[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

IMPROVING CAPITAL ACCESS PROGRAMS WITHIN
THE SBA

=======================================================================

HEARING

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS

OF THE

COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

__________

HEARING HELD
MAY 19, 2015

__________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

_______________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, gpo@custhelp.com.

Small Business Committee Document Number 114-011
Available via the GPO Website: www.fdsys.gov
HOUSE COMMITTEE ON SMALL BUSINESS

STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
TOM RICE, South Carolina
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii

Kevin Fitzpatrick, Staff Director
Stephen Dennis, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S

OPENING STATEMENTS

Page
Hon. Tom Rice.................................................... 1
Hon. Judy Chu.................................................... 1

WITNESSES

Mr. Rich Bradshaw, President, Specialized Lending, United
Community Bank, Greenville, SC, testifying on behalf of the
National Association of Government Guaranteed Lenders (NAGGL).. 3
Ms. Barbara Vohryzek, President and CEO, National Association of
Development Companies, Washington, DC.......................... 5
Mr. Brett Palmer, President, Small Business Investor Alliance,
Washington, DC................................................. 7
Mr. Brandon Napoli, Director of Microlending, Valley Economic
Development Center, Van Nuys, CA............................... 9

APPENDIX

Prepared Statements:
Mr. Rich Bradshaw, President, Specialized Lending, United
Community Bank, Greenville, SC, testifying on behalf of the
National Association of Government Guaranteed Lenders
(NAGGL).................................................... 25
Ms. Barbara Vohryzek, President and CEO, National Association
of Development Companies, Washington, DC................... 31
Mr. Brett Palmer, President, Small Business Investor
Alliance, Washington, DC................................... 34
Mr. Brandon Napoli, Director of Microlending, Valley Economic
Development Center, Van Nuys, CA........................... 44
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Friends of the SBA Microloan Program......................... 47

IMPROVING CAPITAL ACCESS PROGRAMS WITHIN THE SBA

----------

TUESDAY, MAY 19, 2015

House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Tom Rice
[chairman of the subcommittee] presiding.
Present: Representatives Rice, Chabot, Hanna, Huelskamp,
Brat, Chu, and Hahn.
Chairman RICE. Good morning. Call to order this meeting of
the Subcommittee on Economic Growth, Tax, and Capital Access of
the Small Business Committee of May 19, 2015. Thank you all for
being with us today. I call this hearing to order.
As a result of the Great Recession, lending to small firms
declined, and only recently have we started to see signs of
growth. For small businesses, access to capital is often the
deciding factor if a business will expand or close its doors.
Since the Small Business Administration's creation over 60
years ago, the agency has been tasked to administer programs
that help entrepreneurs receive capital. In doing so, the SBA
oversees four primary lending programs: The 7(a) Guaranteed
Loan Program, the Certified Development Company Loan Program,
the Small Business Investment Company Program, and the
Microloan Program.
Each of these programs, as we will hear today, serves a
unique purpose and aims to fill a gap in the commercial
marketplace. Although this is a great oversimplification of the
process, the Small Business Administration does not directly
provide funds to small businesses through any of these
programs. Instead, the Administration guarantees the repayment
of credit and the equity issued by private-sector partners.
These industry partners are vital to the success of the
programs and ensuring that small businesses have access to the
capital they need to grow.
Today, we are fortunate to have an industry witness here
from each program to shed light on the assistance they provide,
and share with us their thoughts on how they can better their
respective programs. I look forward to hearing your
recommendations, and thank you all for taking the time to be
here. I now yield to the Ranking Member for her opening
remarks.
Ms. CHU. Thank you so much, Mr. Chair. And I thank all the
witnesses for being here today. I have been looking forward to
this hearing, especially since I know how valuable your
programs are. And today's hearing will provide even greater
insight into these access-to-capital programs and what
potential improvements could be made to help these initiatives
reach their full potential.
Our small business sector is back at the heart of job
creation after one of the worst economic downturns in history.
Small firms with less than 50 employees have averaged 106,000
new jobs per month for more than a year, and that is a good
sign. As the economy continues to strengthen, more
entrepreneurs will be seeking capital to start a new venture or
expand an existing business. And the Small Business
Administration's loan programs fill critical gaps in the
lending market for small businesses that cannot access
traditional lending sources.
For more than 50 years, the SBA has been assisting
America's entrepreneurs and small business owners through a
myriad of capital programs, including 7(a), 504/CDC,
microloans, and the SBIC Program. Last year, it channeled more
than $30 billion in assistance to over 58,000 small firms under
these programs. And for 2015, SBA is on track to provide over
$25 billion in capital to small businesses.
Each program here fills a distinctive, specific need in the
market. The 7(a) Program, SBA's flagship access-to-capital
initiative, has made an impressive $19 billion in capital
available to small businesses in 2014. This number has
continued to improve over the past few years; however, more
must be done to encourage lending the small-dollar loans, as
well as to increase lending in underserved markets--and
particularly for women, minorities, and veterans. Small-dollar
loans used to account for 25 percent of all dollars approved,
but today, that figure is just 10 percent.
The 504/CDC Program provides long-term, fixed-rate loans to
help small businesses obtain key fixed assets to expand or
modernize--such as in real estate, land, or equipment. Since
1990, the program has provided $64 billion through more than
120,000 loans. In my home state of California, 504 loans have
added over 500,000 jobs to the economy, and benefitted over
20,000 entrepreneurs; however, the program faced challenges
during the economic downturn to the nature of real-estate-heavy
programs.
Despite these setbacks, the program is recovering, and this
year will mark the first time in seven years that SBA has not
requested a subsidy. I hope this upward trend continues, and I
look forward to learning more about what changes we can make to
ensure the 504 Program preserves the 504/CDC Economic Develop
mission, and increases its lending volume.
The Microloan Program is unique in that it is designed to
provide small-dollar loans, under $50,000, to entrepreneurs
that cannot access capital through traditional bank loans--and
it is required to provide education and training to its
borrowers. And often, these borrowers are women and minority-
owned firms.
In 2014, SBA Microloan intermediaries provided nearly $56
million in microloans to small businesses, and created or
retained 15,000 jobs. That is a big impact.
Additionally, this year, SBA has requested a 30-percent
increase in funding for the Microloan Program, which is
expected to support about $75 million in loans to small
businesses; however, there are many technical changes that
could be made to make the program run more efficiently and
allow intermediaries to provide the kind of assistance that
borrowers need. And I look forward to hearing more about those
changes.
And when small businesses are looking for more than a
conventional bank loan but are not yet ready for private
equity, they can turn to the Small Business Investment Company
Program to fulfill their capital needs. In 1958, Congress
created the SBIC Program to fill this lending gap. And last
year alone, the program provided over $5 billion to startups
and high-growth companies.
The SBIC Program faces its own unique set of challenges,
such as limits to the amount of leverages available to them, as
well as issues with the licensing process for established
firms.
Whether it is a working capital loan, a mortgage, a
microloan, or an equity investment, capital is the lifeblood of
every small business. Without it, most firms cannot make the
improvements or hire the people that they need to succeed. SBA
has been there for thousands of small businesses over the
years, and it is the responsibility of the Committee to ensure
that it continues to operate to its maximum potential.
With this in mind, I am looking forward to hearing from
today's witnesses on ways to improving the agency's lending
programs. And I would like to thank all the witnesses for being
here today.
Thank you, and I yield back.
Chairman RICE. Thank you, Mrs. Chu. If additional members
have an opening statement prepared, I ask they be submitted for
the record.
I would also like to take a moment to explain the timing
lights to you. You each have five minutes to deliver your
testimony. The light will start out as green. When you have one
minute remaining, it will turn yellow. Finally, it will turn
red at the end of your five minutes. I ask that you try to keep
it to that time limit, but I will be a little lenient if you
need to close, all right?
Our first witness is Rich Bradshaw, who serves as the
President of Specialized Lending at United Carolina Bank in
Greenville, South Carolina--my home state. Mr. Bradshaw is
testifying on behalf of the National Association of Government
Guaranteed Lenders (NAGGL). At NAGGL, Mr. Bradshaw chairs the
Public Policy Committee, tracking and assessing SBA's current
lending initiatives. Previously, Mr. Bradshaw served in the
United States Air Force and Navy, and I want to thank you for
your service to our country. We look forward to hearing your
testimony. Please begin.

STATEMENTS OF RICHARD BRADSHAW, PRESIDENT, SPECIALIZED LENDING,
UNITED COMMUNITY BANK; BARBARA VOHRYZEK, PRESIDENT AND CEO,
NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES; BRETT PALMER,
PRESIDENT, SMALL BUSINESS INVESTOR ALLIANCE; BRANDON NAPOLI,
DIRECTOR OF MICROLENDING, VALLEY ECONOMIC DEVELOPMENT CENTER

STATEMENT OF RICHARD BRADSHAW

Mr. BRADSHAW. Good morning, Chairman Rice, Ranking Member
Chu, and distinguished members of this Subcommittee. I am
grateful to have this opportunity to testify before you and
discuss the impact of the Small Business Administration's 7(a)
Program on both lenders and the small business community.
As Chairman Rice said, my name is Rich Bradshaw; United
Community Bank. I am the President of Specialized Lending. We
are headquartered out of Blairsville, Georgia, and I work out
of the regional headquarters in beautiful Greenville, South
Carolina--and also representing NAGGL, which is the SBA 7(a)
trade association. I have had the unique experience of running
SBA divisions at very large national institutions, as well as
community banks, and I am also a proud veteran.
Let me give you an example of why I think the 7(a) Program
exists. If you were a manufacturer, and you are doing about $3
million in annual revenue, and you have 25 employees, and you
are looking to buy a new CNC lathe, it is going to run you
about $400,000. Conventional financing--we are going to set the
interest rate at six percent. It is typically going to be five
years, in terms of the term. Under the SBA, we will have that
same interest, but it will be 15 years. The cash flow savings
for that borrower will be in excess of $50,000.
Now I know in Washington, $50,000 is not a lot of money,
but to a company doing $3 million in revenue, it is all the
money in the world. And it allows that owner to focus on
margins, and market share, and hiring that next employee, and
not being so concerned about making payroll on Friday. And I
think that is really the strength of the program.
To put it simply, think about your main streets back home.
How difficult is it for your small businesses and your
constituents to get these loans in a heavily-regulated
environment, especially given the post-2007 era that we find
ourselves in. I am sure that you all hear this all the time in
your districts.
The 7(a) Program annually supports over 45,000 small
businesses. These 45,000 small businesses take their loans, and
are able to hire an additional 500,000 people on an annual
basis. It is also important to note at this time that the 7(a)
Program does not cost the taxpayers anything. It is a very
important point.
In addition, since 2010, the program has returned over $500
million to the Treasury. Quite frankly, in the current
financial climate, the SBA loan programs are the only game in
town for long-term financing on any kind of interest rate or
terms that would be accepted to a small business.
So, what is the one thing that Congress can do to help the
7(a) Program run more effectively and touch more small
businesses? It is make sure that we do not shut down. It sounds
simple, I know, but it is a looming threat we faced last year,
and we face again this upcoming year and the year after.
Potential shutdown of the program happens because we
constantly lend up to the authorized spending cap. This is a
good problem to have. It means small businesses are obtaining
capital, and the program is working. But as the bank executive
who gets to speak to our Board on the updates on the SBA
division, it is very difficult to discuss the running out of
funding concept. It is also very difficult to discuss that with
our borrowers, and we want and need private institutions'
support to reach more small businesses. And they need to know
that Washington is behind them; they need to know that you are
behind them.
As members of Congress, you are probably all too familiar
with having to explain to constituents the ups and downs of
funding in Washington. What I want you to know is that--7(a)
lender--I am there with you every day, and I am having to do
that, as well, and I know we have that experience in common.
For Fiscal Year 2015, the current authorization is $18.75
billion, but we project finishing Fiscal Year 2015 around $20.5
billion. If Congress does not act now, we will simply stop SBA
lending, potentially in the August timeframe.
If you are asking yourself why this program is going so
quickly, think back to your constituents back home, and some of
the challenges they run in obtaining capital and hearing the
word `no' from the conventional lenders, because it is just too
risky for them, and because the profiles of the banks have
changed since the 2007 Recession.
What this results in is the boxing out the bulk of small
business, in terms of getting and obtaining long-term
financing. And if we do not keep running into this problem, it
is important to make sure that Fiscal Year '16 is also properly
funded. The President's request for the 7(a) Program for '16
was $21 billion. NAGGL forecasts the industry will lend up to
$23 billion in Fiscal Year '16. Our ask is that the House and
Senate Small Business Committee authorize, with the
Appropriations Committee, $23 billion.
I also want to, in closing, make sure that the Committee
understands that NAGGL is very focused on the underserved
markets. I cochair the Public Policy Program. And in Fiscal
Year '12 to '15, African-American lending was up 93 percent. In
the same periods for veterans, it was up 88 percent. I have
been the leader in terms of growing the initiatives within
NAGGL, and have a great committee that we work with really
focusing on veteran initiatives.
And with that, I will thank you for letting me speak, and
open it up for any questions.
Chairman RICE. Thank you, sir. We will have questions after
everybody has testified.
Our next witness is Barbara Vohryzek, who serves as the
President and CEO of the National Association of Development
Companies, NADCO. NADCO represents SBA-certified development
companies and other lenders which deliver SBA loans and
financing for small businesses.
Thank you for being here today. You have five minutes, and
you may begin.

