is the
SBA's flagship program, whereby the SBA partners with financial
institutions and guarantees the repayment of loans to small
businesses that cannot obtain capital through conventional
lending. The guarantee percentage ranges from 75 to 85 percent
based on the size of the loan, which is capped at $5 million.
The SBA collects lender fees to run the program, which over
the past 4 years have covered the cost and resulted in zero
expense to the American taxpayer. As the 7(a) program grows in
terms of loan volume, loan amount, and the congressionally
authorized loan limit, we owe it to the taxpayers and the small
businesses involved to conduct vigilant oversight. We have to
make sure that American small businesses who are creditworthy,
but cannot obtain capital elsewhere remain the priority.
In March, Chairman Trent Kelly and the Subcommittee on
Investigations, Oversight, and Regulations, kicked off the
conversation on oversight of the 7(a) Loan Program. In that
discussion, their Subcommittee heard from lenders and financial
institutions directly involved in the loan program.
We are building on that conversation today by examining the
program from the SBA's perspective. Over the years,
improvements have been made by the SBA when it comes to lender
oversight. However, concerns need to be addressed to safeguard
the American taxpayer dollar.
Today, I hope we can hear more about the resources
available at the SBA and the Office of the Credit Risk
Management to conduct lender oversight. We look forward to
hearing about the risk-based models, monitoring systems, and
the lender portals that help the SBA keep a close watch on the
program. The conversation today will help guide us as we
continue to examine the SBA's lending programs and how they may
be improved.
We appreciate the witnesses for being here today. We look
forward to your testimony, and I would now like to yield to the
ranking member, Ms. Velazquez, for her opening remarks.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. And welcome to the
witnesses. Thank you for being here.
Access to capital is critical to the success of small
businesses. If, as the saying goes, small businesses are the
economy's backbone, then the flow of capital is the lifeblood.
However, obtaining conventional credit remains a challenge for
many small businesses. Startups, in particular, are still
considered a risky bet by many lenders.
Through the 7(a) program, the SBA helps fill in the gaps in
the capital markets, mitigating some of the risk to lenders by
guaranteeing that these loans will be repaid. In turn, small
businesses keep their inventory stocked, their employees paid,
and their doors open.
In recent years, 7(a) loans have experienced unprecedented
growth. In fiscal year 2016, over 64,000 loans totaling $24
billion were supported. With the prolific growth of the 7(a)
program, it is critical that this initiative functions
efficiently and effectively. For example, though SBA remains
under its 7(a) lending authorization last year, it is crucial
that SBA closely monitor loan volume and communicate to
Congress in a timely manner concerns regarding reaching the
cap.
In addition, while the overall number of 7(a) loans has
increased, the percentage going to minority and women-owned
firms has remained fairly consistent since 2010, and is lower
than before or during the recession. This disparity is
troubling. It must be addressed to enable creation and economic
growth, particularly in traditionally underserved communities.
Other concerns have been raised by both borrowers and
lenders alike related to the effectiveness of SBA's existing
technology to facilitate lending. Technology is only helpful if
we ensure it works efficiently for lending purposes. Recent OAG
and GAO reports disclosing weaknesses in SBA lenders' oversight
raised other concerns. Their analyses raised questions about
whether the agency has adequate tools to manage the program.
It is the responsibility of this committee, and one we take
seriously, to examine the internal controls of SBA lending
programs. Absent adequate oversight, I am concerned that the
program resources may be unnecessarily strained, potentially
depriving other entrepreneurs of needed credit.
Overall, this committee seeks to ensure that the 7(a)
program works for small business borrowers. I look forward to
hearing from our witness today and gaining their insights on
how we can improve the SBA flagship loan program.
I yield back, Mr. Chairman.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
And if Committee members have opening statements, we would
ask that they be submitted for the record.
And I would now like to take just a moment to explain our
lighting system to the witnesses. I think you are probably
already familiar with it, but we operate under the 5-minute
rule. Each of you gets 5 minutes to testify, and then we will
ask questions. And we will limit ourselves to 5 minutes, and it
goes back and forth between a Republican and a Democrat up
here.
And then there is a lighting system to assist you. The
green light will be on for 4 minutes and then the yellow light
will come on and let you know you have got a minute to wrap up.
And then when the red light comes on, if you could wrap up as
close to that as possible we would appreciate it.
And now I would like to introduce our distinguished panel
here this morning.
Our first witness will be Linda Rusche. Ms. Rusche is the
director of the Office of Credit Risk Management, which
oversees the 7(a) Loan Program within the Office of Capital
Access at the SBA, the Small Business Administration. She
joined as a director in 2015, and previously served in numerous
roles at the SBA, including as branch manager of the Kansas
City Review Branch for OCRM, along with the assistant regional
administrator for Finance and Investment in Region 7. And we
appreciate you being here today.
And our second witness will be William Manger. Mr. Manger
is the associate administrator for the Office of Capital Access
at the SBA. Before his appointment, Mr. Manger served as the
managing director at Brock Capital Group and Investment Bank in
New York City. Prior to his time with Brock Capital, he served
as associate administrator for field operations at the SBA from
2007 through 2009. And we also welcome you here today.
And Ms. Rusche, you are recognized for 5 minutes.
STATEMENTS OF LINDA RUSCHE, DIRECTOR, OFFICE OF CREDIT RISK
MANAGEMENT, OFFICE OF CAPITAL ACCESS, UNITED STATES SMALL
BUSINESS ADMINISTRATION; WILLIAM MANGER, ASSOCIATE
ADMINISTRATOR, OFFICE OF CAPITAL ACCESS, UNITED STATES SMALL
BUSINESS ADMINISTRATION
STATEMENT OF LINDA RUSCHE
Ms. RUSCHE. Good morning. And thank you, Chairman Chabot
and Ranking Member Velazquez. Thank you for the opportunity to
come and speak with you today and to testify before the entire
Committee on the Office of Credit Risk Management of the Small
Business Administration. As director of OCRM, I am responsible
for the oversight and the risk management of SBA's lending
programs and the guaranteed loan portfolios delivered by our
7(a) and 504 lending partners.
SBA's administrator, Linda McMahon, has demonstrated
leadership in championing small business lending while
maintaining prudent lending standards. SBA is particularly
interested in balancing the growing credit needs of America's
small businesses with prudent lending, always ensuring that we
are meeting the requirements of our mission, as authorized by
the Small Business Act. The Office of Credit Risk Management is
to effectively manage program risk, monitor lender performance,
and enforce loan program requirements. In short, to maintain
the integrity and the viability of the programs.
How does OCRM manage all 7(a) lenders and certified
development companies and over $1 billion in credit? Our first
step is through use of our loan and lender monitoring system
which tracks monthly performance of every loans, assigns a
quarterly credit score for each loan, and then rolls that into
a quarterly purchase rating for each lender based on those
loans. This provides an initial risk profile for each lender
and CDC and allows OCRM to bucket higher risk lenders and CDCs
for additional monitoring.
Next, OCRM uses our composite risk measurement methodology
that we call PARRiS for 7(a) lenders, SMART for CDCs, to
further diagnose our higher risk lenders. Benchmarks of
historical and projected performance have been developed for
PARRiS and SMART and provide relative measures of individual
lenders' financial risk.
Third, OCRM conducts approximately 300 focused, risk-based
exams and reviews every year using these protocols. OCRM also
conducts over 1,200 assessments each year before renewing
delegated authority status for those lenders and CDCs which
have been granted enhanced authority by SBA. And we also
conduct quarterly financial and capital assessments of our SBA
supervised lenders, since SBA is generally their sole Federal
financial regulator.
OCRM has been at the forefront of identifying emerging
risks, one of which involves the ongoing discussion of which
businesses are in need of SBA financing. The Small Business
Act, as amended, states that small business loan guarantees are
to be provided only to those borrowers who cannot obtain needed
credit on reasonable terms from other Federal sources--I am
sorry, other non-Federal sources. With recent robust growth of
the 7(a) program, OCRM has paid particular attention in its
reviews to a lender's documented credit elsewhere reasons. We
have identified some instances of lack of understanding on the
part of lenders and occasionally poor internal controls within
lender operations which contribute to some noncompliance. OCRM
requires those lenders which demonstrating noncompliance to
correct individual file deficiencies, and as needed, to alter
policies, procedures, or internal controls to ensure full
compliance. OCRM will continue to focus on this on this area in
our upcoming reviews to ensure the mission of the agency is met
in providing small businesses financing they cannot obtain
elsewhere on reasonable terms.
Thank you for the opportunity to share this information. I
will be happy to respond to your questions.
Chairman CHABOT. Thank you very much.
And Mr. Manger, you are recognized for 5 minutes. It is
with a hard G, I understand, Manger? Okay.
Mr. MANGER. Correct. Thank you.