STATEMENT OF BARBARA VOHRYZEK

Ms. VOHRYZEK. Chairman Rice, Ranking Member Chu, and other
distinguished members of the Committee, thank you for inviting
me to testify, and I look forward to an exchange of ideas today
with you on ways we can work together.
My name is Barbara Vohryzek, and I serve as President and
CEO of the National Association of Development Companies,
a.k.a. NADCO. And we represent more than 90 percent of the 263
certified development companies, also known as CDCs. These CDCs
are mostly nonprofit entities that provide small businesses
with the 504 Loan Program, while often also participating in
other federal, state, and local economic development programs.
This is familiar territory for me. I founded and ran
California Statewide CDC for over 21 years. The 504 Loan
Program is a financing tool for economic development, and
provides small businesses, as Ranking Chair said, with long-
term fixed-rate loans to help them acquire equipment. And so I
do not have to restate, which you also said--and I appreciate
that--that, last year, we did--since 1990, we have provided
$64.3 billion in financing over 120,000 loans.
So, by law--and the reason that we are really here is, we
are here to create jobs. And we have to create one job per
$65,000, and we have to meet a public policy goal. And we have
several.
Economic development is the watchword, though, for many of
NADCO's members. While 504 was designed to be the larger SBA
loan and have a strong community impact, many CDCs also serve
entrepreneurs who need smaller loans through programs such as
the SBA's Community Advantage Pilot Program, which provides
loans under $250,000, and SBA's Microlending Program, which
provides loans under $50,000. Incubators, CDFIs, and EDA
revolving-loan funds are all represented by multiple CDCs in
our community. And these are just a sample of the broader that
is being done by CDCs nationwide; however, it is the 504 Loan
Program that unites us all.
The program has had, as was previously mentioned,
challenging years, as many others did during the Great
Recession. But I am pleased to report, as you all know, that we
will be back to zero subsidies, self-funded with no
appropriation, October 1st of this year.
I recommend that during the 114th Congress, the
Subcommittee focus on several long-term modifications, as well
as some immediate fixes to a few current challenges that the
industry and the program face.
First, the 504 Program lacks definition. It is SBA's
Economic Development Loan Program, and CDCs are economic
development entities. However, no definition is currently in
statute or regulation for the economic development or CDC. I
recommend that we work together, as we have been doing with
SBA, to formalize these and other definitions, so that there
are clear metrics for the program to fulfill its mission.
Second on the list of long-term program modifications, I
recommend that the successful debt refinancing with the 504
Loan Program be restarted permanently. This temporary refinance
program made available to small businesses precious working
capital, which otherwise would have been spent on either high
interest rates or--worse yet--balloon payments. This request is
quite timely, as well. Over 4,000 small-balance, commercial,
mortgage-backed security loans will mature in the next three
years. Borrowers will need to refinance out of what is being
called the wall of maturities; yet, many banks that handled
small-balance loans prior to the financial crisis are no longer
in the market or in business. This is a gap for small
businesses that could be filled by this debt refinancing
program.
Third and finally, the franchise agreements review process
needs to be addressed. NADCO recommends that SBA adopt
procedures to streamline the review and approval of franchise
and license agreements.
While these long-term challenges will strengthen the 504
Program for future small-business borrowers, several pressing
matters are preventing CDCs from best serving their communities
today.
The first is that of adequate levels of staffing at SBA.
Recent retirements and other departures mean that a single SBA
staff member may be handling the work of two, three, or even
more personnel. This scarcity slows our ability to support
small business entrepreneurs seeking 504 loans, and increases
the concern and lack of confidence within the small business
and banking community about our ability to deliver loans in a
timely fashion. We hope this Subcommittee advocates for
adequate resources for the budget and appropriations process
for SBA to manage this situation.
The other challenge which concerns the industry--and is
taking me over five--is a move by some in Congress to institute
fair-value accounting. If the small business community is
consulted on these budgetary changes, I urge you to oppose
them.
Thank you again for the opportunity to share NADCO's
thoughts, and I look forward to your questions and a vibrant
discussion about America's entrepreneurs.
Chairman RICE. Thank you. Our next witness is Brett Palmer,
who serves as the President of the Small Business Investor
Alliance. The SBIA is a national organization of lower-middle-
market funds and investors, primarily small business investment
companies whose members provide capital to small businesses.
Welcome, Mr. Palmer. You may begin.

STATEMENT OF BRETT PALMER

Mr. PALMER. Good morning, Chairman Rice, Ranking Member
Chu, and members of the House Small Business Subcommittee on
Economic Growth, Tax, and Capital Access. Thank you for holding
this hearing today to examine the effectiveness of the capital
access programs, including the Small Business Investment
Company Debenture Program. The Small Business Investor Alliance
represents investors in domestic small business, including
nearly all of the SBICs.
I would like to make several points with my testimony.
First, the SBIC Program is an effective and important program
for enhancing access to capital for domestic small businesses.
Second, the SBIC Program works primarily because at its
core is a market-driven effort that serves the public by
growing domestic small business and does so while operating a
zero subsidy. Legislation to increase the family of funds limit
is the most important issue faces us today, and we encourage
you to pass it immediately. The cosponsors of the bill, many of
whom are here today, thank you for supporting HR 10-23. Its
passage will ensure that the best small business investors will
continue to invest and grow domestic small businesses.
Improvements can be made to the SBIC Program, because it is
operating in a way that is certainly adequate, but there is a
lot of room for improvement. And more improvement can help us
serve more small businesses and more people in this country.
The SBIC Program exists because, structurally, what was
true in 1958 is still true today. It is much harder for small
businesses to access capital than it is for their larger
brethren. That will always be true.
The SBIC Program helps mitigate this. It will never replace
that problem and fix that problem entirely, but it helps
significantly. The importance of SBIC capital was made
abundantly clear in the financial crisis and the recession that
followed. While most financial institutions were cutting off
capital to small business and recalling loans, SBICs were
throttling up and filling the capital void.
Demand for capital from SBICs has grown dramatically since
the financial crisis and continues to grow. From Fiscal Year
2011 to present, SBICs have made $17 billion in investments in
about 5,500 small businesses in nearly every state. This
activity saved businesses and grew jobs.
In 2004, the SBIC Program had only about $5 billion in
assets. Today, it has grown to over $21 billion. Not only did
the Debenture Program not take losses during the time of
economic turmoil, it ran a small surplus. In the face of
economic calamity, this program worked both for small
businesses and the taxpayers. This growth is not driven by
government directive, but by the market needs of small
businesses and the opportunities being recognized by private
investors.
These investments do create jobs--and lots of them. A
recent Pepperdine study found that private-equity-backed
businesses grew jobs at a rate 257 percent faster than the
economy at large. We need more of that. With the continued
support of Congress, the administration, and the private
sector, this program will continue to grow, and serve more
small businesses, and create more jobs.
The program works differently than many other programs. To
become an SBIC, a potential SBIC must pass two important
filters--and they are both critical. The first one is the
private market filter. If the private sector will not trust a
fund manager with their manager, why should the SBA? It should
not. But if they are able to raise that private capital, then
they must survive a rigorous licensing process that the SBA
runs, and many applicants cannot get through this process. Only
about 25 percent of the funds that first approach the SBA about
forming an SBIC are able to get through the process.
Assuming they are able to get through the private sector
filter and get through the government filter, they are able to
access an SBA-backed credit facility--able to lever the fund at
a 2:1 ratio. So, what that does is, it takes $50 million in
private capital and turns it into $150 million of small
business capital at no cost to the taxpayer.
Unlike many other government programs that I know of, there
is no guarantee on any of the individual investments. In fact,
the private sector is at first-loss position for all the
investments. SBA guarantees the investors and the credit
facility, but not the SBIC or its individual investment. This
means that there is 100-percent private sector skin in the
game, and in the interests of the private sector and the
public, protections are aligned. This is a key reason why the
Debenture Program has gone so many years, running at a small
surplus and maintaining a zero subsidy.
The family of funds limit is important to us in this
program because the family of funds limit only limits
successful small business investors. The only funds that can
hit the limit are funds that have repeatedly come back as SBIC
funds in raising private capital money and going for the
licensing process. Underperforming funds cannot hit this limit,
because they cannot raise another fund. We ask that you pass HR
10-23 to raise this limit, to make sure that the successful
small business investors can continue to do so.
There are a number of improvements that the program needs.
There are a lot of good things that are happening, but there
are some improvements, too, that are needed. The licensing
process is extremely slow and it is expensive. We have
testified for years, the licensing process blocks qualified
applicants, and unnecessarily limits diversity in the program--
both geographic and other diversity forms. We ask for your help
in pushing the SBA to reform its licensing process, and
speeding it up, and making it less expensive.
In summary, the SBIC Program is working--and working well.
Raising the family of funds limit will increase small business
investing, and help many small businesses grow and access more
capital. An SBI needs more operational oversight to help make
data reforms.
And with that, I turn back the floor and be open to any
questions you might have.
Chairman RICE. Thank you, Mr. Palmer.
I yield to Ranking Member Chu to introduce her witness.
Ms. CHU. It is my pleasure to introduce Mr. Brandon Napoli,
who is joining us today all the way from Van Nuys, California--
Southern California--my area. Mr. Napoli serves as the Director
of Microlending for Valley Economic Development Center--or the
VEDC--and is here to testify about his experience with the SBA
Microloan Program. VEDC is an SBA Microloan intermediary, and
it was named one of the top 10 SBA intermediaries in the
country, approving over $1 million in microloans for 2014.
Prior to joining VEDC, Mr. Napoli served as a Community
Loan Program Officer at the CDC Small Business Finance in San
Diego, California. He is a graduate of Point Loma Nazarene
University and San Diego State University.
Welcome, Mr. Napoli.

STATEMENT OF BRANDON NAPOLI

Mr. NAPOLI. Chairman Rice, and Ranking Member Chu, and
members of the Subcommittee, thank you for the opportunity to
submit testimony about a crucial component of a vital American
business community.
My name is Brandon Napoli. I am the Director of
Microlending at VEDC, located in Los Angeles. We are one of the
nation's largest SBA microlenders. We provide real money to
real people, creating real jobs.
Microlending is foundational to the economy, and VEDC is
committed to helping entrepreneurs like Maria Martir secure
microloans to foster healthy, sustainable community. Ms. Martir
had saved $40,000 to launch a business, but her request for a
$10,000 loan was declined by local, traditional lenders,
because there was no outside collateral or existing cash flow.
Ms. Martir turned to VEDC, who offers access to capital, as
well as free technical assistance, for entrepreneurs unable to
secure traditional bank financing.
Three years after receiving a $10,000 loan and help with
writing her business plan, Ms. Martir's De Todo Un Poquito
Cafe--A Little Everything--has expanded next door, hired on her
four children, and is now looking to expand elsewhere.
Her experience illustrates what we in the industry have
known from years of experience: Hands-on technical assistance,
coupled with need-based financing, greatly increases a small
business's chance of success.
Microlending reaches entrepreneurs who are outside the
economic mainstream, who are very much a part of the economic
fabric of this country. Ms. Martir's cafe is one of 25 million
businesses--or 88 percent of all business--in the United States
considered a micro-business--a business with five or fewer
employees and less than $50,000 in startup capital. These
businesses generate $2.4 trillion in receipts, account for 17
percent of U.S. GDP, and employ more than 31 million Americans.
Micro-businesses are everywhere--the farmer at the Saturday
Market, the trucker who works those long hours on the road, the
contractor who built your home, the beauty salon or barber
shop, your favorite neighborhood restaurant that you always
want them to commercialize the barbecue sauce, and the
miniature golf course you worked at as a kid. Think of the
business you frequent, and I am sure that you encounter many
micro-businesses you call your own.
Ms. Martir's De Todo Un Poquito Cafe and other microloan
businesses could not do what they do without the support they
get from SBA Microloan intermediaries, such as VEDC. Since
1998, VEDC has lent over $11 million and 1,000 SBA microloans.
Thankfully, there are many others like VEDC around the country.
For example, the Economic and Community Development Institute
in Ohio that provide a one-stop shop where a business owner can
secure flexible financing, as well as individual business
assistance throughout the life of a loan.
The proposed Fiscal Year 2016 budget provides continued
opportunities for American entrepreneurs to start their own
business and become successful, independent, and self-reliant.
To keep the American dream a reality for millions of micro-
businesses, Congress needs to increase the effective investment
it has made in SBA Microloan from $24.8 million to $28.3
million, and make the programmatic changes suggested by the
current intermediary micro-lenders.
Increasing lending and easing some of the SBA Microloan
Program restrictions will help to further the American dream,
one microloan business at a time. Since the Microloan Program
was authorized in 1991, intermediary lenders have borrowed over
$414 million, of which they have been able to lend $629 million
to small businesses that help create or retain 185,000 jobs at
the cost to the federal government of around $2,000 per job.
During this time--and since launch of the SBA Microloan
Program--intermediaries have realized that several well-
intentioned policies now serve as barriers to gains and
efficiencies. The most restrictive barrier is the statutory
restraint of utilizing 75 percent of the technical assistance
post-funding and only 25 percent prefunding.
As Ms. Martir and the majority of micro-enterprises, the
need for intense technical assistance before receiving
financing ensures that the small business is loan-ready.
In closing, every day, VEDC and microloan lenders across
America seed hardworking people like Ms. Martir who want to and
can build businesses, create jobs, and strengthen communities.
The greatest investment we can make is in people who create
jobs. The returns go far beyond dollars paid back.
Thank you for this opportunity to share Ms. Martir's and
the industry's story, and I look forward to your continuing
support of the programs designed to promote job creation,
especially those with proven track records, such as the
Microloan Program at SBA.
Chairman RICE. Thank you, Mr. Napoli. I have a lot of
questions for you, but I want to start out by saying that, in
my opinion, there is nothing more important than American
competitiveness and jobs. We cannot have a strong country
without a strong economy, and I think you guys are on the
frontline, and I cannot thank you enough for what you do--
providing access to capital. I think that is one of the
foundations, one of the bricks in the foundation of the
prosperity of this country. And I am so impressed listening to
how you perform your duties and how you grow jobs in this
country.
I have so many questions with respect to what areas--where
are the gaps here that are not being filled? You know, you have
microloans. You have the 7(a) loans. You have the CDC/SBIC. Who
is falling through the cracks here? It sounds like you have got
the small business area pretty well-covered. Are there broad
classes that are not being covered? Mr. Palmer, I will start
with you.
Mr. PALMER. Sure. I think that one of the classes that has
not been covered and not really discovered is the early-stage
equity side--and a lot of businesses to start up that are
smaller businesses, that are not necessarily tech and biotech
in Silicon Valley, really do have a real challenge in figuring
out how to get, you know, early-stage equity investing when you
are not cash flowing, and you are not going to be cash flowing
in the very near-term, to, you know, pay an interest payment on
a debt structure. So, I think that is an area that really is
lacking in the economy right now.
Chairman RICE. Mrs. Vohryzek, you said something that
intrigued me earlier. You said we need to restart the refinance
program--and why did you say that?
Ms. VOHRYZEK. There are a couple of reasons, but the large
reason coming is what is known as the wall of maturities. So,
these small-balance loans that were done prior to the
recession--a lot of small businesses are in these pools and
these mortgage-backed securities. And so as they mature and
they come out of the pool, then the houses--the larger
investment houses--do not do loans under $2.5 million. And so
there is all of these owner/user small business types coming
out of that, having to come up with other financial
instruments.
Chairman RICE. So, there were commercial lenders that made
these loans before the financial crisis.
Ms. VOHRYZEK. They were actually pooled loans. So, Wall
Street firms would typically be involved. Some of them--I mean,
you know, Chase is in the room, and they act on both sides. So,
you have a lot of banks that also have investment houses, as
well.
Chairman RICE. Here is my question: You know, certainly
things were out of hand before the financial crisis, and
certainly there needed to be some additional safeguards. But
have we snapped back so far that we have taken lenders out of
the market that were previously providing this financing? And
can the SBA ever--because I do not think they can--can they
ever respond to that demand?
Ms. VOHRYZEK. Oh, boy. I am not sure--I am trying to
understand the question. For some reason, I was kind of caught
with the walls of maturity, thinking of these coming out. The
comment we made--and I made--about ``as these loans come to
market''--as you know, the shrinkage in the number of community
banks that are now alive and well, versus who they were back in
'07, '08--we have had a shrinkage in numbers of community
banks. And very often, the borrowers would look to their
community bank to refinance. Those would be where they would
typically go.
Chairman RICE. I agree that we have had a huge shrinkage.
Mr. Bradshaw, I am going to turn to you. I agree we have had a
large shrinkage in community banks, and I think a lot of that
is because we have snapped back too far with regulation. And
what I am concerned with--Mr. Bradshaw, do you think the SBA
can ever fill that niche completely, or do you think we need to
expand, do what we can to ease the regulation on community
banks and get them back in the market?
Mr. BRADSHAW. I think the answer is probably yes on both
sides--meaning, can SBA fill the gap? Yes. Can it fill it all
the way? No, but the combination of SBA and a combination of
less regulation can get us a long way there.
Chairman RICE. Mr. Palmer?
Mr. PALMER. The private sector can fill a lot of gaps that
we cannot. And the SBA is really meant to fill areas where the
private sector cannot fill the gap, but where there is a public
policy need. The banks, particularly the smaller banks, are
feeling all sorts of pressure that really is hindering their
lending. They are not something that we compete with. We
actually augment a lot of the banks. But I think that is an
area--certainly, there is need for regulation; do not get me
wrong. But I do think that the banks that I talk to--and I hear
from anecdotally--feel there is a lot of pressure that is
hindering them from doing small business lending that they
otherwise would do.
Chairman RICE. Mr. Napoli, I do not know that this is
really in your area of expertise, but I want to ask you the
same question.
Mr. NAPOLI. Can you repeat the question?
Chairman RICE. My time is expired. Thank you very much. I
will yield to Mrs. Chu for her question.
Ms. CHU. Well, thank you. And I feel the same as Chairman
Rice, in terms of all that you are doing for the small business
community, in providing them the access to capital. And I am
intrigued by your recommendations for improvement.
And I will start with you, Ms. Vohryzek. Last week, I
introduced the CREED Act, which would reinstate SBA's 504
Refinancing Program. The President has supported this
initiative in his budget. The SBA Administrator has spoken
favorably of the program, and the Senate has marked up their
version of the CREED Act with bipartisan support from the
Chairman and Ranking Member. Do you believe the reauthorization
of the 504 Refinancing Program would be beneficial for the
small business economy? And simply that while we were already
in the recovery period--but can you tell us why right now
actually is an optimal time to restart the Debt Refinancing
Program?
Ms. VOHRYZEK. Well, first of all, let me thank you for
introducing the CREED Act. The industry is very thankful for
that. I think it is a good time. I mentioned the walls of
maturities that is coming up, and that would be an opportunity
to help small businesses that are coming out of that, looking
for alternative financing by providing them with refinancing
under the 504 Program.
I also believe that the 504 Program is a very efficient way
to refinance, and I think it is good for the banks. And I will
tell you why. When you refinance a 504--a situation where it is
a 504 refi--the bank may be involved, and they continue to be
involved. So, they are not taken out by another bank. So, it is
an opportunity for many banks--and, often, community banks--to
keep their customer, and then we do the second mortgage,
because our loan is always in companion with the first mortgage
lender. This is a relationship that the lender has, and we are
coming in to accommodate them up to a 90-percent loan-to-value,
which--Chairman Rice, I apologize. I think I now understand
your question, and I guess what I would echo in here--but also
state that I think that I am a Director of community bank, and
I would say that the guarantee, whether it is a 504 second
mortgage or a 7(a), allows us to do loans that we otherwise
would not be able to do. So, it is absolutely a critical
product--particularly now, with all of the regulation that has
fallen on the smaller banks, we are looking for opportunities.
I am sorry, Ranking Member; I wanted to get back to your
question. But there is a great need out there for the ability
to take advantage of the low rates. We see it across the board
in housing right now so homeowners can lower their rate. And in
many different cases, it is allowing them to get the working
capital, when we speak about small businesses, for growth. And
that was alluded to. Mr. Bradshaw alluded to the need for
working capital, and how businesses--that $50,000 that was
saved on that $400,000 equipment loan.
When we refi, and you look at the cost savings, and you
bring them into a low-cost interest--the first mortgage will be
lower. Our second mortgage will be a lower interest rate. The
savings over time provides that business the opportunity to
invest in jobs, inventory, and growth.
Ms. CHU. Okay. Well, thank you. Mr. Napoli, I was impressed
by the success of the Microloan Program. And you emphasized
this issue regarding technical assistance, this requirement
that only 25 percent can be used prior to the loan. Why do you
believe that this should be changed?
Mr. NAPOLI. Thank you for the question. Since the creation
of the program back in '91, a lot has changed. Micro-lenders
are now not just micro-lenders; they also offer other types of
technical assistance, or an SBA 7(a) loan, a 504 loan. A lot of
times, a client comes in, and through that SBA technical
assistance, we find that there might be a better fit for
another product. And so we only give them the pre-loan
technical assistance.
Another thing is, a lot of times when a client comes to us,
they do not have a money problem at first; they have an idea
problem. And so to be able to frontload a lot more technical
assistance in the frontend, and deal with that idea problem--
like creating a business plan, or helping them with lease
negotiation, or working with marketing--instead of trying to
get them through the process quickly, and get them a loan, so
then we can give them more technical assistance--will allow us
to be able to really foster that time with the client before
they just get the loan and go forward.
Overall, just more flexibility and technical assistance
would allow the intermediary--which was proven over the last 20
years--that they are able to serve the clients with customized
technical assistance in their local communities.
Ms. CHU. And also, intermediaries are limited to no more
than 25-percent contracting out, and you think that this should
be changed. Why is that?
Mr. NAPOLI. That is correct. Right now, the SBA says that
we can only use 25 percent of our TA dollars for contractors,
and that poses two limitations. The first is, it is hard to
recruit talent outside of my staff. So, if I need to get a CPA,
or a lawyer, or someone that has specific technical experience,
overall, I am limited to 25 percent of my money being used for
those contractors.
Additionally, if I want to expand in the local markets, and
I want to have somewhat of a local presence there, again, I am
limited by the fact that I can only do that with 25 percent of
my dollars.
Ms. CHU. Thank you. I yield back.