STATEMENT OF WILLIAM MANGER
Mr. MANGER. I would like to thank Chairman Chabot, Ranking
Member Velazquez, and the entire House Small Business Committee
for the opportunity to testify before you today. I had a great
meeting in April with some of your staff and look forward to
building a strong and open relationship with all of you moving
forward.
It is an honor for me to be here and to have been appointed
Associate Administrator for the SBA's Office of Capital Access
by Administrator Linda McMahon. It has been 8 years since I
last worked at the SBA as associate administrator for the
Office of Field Operations in Washington, and prior to that I
served as SBA's Regional Administrator in Region 2 in New York.
From the very beginning of my time at the SBA, I was able to
witness the positive impact our programs have on communities
across the country. I can definitely say that I am very excited
to have the ability to improve the services we provide and help
small business owners and entrepreneurs grow to their full
potential.
As Associate Administrator, I oversee the SBA's flagship
7(a) and 504 loan programs, as well as our Microloan and Surety
Bond programs. The role that the SBA and the Office of Capital
Access plays in our credit markets fills an important gap in
the lending marketplace. Our agency aims to help small
businesses obtain credit which is otherwise unavailable through
conventional lending. As many of you know, oftentimes
entrepreneurs have the will and drive to succeed but access to
capital, unfortunately, proves to be an unsurmountable hurdle.
That is where we come in. Our programs have been helping small
businesses get on their feet and grow for decades, but as we
all know, there is always room for improvement.
Administrator Linda McMahon has placed an emphasis on
making sure our entire agency, and our Office of Capital
Access, is running as efficiently and effectively as possible.
That is exactly what I intend to do as Associate Administrator.
The Office of Capital Access is streamlining our standard
operating procedures and plans to repeal unnecessary
regulations that do not benefit small businesses aiming to
start or expand. We will also place an emphasis on SBA loan
center efficiency, which will decrease the time it takes for
lenders to process, service, and collect SBA guaranteed loans.
As we work to recruit more lenders for our programs, we
have stressed to our lending partners that we want to see more
small dollar loans being made to entrepreneurs. Our focus will
remain on helping those who need capital most before anyone
else. That includes our veterans, women-owned businesses,
minority-owned businesses, and rural communities.
In addition, the Office of Capital Access sees our 7(a)
program in particular as a powerful tool for helping create and
retain jobs for American workers. It is of paramount importance
to me and our agency that our 7(a) and 504 flagship programs
continue to operate at zero subsidy and remain a great deal for
taxpayers. Having been serving as Associate Administrator for
just less than 2 months now, I can assure you that our office
is placing an incredible amount of emphasis on oversight to
make sure our programs are being administrated properly. Linda
Rusche plans a crucial role in that as director of our Office
of Credit Risk Management.
The Office of Capital Access and the Office of Chief
Financial Officer are also constantly monitoring our program
level limits and SBA thanks the Committee for its assistance in
raising the 7(a) program level to $27.5 billion in Fiscal Year
2017 from $26.5 billion Fiscal Year 2016.
While SBA is witnessing increased demand by the small
business community this year, we are not currently in jeopardy
of exceeding our capacity to meet such demands. However, to
ensure that America's small businesses can fully benefit from
the tools and resources provided by the SBA and that the
support continues through the year uninterrupted, the
administrator supports proposed legislation that would grant
circumstantial authority to the Administrator to increase 7(a)
lending authority by 15 percent when program subsidy is zero
and appropriate notice is provided to Congress. The flexibility
offered by the proposed statutory provision would offer greater
certainty to our 7(a) lending partners and make additional
assistance available to small businesses at no additional
subsidy cost to the taxpayer.
While we continue to see job creation and responsible
growth from all of our programs, I cannot stress enough how
committed we are to proper oversight. I look forward to a
transparent and collaborative relationship with this Committee
to ensure we are fulfilling all aspects of our agency's
mandate.
In conclusion, please know that in me you have someone that
shares our administrator's vision of a stronger small business
community in America and is committed to administering our
programs both properly and in the best interest of the American
taxpayer. Thank you.
Chairman CHABOT. Thank you. And I will now recognize myself
to begin the questioning for 5 minutes.
My first question, we tape these Committee hearings and
there are small business folks out there across the country who
could be watching, you know, either now or down the road
because the tapes are available online, and we put out, you
know, what goes on in these meetings, so it gets out there. So
let me ask both of you this. Let us say I am a small business
person and I am listening to the testimony and I am thinking,
well, do I qualify for a loan, a 7(a) loan which is the largest
loan program that we have? Am I going to qualify? I heard them
say something that I do not qualify for this, you know, if I am
too qualified, unless if I can get a loan elsewhere then I am
not supposed to go to them, but how do I know if I am not so
qualified that I am overqualified to get a loan? And I do not
necessarily want to make myself look too unqualified that they
turn me down at the SBA and then I am really out because I do
not qualify anywhere else and I am underqualified for the SBA,
so I either cannot start my business in the first place or I
cannot expand it. So what would you have to say to those folks
that might be wondering about how qualified do they actually
have to be or unqualified do they have to be?
So, Ms. Rusche, you were smiling a lot. I will let you go
first.
Ms. RUSCHE. Thank you so much, Chairman Chabot.
Having been a loan officer in the field, that question gets
asked a lot. And it is a perfect question. We appreciate the
opportunity to elaborate on credit elsewhere.
Small businesses walk into lenders, into banks, to look for
a loan. Often they do not recognize that it may become an SBA
loan. There are challenges to receiving a loan when you are a
small business, particularly if you are a startup, a small
service firm, limited collateral. Those are the types of
circumstances that are difficult for lenders to lend to without
some additional enhancement or protection. Our SBA guarantee
provides that benefit, so often it is the lender who steers the
customer towards the SBA, as opposed to a customer walking in
and saying, oh, I want an SBA loan. They just want a loan. They
want the credit. And our credit elsewhere test requires the
lender to consider first, can I make this loan in my current
policies? And if I cannot, then I can turn to the SBA and
document in the file why I need that guarantee from the SBA,
and the loan is then made.
Chairman CHABOT. Thank you. That was a very good answer.
Mr. Manger, I do not know if you wanted to add anything to it.
Mr. MANGER. I would just like to add a little bit. As the
former Associate Administrator for Field Operations, I would
like to put in a plug for the 68 district offices that exist
across the country. Certainly, any aspiring small business
owner and entrepreneur can go into any of those district
offices, contact them electronically or by phone, and ask them
specifically those questions--do you think my business would
qualify for an SBA loan?
I would also put in a plug for our entrepreneurial
development partners: SCORE, the women's business centers, the
small business development centers. All of those will see any
aspiring entrepreneur free of charge, and they can go in there
and ask these questions. For example, is my business plan
formulated enough? Do I have enough projections in here? Will
the bank accept these? I think, again, we offer other services
aside from just the loan programs that are very, very
beneficial to small business owners.
You know, somebody that needs a longer term loan, that is
an excellent entrepreneur for the 7(a) program. The average
term of a 7(a) loan is 13 years. Most conventional loans made
by a bank are only 3 to 5 years. So that business that needs a
longer term in order to return payment on that loan really
would benefit from the SBA 7(a) program. You know, and
certainly any business that needs to make an acquisition, that
is something usually that lenders are hesitant about making
those loans, but with a 7(a) guarantee they are able to make
that acquisition.
Chairman CHABOT. Thank you. I have got time for about one
more question here before my time expires.
We hear from a lot of small businesses, everybody that is a
member of this Committee, and one of the complaints that we
hear from small business folks who try to get a loan through
the SBA is how what a paperwork-intensive process it can be.
And I have heard stories that sometimes during the course of
the process that they kind of give up, unfortunately.
Now, in your testimony, Ms. Rusche, and I will quote, ``We
have plans to appeal unnecessary regulations that do not
benefit small businesses aiming to start or expand.'' So what
specific regulations do you have in mind to make the process
less burdensome than it is, and what regulations can we get rid
of that will help small business folks?
Ms. RUSCHE. Thank you for that question. I am actually the
regulatory overseer of most of the lenders who deliver the
program and, therefore, we believe we have reasonably adequate
regulations. We do not have any plans to repeal any specific
ones related to lender oversight; however, we are looking very
thoroughly at the regulations for applying for the loan, and
that is another jurisdiction within the Office of Capital
Access. I would like to invite my boss, Bill Manger, to speak
to that comment.
Chairman CHABOT. Yeah, we would welcome him, but keep it to
a minute if you would so we do not go over.
Mr. MANGER. Sure. Yes. So one of the first things I did,
Mr. Chairman, when I came in as the Associate Administrator for
Capital Access, was speak to all my directors and say we need
to simplify our processes to make it easier for borrowers and
lenders to access the capital that we are providing. To do
that, I have instructed the directors to look at all of the
SOPs, especially the one that concerns the loan processes, and
we are streamlining those SOPs to make it as simple as
possible, but also for the clarity so that a lender knows
exactly what is required of them in order to get the benefit of
the SBA guarantee. We are also looking at some of the
regulations, as Ms. Rusche said, in the Office of Capital
Access, to determine which of those we can eliminate in some
cases just to make it easier for, again, our borrowers to
access the lending programs.