Chairman RICE. Now I yield to the Chairman of the full
Committee, Mr. Chabot.
Mr. CHABOT. Thank you, Mr. Chairman, and let me begin by
thanking you, Mr. Chairman, and the Ranking Member, Ms. Chu,
and the other members for attending this hearing--and
especially the witnesses for being here today.
I think we all know that access to capital is one of the
most critical challenges that is faced by small businesses in
today's environment. It has been the case in the past; probably
will be in the future. But it is really important, and so
addressing this in this hearing, I think, is quite important.
So, thank you.
I just have two questions. And, first of all, Mr. Palmer, I
will begin with you, if I can. I recently introduced HR 10-23,
the Small Business Investment Company Capital Act of 2015,
which would increase the amount of capital available to small
businesses by raising the family of funds cap from $225 million
to $350 million. Do you have any data on the effect that this
would have on small business lending--and just anything you
would like to say about that legislation, we would be happy to
hear.
Mr. PALMER. Well, Chairman Chabot, thank you first and
foremost for your support of that legislation and your
leadership in this Committee. I would also like to thank
Congressman Hanna and Congresswoman Chu, who are cosponsors of
that bill.
We have a number of funds that are slamming into that
ceiling, and there are a number of funds that are going to hit
the ceiling that may not apparent that they are going to hit it
yet. They know it, but it is not necessarily showing them the
data, because they are long-term investors. So, their current
fund--they may not be at the limit, but as they are planning
their next fund, they know they are going to slam into it, and
they are considering whether or not they are going to do a
small business fund.
So, I think that once this gets up and running, I think it
will be an increase of between $500 and $750 million a year in
small business investing. Marketing conditions will dictate
that, but that is a significant increase in small business
capital that is out there at zero cost to the taxpayer.
Mr. CHABOT. Okay, thank you very much. And my second
question, Mr. Bradshaw, I would like to go to you, if I can.
Thank you, first of all, for your service to our country. I
greatly appreciate that.
I am planning to introduce a bill shortly that would
statutorily eliminate the origination fees on 7(a) loans, the
express loans to veterans. As you know, SBA is already doing
this through the Administrator's discretion, at no cost to
taxpayers. Can you discuss the 7(a) Expense Loan Program, and
how this fee waiver benefits veteran entrepreneurs?
Mr. BRADSHAW. Sure, and thank you for the support of this,
Chairman Chabot. Veterans are my passion. And just for the
Committee, I brought our brochure that we do. I know it is a
long way to see, but we do this, and we work together as a
committee with NAGGL. We compete with each other every day, and
so we are always trying to, you know, take deals away from each
other. In terms of veterans, we actually share our marketing
ideas, and we work together. We electronically send things like
this around. Speaking with some of you before--last time I sent
this around, I had a person call me and said, ``I really,
really like this. Is it all right if I copy it?'' I said,
``Absolutely, but you may want to change the phone number.''
So, thank you for the support of the veterans. I have been
representing NAGGL--very vocal on that from day one, because
several years ago, one of the biggest initiatives of SBA was
the veteran push. And I was always, ``Well, if we have a
veteran push, should not we reduce the fees?'' And we take this
very seriously in NAGGL and in the institution I run. The fees
have really made a difference. Sometimes, it is momentum. It
has been very recent. This year has been the biggest year in my
institution.
Mr. CHABOT. Thank you very much, and I yield back the
balance of my time.
Chairman RICE. I recognize the gentlelady from California,
Ms. Hahn.
Ms. HAHN. Thank you for all of your testimony.
You are supporting our small businesses, helping our
economy, getting people hired. It really is so critical. And I
appreciated all your testimony this morning.
Last August, I held a roundtable with a lot of local women
business owners in a waffle shop in San Pedro. It was a great
morning, and while I am always impressed to hear, like, the
7(a) Program were up in lending, I think, for loans under
$150,000 up by 23 percent. I mean, we are hearing all these
great stories about how more capital is getting to our small
businesses. But I got to tell you, almost every one of those
women owners that came that morning, you know, continued to
complain a little bit about always being denied by banks for
some of these 7(a) loans.
And still, probably one of the biggest complaints I get
from my small businesses in my district is still difficulty--
there is a disconnect on getting some of this capital to our
small businesses.
So, I was going to ask Mr. Bradshaw, do you have a sense of
what are some of the reasons that lenders decide that a small
business is not worth the risk? What would those be, and how
can we maybe fix that?
Mr. BRADSHAW. I think the challenge when people look at a
small business conventionally--probably the biggest challenge
is collateral. So, that is probably number one.
And then number two is, traditional, conventional lending
has shorter terms. And those shorter terms do not allow the
loan to meet bank debt service requirements, because it is just
a shorter term. You are thinking about buying a car in five
years versus ten years; the financials do not work for the
company to do it on five years, where they would on ten years.
And I think those are the biggest impediments.
Ms. HAHN. Do any of the other witnesses have any comment on
why you think some of our small business--particularly our
women-owned--many women-owned businesses sometimes fall through
that crack that we were talking about, of being, you know, not
a good risk?
Ms. VOHRYZEK. Well, I would say it is a bit out of my
wheelhouse as representing the 504 industry, although a number
of our members do a great deal of technical assistance.
I think that the reality of banking these days is that they
simply do not have the time to invest in what needs to happen
with a small business in order to make them capital-ready. Mr.
Napoli actually brought up a very good point I was applauding
over on my side that much of the work needs to happen before
the loan.
And so there are networks, like the SBDC network SCORE,
that can help borrowers--and including the micro-lending
network and community advantage network that actually work more
intensively, I would say. I do not know the women you met with,
but I would probably, you know, speak with them about, you
know, where they are on the capital readiness. And you are
really looking at the continuum of capital readiness sitting at
the table. But I think a lot of it is how they are queuing it
up--you know, meaning how they put together their request for
funding, and whether they qualify for conventional. And then as
you go to SBA, there is obviously a greater tolerance for no
collateral or high loan-to-value situations. But a lot of small
entrepreneurs and businesses, they simply need hands-on in
order for them to be able to get to the capital point.
Ms. HAHN. Right. Thank you. And, Mr. Napoli, I would follow
up with what you were talking about--how you offer this kind of
assistance helping writing business plans, finding ways to
finance businesses that have been considered unbankable. Do you
believe that model could also be expanded to assist small
businesses that are being denied these 7(a) loans, so that they
could also get this kind of financing?
Mr. NAPOLI. Absolutely. And to go back to your original
question, I know over 60 percent of my portfolio is made up by
women and minority. So, I think what microloans do very well is
actually reach out to those communities, and allow them to feel
welcomed into the process.
And one of the things is the technical assistance that we
do provide, from a gamut of different services that could
completely be relevant to more upstream 7(a) lending, as well.
What I find is, borrowers are very competent at making
widgets or doing exactly what they do to know. But they do have
blind spots. I even have my own MBA, and as I was discussing
yesterday, I would be frightened to start my own business
because I did not do so well in my accounting class. And so I
think, you know, when we are talking to business owners at any
level, technical assistance is something that is absolutely
necessary for them to become more successful.
Ms. HAHN. Thank you. Mr. Chairman, I yield back.
Chairman RICE. I now yield to the very learned Chairman of
the Contracting and Workforce Subcommittee, Mr. Hanna.
Mr. HANNA. Hey, thanks. Mr. Napoli, changing the 75/25
rule, I want to ask Mr. Bradshaw about Dodd-Frank, and
commercial banking, and how that has changed the nature of--and
you mentioned mortgage-backed securities, the wall of loans. I
mean, if you never pay anybody back, basically you never
default--which is--I am concerned about the wall of loans.
But, Mr. Napoli, how would you recapture that money if you
were to change this or eliminate it all together? Because what
you say makes perfect sense--that people need a lot of
technical assistance. They have a great idea, but no basic
skill set to do this. What would that look like, though, and
what would it cost? Because, basically, you are upfronting
money before you make a loan, and you may decide otherwise. So,
how do you navigate that?
Mr. NAPOLI. That is a great question. I think one way you
honestly navigate it is through looking at, obviously, the
portfolio's performance of what we have already done, and
trusting in these microloan intermediaries that they are going
to make the right decisions from the years of experience. And,
also, you incentivize them to continue to stay loan-centric in
their lending, so they are not just offering technical
assistance.
Mr. HANNA. So, what you are saying is that we should allow
the subjective nature of the process and the people in the know
to take advantage of their knowledge, their interaction with
people, and give them more latitude in that ratio of 25/75 and
TA assistance.
Mr. NAPOLI. That is correct.
Mr. HANNA. Thank you. That is helpful, because I believe
that makes sense to me. I just do not know what it would cost.
Mr. Bradshaw, talk to me, if you can, because you have
mentioned a couple times about commercial banks, and how they
have changed, and how they have walked away a little bit--that
is my words. How did that play out, and why did it make what
you are doing more important?
Mr. BRADSHAW. I think, as we are all aware, with the
recession--and part of the recession that came was, banks
became more conservative; credit became tighter to get. In
addition, we became a little more heavily regulated. And you
mentioned Dodd-Frank; that has been part of it. And it has not
just been--in addition to someone looking over our shoulders,
there has been a real cost associated with that, too--meaning
you have to hire more compliance officers, you have to have
more bank security officers. There has been a real cost
associated with that. And I think that has just continued to
add to tightening the credit market. And one aspect that does
help from this, from the SBA standpoint, is, the SBA loans take
less capital. And so by applying SBA loans, banks can take
advantage of that attribute--that they are not using as much
capital, and they are not running into the capital requirements
under Dodd-Frank and other regulatory requirements.
Mr. HANNA. Everybody here has referenced the fact uniformly
that the default rate is really, really low, which makes you
feel good about the process, and it makes people want to raise
the limit, because--what the hell--there is no associated risk,
right? We know that is not true, because there has to be. And I
could answer the question, why have a limit at all? But could
you talk to me about this mortgage wall or this lending wall,
Ms. Vohryzek? Because it is interesting to me, because implicit
in that is that there are people who will default if they are
pushed up against that wall without the extension. Is that
fair?
Ms. VOHRYZEK. What would happen, just for the sake of this
discussion--let us say you have an owner/user small business
borrower in there that was financed through one of these
security pools, and they are coming out with a $2 million
balloon. And it is very tough to finance a $2 million balloon
payment. Basically, you are looking to refi, so you are coming
into the commercial market or the SBA market, saying, ``I need
to refinance this $2 million balloon.''
Mr. HANNA. And how long have they been in business, do you
think?
Ms. VOHRYZEK. You know, that would require that I would
know what was sitting in those mortgage-backed pools back in
'05, '04. You know, I would imagine that if they got into the
pool in the first place, my guess would be that they were a
relatively seasoned business, because in the pooling process,
they would be vetting if it were a known user----
Mr. HANNA. Thank you. That is helpful. So, if they are a
relatively seasoned business, they took out a balloon mortgage,
which can be foolish on its face, right? They knew that. They
are facing that. They are a relatively mature business. What do
they need with us?
Ms. VOHRYZEK. What was available to them in '05--let us
say, for instance, they were financed in '05. They are upside-
down on that commercial building in Brooklyn. Well, maybe not
Brooklyn. Maybe they are upside-down in that commercial
building in Oklahoma City or, you know, wherever things
flipped. And California was one of them, but we are recovering.
So, their loan-to-value is compromised--or they are at 90
percent if they try to get $2 million, whereas under a normal
amortization, they may have been at 70, which would be
financeable pretty easily through the banking markets. But 90
is absolutely an SBA product.
And so I want to differentiate. In SBA lending, under our
program, the 504, we are looking to provide working capital--
free up working capital for these businesses to grow. And in
the case of refinance, this is so that they have the funds in
order to expand their business and not be taken down by the
inability to get a 90-percent loan-to-value. We are not looking
at businesses that if they had the financing available would
default. We are looking at a market gap. And so these could be
healthy businesses coming out, but they are still at a high
loan-to-value.
Mr. HANNA. Thank you. That clarifies everything for me--
because, really, you are not trying to push out the inevitable;
what you are trying to do is help people who inevitably will
succeed, in your view.
Ms. VOHRYZEK. And to remember that there have been many
times in our history in lending where balloon payments were
absolutely the market. When I first started in the '80s, five-
year mini-perms was kind of a standard on commercial product,
and it then stretched to ten. Even to get banks to go to 10
years, given capital requirements and liquidity issues--10
years can be tough. So, it just depends where we are in the
market in lending.
Mr. HANNA. My time is way over. I thank the Chairman for
indulgence. Thank you.
Ms. VOHRYZEK. Oh, I apologize.