Chairman CHABOT. Thank you very much. Thank you. We
appreciate that.
And I will now recognize the ranking member, Ms. Velazquez,
for 5 minutes.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Mr. Manger, I am pleased to hear that you are emphasizing
to lenders that they need to make smaller loans. When we look
at the portfolio of the 7(a) Lending program, we found that in
2015, the average 7(a) loan was $371,000. In fiscal year 2016,
it was $376,000. Yet the maximum size of the 7(a) loan has
increased to $5 million. My question to you is what is SBA
doing to promote small dollar loans?
Mr. MANGER. Thank you very much for that question.
As you said, I am working very diligently with our lending
partners. In fact, I met with many of them last week to
encourage them to make those smaller dollar loans available.
Ms. VELAZQUEZ. Okay. So what are you doing, or the agency,
to implement the lender mission rating from the January 4,
2017, policy notice?
Mr. MANGER. I can actually ask Linda Rusche to help answer
that.
Ms. VELAZQUEZ. Sure.
Mr. MANGER. We are still reviewing that, though.
Ms. RUSCHE. The mission rating that we have developed for
7(a) lenders is built upon information that we receive from
applications. Nothing additional needs to be prepared by a
lender or a borrower. It is part of the basic information we
receive. We have published that document. We have not yet fully
implemented the protocol within our electronic system and we
are working to do that, but also evaluating the data upon which
it is based. Some of that data is voluntarily submitted as
opposed to being mandatorily required, and we want to ensure we
have a good rating that is well constructed and valid before we
implement it fully.
Ms. VELAZQUEZ. And how long do you think this process is
going to take? Let me just share with you the frustration that
we face on this committee because I have seen so many
administrators come in here to testify and we raise the issue
of smaller loans, and when we look at the 7(a) portfolio, there
is a need for smaller loans. How long will it take for you to
get the data you need in order to implement the policy?
Ms. RUSCHE. Thank you for allowing me to clarify that. We
have the data but we are ensuring that it is fully accurate
before we publish that rating. That rating will actually be
given to each individual lender. It is not a list of mission-
rated lenders that we would publish. It is based on
confidential information provided to us, but the lenders will
each know where they stand in that system. And we have been
reviewing it literally the last couple of weeks.
Ms. VELAZQUEZ. Okay. Thank you.
Mr. Manger, again, many congressional hearings and we
constantly hear from women, minority firms, rural America, the
fact that on average, it is very difficult for them to get the
lending they need. When we look at the 7(a) program, pre-
recession levels was $17 billion; today it is $27 billion. Yet,
lending for women, minority, and rural America, has seen a
decrease compared to pre-recession levels. What are you doing
to address that issue?
Mr. MANGER. That is an excellent question, and I would just
like to say that our Express program, which is for loans under
$350,000, 46 percent of our units are done by Express under
$350,000. And we also have a segment of the 7(a) program that
is known as Community Advantage. It is still in a pilot, but
this is for loans under $250,000, with an average of $130,000.
So we do have programs that are being effective, and actually,
those programs are increasing.
Ms. VELAZQUEZ. What are you doing to encourage more lenders
to take seriously their responsibility to provide assistance to
underserved communities?
Chairman CHABOT. The gentlelady's time is expired, but you
can answer the question.
Mr. MANGER. Yeah. No, again, Congresswoman, it is a very
good question. We are doing as much outreach to our lending
partners because the lenders are the ones that are making the
loans. We are guaranteeing them, but we need to work with our
lending partners. I am glad to see that we have a couple of
people from NAGGL here so they hear me loud and clear that we
are looking to see more loans to women, minorities, veterans,
and rural communities, and we are working very vigorously in
order to achieve that goals.
Ms. VELAZQUEZ. Thank you.
Chairman CHABOT. Thank you. The gentlelady's time is
expired.
The gentleman from Missouri, Mr. Luetkemeyer, who is the
vice chairman of this Committee, is recognized for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. And welcome to
our guests today.
The National Federation of Independent Business has a
recent study out that shows that a lot of large banks and large
businesses are doing well. But it also shows that a lot of
small banks and small businesses are not, from the standpoint
that it is more difficult for them to do business, their
capital is strained, and as a result we have got basically what
they call a two-speed economy going on, where part of the
economy is going well, part of it is not.
So it is interesting to hear, and I am glad to hear, Ms.
Rusche, that you made the comment that we have robust growth in
the 701 program, so I think it begs the question, why are we
experiencing a growth there? Are we changing lending standards
or is there a demand for the banks? Are the banks becoming more
engaged? Small business becoming more engaged? Why are we
suddenly seeing this interest in the 701 program and the
growth?
Ms. RUSCHE. Thank you for the opportunity to share that. We
are pleased that there is robust growth in the program. There
is growth in both the large and the small loans involved, and a
wide breadth of all lender varieties that are applying for the
guarantees in our program.
We are seeing the economy improve as well, and we find that
to also be of assistance in our growth of the 7(a) program. But
again, it is the lenders who come to us as opposed to us
telling the lender. The lender must know what applicant needs
that they have.
Mr. LUETKEMEYER. Okay. But one of the key points that I am
trying to get to here is there is no loosening of lending
standards to get more growth.
Ms. RUSCHE. Thank you for that clarification. And no, there
are no loosening of lending standards.
Mr. LUETKEMEYER. But just more of a demand?
Ms. RUSCHE. But we are seeing more of a demand.
Mr. LUETKEMEYER. Okay.
Ms. RUSCHE. And may I----
Mr. LUETKEMEYER. Okay. You made the comment about prudent
lending standards as a way to provide some oversight. Can you
define what prudent lending standards would be in your mind?
What are you looking for when you go in and you look at
something? I mean, because are you not approving the loan
anyway? I mean, the bank gives you the loan and you are looking
at it. So why would you be looking at prudent loan lender
standards. That, to me, would be a standard operating
procedure.
Ms. RUSCHE. Prudent lending standards are an operating
procedure. That would require consideration of the equity
investment of the customer, the projections proposing for
repayment ability, cashflow needs of the business while that
repayment ability is met, and strong management of the business
to ensure that there is good management.
Mr. LUETKEMEYER. Okay. So there is nothing beyond the
normal way that you look at a loan from a standard point of
those important criteria that make up the loan that you are
trying to make and why you approve it or disapprove it?
Ms. RUSCHE. I am unclear of the question.
Mr. LUETKEMEYER. Well, I am kind of a concerned about when
you say ``prudent loan standards.'' Is there something there
that is a red flag that you are looking at that somebody is not
looking at? Because whenever you are looking at a bank making
the loan and then you are guaranteeing it, it seems to me like
it would be kind of cookie cutter. You have got a basic way of
application to you. He has to have certain documents, and so it
has to adhere to certain stands. So why would you have to look
then at prudent loan standards? I would think that would be an
inherent part of what you are doing already.
Ms. RUSCHE. Prudent lending standards are an inherent part
of what we do.
Mr. LUETKEMEYER. Okay.
Ms. RUSCHE. We look at loan files to ensure it has been
individually and then we have our robust metrics to ensure that
on a portfolio-wide basis we retain that good performance.
Mr. LUETKEMEYER. Okay.
Mr. Manger, this is kind of a specific question, but we
have had an entity come to us with regards to a franchisee. And
you have issued some sort of an addendum that you ask the
franchisor to sign in order for the franchisee to qualify for
an SBA loan. And it is becoming very cumbersome for the
franchisor in certain situations. Can you elaborate on that?
Are you aware of what I am talking about?
Mr. MANGER. Yes.
Mr. LUETKEMEYER. Okay.
Mr. MANGER. That did happen prior to my coming aboard,
again, at the SBA, but yes. The lenders actually asked us to
try and simplify the process for borrowers that wanted loans
for the acquisition of a franchise, the startup of a franchise.
So in our office, they put together basically a one-page form
that had to be completed in order to make sure that the
franchise would be eligible for an SBA guarantee. Actually, I
would say that the program was more cumbersome prior to that
for the majority of franchises because it took a lot of time
from when it was submitted to the Office of Capital Access, to
go through our Office of General Counsel, and to get a response
as to whether that franchise was eligible or not.
Now, that being said, there are many franchises that had
prearranged agreements with SBA from prior to January and we
are maintaining those. So any franchise that had an agreement
with SBA prior to January can continue to use that. It really
is new franchises that want to be eligible for an SBA loan that
are to comply with the addendum, but we did that at the
lenders' request because they thought that it was a simpler way
to do it and it would save a lot of time in actually getting
the loan to the borrower for the franchise.