Mr. HANNA. Oh, no, it is my fault. Thanks.
Chairman RICE. I want to just ask a couple more questions.
Mrs. Vohryzek, this wall of refis is just a curious thing. Is a
part of that because the capacity of lending has declined? You
know, we are hearing there are fewer community banks today than
there were eight years ago. And there is also, for the first
time in seven years, there has been less business startups than
there have been businesses going out of business. And I am not
sure that those things are not very closely related, because
access to capital is one of the keys to our competitiveness.
So, what I am asking you--because I am concerned that the
SBA, although you are doing great work, can never fill the
void--that commercial lending is going to have to be where this
solution is found--do you think it is because of lack of
capacity? Has the pendulum swung too far, and are we regulating
these community banks out of business, and, therefore, we have
this wall of refis coming that presents this big problem?
Ms. VOHRYZEK. I think that things have swung quite to the
opposite direction, as has been mentioned several times. It is
costly to run a bank now--I do not care if you are large or
small--with all the regulations. And, really, you know, things
that are in place that they want to avoid another disaster--I
understand why they are there. But, as you said, the swing is
quite strong. Can SBA fill the gap?
When you are looking at programs--at least three of the
four here--that are paying for themselves through zero
appropriation, it is a heck of a deal for the taxpayer and for
our communities, as we are at zero subsidy.
And so, yes, we are filling a really important gap. And as
you have seen in the 7(a) program, the growth is there. And in
504, you know, we have been a little challenged, and we will
come back roaring. But, you know, we have had times right now
that our volume is not as high as it could be. But we still are
zero subsidy. And so we fill a gap, and we fill a gap at no
cost to the taxpayer. And so for that reason, I would say that
we can grow, and we can be important to fill what you are
speaking about.
Chairman RICE. Mr. Palmer?
Mr. PALMER. I guess what I would add to that is, you know,
Dodd-Frank existed because we clearly had gotten, you know,
overboard, and there were real problems that had to be
addressed. But one of the challenges of a Dodd-Frank is that it
does not scale. You know, if the big banks are screaming about
the costs and the regulatory compliance problems, the little
guys--it is 10 times worse. We are seeing that in the private
equity space, as well, where the big private equity funds can
deal with all this SEC compliance, and the little one are
getting creamed.
I mean, you know, with all good legislation, you have to go
back and review it. I think if that ever does get reviewed, I
think it is worthwhile to look at the scaling challenges of the
smaller lenders and the smaller investors, versus the largest,
as far as how they can handle the compliance costs on the
backend.
Chairman RICE. I think community banks should be exempted,
but that is just my opinion. Mr. Bradshaw?
Mr. BRADSHAW. I like that, sir. And to your point, Chairman
Rice, I mean, my institution is a large community bank, and we
are just under $10 billion. And in Dodd-Frank, going over $10
billion, there becomes essentially a regulatory tax. And so you
do not go to $11 billion; you go from just under $10 to $14 or
$15, because you have to pay for that additional cost. You just
do not go right over it. And so, you know, it is a very real
thing in our world.
Chairman RICE. Yeah, I have spoken to community banker
after community banker. Community bankers have come in here.
The owner of the only minority-owned bank in Washington, D.C.
was in here last year, saying that if we cannot find some
relief for him, that Dodd-Frank will put him out of business.
And I hear that over and over again, and access to capital is
just so incredibly important. I worry that we really need to go
back and review some of that. I yield to Mrs. Chu, if you have
any additional questions.
Ms. CHU. I do. Thank you, Mr. Chair. Mr. Bradshaw, last
year, the 7(a) Program faced a funding shortfall, and Congress
had to include a billion-dollar allocation for the program in
the continue resolution to prevent the program from shutting
down.
For 2015, the 7(a) Lending Program is potentially facing
another shutdown in a few months if loans continue to follow
these projections. How critical is it for Congress to
appropriate and authorize adequate funding for the program? And
what would be a real-life example of what consequences would be
if there is a potential shutdown of the program?
Mr. BRADSHAW. Thank you, Congresswoman Chu. Yes, we feel
that the program will run out of money this year. We talked
about in my testimony that within--probably in August. And what
that would mean in terms of real life is, you could have a
customer that you are working with. They are acquiring a
business, or a piece of real estate, or both. They have a
purchase-to-sale agreement, so they have committed hard money
to this purchase-to-sale agreement, and we cannot process their
loan, because we have run out of money with the SBA.
Ms. CHU. Thank you. Mr. Palmer, I certainly heartily
support the idea of lifting the cap from $225 million to $350
million. And I understand there is also another issue, which
has to do with the licensing of the family of funds, and that
it is taking longer and longer. Could you talk about that issue
and what needs to be done?
Mr. PALMER. Sure. Thank you very much. The licensing
process for the SBIC Program is for the frontline of taxpayer
protection, in that they are making sure that only qualified
people are getting through, and those standards need to be
high.
However, the licensing process is really long, and this
administration actually did a very good job for several years
getting that licensing process down to about five months. The
official numbers are around nine or ten months. That does not
include a month of the magic mailroom, where the documents do
not get processed and some other stuff. So, it really is
running over a year for repeat licensees.
And for a repeat licensee, you are talking about someone
who has raised the private capital, gotten licensed with the
SBA, invested successfully, gone out to the market again
several years later, raised private capital, has been
compliant, and then it is taking them another year--potentially
even longer than it did the first time. That does not make any
sense.
And so they have got a process that the standards need to
be high, but it has got this multitiered process that really
can be consolidated, and sped up, and maintaining taxpayer
protections that, really, right now is causing people's, you
know, vein in their forehead to pop out, out of frustration,
but it is also slowing things down, adding costs, and there
really is not any benefit to it. We would really like to get
that reformed, and I think probably the SBA would, too. They
just kind of need a little push to make it happen.
Ms. CHU. And it makes total sense to differentiate the
repeat licensee versus the new one.
Mr. PALMER. And I think there is an added benefit to that,
too--because if you put your resources to the first-time funds
that are really more unknown, it gives you more opportunity to
reach out to geographies that you have not touched before or
that you have not done the outreach for. It also lets you do a
deeper dive on the backgrounds of the people that are coming
in, so you can get more diversity of fund managers that are
coming in--because, right now, you know, they are treating
everyone exactly the same, even if you have been on your fourth
or fifth license. And dedicating those resources there, where
you really have a whole new generation of, you know, investment
managers, and women, and minorities, and doing different
strategies. They cannot get the time of day, because they are
not in such a tight band. And I do not think that helps the
program or the country at large.
Ms. CHU. Mm-hmm. Mr. Napoli, you had a third reform that
you were discussing, which is this 1/55th rule. And the SBA has
requested to adjust this cap for the 1/55th rule in the 2016
budget request. Can you tell us what this is, and what you
think the adjustment should be on this?
Mr. NAPOLI. Yeah. So, currently, there is a rule called the
1/55th rule. And what it means is that the amount of funding
for lending for SBA micro intermediaries is divided equally
between 55 states and territories. That is the case, even when
several of those territories or states do not even have an
intermediary actually located there--or, a lot of times, they
do not even need that much actual lending capital, but other
intermediaries do.
And so what happens for the first two quarters or six
months of the federal year, funds are just sitting at the SBA
until they are able to open up to these other intermediaries in
other states that actually have a demand that has been waiting
for the last six months.
What it can look like is just actually look at eliminating
that all together, and allow for those intermediaries that
actually have demand to show that, and for the SBA to make
loans that are targeted to those intermediaries that make sense
for the demand that they have.
Ms. CHU. Thank you. And if I could ask another question--it
is about the SBA requesting a 30-percent increase in funding
for the microloan intermediary lending authority, which would
be expected to support about $75 million in loans to small
business. Do you think this increase is enough for the level of
demand that you encounter?
Mr. NAPOLI. Well, as I stated, you know, 88 percent of
small businesses fall under micro. It is a huge amount of
businesses. But I also know that that is a completely
digestible demand that we can meet this next year. So, yes,
absolutely, that is something I think that we can--I can come
back in a year from now, and show the amount of jobs created,
the fact that we have gotten the money out, made quality loans,
and then the next year, pose the exact same good problem to
have.
Ms. CHU. Thank you. I yield back.
Chairman RICE. Mr. Hanna?
Mr. HANNA. Does anybody--Mr. Bradshaw, Mr. Palmer--we have
a situation which I think Chairman Rice rightly identified, and
that is, this kind of dragnet thing that Dodd-Frank did caught
up a lot of commercial banks that were doing just fine, added
millions to their cost of doing overhead in small communities,
limited their--increased their overhead, limited their ability
to make local loans, and do the things that you four do so
well.
And I saw you nod your head, Mr. Bradshaw. You would
eliminate, at some point--maybe on a sliding scale--the
requirement for commercial banks to fall under some of those
rules or those--how would you change that? What would you do
differently?
Mr. BRADSHAW. Well, I am going to respectfully agree with
Chairman Rice. I like the thought process of looking at the
community banks first. And if you look at--we announced an
acquisition about 30 days ago of a $1.3-billion bank, and in
the press release, the CEO of that bank said one of the reasons
he was selling was because the regulatory pressures were just
too hard on it.
Mr. HANNA. Yeah. Well, I guess what I am suggesting
implicitly--and Mr. Palmer or anybody--is that in doing that,
we actually made it more necessary for the SBA to do all those
things, because we interrupted the marketplace in a place that
arguably maybe we did not need to or did not need to do as much
as we did.
So, the whole nature of loans from commercial banks has
become more strict, more difficult, more onerous for people to
go to. So, therefore, you have more need for what you all do,
which it is good that you are filling the need, but maybe we
can work up the food chain and down the food chain.
Mr. BRADSHAW. I would like to comment that, you know, in a
commercial loan environment, you do have a credit approval
process. And I can tell you that the credit officers have not
forgotten about 2007 and 2008. So, I do not know that all the
additional regulation is necessary in that regard.
Mr. HANNA. Mr. Palmer?
Mr. PALMER. Well, the growth in the SBICs has been driven
by a couple things, but one of which is just the awareness of
the SBIC Pogram. And, frankly, it has been run well. It really
had some struggles before the financial crisis, just from
management issues and very few licenses were getting out there.
So, as the SBIC product has become normalized, they have
partnered with a lot of banks, which they had done before to a
certain degree, but not to the extent they do. So, they are
backfilling and allowing banks to do lending that they
otherwise could not do, because they are often coming in with
subordinated debt where the bank comes in with the senior, but
the condition of the business itself would not otherwise be
eligible for a loan. So, you know, they go hand-in-glove.
But to your point, I do think we need a healthy banking
structure generally, and let the banks, you know, operate in an
appropriate and prudent way to fill the market needs. And then
where the gaps are, where public policy should be applied, let
it be applied.
Mr. HANNA. Sure. And if they are not allowed to assume any
risk, then there is more and more demand on what you all do.
Mr. PALMER. Well, the challenge--there is a real
perception, whether fair or unfair, in the market that risk is
trying to be, you know, really stripped of every investment and
every loan in the universe. And without a downside risk, there
can be no upside risk. And I think at some point, we need to,
you know, establish, what is the appropriate level of risk we
are willing to live with as a society?
Mr. HANNA. Mr. Napoli, you could probably speak to that
better than anybody here, since you do microloans. Do you think
a lot of people could be successful that just do not fill the
bill for you? Do you think, like, there are opportunities out
there that take greater associated risk for microloans, and
ultimately grow what it is you are out there growing as
businesses, and create jobs, and all of that?
Mr. NAPOLI. Absolutely. As I said before, one thing micro-
lending does is definitely address the minority and women-owned
markets better than any other lending tool. But one of the
trends I see right now is the increase of younger entrepreneurs
that is not being addressed by the market--talking about, you
know, people coming out of college, even young 30s. And a lot
of times, these are held down by the amount of student loans
they have. It is a huge factor. But I think that is one thing
that we could definitely target and do a much better job.
Mr. HANNA. Thank you. My time has expired again. Thank you,
Chairman.
Chairman RICE. That was a great hearing. Thank you all for
participating today. I truly appreciate you taking time out of
your hectic schedules to provide the Committee with suggestions
for improving SBA's lending programs. These ideas will be
instructive as the Committee works to ensure small firms have
access to capital which is vital to their success, and
necessary for the United States's continued economic growth.
I ask unanimous consent that members have five legislative
days to submit statements and supporting materials for the
record.
Without objection, so ordered. The hearing is now
adjourned.
[Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]
A P P E N D I X