Chairman CHABOT. The gentleman's time is expired.
Mr. LUETKEMEYER. Thank you very much for your response.
Chairman CHABOT. Thank you.
The gentleman from Illinois, Mr. Schneider, who is the
ranking member of the Subcommittee on Agriculture, Energy, and
Trade, is recognized for 5 minutes.
Mr. SCHNEIDER. Thank you. And I want to thank both Mr.
Manger and Ms. Rusche for being here, for making your time
available, but also for all you are doing to try to help
promote small business in our country.
As you know better than most, it is small business that
drives our economy and it is these entrepreneurs and people who
are looking for capital to grow that will allow us to create
the jobs we need.
Mr. Manger, I appreciate very much your testimony. You laid
out a clear vision and a number of goals for what you are
hoping to accomplish in your tenure in this position. I would
like to take it a step further from goals to actually strategy
for achieving these goals and the steps you are planning to
take, in particular as it relates to increasing lending to
underserved populations as you have talked about: minorities,
women, veterans, rural. Do you have specific actions you are
planning to take to try to grow their numbers?
Mr. MANGER. Yes. And thank you, Congressman, for the
question.
What we are doing is we are working with our not-for-profit
partners who make the smallest loans. For example, our
Microloan program, which is, again, loans under $50,000, the
average size of those loans is $13,000. It is a much better
option for a borrower than to, say, put that on several credit
cards where they would be paying a much higher rate. The
Community Advantage program, while it is still in pilot until
2020, we will be reviewing this in the next year to determine
whether we should make that program permanent. Again, that is
loans $250,000 or less, average size $130,000. Both of those
programs are made available to different constituencies through
our not-for-profit partners. When I have looked at lists of
cities across the country that show where we are very
effective, we are very effective in Philadelphia, New York, St.
Louis. The reason for our effectiveness is the strength of the
not-for-profit partner in that city. Cities where we are not
doing as well are ones where the not-for-profit partner is not
as vibrant.
So we are going to be targeting not-for-profits in
different cities across the country to come on board with the
program to increase our Microloan and Community Advantage
programs, especially to focus on minorities, veterans, and
women-owned businesses. I think with, again, reinvigorating the
partners, the not-for-profit partners that must be part of the
equation, we will be able to get more loans out and penetrate
those markets.
Mr. SCHNEIDER. Are there specific profiles of a successful
not-for-profit partner? What do they look like? What are they
doing in particular that makes them stand out?
Mr. MANGER. That is a very good question.
So in Missouri, we work with Justine Peterson. Justine
Peterson is really an exemplary not-for-profit. What they do is
they help entrepreneurs build a credit-risk profile by making
money available to them first on a very small basis, you know,
several hundred dollars. And when they show that they repay
that, they increase the loan a little bit more. This is
building a credit history for that aspiring entrepreneur, small
business owner, and they can continue them up the continuum to
a larger and larger loan.
And we have seen them do amazing work out in Missouri, St.
Louis, Ferguson. It is incredible what they have been able to
do. And so we would actually like that model to be replicated
by other not-for-profits in other cities because we think that
is really a very powerful model and really works. We have seen
people actually graduate from the Microloan program to the
Community Advantage program because they have been able to
build a stronger and stronger credit history.
Mr. SCHNEIDER. Let me take back the time. I would love to
talk more about that offline.
But it is not just in the Microloan area. How do we expand
the reach to these underserved populations in the larger loans,
cultivating an environment or a culture of entrepreneurship,
helping them getting the skills and attributes they need to
have businesses of size that are going to have a $200,000 or
$500,000 loan?
Mr. MANGER. Again, a lot of it has to do with financial
literacy. We want to make sure that these aspiring
entrepreneurs have the tools at their disposal and the
knowledge of how to build a sound business that is going to be
successful. We do that through our entrepreneurial development
partners. The SBDCs again are offering counseling free of
charge. Our women's business centers are doing that. The SCORE
partners are doing that, and our district offices. We do many,
many outreach events trying to explain to them what is
necessary really to build a strong business and what foundation
is necessary, what type of business plan, what type of
projections are necessary so that they have a successful
business.
Mr. SCHNEIDER. Great. Well, thank you. I am out of time. I
will just again emphasize I appreciate the vision, grateful for
the goals. Goals have to have numbers behind the goals and we
need strategies and actions. I look forward to working together
to try to achieve these. Thank you.
Chairman CHABOT. Thank you. The gentleman's time has
expired.
The gentleman from Mississippi, Mr. Kelly, who is the
chairman of the Subcommittee on Investigations, Oversight, and
Regulations, is recognized for 5 minutes.
Mr. KELLY. Thank you, Mr. Chairman. And thank both of you
for being here today and testifying.
As Chairman Chabot said, we kicked off this conversation in
March with lenders that provide 7(a) loans. During that hearing
we discussed the credit elsewhere test. I want to follow up
with you today on that. Can you both describe the credit
elsewhere test? And can you define it and how lenders
specifically administer it?
Ms. RUSCHE. Thank you for the question and the opportunity
to elaborate on our credit elsewhere test. This is from the
Small Business Act as it is periodically amended that requires
that we provide guarantees to customers who cannot otherwise
obtain credit without the guarantee applied to the loan. As I
earlier mentioned, in most cases the borrower comes to the
lender and requests a loan, but the lender sees some credit
weakness that generally things like they need a longer term for
cashflow, collateral is insufficient, it is a startup business,
it is a change of ownership and there is new management, and
the lender requires that that additional enhancement be placed
on the loan because they otherwise would not make it. And that
is the key piece. The guarantee allows the lender to make a
loan that otherwise would not be available to the customer.
Mr. MANGER. Yeah. I would just add again that many times it
has to do with the sector or the industry sector that the small
business is in. For example, we all know that the restaurant
business is a risky business. Many lenders are not willing to
make a loan to somebody who wants to start up a restaurant, but
with an SBA guarantee, it mitigates their risk and they are
willing to make that capital available so that someone can
start a restaurant or a business again that has a riskier
profile.
Mr. KELLY. Thank you. And to follow up, are lenders, to
your knowledge, running afoul of this credit elsewhere test?
Ms. RUSCHE. If I could take the opportunity to answer that
one. We review lenders periodically. I have mentioned the
onsite reviews that we conduct where we look at the files and
identify what the reasons are that are fully documented. We
could always do a better job of educating or lender population
as to the requirements, and we do that in our oversight
reviews, as well as through our regular policies. And improving
our streamlining processes in the SOP. We are mindful of that
and continually work to identify any deficiencies we have in
educating our lenders, but generally speaking, the lenders
understand this test and conform to it appropriately.
Mr. KELLY. And this program at its core runs on behalf of
the small businesses and not the lenders' bottom line, so are
there small businesses that have the ability to obtain
conventional lending utilizing the 7(a) program and what is SBA
specifically doing about this? So not from the lenders'
standpoint, but small businesses'. You know, it is for the
small businesses. So what are you doing to ensure that small
businesses are not getting into the SBA program when they
should be conventional lending?
Ms. RUSCHE. We carefully review every loan file that we
look at in our review processes to ensure that that is not
happening, and when we see any indication that there might be
confusion about that we provide direction and guidance to
require the lender to correct any mistakes in that area.
Mr. KELLY. And Mr. Manger, do you have anything to add?
Mr. MANGER. You know, I would just say that the SOP rewrite
that we are going through right now will clarify to a great
extent, I think, the credit elsewhere test. And I would also
just add that certainly if we have a loan that needs to be
purchased by the SBA, unfortunately, and we find that that loan
did not meet the credit elsewhere test, that we will not be
paying out the guaranteed portion of that loan. So there is a
risk, obviously, to any lender that does not properly document
the credit elsewhere memo.
Mr. KELLY. And just going back very briefly, and this is
just a comment, but I would like both of you, especially you,
Mr. Manger, going back to the chairman's comment to start the
hearing, it is imperative that we make this process simple
enough that people can use it and get through it and get the
credit that they need and deserve and not tied up with all
these regulations and paperwork and additional addendums and
all those things. I closed loans a long, long time ago as a
lawyer, and people did not know what they were signing and
there was no way to explain it. So you add all this, but it
does not add any benefit to the person who is receiving that
loan. They need to understand what they are signing, what they
are doing, so simplify it as much as you can.
And with that, I yield back, Mr. Chairman.
Chairman CHABOT. Thank you very much. The gentleman yields
back.
And the gentleman from Pennsylvania, Mr. Evans, who is the
ranking member of the Subcommittee on Economic Growth, Tax, and
Capital Access, is recognized for 5 minutes.
Mr. EVANS. Thank you, Mr. Chairman.
Mr. Manger, thanks to the chairman and our ranking member,
a great deal of discussion has been around the access of
capital, and I heard you mention Philadelphia. And I am from
the city of Philadelphia. I represent the Philadelphia
Montgomery County.