[GRAPHIC] [TIFF OMITTED] T4650.001

Chairman Rice, Ranking Member Chu, and distinguished
Members of this Subcommittee, I am grateful to have this
opportunity to testify before you to discuss the impact of the
Small Business Administration's 7(a) loan program for both the
lending and small business communities.

I wear many hats as I testify this morning--the lender who
has worked at both a large, national bank and in my current
position at a community bank; the member from NAGGL, the
national trade association for 7(a) lenders; and a proud
veteran. I hope that all of these perspectives that I bring to
the table will help create a productive conversation with this
Subcommittee about the strengths, the challenges, and some of
the possible misperceptions about the 7(a) loan program.

The 7(a) program annually supports over 45,000 small
businesses and over 500,000 jobs with partnership from more
than 2,600 participating private-sector lenders. And we do all
of this at no cost to the taxpayer. In fact, in many years, the
program's subsidy rate has been reestimated down the road to be
far less than originally estimated, resulting in over $530
million returned to the Treasury since FY 2010.

The 7(a) borrower is a small business that cannot find the
same terms in the conventional market because the banking
industry, continues to remain cautious with its capital and
heavily regulated in this post-Recession, post-Dodd-Frank
environment. The bulk of conventional loans are made for 3-year
terms of less. This means that the majority of small businesses
who typically need long-term, competitively priced loans can
only find these terms through the SBA loan programs, which
offer loans up to a term of 25 years, with average terms for
the 7(a) program of 16 years.

In a Basel III world, banks avoid tying up their deposit
base in long-term loans. A larger, short-term deposit base is
meant to keep the bank afloat in the event of a recession,
allowing the institutions to stay nimble enough to shrink their
loan portfolio when necessary. For any bank to tie up a
significant portion of their deposits in long-term loans would
be a funding mismatch and regulators would raise red flags. The
7(a) loan program provides a way for banks to make these long-
term loans that, in today's financial climate, are virtually
impossible to obtain by small businesses conventionally.
Simultaneously, borrowers are just coming out of the shadow's
of the Recession, dramatically increasing the pool of 7(a)
applicants. It is no wonder that annual new loan originations
have grown from $16 billion in FY13 to what industry
anticipates will be $23 billion in new loan originations in
FY16.

Therefore, the single-most pressing issue that threatens
the 7(a) program year in and year out is constantly hitting the
lending cap set by Congress. On the one hand, this is a good
problem to have--it means that the program is growing beyond
what Congress expected and that the program's private sector
lenders are pumping more and more loans out into the small
business economy than ever before. In fact, the program volume
in dollars increased on average 22% ahead of last fiscal year
as of the first week of May. On the other hand, it means that
like last year, the program is once again facing a potential
eleventh hour threat of shutting down in this fiscal year and
potentially not receiving enough room to grow in FY 2016.

If there is one thing that Congress can do to help the 7(a)
program run more effectively and serve more small businesses,
it is to make sure that the authorizing committees and the
appropriations committees in both the House and Senate work
together every fiscal year to set a cap for the program that
gives the portfolio enough room to grow without the looming
fear of shutting down. The consequences of not setting an
appropriate cap are dire for the program.

Washington stop-and-go funding patterns are a complete
mismatch for how the rest of the world operates outside the
beltway. Small business owners and lenders alike need assurance
that the 7(a) program will be a reliable resource. The 7(a)
loan goes to small businesses that incorporate this capital
into their business models months in advance for new hires or
long-term expansion plans. Quite simply, the small business and
lending communities will stop turning to the 7(a) program as an
answer to capital access if they feel its existence is
uncertain. Believe me--this issue is difficult to explain to
the board of directors of a community bank. In addition,
participating lenders diligently watch the volume of the
program and their anticipated pipelines, and if it seems the
program will come close to the authorized cap at the end of the
fiscal year, lenders will start to change lending behavior as
early as June. If the most important thing in finance is market
fears and perceptions, the always precarious nature of the 7(a)
authorization is undoubtedly the weakest part of the program.

For Fiscal Year 2016, the President's budget request for
the 7(a) program was $21 billion. NAGGL is anticipating that
the 7(a) program will actually lend about $23 billion in FY16.
We are asking that the House and Senate Small Business
Committees work together with their respective Appropriations
Committees to give the program what it needs to simply allow
for the natural increase in small business lending, a trend I
know this committee would strongly applaud. I understand and
respect Congress' need to justify every dollar spent. But
Congress cannot encourage small business lending on the one
hand, and yet on the other hand, keep the lenders and borrowers
in constant fear of shutdown for simply robustly participating.

Even more pressing is the potential authorization
shortfalls this fiscal year. For the past three fiscal years,
loan volume in dollars has on average increased by 27% in the
second half of the fiscal year from the first half of the
fiscal year. And I am confident that trend will remain true for
FY 2015, putting us easily at around $23 billion gross and
$20.5 billion net, if not more. While that level of lending is
encouraging, it is also disastrous since the industry only has
$18.75 billion in authorization from Congress. That is akin to
giving a car with no brakes a full tank of gas but only giving
it a little bit of road. What is the car supposed to do when it
runs out of road?

Last year, in FY14, we had this same funding shortfall and
Congress included a $1 billion anomaly in the Continuing
Resolution in September 2014 to save the program from shutting
down. And we certainly would have shut down without that
additional authorization--the 7(a) program made loans totaling
$19.2 billion gross and $17.7 billion net, given an original
$17.5 billion in authorization. That net figure would have been
even greater had the additional funding come earlier than the
last week of the fiscal year since lenders begin to change
their lending behavior at least four months in advance of the
end of the fiscal year. I know personally that many lenders
slowed down their own lending early last fiscal year in
anticipation of a shutdown. No lender wants to tell a small
business borrower that its loan was delayed. In real world
terms, that means the small business can't make those
additional hires or has to find a way to stall construction on
a new expansion. That is the opposite direction we want the
small business economy to be moving toward.

We hope that either Congress or the SBA can work with us to
address this looming issue for FY15. Otherwise, the program
could shut down and the 7(a) program's reputation as a reliable
resource for small businesses will be damaged. And more
importantly, small businesses will not receive the access to
capital they so badly need in this economic climate.

As a lender, I can tell you that most people do not
understand the 7(a) loan program. This program is not a subsidy
for small businesses--it's a loan made with a private financial
institution to small businesses that are paid back in full and
treated as any other conventional market loan. The program is
the very essence of a public-private partnership, allowing
government to stand out of the way of what banks know how to do
best.

Perhaps the most critical part of the program to highlight
is that I know for a fact that without the 7(a) program, the
loans I make would never be made. That does not mean the small
businesses receiving a 7(a) loan are failing or unable to repay
their loans. Many believe that a mission statement of helping
small businesses find capital that they could not find
elsewhere means that these small businesses are somehow
subprime--that is false. These small businesses are not
subprime; rather, the current conventional market is
unavailable to satisfy the majority of small business needs. As
lenders participating in the SBA programs, we have to abide by
many parameters, including making sure the borrower is in sound
financial health and credit worthy. As bankers, we never want
to see a risky loan on our books to open us up to potential
losses or criticism from our regulators. The 7(a) program
ensures we have skin in the game with the lender standing to
lose 25%-50% of the loan in the event of default, as well as
heavy oversight measures that would affect our reputation as
financial institutions.

As an active part of NAGGL, I co-chair the association's
Public Policy Committee, which focuses solely on the public
policy goals of the 7(a) program. The 7(a) program is
inherently connected to a larger mission--to lend to small
businesses that cannot find credit elsewhere. Over the years,
this has come to mean not only small businesses that cannot
find a conventional loan, but also underserved markets and
minority populations. This public policy portion of the program
is a critical mission for NAGGL and the 7(a) industry, and we
have already begun the task of creatively addressing the gap in
lending to certain demographics. Veterans and African-Americans
are two of the most underserved populations within the SBA
lending programs. It is important to note, according to SBA's
weekly lending statistics as of the first week in May, when
comparing May 2015 to May 2012 year to date, 7(a) lending to
African-Americans has increased by 93%. Similarly, when
comparing May 2015 to May 2012 year to date, lending to
veterans has increased by 88%. Let me caveat this good news
with some sobering reality--these increases are augmented by
the fact that the pool for each of these underserved
demographics is so small in the first place. These are steps in
the right direction, but we have much more we can do as
lenders.

In response to this, the 7(a) lending industry is reaching
out into the communities to attack this challenge in a
personal, hands-on way. For example, the SBA and the industry
have learned over the years that it is not a matter of lenders
not choosing minority borrowers. Rather, it is a matter of
minority borrowers not being credit ready and aware of SBA
opportunities. In response to this educational need, NAGGL
recently partnered with the SBA to create an entrepreneurial
education toolkit for minority communities that will be
translated into Spanish and taught through faith-based and
local community organizations. This educational initiative,
called the ``Business Smart Toolkit,'' is being rolled out this
year. I'm looking forward to seeing the results of this
terrific partnership.

Additionally, NAGGL has been crisscrossing the country to
honor minority small business borrowers who have received a
7(a) loan and subsequently revitalized their neighborhoods.
During Black History Month of this year, NAGGL hosted an event
to honor James Hamlin, an African-American entrepreneur in
Baltimore on Pennsylvania Avenue, the epicenter of the most
recent protests have been centered. With the help of a 7(a)
loan, Mr. Hamlin opened The Avenue Bakery and turned around a
small corner of his community that is currently under the
microscope of the world when it comes to underserved segments
of the population that have been left behind. Mr. Hamlin's
bakery was spared from any recent violence that occurred in the
city and he is a beacon of hope when it comes to how we
communicate with younger generations about how to make a better
life. Mr. Hamlin will also tell you that at the end of the day,
struggles in minority communities are all about economics. We
hope that the 7(a) loan is a way to inject these underserved
markets with the power of economic sustainability and success.

As a veteran, I acutely see the challenges we're facing in
the portfolio to lend to veterans, as well as other underserved
markets, in a very personal way. I feel compelled to be a part
of the answer to help the SBA loan programs become more
accessible to minorities. As a young man, I attended the Air
Force Academy and subsequently served five years active duty in
the Air Force. Following my service, I entered the Naval
Reserve and for sixteen years working in Naval Intelligence,
until finally retiring in 2005. Now, in a new chapter of life,
for the last two years I have served on Senator Lindsey
Graham's Academy selection boards, interviewing prospective
applicants.

One of the most rewarding parts about my alternate life as
a banker is that in the SBA 7(a) program, I actually have the
rare ability to merge my two worlds and help veterans achieve
economic empowerment when they return from the battlefield. I
helped create and chair NAGGL's Operations Veterans Access
Subcommittee focused on bringing veterans into the 7(a)
program. I was encouraged by so many of my peers committing to
NAGGL that they would increase lending to veterans by 5% over
the course of the coming year, but we need to do more. Some of
my favorite moments of my job is seeing that a loan on my desk
is going to a veteran and calling them up personally to thank
them for their service. Now, as the industry continues to hone
in on underserved markets like veterans, I hope that those
calls become more and more frequent.

Once again, thank you for this opportunity to testify. I'm
encouraged by being here today that Congress and industry can
work closely together to address some of the program's
challenges and encourage our strengths. I look forward to
discussing the 7(a) program more with you and happy to take
your questions.
Representative Rice, Representative Chu, and other
distinguished members of the committee: Thank you for inviting
me to testify before the subcommittee. I know you all share the
goal that I do, which is to ensure American small businesses
have the access to capital necessary to grow and, in doing so,
help their local communities flourish. I look forward to the
exchange of ideas today on ways we can work together towards
that vision.

My name is Barbara A. Vohryzek and I serve as President and
CEO of the National Association of Development Companies, or as
we're commonly known, NADCO. In that role, I represent more
than 90% of the Certified Development Companies in the country.
These Certified Development Companies, or CDCs, are mostly non-
profit entities that execute the financing for SBA's 504 loan
program, while often also participating in other federal,
state, and local economic development programs, including the
SBA Microloan program and the SBA Community Advantage Loans
program. This is familiar territory to me--I founded and ran
California Statewide CDC for over 21 years.

The 504 loan program is a financing tool for economic
development that provides small businesses with long-term,
fixed-rate loans to help them acquire major fixed assets for
expansion or modernization of their businesses. These loans are
most frequently used to acquire land, buildings, machinery, or
equipment. Eligibility for 504 loans is linked to job creation.
By law, each $65,000 in financing must create or sustain one
job, or meet one of several public policy goals. Our loans are
closely linked with our local government and local communities
so we can help them grow. A loan which includes a 504 guarantee
portion can be over $13 million, which allows the CDC community
to contribute to impactful economic development work.

The 504 loan program had challenging years during the
economic downturn. As a real estate-heavy program, it
experienced losses and, in directly tracking with the real
estate market, took a while to recover. I am pleased to report
though that this October, it is back to being self-funded with
no appropriation, as it had been since the program went to
self-funding in FY1996. Now that we are on firm footing, we
must turn to where the 504 program and the CDC industry must go
next.

I recommend that during the 114th Congress, the
subcommittee focus on several long term modifications as well
as make some immediate fixes to a few current challenges that
the CDC industry and the 504 loan program face.

First, the 504 loan program lacks definition. It is SBA's
economic development loan program and CDCs are economic
development entities. However, no definition exists in statute
or regulation for ``economic development'' or for ``CDC.'' I
recommend that we work together, as we have already started to
with SBA, to formalize these definitions so that there are
clear metrics for this program to fulfill its mission and be
respectful stewards of the taxpayer's guarantee. This will be
an opportunity for us to delve into many important topics, such
as making the Community Advantage loan program permanent and
increasing outreach to minority borrowers.

Second, I recommend that the successful debt refinancing
with a 504 loan program, a program that was in place several
years ago, be restarted permanently. When this program was
active from mid-2011 through September 2012, the peak of the
economic downturn, more than 2,300 small businesses refinanced
over $5 billion in capital. This returned to their business the
many tens of thousands of dollars a year previously spent on
high interest rates or saved them from balloon loans. Small
businesses who participated in the refi program were required
to reinvest the savings in their businesses, creating jobs and
opportunity for them and into the wider community. SBA
estimates that this program would operate at a zero subsidy
cost, so no appropriation, if restarted. In fact, this year's
subsidy reestimates for the programs show that existing refis
have operated at a negative subsidy rate, meaning that they
have actually made money for the government. A program with
such a strong track record should be available again to our
small businesses.

This request is timely as well over 4,000 small balance
commercial mortgage-backed security loans will mature in the
next 3 years. Most of these borrowers will need to refinance
yet many banks that handled small balance loans prior to the
financial crisis are no longer in the market or no longer in
business. This will be a gap for small business owners which
must be filled. Refinancing these conventional loans with the
504 loan program can do that.

Third, last year the committee introduced H.R. 5600, which
clarified SBA franchise and affiliation rules. NADCO would
welcome passage of a similar bill to address this confusing
issue.

While these long term changes will strengthen the 504
program for future small business borrowers, several pressing
matters are preventing CDCs from best serving their communities
today. Most timely is a recent SBA procedural notice which
states, for the first time in the program's history, that the
Anti-Deficiency Act prevents 504 loans with open-ended
indemnities from closing without onerous waivers, costly
attorney fees, and many hours of red tape for small business
owners and CDCs. When this unprecedented policy was first
issued, NADCO surveyed our members and discovered that a
billion dollars in financing had been delayed or canceled from
this change. And that was only as of October 31, 2014. More
perplexing yet, this policy was issued despite the fact that,
according to the SBA, not one single loan has caused any loss
of taxpayer dollars due to this issue. While fixing this
problem is within SBA's regulatory authority, the Agency has
not, as of yet, found a solution that is workable for small
businesses. I hope we have the opportunity to discuss this
complex issue during your questions. There is no issue more
critical in the 504 program and, in my opinion, in the
government lending arena, since it seems that this policy
logically extends to the many other SBA and federal government
loan and guarantee programs that have real estate as
collateral.

A final challenge that the CDC industry faces is a
challenge that I know is shared by many of the other SBA
partners--that of adequate levels of SBA staffing. Recent
retirements and other departures mean that a single SBA staff
member may now cover portfolios previously managed by 2, 3, or
even more staff members. This result of this change is both a
slowing of our ability to support small business entrepreneurs
seeking SBA 504 loans, and an increasing concern and lack of
confidence within the business community about our ability to
deliver 504 loans in a timely fashion. Our small business
borrowers deserve to have access to capital that is
unconstrained by the vacancy of these SBA positions that are so
critical to our ability to deliver this high value loan
program. We hope this subcommittee provides adequate resources
through the budget and appropriations process to hire and train
strong SBA employees.

Thank you again for the opportunity to share NADCO's
thoughts. I look forward to your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Brandon Napoli, Director of Micro lending at VEDC

Statement for Record for the Subcommittee on Economic Growth,
Tax and Capital

Access of the House Small Business Committee

U.S. House of Representatives

May 19, 2015

Chairman Steve Chabot and members of the sub-committee,
thank you for the opportunity to submit testimony about a
crucial component of a vital American business community. My
name is Brandon Napoli and I am the Director of Micro Lending
at VEDC, located in Los Angeles. VEDC is one of the largest SBA
micro lenders in the nation. We provide real money to real
people who are creating real jobs.

Micro lending is foundational to our economy, and VEDC is
committed to helping entrepreneurs like Maria Martir secure
microloans that foster healthy, sustainable communities. Maria,
who started her own business at age 12 in Mexico, is the proud
owner of De Todo Un Poquito Cafe (A Little of Everything) in
Los Angeles. Raising the funds to start her own business was
not easy; Maria saved what she could out of every paycheck she
received. Three years later and with $40,000 in savings, she
approached several banks for the last $10,000 to provide a
working capital cushion for the first several months of
operation. Maria was turned down several times for traditional
financing. She had no existing cash flow and no outside
collateral. Maria turned to VEDC, which offers access to
capital for entrepreneurs unable to secure traditional bank
financing as well as free technical assistance.

Three years after receiving a $10,000 loan along with help
writing her business plan, Maria's original cafe has grown to
occupy the vacant space next to her and has created jobs for
her four children. She is now looking to expand elsewhere.
Maria's experience illustrates what we at VEDC know from years
of experience--hands on technical assistance, coupled with
need-based financing, greatly increases a small business's
chances of success.

Micro lending is not just about making small loans, though.
It is about reaching entrepreneurs who are outside of the
economic mainstream and helping them start and sustain a
business that eventually creates jobs, adds to the tax base,
and after a few years, becomes bankable.

All those micro-businesses add up to big numbers. These
businesses generate $2.4 trillion in receipts, account for 17%
of U.S. GDP, and employ more than 31 million Americans.\1\
Maria Martir owns one of the 25 million businesses, or 88% of
all businesses, in the United States considered a micro-
business--a business with five or fewer employees and start-up
capital of under $50,000. Microbusinesses are everywhere--the
farmer at the Saturday market, your neighbor who runs the local
childcare center, the trucker who works long hours on the road,
the contractor who built your home, the beauty salon or barber
shop, your favorite neighborhood restaurant that you always
suggest needs to commercialize their barbecue sauce, or the
miniature golf course you worked at as a kid--think of the
businesses you frequent and I am sure that you encounter many
microbusinesses you call your own.
---------------------------------------------------------------------------
\1\ Survey of Business Owners and Self-Employed Persons, conducted
by the U.S. Census Bureau in 2007 and 2008.

The proposed FY2016 SBA Budget provides continued
opportunities for American's entrepreneurs to start their own
businesses and become successful, independent, and self-reliant
like Maria. To keep the American Dream a reality for the
millions of micro-business owners, Congress needs to increase
the effective investment it has made in SBA Micro Loan Program
from $24.8 million to $28.3 million and make the programmatic
---------------------------------------------------------------------------
changes suggested by current intermediary micro lenders.

Increasing this funding would have a positive impact on a
current market trend that is siphoning the cash flow out of
small businesses today. Today, we hear about online lenders and
how they are addressing the financial needs of small
businesses. But a lender that provides short term, high-
interest rate products without transparency in their pricing is
not what small businesses need. The good news is that there are
initiatives like microloan.org and SBA LINC, both new gateway
referral programs for small business owners. These efficiencies
are being built, through automation, yet staying committed to
the long-term, relationship-based lending that has been the
driver behind high performing portfolios and the successful
borrowers who have benefited from them.

Maria's De Todo Un Poquito Cafe and other microbusiness
could not do what they do without the support they get from SBA
micro loan intermediaries like VEDC. Since 1998, VEDC has lent
over $11 million by providing over 1,000 SBA micro loans, as
well as pairing business technical assistance with the loans.
Thankfully, there are many others like VEDC around the country.
These participating intermediary lenders, like CDC Small
Business Finance in California, Lift Fund which lends in over
five Southern States, Common Capital in Massachusetts,
Community Investment Corporation in Connecticut, Entrepreneur
Fund in Minnesota, Wisconsin Women's Business Initiative
Corporation, and the Economic and Community Development
Institute in Ohio provide a ``one-stop-shop'' where a business
owner can secure flexible financing as well as the
individualized business assistance as needed throughout the
life of their loan. This model forges a unique dynamic between
the lender and the business owner that has enabled intermediary
lenders to maintain healthy and growing loan portfolios while
financing businesses deemed ``un-bankable'' by conventional
lenders. And unlike the growing trend of the online lenders,
these community based lenders offer affordable capital with
longer terms, and lower interest rates.