I am very much interested in a very specific way about
access of people of color taking advantage of these
opportunities as well as newly upstart. Because we start about
growth for the economy. It is always talked about the aspect of
women, African American, Hispanics, and others getting into the
marketplace. Talk to me a little bit about people
understanding, taking advantage of this opportunity, because I
heard you mention, you know----
Mr. MANGER. Yes. And I did mention Philadelphia. And really
because we have some not-for-profit partners in Philadelphia
who have----
Mr. EVANS. Such as?
Mr. MANGER. You know, I will have to get you those names,
Congressman. I will get those for you.
Mr. EVANS. Okay.
Mr. MANGER. But the results have been really quite amazing
in Philadelphia among all of our American cities. And it really
is because those not-for-profits that work in the inner city
are making those available to women-owned businesses,
businesses of color. You know, your congressional district this
year up until April 30th has had 59 loans made for about $11.5
million. That is a little bit down from last year, but last
year the full year there were 116 loans made for just over $30
million. So we are getting money out into your specific
district. And again, we are going to continue to work to do
that across the country.
The dollars that actually were getting out to women this
year as a whole on the 7(a) program is up 7.2 percent. The
dollar amount to African Americans is actually up 22.2 percent
in the 7(a) program. And actually, we are seeing upticks in all
of those areas except for veterans, but the good news on
veterans is that for loans under $150,000 in the 7(a) program,
the dollar amount to veterans is up 10.3 percent.
Mr. EVANS. So, one, I would greatly appreciate if you would
provide the information of who the organizations are, because I
am interested and the question is the strategies. Because in
the same district we have a poverty number of about 28.1
percent. Translate that in numbers, about 195,000 people. And
to me, the number one issue is the growth of businesses and
jobs. So that is why I asked you that question in terms of
growth and development. I heard you mention a little bit about
the difficulty of restaurants. Do you also see that with
supermarkets, retail in general?
Mr. MANGER. Congressman, I do not have the specific
statistics on those other businesses. We can certainly get
those for you, but, you know, there are definitely certain
businesses that lenders realize have a higher risk profile and
they are more hesitant to make that capital available to
somebody who wants to start one of those businesses and that is
really where the SBA comes in. We are able to, with a
government guarantee on that loan, be able to make the bank see
that the risk is mitigated to a level that is agreeable to them
so that they can actually make that loan available.
And you are absolutely right. We are wanting to see more
capital out to all segments of the American society because we
understand obviously that that is really one of the biggest
creators of job growth. I mean, there is a correlation between
access to capital and the hiring of more employees. That has
clearly been shown in several studies and we want to make sure
that capital is accessible to all because we realize that that
is again where we are going to create more jobs. As you know,
two out of three net new jobs are created by a small business,
and so we want to continue to increase that as much as
possible.
Mr. EVANS. And that is kind of why I am spending all of my
time asking you that question because since I have been on this
Committee, you know, everybody talks about the access of
capital as the number one issue and that is what I hear
constantly. So I just wanted to be clear, are you and your
particular agency doing all it needs to do in terms of outreach
to make that happen?
Mr. MANGER. Congressman, we can always do a better job, and
we are looking to improve ways in which we deliver our services
and programs to everybody in the country. And I can assure you
that while I am here as Associate Administrator, that will be
our goal and our mission and we will continue that.
Mr. EVANS. I thank the chairman and yield back the balance
of my time.
Chairman CHABOT. Thank you. The gentleman yields back.
The gentleman from Iowa, Mr. Blum, who is the chairman of
the Subcommittee on Agriculture, Energy, and Trade, is
recognized for 5 minutes.
Mr. BLUM. Thank you, Chairman Chabot.
The loan portfolio, 7(a) loan portfolio, how large today in
billions?
Mr. MANGER. Today, the 7(a) program total loan portfolio is
$80 billion.
Mr. BLUM. And the default rate on that?
Mr. MANGER. Is just under--2 percent is the loss purchase
rate.
Mr. BLUM. So if I can do my math correctly that is a big
number every year.
Mr. MANGER. And it is being supported by the zero subsidy
on which the program is running. The fees that pay for the
program are paying for those losses.
Mr. BLUM. Which is great. That is unusual.
Mr. MANGER. We really like the zero subsidy and we will do
everything to maintain the zero subsidy for the program.
Mr. BLUM. We would hope so.
Mr. MANGER. Yes.
Mr. BLUM. What happens when somebody defaults vis-a-vis
asset recovery?
Mr. MANGER. So first, the lender works as hard as they can
to make sure that they can recoup as much from the borrower as
possible. If at the end of the day it has to be purchased by
the SBA, which is a last resort, that loan is sent to our
office in Herndon, Virginia, where we do all of the loan
processing for the purchases, and again, it is reviewed, and if
everything is in accordance with SBA policy, we make good on
the guaranteed portion. Now, at the end of that, if there is
anything further that can be done, we are required to send that
loan over to the Department of the Treasury for any final
collections that could occur by them, but that is the process.
Mr. BLUM. What percentage of the loans that default do we
get some type of asset recovery on?
Mr. MANGER. You know, I do not have that exact number, but
I do know that we are recouping obviously a good portion, but I
do not have that exact number. I will get it for you.
Mr. BLUM. I think someone said in previous testimony here
today that the loans are reviewed quarterly. Is that correct?
Or is it the lenders that are reviewed quarterly?
Ms. RUSCHE. What I mentioned was that we have a quarterly
purchase rating. That is an analytic rating that we establish
for every lender that is based upon their existing loan
portfolio that helps us bucket them into degrees of risk based
on the performance of their loans so that we can attend to the
higher risk lenders.
Mr. BLUM. Buckets of risk, that was it. I was on a bank
board for 18 years, in charge of the board of directors'
commercial credit review. We would have what we would call
suspect loans based on the review of those loans. Do you have
something similar to that? Do you know how many loans currently
are at risk or suspect of not paying back or of default?
Ms. RUSCHE. We would actually expect our lenders to manage
the individual loan credits in their portfolios, and if they
come to the point where a purchase or an honoring of the
guarantee is necessary, that is when it comes into the SBA
space. But we have lending partners and those partners are the
ones who actually work with the customers through payment
issues and payment problems. Our analytics do help those
lenders identify their individual loans by buckets of risk as
well and we share that with those lenders to help them improve
that process.
Mr. BLUM. Okay. So our lenders, the SBA lenders are only
organizations that are reviewed by outside organizations such
as a State banking association or the Federal Reserve, is that
correct?
Ms. RUSCHE. We have several groups of lenders. One group of
those is lenders that are regulated by entities such as FDIC,
OCC, or the Fed. We have another population of lenders that are
primarily regulated by the Small Business Administration, and
we tailor our review processes to those facts. So we are a
little more extensive on our examination reviews and oversight
of the lenders for which there is no other entity. We do not
want to duplicate what already exists.
Mr. BLUM. And I have one last question here and a minute.
In 2015, GAO did a report and they said lender oversight is a
``longstanding management challenge'' of the SBA. I am sure--I
do not have the report in front of me--they offered
recommendations. How are we doing on those recommendations?
Have they been accomplished? What percentage of them have not
been addressed? Because we are sitting here 2-1/2 years later.
Ms. RUSCHE. Thank you very much for that question. I have
been the director of OCRM for 2 years and we have closed all
but one of the recommendations and we are working actively on
it.
Mr. BLUM. Very good. I appreciate you being here for your
testimony today, and I yield back 15 seconds of my time, Mr.
Chairman.
Chairman CHABOT. All right. The gentleman yields back.
Thank you very much. And we will go to a second round quickly
here, and we will recognize the ranking member for up to 5
minutes.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Mr. Manger, I come back to you because, when you leave this
hearing, I want you to understand my concern regarding the gap
in financing loans below $360,000 in the 7(a) program. The fact
of the matter is that while the overall number of 7(a) loans
has increased, the percentage going to minority and women-owned
firms has been fairly consistent to the levels of 2010.
So my question is, why is it that minority lending and
women lending has not rebounded as well as the rest of the 7(a)
portfolio? I do not want to hear your answer; I just want to
see the numbers the next time around and I am going to be
paying attention to that.
I have a question regarding lenders closely monitoring the
7(a) authorization cap because emergency supplemental authority
was required in fiscal year 2014 and 2015. So could giving SBA
flexibility to increase the 7(a) lending authority beyond the
congressionally authorized cap provide assistance in this
situation?
Mr. MANGER. Yes. I would like to answer that,
Congresswoman.
We want to make sure, and the Administrator, Linda McMahon,
made it very clear to me when I first came into the agency, she
said, ``The last thing I want to have happen is the program
shut down.'' And I pledged to her that we will watch it on a
daily basis to make sure that at the first instance that we
think that there is a problem that we are going to hit that
authorization level, that we will notify OMB and Congress
immediately so that we can rectify that situation because we do
not want the program to shut down.
And with that I would also say that, as you know, Linda
McMahon has asked Congress to give her the ability to increase
the cap by 15 percent if it does not affect the zero subsidy,
no effect to the budget, so that we could increase that cap
upon notification of Congress if we think again we are getting
close to that level. It would give our lending partners a
little breathing room so they know that there would be no issue
with the cap being reached and, again, the program having to
shut down. So we would really like, and Linda McMahon stressed
to me this morning before I came up here, she said, please make
sure you mention to them that we are asking for that relief.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. I yield back.
Chairman CHABOT. Thank you. And I will recognize myself.
First of all, Mr. Manger, I will go to you if I can. Some
lenders--Manger, I am sorry--some lenders utilize the secondary
market with the 7(a) loans. Would you describe the process of a
lender using the secondary market?
Mr. MANGER. Sure. And I think Ms. Rusche could help with
this as well. But basically, when a loan is made, we do allow
some lenders to be able to sell that loan into the secondary
market. Now, the thing that is most important to remember,
though, they can only sell the guaranteed portion of the loan.
The originating lender must maintain on average 25 percent of
the value of that loan on their books. So they still have skin
in the game, as they say. So we allow that. It is something
that our lenders appreciate, but they realize that they do
maintain skin in the game. They are only selling the guaranteed
portion that is guaranteed by the SBA.
Chairman CHABOT. Thank you.
Ms. Rusche, to follow up on our previous discussion about
the enforcement measures, are there enforcement actions that
are available to the Office of Credit Risk Management? Are they
strong enough to protect lender noncompliance?
Ms. RUSCHE. We have strong protocols in place. We have a
Lender Oversight Committee, a collection of officials from the
SBA, who assist OCRM in ensuring that we have sufficient
resources, and when we need to take action, they have a say in
taking that action so it is done appropriately. We would
certainly enjoy working with your Committee to review
additional possible authorities that we may want to consider,
but we do think we have strong protocols in place at the
present time.
Chairman CHABOT. Okay. Thank you.
And back to you, Mr. Manger. Ms. Rusche's testimony earlier
states that staff is supplemented by support contractors for
reviews and exams and enforcement activities. Can you talk
about that? Are we hiring outside contractors for these roles
or just how does that work?
Mr. MANGER. Yes. So in the Office of Credit Risk Management
under the Office of Capital Access we have 27 full-time
equivalents working on lender oversight. We augment that with
contracts. For example, we do have a large contract with Dun
and Bradstreet. Dun and Bradstreet supplies us amazing metrics
on the lenders in our program. In fact, I believe Linda Rusche
has one of the pages that they supply to us, and it really is
broken down to a fantastic degree so that we get a clear
picture of exactly what is going on with that lender. That
would be very difficult to get some of that information that
D&B provides us without having that contract. So we are very
happy to have that contract. They provide us a great amount of
information. And then again, those 27 FTEs in the office do the
work onsite that we need to have done.
Chairman CHABOT. Okay. Thank you.
And then my final question, and I would invite either one
of you that would like to take this to do it, you know, we have
talked about the 7(a) Loan Program here today in some
considerable detail, but that is not the only loan program
obviously the SBA has. We have the 8(a) Loan Program, the
Microloan program, the 504 Loan Program. For those, again, who
might be out there wondering what they might qualify, could you
sort of just give us a one or two or three-sentence idea of
what the various programs are and how they fit in? Who would
they appeal to?
Mr. MANGER. Sure. And that is a great question, and I hope
people are listening out there because this would be very
helpful to them.
So the 7(a) program is really our flagship program. It is
our largest program; $80 billion is in the total portfolio
size. That loan can be used for anything, including working
capital. It is a great loan for a startup. It really is the
program that we most use and I am happy to report that the
increase this year in the usage of that program is up 9.7
percent. So it is being used. But what is even more
interesting, Congressmen, and I think you will find this
interesting, Mr. Chairman, is that the 504 program, which is
for fixed asset acquisition, so any types of bricks and mortar,
land, buildings, equipment, heavy equipment for a business, the
504 program has actually increased this year by 13.8 percent.
And there are really two reasons for that.
One, with the 504 program you are guaranteed a fixed rate
for a long term, 20 years, for example, on a 504 loan. In a
rising interest rate environment, which we have today, there
are many people that are interested in being able to acquire
those fixed assets at a fixed rate. Certainly, with the economy
doing as well as it is recently, we also find many small
businesses are willing to go out and make that expensive
equipment purchase. The 504 Loan Program is perfect for that
type of small business owner that needs to acquire a big piece
of equipment, fixed assets. The size of that loan goes up to
$5.5 million, and again, we are seeing an increase in that
program greater than 7(a) this year, 13.8 percent.
The Community Advantage program is actually a subset, a
pilot subset of the 7(a) program, and that was started in 2011
for loans under $250,000. Again, average size $130,000, and
that program is up 19 percent this year. So that is a subset of
7(a), but it is doing extremely well and we will be looking at
that to possibly make that permanent in the future. The pilot
runs through 2020.
And finally, the Microloan program. Again, this is
something that is done in conjunction with our not-for-profit
lending partners, lending intermediaries, and those loans are
under $50,000, average size $13,000. They have great impact for
that person that only needs a small amount of money, and that
program has seen an increase even greater than the 7(a) program
this year. In fact, demand for Microloans has gone up since the
election. That is up 10.3 percent this year.
Chairman CHABOT. Thank you very much. My time is expired.
The gentlelady from Puerto Rico, Ms. Gonzalez-Colon, is
recognized for 5 minutes.
Ms. GONZALEZ-COLON. Thank you, Mr. Chairman. I just want to
make just one question. And it is going to be does the SBA
encourage the banks to operate in the secondary market?
Ms. RUSCHE. Thank you very much for that question.
I think encourage is probably not the correct word we would
use. We allow under our protocols for a lender to participate
in selling the guaranteed portions of loans in a secondary
market. It is the lender's choice.
Ms. GONZALEZ-COLON. So it is going to be a choice. It is
not that you are encouraged to do that?
Ms. RUSCHE. No, we are neutral on it.
Ms. GONZALEZ-COLON. And what is the premium paid to acquire
a guaranteed loan in the 7(a)?
Mr. MANGER. Are you asking about what the interest rate is?
Ms. GONZALEZ-COLON. Mm-hmm.
Mr. MANGER. It is 2-3/4 above prime for the regular 7(a)
program.
Ms. GONZALEZ-COLON. Thank you, sir. I yield back.
Chairman CHABOT. Okay. The gentlelady yields back. We want
to thank our--oh, she does? Okay. Thank you very much.
All right. The gentlelady from American-Samoa, Ms.
Radewagen, who is the chairman of the Subcommittee on Health
and Technology, is recognized for 5 minutes.
Mrs. RADEWAGEN. Thank you, Mr. Chairman. And I want to add
my welcome to the panel today.
The Microloan program that was mentioned, I have been
really very fascinated with that. That tends to work for us out
in American Samoa, and perhaps my staff can work with your
staff to find out more about it because they do not even need
under 50K loans. You are talking about $1,000 or $2,000. It
makes a whole difference and they build these little businesses
and they are just burgeoning all over the islands, and I wanted
to just mention that.
So thank you, Mr. Chairman, I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back. And
on that point that the gentlelady raised, if somebody out in
American Samoa or in Cincinnati, Ohio, or anywhere else wanted
to know more about these programs, would you suggest they go to
your website and they would find information there on these
things?
Mr. MANGER. Certainly. Our website has a lot of
information.
Chairman CHABOT. And what would that website be?
Mr. MANGER. SBA.gov.
Chairman CHABOT. SBA.gov.
Mr. MANGER. You got it. But, you know, I would also
encourage those to reach out to our district offices. They are
really on the frontlines throughout the United States and the
territories, and they provide a great service and I would also
point anyone to them as well.
I would also just like to mention, though, the LINC
program. I am not sure if we have spoken about LINC here today,
but LINC was a setup a few years ago at the SBA to pair up
lenders with particular borrowers. And LINC to date has
generated over 200 emails from borrows looking for financing at
SBA-participating lenders. And to date as a result, we have had
70,000 unique borrowers receive a match from a lender and they
are proceeding with financing. There are over 1,200
participating lenders on LINC.
And Mr. Chairman, I would just like to mention that we are
actually enhancing LINC right now. And within the next month we
are going to be relaunching it under the new name Lender Match.
And certainly, if you and your staff would be interested, we
would like to show you a preview of that before it is launched.
Chairman CHABOT. Excellent. We would be very interested in
that.
We want to thank our witnesses for their testimony here
today.