The SBA Microloan Program reclaims the American Dream, one
micro-business at a time. Intermediaries work with every day
entrepreneurs to harness their innovative ideas and creativity
and empower them to become their own bosses. Our micro
entrepreneurs work hard to become self-sufficient. They hire
locally, pay taxes, and, in other ways, give back to their
communities. It is our responsibility to make sure they have
the access to capital they need.

Since the Microloan Program was authorized in 1991,
intermediary lenders have borrowed $414 million from the SBA
and have used those funds to originate more than $629 million
in loans to small businesses that have created or retained
185,800 jobs at a cost to the federal government of less than
$2,228 per job. After 24 years, the cumulative default rate on
SBA loans made to intermediary lenders is 1.8%. This is due
largely to intermediary lenders having ``skin in the game'' in
terms of having to pay back the SBA, and therefore a vital
interest in their borrower's success. There are currently 137
active intermediary lenders participating in the program, and,
in 2014 alone, these lenders made 3,917 loans totaling $55.5
million to small businesses supporting 15,880 jobs. Overall,
intermediary lenders have proven that this is an efficient
model to make smart investments in our local communities.

After 24 years, these intermediaries have also realized
that several of the, well-intentioned policies, originally
placed by cautious policy makers, now serve as barriers to
gains in efficiencies. The most restricting barrier is the
statutory restraint of utilizing 75% of the technical
assistance post funding and only 25% pre funding. As with
Maria, and the majority of micro entrepreneurs, the need for
intense technical assistance before receiving financing ensures
the small business owner is loan ready. Additionally, micro
lenders now offer a continuum of services; including, technical
assistance, microloan, the SBA 7(a), small business loan, or a
504 loan, that support a business until they are bankable. When
they speak to one of the hundreds or even thousands of pre-loan
clients, the need identified through the pre-loan technical
assistance provided, may result in the client being better
suited with one of these other products. In other words,
technical assistance is provided to all clients, regardless of
the loan they end up, but that is not known at the start of the
process.

We are all cognizant of the current budget situation.
However, programs designed to promote job creation--especially
those with proven track records such as the Microloan programs
at SBA--require continued support.

In closing, every day, VEDC and micro lenders across
America see good, hardworking people like Maria who want and
can build a better country, contribute to society, and create
jobs. The greatest investment we can make is in these people,
in your people who create jobs. The returns go far beyond the
dollars paid back. Thank you for the opportunity to share
Maria's story and for your continuing support of microloans.
Friends of the SBA Microloan Program

------------------------------------------------------------------------

Friends of the SBA Microloan Program

Statement for the Record for the Subcommittee on Economic
Growth, Tax and Capital

Access of the House Small Business Committee

U.S. House of Representatives

May 19, 2015

Mr. Chairman and Members of the Subcommittee, thank you for
the opportunity to submit testimony to the Small Business
Committee of the U.S. House of Representatives on the Small
Business Administration (SBA) Microloan Program on behalf of
the Friends of the SBA Microloan Program.\1\
---------------------------------------------------------------------------
\1\ This testimony is submitting on behalf of the Friends of the
SBA Microloan Program, including: Roberto Barragan (VEDC), Wendy K.
Baumann (Wisconsin Women's Business Initiative Corporation), Robert
Boyle (Justine Petersen Housing & Reinvestment Corporation), Mark
Cousineau (Connecticut Community Investment Corporation), Grace Fricks
(Access to Capital for Entrepreneurs), Brett Gerber (Impact Seven),
Dave Glaser (Montana Community Development Corporation), Luz Gutierrez
(Rural Community Development Resources), Clint Gwin (Pathway Lending),
Gina Harman (ACCION The US Network, Inc.), Edmundo Hidalgo (Chicanos
Por La Causa), Peter Hille (MACED), Inna Kinney (Economic and Community
Development), David Kircher (Wisconsin Business Development), Sandy
Lowell (Northern Community Investment Corporation), Lisa Macioce
(Bridgeway Capital), Ceyl Prinster (Colorado Enterprise Fund), Jeff
Reynolds (Center for Rural Affairs), Nelly Rojas-Moreno (LiftFund),
Chris Sikes (Common Capital), Kevin Smith (Community Ventures
Corporation), Namoch Sokhom (Pacific Asian Consortium in Employment
Business Development Center), Jennifer Sporzynski (CEI), Robert
Villarreal (CDC Small Business Finance), Birdie Watkins and Jerry
Rickett (Kentucky Highlands Real Estate Corporation), Shawn Wellnitz
(Entrepreneur Fund), Dennis West (Northern Initiatives), and Karl
Zalazowski (California Coastal Rural Development Corporation).

The Friends of the SBA Microloan Program is an informal
working group of nonprofit SBA Microloan Intermediaries. Its
members provide small-dollar loans up to $50,000 and business
development resources to help women, low-income, veteran, and
minority entrepreneurs successfully create and grow sustainable
businesses. In doing so, its members support economic
opportunity for underserved entrepreneurs in rural, suburban,
and urban communities across the nation by increasing access to
the resources and services necessary to create wealth and build
---------------------------------------------------------------------------
assets through business ownership.

The Impact of the SBA Microloan Program

The Friends of the SBA Microloan Program strongly supports
the SBA Microloan program as a critical tool for our nation's
small businesses. Under the Microloan program, the SBA provides
loans to nonprofit intermediary lenders who, in turn, lend the
funds--in addition to state and local resources--in amounts of
$50,000 or less to the smallest of small businesses. Microloan
program intermediary lenders also receive grants to help fund
the cost of providing business-based training and technical
assistance to small business borrowers and potential borrowers.
The fusion of capital and training helps shore up the capacity
of these small businesses to help them turn a profit, improve
operations, grow the business, and create jobs.

Since the program was launched in 1991, SBA Microloan
Intermediaries have borrowed $414 million from the SBA and have
made over $629 million in loans to small businesses that have
created or retained 185,800 jobs at a cost to the federal
government of less than $2,228 per job. According to SBA's
Fiscal Year 2014 (FY14) Financial Report, the cumulative loss
rate to the SBA on the Microloan Program is exceptionally low
at just 1.88 percent.

In FY14, the SBA approved 36 loans--amounting to $26.5
million--to Microloan Intermediaries. By the end of the fiscal
year, these Intermediaries leveraged an additional $29 million
to provide $55.5 million in microloans to 3,917 small
businesses. These businesses created or retained 15,668 jobs in
local economies.

SBA Microloan Program
FY14 Performance Metrics
----------------------------------------------------------------------------------------------------------------
Loan Amount
Small Businesses Assisted With Jobs Supported by Loan Amount Approved by Small Businesses
Microloans Microloans Approved by SBA Lenders to Counseled
to Microlenders Microborrowers
----------------------------------------------------------------------------------------------------------------
3,917 15,880 $26.5 million $55.5 million 15,668
----------------------------------------------------------------------------------------------------------------

Support for Increased FY16 Appropriations

The Friends of the SBA Microloan Program strongly supports
the funding recommendations included in the House Small
Business Committee's FY16 Views and Estimates of the SBA
Microloan Program. Specifically, we support the Committee's
call for a modest increase in funding for Microloan Budget
Authority and Technical Assistance grants.

In its assessment, the House Small Business Committee
voiced its support for an additional $800,000 in Budget
Authority for the SBA Microloan program which would allow for
an additional $10 million in microlending authority. If
enacted, this would increase the program's Budget Authority to
$3.3 million and its program levels to $35 million. The
Committee noted that its support for increased funding--also
proposed by the Administration in the President's FY16 Budget
Request--was due to ``the effectiveness of the Microloan
Program in job creation.''

Likewise, the Committee supports the Administration's
request of $25 million in FY16 for SBA Microloan Technical
Assistance grants, which represents an increase of $2.7
million. Calling the program the ``keystone of the Microloan
program,'' the Committee agreed that Technical Assistance
grants are both ``valuable and irreplaceable.''

Recommended Legislative Proposals

The SBA Microloan Program was established in 1991 as a
pilot program. Since that time, the program has grown to 137
active intermediary lenders who made more than $55 million in
loans to almost 4,000 small businesses across America in 2014.

While the program has grown in size, scope, and success,
many of the original provisions of the pilot program remain in
effect. These provisions create a paperwork burden for
Microloan Intermediaries and the SBA. Moreover, these
provisions have been in statute since the inception of the
microloan program and are no longer appropriate.

Proposal 1: Limitations on Prospective Borrowers

Section 7(m)(4) of the Small Business Act (15 U.S.C. 636)
establishes a grant program to help SBA Intermediaries provide
marketing, management, and technical assistance to address the
small business concerns of prospective and current borrowers.
Under current law, up to 25 percent of the total grant funds
may be used to provide highly targeted technical assistance and
business counseling to prospective borrowers. This provision is
known as the ``75/25 Rule.'' By providing these services, SBA
Intermediaries can help prospective borrowers prepare to become
microloan borrowers in the future.

Moreover, implementation of this rule has limited the
ability of intermediaries to counsel and underwrite prospective
borrowers and has created a high administrative burden, as
grants must meet the 25 percent limitation on a quarterly
basis. Rural organizations indicate that given that time to
travel to meet with business, this limitation has made their
efforts especially difficult. With a loan loss rate of less
than 2 percent, intermediaries have proven their ability to
service their loan portfolios. Limiting their ability to work
with new or prospective borrowers is no longer necessary.

The Friends of the SBA Microloan Program recommends that
Congress eliminate Section 7(m)(4)(E). Specifically, it
proposes the following language:

Section 7(m)(4) of the Small Business Act (15 U.S.C.
636(m)(4)) is amended--
(a) by striking subparagraph (E)(i); and
(b) by redesignating subparagraph (E)(ii) as
subparagraph (E)(i).

This language is similar to a provision of the Women's
Small Business Ownership Act of 2014, as introduced by Senator
Cantwell in July 2014.

Proposal 2: Minimum State Allocations

Section 7(m)(7)(B) of the Small Business Act (15 U.S.C.
636) establishes the minimum state allocation of microloans to
SBA Intermediaries. It states that ``the Administration shall
make available to each state an amount equal to the sum of (I)
the lesser of (aa) $800,000; or (bb) 1/55 of the total amount
of new loan funds made available for award under this
subsection for that fiscal year.'' The statue goes on to
provide that in the 3rd quarter of the year, the Administration
may collect and redistribute any funds that are unlikely to be
made available.

With 137 borrowers across the country, this provision--
which was designed to promote geographic diversity--is no
longer necessary.

The Friends of the SBA Microloan Program recommends that
Congress eliminate the ``1/55th Rule.'' Specifically, it
proposed the following language:

Section 7(m)(7) of the Small Business Act (15 U.S.C.
636(m)) is amended--
(a) by striking subparagraph (B).

Proposal 3: Third-Party Contracts

Under current law, no more than 25 percent of technical
assistance grants may be used for contracts with third parties.
This provision makes it difficult for organizations with small
grants that do not have enough money to hire full-time staff
and may be better able to fulfill grants obligations with
consultants.

The Friends of the SBA Microloan Program recommends that
Congress eliminate the limitation on third-party contracts.
Specifically, the Friends Network proposes the following
language:

Section 7(m)(4) of the Small Business Act (15 U.S.C.
636(m)(4)) is amended--
(a) by striking subparagraph (E)(ii).

Conclusion

Over nearly 25 years, the SBA Microloan program has proven
to be a successful tool for assisting small businesses in
rural, urban, and suburban communities across the nation.
Despite its success, there are a number of provisions that were
included in the original authorizing legislation that are no
longer appropriate and which limit the ability of
Intermediaries to serve small businesses. In light of the
program's proven track record, the Friends of the SBA Microloan
Program recommends that Congress eliminate these burdensome and
unnecessary provisions.

[all]