As the economy continues to recover and as access to
capital continues to be a roadblock for the Nation's small
businesses, it is imperative that this program that we have
been discussing here this morning, the 7(a) Loan Program, is
run in as efficient a manner as possible while, of course,
safeguarding the American taxpayer dollars. And with the
program experiencing such significant growth in recent years,
we have a lot on the line, and so we want to thank you for what
you do about this important program and making sure that it is
run as efficiently as possible, and obviously follow up with
the things. The ranking member asked for some additional
information and we would urge you to provide that.
I would ask unanimous consent that members have 5
legislative days----
Ms. GONZALEZ-COLON. Mr. Chairman?
Chairman CHABOT. Yes?
Ms. GONZALEZ-COLON. Can I make just one more question?
Chairman CHABOT. Absolutely. The gentlelady is recognized.
Ms. GONZALEZ-COLON. Thank you, Mr. Chairman.
I understand that over 30 percent of the total amount of
(7)a loans each year are made only for owner-occupied
commercial real estate transactions. Is that true?
Mr. MANGER. I do not have that exactly number with me. I
will have to get that for you.
Ms. GONZALEZ-COLON. Can you check that information?
Mr. MANGER. Yes.
Ms. GONZALEZ-COLON. And if that is true, can you tell us
what percentage of those loans are used for business
acquisition, partners' bios, working capital, debt
consolidation startup capital, equipment financing, or real
estate financing when you search for that information?
Ms. RUSCHE. We will review our analytics and develop that
information and provide it.
I yield back.
Chairman CHABOT. So I would unanimous consent that members
have 5 legislative days to submit statements and supporting
materials for the record.
Without objection, so ordered. And if there is no further
business to come before the Committee, we are adjourned. Thank
you very much.
[Whereupon, at 12:15 p.m., the Committee was adjourned.]
A P P E N D I X
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Good morning, Chairman Chabot and Ranking Member Velazquez,
and thank you for the opportunity to testify before this
Committee on the Office of Credit Risk Management (``OCRM'') of
the U.S. Small Business Administration (``SBA''). As Director
of OCRM, I am responsible for the oversight and risk management
of SBA's lenders and their SBA-guaranteed loan portfolios for
the 7(a) and 504 Loan Programs. I have spent the last two
decades involved in lender oversight and loan program risk
management at SBA and I have been the Director of OCRM since
2015.
SBA's Administrator Linda McMahon has demonstrated
leadership in championing small business lending while
maintaining prudent lending standards in our loan programs. SBA
is particularly interested in balancing the growing credit
needs of America's small businesses with prudent lending,
always ensuring that we are meeting the requirements of our
mission as authorized by the Small Business Act and the Small
Business Investment Act.
SBA's role is to fill an unmet need in the market place--to
help creditworthy small businesses access credit when credit is
not available elsewhere--generally due to lack of collateral,
start-up business status, industry type, or other issues. SBA
is critical in providing credit to underserved markets, in a
commercially prudent and reasonable manner.
The Office of Credit Risk Management mission, and therefore
my mission as its Director, is to effectively manage program
credit risk, monitor lender performance, and enforce loan
program requirements. In short, our mission is to maintain the
integrity and viability of the 7(a) and 504 Loan Programs.
As of March 31, 2017, OCRM monitored a portfolio of 3,654
lenders that provide 7(a) guaranty financing in excess of $82.3
billion and 228 Certified Development Companies (``CDCs'')
responsible for approximately $26.8 billion in 504 debenture
guarantees. This includes supervision of 14 Small Business
Lending Companies (``SBLCs''), 27 Non-Federally Regulated
Lenders (``NFRLs'') and over 100 Community Advantage Lenders.
How does the Office of Credit Risk Management monitor all
SBA 7(a) Lenders and CDCs and over $100 billion in credit? Our
first step is through use of our Loan and Lender Monitoring
System (``L/LMS''), the bedrock of our lender performance
monitoring, which tracks the monthly performance of all 7(a)
and 504 loans and assigns a quarterly credit score for each
loan. A quarterly purchase rating for each lender is also
generated using this L/LMS data. This provides an initial risk
profile for each lender and CDC and allows OCRM to ``bucket''
higher risk lenders and CDCs for additional monitoring.
Next, OCRM uses our composite risk measurement
methodologies and scoring guides, ``PARRiS'' for 7(a) Lenders
and ``SMART'' for CDCs, to further diagnose higher risk
lenders. PARRiS is an acronym for five components that focus
our attention on Portfolio Performance, Asset Management,
Regulatory Compliance, Risk Management, and Special Items. The
504 program SMART components cover the following areas:
Solvency and Financial Condition, Management and Board
Governance, Asset Quality and Servicing, Regulatory Compliance,
and Technical Issues and Mission.
Benchmarks of historical and projected performance have
been developed for the PARRiS and SMART methodologies, and
provide relative measures of lenders' financial risk specific
to each program. These were most recently refreshed with
updated performance information in early 2017. By using both
predictive and historic performance metrics in the PARRiS and
SMART methodologies, OCRM obtains a holistic picture of lender
risk, upon which to consider additional oversight activities.
Third, OCRM conducts approximately 300 focused risk-based
reviews and examinations using these protocols each year. These
consist of multiple types including Analytical Reviews, Full
Reviews, Targeted Reviews, and Safety and Soundness
Examinations.
OCRM also conducts over 1,200 assessments each year before
renewing delegated lending status for those lenders and CDCs
which have been granted enhanced authority by SBA. We also
conduct quarterly financial and capital assessments of our SBA
Supervised Lenders, since SBA is generally their sole federal
financial regulator. Also, we conduct reviews of CDC annual
reports to determine whether CDCs have the financial ability to
operate and are in compliance with loan program requirements.
In addition to its lender monitoring and supervision
activities, OCRM has been at the forefront of identifying
emerging risks, one of which involves the ongoing discussion of
which businesses are in need of SBA financing. The Small
Business Act, as amended, states that small business loan
guarantees are to be provided to only those borrowers who
cannot obtain the needed credit on reasonable terms from other
non-federal sources. Over the years SBA has promulgated
regulations and developed policy to assist lenders in making
this determination and fully documenting it for each 7(a) loan
approved.
With recent robust growth in the 7(a) program, OCRM has
paid particular attention in its reviews to a lender's
documented ``credit elsewhere'' reasons. We have identified
some instances of lack of understanding on the part of lenders,
and occasionally poor internal controls within lenders'
operations, that contribute to their non-compliance with this
requirement. OCRM requires lenders which demonstrate non-
compliance to correct individual file deficiencies, and as
needed, to alter policies, procedures or internal controls to
ensure full compliance with the Act and all other applicable
regulations and procedures. OCRM will continue to focus on this
area in our upcoming reviews, to ensure the mission of the
Agency is met in providing small businesses with financing they
cannot obtain elsewhere on reasonable terms and conditions.
To accomplish our responsibilities, OCRM operates with a
staff of 27 supplemented by support contracts for reviews,
exams and enforcement activities. OCRM continuously assesses
our internal operation to ensure we deliver our critical
monitoring, supervision and enforcement activities with the
most effective and efficient mix of these resources. We also
continuously assess the functions of our contracts in the same
manner, working continuously to improve consistency through
retention of well-trained leaders.
In fiscal year 2017 and beyond, OCRM will continue to
conduct a portfolio diagnostic of every lender using historical
performance, the predictive credit scores for all 7(a) or 504
loans, and the PARRiS and SMART methodologies to evaluate the
relationship of each lender's metrics to benchmarks. OCRM will
also continue to monitor lenders through programmatic risk-
based reviews, using PARRiS and SMART to target existing and
emerging risks, as identified.
SBA also continues in active discussions with primary
federal regulators on such topics as information sharing and
vendor management. Through exchange of information we can bring
improved oversight and monitoring to our activities and theirs,
minimizing duplication and burden.
Thank you for the opportunity to share this information
today regarding how OCRM supports SBA's role of providing
access to capital for small business owners of this great
country. I will be happy to respond to your questions.
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I'd like to thank Chairman Chabot, Ranking Member Velazquez
and the entire House Small Business Committee for the
opportunity to testify before you today. I had a great meeting
in April with some of your staff and look forward to building a
strong and open relationship with all of you moving forward.
It is an honor for me to be here and to have been appointed
Associate Administrator for the SBA's Office of Capital Access
by Administrator Linda McMahon. It's been eight years since I
last worked at the SBA as Associate Administrator for the
Office of Field Operations in Washington and prior to that, I
was also fortunate enough to serve as SBA's Regional
Administrator for Region 2, based out of New York. From the
very beginning of my time at the SBA I was able to witness the
positive impact our programs have on communities across the
country. I can definitely say that I am very excited to have
the ability to improve the services we provide and help small
business owners and entrepreneurs grow to their full potential.
As Associate Administrator, I oversee the SBA's flagship
7(a) and 504 loan programs, as well as our Microloan and Surety
Bond programs. Just a couple of weeks ago this Administration
had our first opportunity to take part in National Small
Business Week. It was a tremendous success and showcased so
many incredible entrepreneurs that have successfully utilized
these programs and created jobs for American Workers.
National Small Business Week serves as a reminder of how
crucial small enterprises are to our economy and it is a great
time for our nation's leaders to reflect on how to better serve
the small business community. I am very optimistic about this
Administrations agenda in that regard. Recently, there has been
a tremendous amount of optimism and confidence in our economy
and our talented team of program directors and I will be
working tirelessly to help deliver on the high expectations set
by this Administration.
The role that the SBA and the Office of Capital Access
plays in our credit markets fills an important gap in the
lending marketplace. Our agency aims to help small businesses
obtain credit which is otherwise unavailable through
conventional lending. As many of you know, often time's
entrepreneurs have the will and drive to succeed, but access to
capital unfortunately proves to be an insurmountable hurdle.
That is where we come in. Our programs have been helping small
businesses get on their feet and grow for decades, but as we
all know there is always room for improvement.
Administrator Linda McMahon has placed an emphasis on
making sure our entire agency and our Office of Capital Access
is running as efficiently and effectively as possible and that
is exactly what I intend to do as Associate Administrator.
The Office of Capital Access is streamlining our Standard
Operating Procedures (SOP's) and plans to repeal unnecessary
regulations that don't benefit small businesses aiming to start
or expand. As our SBA One system continues to be a success, we
are in the process of modernizing the 504 lending system and
bringing it up to speed technologically.
We will also place an emphasis on SBA loan center
efficiency, which will decrease the time it takes for lenders
to process, service and collect SBA guaranteed loans.
As we work to recruit more lenders for our programs, we
have stressed to our lending partners that we want to see more
small-dollar loans being made to entrepreneurs. Our focus will
remain on helping those who need capital most before anyone
else--that includes our veterans, women-owned businesses,
minority-owned businesses, rural communities and all of our
emerging markets. In addition, the Office of Capital Access
sees our 7(a) program in particular, as a powerful tool for
helping create and retain jobs for American workers.
It is of paramount importance to me and our agency that our
7(a) and 504 flagship programs continue to operate at zero
subsidy and remain a great deal for taxpayers. As we look to
refine the programs within the Office of Capital Access--the
continued zero subsidy status of our programs will absolutely
be a major priority for this Administration.
Having been serving as Associate Administrator for just
under two months now I can assure you that our office is
placing an incredible amount of emphasis on oversight to make
sure our programs are being administered properly and
appropriately. Linda Rusche plays a crucial role in that as
Director of our Office of Credit Risk Management.
The Office of Capital Access and the Office of Chief
Financial Officer are also constantly monitoring our program
level limits, and SBA thanks the Committee for its assistance
in raising the 7(a) program level to $27.5 billion in FY 2017
from $26.5 billion in FY 2016. While SBA is witnessing
increased demand by the small business community this year, we
are not currently in jeopardy of exceeding our capacity to meet
such needs. The Office of Capital Access works closely with the
SBA Lending community to communicate that the agency is in good
financial position with sufficient resources through the end of
this fiscal year.
However, to ensure that America's small businesses can
fully benefit from the tools and resources provided by the SBA
and that this support continues through the year uninterrupted,
the Administrator supports proposed legislation that would
grant circumstantial authority to the Administrator to increase
7(a) lending authority by 15 percent when program subsidy is
zero and appropriate notice is provided to Congress. The
flexibility offered by the proposed statutory provision would
offer greater certainty to our 7(a) lending partners and make
additional assistance available to small businesses at no
additional subsidy cost to the taxpayer.
While we continue to see job creation and responsible
growth from all of our programs I cannot stress enough how
committed we are to proper oversight--to date our 7(a) program
lending is up 10% over last year.
I am glad to have the opportunity to testify before this
committee today and demonstrate the work we are doing to help
America's entrepreneurs attain the American dream. Under the
leadership of Administrator McMahon, the SBA is more dynamic
and forward looking than ever before. Likewise, this
committee's partnership is something our office views as
invaluable to improving the sustainability of our programs.
I look forward to a transparent and collaborative
relationship with this committee to ensure we are fulfilling
all aspects of our agency's mandate.
Please know that in me you have someone that shares our
Administrator's vision of a stronger small business community
in America and is committed to administering our programs both
properly and in the best interest of the American taxpayer.
Question for the Record
Committee on Small Business
SBA's 7(a) Loan Program: A Detailed Review
May 17, 2017
Responses by William Manger, Associate Administrator for
Capital Access, SBA
Rep. Luetkemeyer to Mr. William Manger
At our hearing you discussed the franchisee
lending process and how it was changed with the intent to
simplify and streamline lending. Notwithstanding these best
intentions, my understanding is that the narrow scope of this
rule is significantly hindering access to loans for small
businesses and that some franchisors who previously had
agreements are unwilling to sign the new addendum. In addition,
I'm hearing that the new process is hurting the ability to
access loans for some small business owners who are not
franchisees, but may have an independent contractor
relationship with another entity selling or distributing their
products. Can you tell me what steps you've taken or plan to
take to provide additional flexibility in the process and
ensure that legitimate small businessmen and women can have
access to lending in these franchise and non-franchise
situations?
SBA Response:
Franchisees represent a significant portion of SBA's loan
portfolio--in FY2016, loans approved to franchisees represented
$4.68 Billion, or 16.2% of SBA's lending. For many
entrepreneurs getting started in business, the purchase of a
franchise can be the fulfillment of a lifelong dream to own and
operate a business. Without the benefit of an SBA guarantee,
and the financing it unlocks, many of those dreams might go
unrealized.
SBA's franchise lending processes are designed to ensure
that legitimate small businesses, whether franchisees or non-
franchisees, have access to the capital that is not available
elsewhere that they need to start, expand and grow the
business. As you know, Congress has authorized SBA to provide
financial assistance through its business loan programs only to
independently owned and operated small businesses. Therefore,
when SBA considers the size of an applicant for SBA financial
assistance, it takes into consideration the size of the
business together with all of its affiliated entities. A
business's affiliated entities are those entities that control,
are controlled by, or are under common control with the
business. Affiliates may be identified through ownership,
management, hiring practices or other similar means of control.
For franchisees seeking SBA financing, SBA has generally
determined whether a franchisee is affiliated with its
franchisor by reviewing the franchise agreement to ensure that
the agreement is not so controlling as to create affiliation
between the franchisor and the franchisee. If the franchisor
and franchisee are affiliated, their size is aggregated to
determine whether the application is ``small'' under the
current SBA size regulations.
In the past, agreements were reviewed on a case by case
basis. Effective January 1, 2017, however, SBA revised its
franchise review process to provide for a more streamlined
approach. The two main changes to the process were as follows:
1. Adopt the Federal Trade Commission (FTC)
definition of a franchise. The intent was to reduce the
number and types of agreements that SBA would consider
franchises under its regulation.
2. Create a Standard Form Addendum to be used with
all agreements that meet the FTC definition of a
franchise. The intent was to reduce the required review
of each franchise agreement to determine if there was
affiliation between the franchisor and the applicant
small business.
While the new process was embraced by some franchisors, SBA
found that there were a number of franchisors that were
unwilling to execute the SBA Standard Form Addendum. In order
to address this problem, SBA amended its process in February
2017 to allow for the use of a previously negotiated addendum
to be used in place of the Standard Form Addendum. This revised
process allows a franchisor that had worked with SBA on a
negotiated addendum in either 2015 or 2016, to use that
addendum with any of their franchise agreements, in place of
the required SBA Standard Form Addendum. This more flexible
approach gives the franchisor a choice and as a result has
improved the process, allowing many more small business
franchisees the ability to access SBA financial assistance.
But we are not satisfied that we have adequately addressed
the challenges in franchise lending to independently owned and
operated small businesses, and we are not finished. A dedicated
mailbox has been set up to receive comments and concerns from
franchisors and lenders regarding the new process. A team of
SBA employees from the Office of Capital Access and the Office
of General Counsel responds to any queries and issues that are
sent into the box. Through this and other means, we are gaining
a better understanding of the issues and challenges that still
exist in the SBA franchise lending area. We have seen that
there is some confusion and uncertainty among SBA lenders about
the FTC's definition of a franchise, particularly with respect
to its applicability to certain independent contractor
relationships. SBA has provided guidance to lenders and
businesses as to whether these agreements meet the FTC
definition of a franchise. SBA will continue to provide this
type of assistance, and is considering the possibility of
creating a national listing of reviewed agreements so lenders,
franchisors and small business franchisees will know which
agreements meet the FTC definition of a franchise. In addition,
SBA will continue to provide training sessions to lenders to
ensure that they understand the new process and can provide the
correct guidance to their small business clients.
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